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Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.

Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes

If you’re starting or planning to launch a new business, keep these three rules in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Eligible expenses

In general, start-up expenses are those you make to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Plan now

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Monday, August 2

Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due.
Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

Tuesday, August 10

Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time.

Wednesday, September 15

Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic extension:
- File a 2020 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2020 to certain employer-sponsored retirement plans.

It’s a safe bet that state tax authorities will let you know if your business hasn’t paid enough sales and use taxes. But the lines of communication may not be so open if you’re overpaying. For this reason, many businesses use reverse audits to find overpayments so they can seek reimbursements.

In most states, businesses are exempt from sales tax on equipment used in manufacturing or recycling, and many states don’t require them to pay taxes on the utilities and chemicals used in these processes, either. In some states, custom software and other computer equipment are exempt if used for research and development projects. These are just a few examples of potentially available exemptions.

Many companies have sales and use tax compliance systems to guard against overpaying, but if you haven’t reviewed yours recently, check to make sure it’s functioning properly. Employee turnover, business expansion or downsizing, and simple mistakes all can take their toll.

A formal reverse audit can extend across your business, going back as far as the statute of limitations on state tax reviews. If your state auditors can review all records for the four years preceding the audit, for example, the audit could encompass the same timeframe.

To be clear, reverse audits are often time consuming and complex. But a well-executed one can not only reap tax refund rewards now, but also help update your compliance systems going forward. Let us help you target the exemptions available to your business and ensure refund claims are properly prepared before submittal.

The IRS recently released guidance providing the 2022 inflation-adjusted amounts for Health Savings Accounts (HSAs).

Fundamentals of HSAs

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2021-25, the IRS released the 2022 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2022, the annual contribution limitation for an individual with self-only coverage under a HDHP will be $3,650. For an individual with family coverage, the amount will be $7,300. This is up from $3,600 and $7,200, respectively, for 2021.

High deductible health plan defined. For calendar year 2022, an HDHP will be a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2021). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,050 for self-only coverage or $14,100 for family coverage (up from $7,000 and $14,000, respectively, for 2021).

Many advantages

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and be can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.

If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.

Fundamentals of self-employment tax

The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.

What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.

Keep your salary “reasonable”

Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C corporation

There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.

Many factors to consider

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.

Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.

Uncomplicated paperwork

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.

Here are some considerations.

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

Are you considering buying or replacing a vehicle that you’ll use in your business? If you choose a heavy sport utility vehicle (SUV), you may be able to benefit from lucrative tax rules for those vehicles.

Bonus depreciation

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in a calendar year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service through December 31, 2022.

The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too.

Weight requirement

This option is available only if the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

Note: These tax benefits are subject to adjustment for non-business use. And if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Detailed, contemporaneous expense records are essential — in case the IRS questions your heavy vehicle’s claimed business-use percentage.

That means you’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.

If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on your 2021 tax return. Before signing a sales contract, consult with us to help evaluate the right tax moves for your business.

March 1, 2021

Health Coverage Reporting to IRS – If you are an Applicable Large Employer, file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you are filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31.

Businesses – File information returns (for example, certain Forms 1099) for certain payments you made during 2020. However, Form 1099-NEC reporting nonemployee compensation must be filed by February 1. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the General Instructions for Certain Information Returns for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.

If you file Forms 1097, 1098, 1099 (except a Form 1099-NEC reporting nonemployee compensation), 3921, 3922 or W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms generally remains February 1.

Payers of Gambling Winnings – File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2020. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms remains February 1.

Large Food and Beverage Establishment Employers – with employees who work for tips. File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically your due date for filing them with the IRS will be extended to March 31.

Farmers and Fishermen – File your 2020 income tax return (Form 1040 or Form 1040-SR) and pay any tax due. However, you have until April 15 to file if you paid your 2020 estimated tax by January 15, 2021.

March 2, 2021

Health Coverage Reporting to Employees – If you are an Applicable Large Employer, provide Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to full-time employees. For all other providers of minimum essential coverage, provide Form 1095-B, Health Coverage, to responsible individuals.

March 10, 2021

Employees Who Work for Tips – If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.

March 15, 2021

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in February.

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in February.

Partnerships – File a 2020 calendar year income tax return (Form 1065). Provide each partner with a copy of their Schedule K-1 (Form 1065-B) or substitute Schedule K-1. To request an automatic 6-month extension of time to file the return, file Form 7004. Then file the return and provide each partner with a copy of their final or amended (if required) Schedule K1 (Form 1065) by September 15.

S Corporation Election – File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2021. If Form 2553 is filed late, S corporation treatment will begin with calendar year 2022. – File a 2020 calendar year income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe in tax. Then file the return, pay any tax, interest, and penalties due and provide each shareholder with a copy of their Schedule K-1 by September 15.

March 31, 2021

Electronic Filing of Forms – File Forms 1097, 1098, 1099 (except Form 1099-NEC), 3921, 3922, and W-2G with the IRS. This due date applies only if you file electronically. The due date for giving the recipient these forms generally remains February 1.

Electronic Filing of Form W-2G – File copies of all the Form W-2G (Certain Gambling Winnings) you issued for 2020. This due date applies only if you electronically file. The due date for giving the recipient these forms remains February 1.

Electronic Filing of Forms 8027 – File copies of all the Forms 8027 you issued for 2020. This due date applies only if you electronically file.

Electronic Filing of Forms 1094-C and 1095-C and Forms 1094-B and 1095-B – If you’re an Applicable Large Employer, file electronic forms 1094-C and 1095-C with the IRS. For all other providers of minimum essential coverage, file electronic Forms 1094-B and 1095-B with the IRS.

During the COVID-19 pandemic, many people are working from home. If you’re self-employed and run your business from your home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expenses method and the simplified method.

Who qualifies?

In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.

What can you deduct?

Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:

Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
Depreciation.

But keeping track of actual expenses can take time and require organization.

How does the simpler method work?

Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

The cap can make the simplified method less valuable for larger home office spaces. But even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.

Can I switch?

When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2020 return, use the simplified method when you file your 2021 return next year and then switch back to the actual expense method for 2022. The choice is yours.

What if I sell the home?

If you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.

Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.

Do employees qualify?

Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive a paycheck or a W-2 exclusively from their employers aren’t eligible for deductions, even if they’re currently working from home.

We can help you determine if you’re eligible for home office deductions and how to proceed in your situation.

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Getting a New Business off the Ground: How Start-Up Expenses are Handled on Your Tax Return

2021 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

Is Your Company Overpaying on Sales and Use Taxes?

The IRS Has Announced 2022 Amounts for Health Savings Accounts

An S Corporation Could Cut Your Self-Employment Tax

Simple Retirement Savings Options for Your Small Business

Tax Advantages of Hiring Your Child at Your Small Business

Need a New Business Vehicle? Consider a Heavy SUV

Tax Deadlines: March 2021

If You Run a Business From Home, You Could Qualify for Home Office Deductions

DOs and DON’Ts to Help Protect Your Business Expense Deductions

The One, Big, Beautiful Bill Could Change the Deductibility of R&E Expenses

Five Tax Breaks on the Table: What Business Owners Should Know About the Latest Proposals

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