Tax-Saving Tips: December 2021
Tax Credits for Schedule C Businesses without Employees
Obtaining
a tax credit is the next best thing to paying no taxes at all.
The
tax code contains over 30 non-refundable tax credits for businesses. These are
part of the general business tax credit and are claimed on IRS Form 3800,
General Business Tax Credit, and on Schedule 3 of Form 1040. The general
business credit is not itself a tax credit, but rather an overall limitation on
the total credits that a business can claim each year.
What
if you’re a Schedule C business owner who doesn’t have employees and isn’t
involved in one of the niche businesses that come with a credit? You’re not
necessarily left out of the tax credit bonanza. Here are six tax credits that
many Schedule C businesses with no employees can claim (and of course, you can
qualify for these credits with employees, too).
1.
Credit for
Increasing Research Activities
The
credit for increasing research activities is intended to encourage businesses
to invest in scientific research and experimental activities.
Any
technological research qualifies, so long as it relates to a product’s new or
improved function, performance, reliability, or quality. The research must
involve the physical or biological sciences, engineering, or computer science.
You
don’t have to have employees to get this credit, because you can claim the
credit for 65 percent of the cost of hiring third parties to perform research
activities on your behalf, such as outside contractors, engineering firms, or
research institutes.
If
you qualify, calculating the credit is worthwhile.
2.
Qualified Plug-In Electric Drive Motor Vehicle Credit
If
you purchase a new electric vehicle, you may be able to claim a credit. These include
fully electric vehicles (EVs) and plug-in hybrid EVs (PHEVs).
The
maximum credit is $7,500, and the minimum is $2,500. But the actual amount
depends on the size of the vehicle’s battery. EVs generally get the maximum
$7,500, while PHEVs often qualify for less. For example, a Ford Mustang Mach-E
qualifies for a $7,500 credit, while a Subaru Crosstrek Hybrid gets
only $4,502.
Unfortunately,
the credit phases out the year after a manufacturer reaches 200,000 total EV
car sales in the U.S.
Tesla
and General Motors are the only two manufacturers so far to reach the limit,
and the credits for their EVs are now completely phased out. So you won’t get a
federal credit if you purchase a Tesla or a Chevy Volt. Toyota and Ford will
probably be next to cross the 200,000-EV threshold.
When
you claim the credit for a business vehicle, you reduce the vehicle’s
depreciable basis by the credit amount. You then depreciate the remaining
adjusted basis as you would for any other business vehicle.
3.
Disabled Access Tax Credit
The
Americans with Disabilities Act (ADA) prohibits private employers with 15 or
more employees from discriminating against people with disabilities in the full
and equal enjoyment of goods, services, and facilities offered by any “place of
public accommodation”—this includes businesses open to the public.
The
disabled access tax credit is designed to help small businesses defray the
costs of complying with the ADA. But you don’t have to have employees to claim
the credit. The credit may be claimed by any business with either
·
$1
million or less in gross receipts for the preceding tax year, or
·
30
or fewer full-time employees during the preceding tax year.
The
amount of the tax credit is equal to 50 percent of your disabled access
expenses that exceed $250 in a year but are not more than $10,250. Thus,
the maximum credit is $5,000.
4.
Business Energy Tax Credit
The credit can be
claimed for various types of renewable energy installations, including thermal
and geothermal energy, wind turbines, and fuel cells.
But small
businesses most often claim the credit for the cost of installing solar panels
and related equipment to generate electricity to provide illumination, heating,
or cooling (or hot water) in a business structure, or to provide solar process
heat.
Unlike the solar
credit for homeowners, there is no dollar limit on this business credit. The
credit is 26 percent of the cost of solar property whose construction begins in
2020, 2021, or 2022.
The tax code
reduces the credit percentage to 22 percent if construction begins during 2023.
5.
Rehabilitation Tax Credit
The
secretary of the interior must certify to the secretary of the treasury that
the project meets their standards and is a “Certified Rehabilitation.” If your
building is not already registered as historic but you think it should be, you
can nominate it for historic status by contacting your state historic preservation office.
6.
New Energy-Efficient Home Credit
The credit is
available for all new homes, including manufactured homes, built between
January 1, 2018, and December 31, 2021. To meet the energy savings
requirements, a home must be certified to provide heating and cooling energy
savings of 30 percent to 50 percent compared with a federal standard.
A reduced credit
of $1,000 is available for manufactured homes with a heating or cooling
consumption at least 30 percent less than a comparable house and with the
Energy Star label.
Are
More Credits on the Way?
In
the news, you have been reading and hearing about the Build Back Better bill
that passed the House and is being considered by the Senate. There are lots of
tax credits in the bill. But there are three things to know as of December 1,
2021.
1.
The
Senate will likely create and try to pass its own version of this bill.
2.
If
the Senate passes the bill in a different form, the bill will go to a
conference with both House and Senate members, who will make more changes.
3.
Regardless
of what happens, we don’t see any changes in the current bill or expect any
changes that will affect the information in this newsletter. The changes, if
any do become law, will apply to 2022 and later.
Tax Credits for
Schedule C Business Owners with Employees
If
you hire an employee for your Schedule C business, you can qualify for several
valuable tax credits.
Each
credit is different, and certain limitations apply to all or most employer tax
credits.
Remember,
like we said above, tax credits are the best. They beat deductions. Note the
difference below (using the 32 percent bracket):
·
A
$1,000 deduction for wages reduces your income taxes by $320.
·
A
$1,000 credit reduces your taxes by $680 ($1,000 - $320).
Many
tax credits are not available if you hire a person related to you, including
children, stepchildren, a spouse, parents, siblings, step-siblings, nephews,
nieces, uncles, aunts, cousins, or in-laws.
Eight
Valuable Tax Credits for Business Owners
Below
are listed the eight non-refundable tax credits that Schedule C business owners
can claim when they hire employees.
1.
Work Opportunity Tax Credit (WOTC)
The
WOTC rewards employers for hiring employees from groups the IRS has identified
as having “consistently faced significant barriers to employment.”
2.
Family and Medical Leave Credit
Federal
law doesn’t require that you give paid leave to your employees who need to take time off for family reasons
(such as the birth of a child) or due to their illness or that of a family
member. (A few states require some paid leave that’s funded through payroll
deductions.)
But if you choose to provide such paid leave, the federal
tax code may reward you with a family and medical leave tax credit.
3.
Credit for Small Employer Health Insurance Premiums
If
you have fewer than 50 full-time-equivalent employees, you are not required to
provide your employees with health insurance. But if you elect to do so, you
may qualify for the small business health care tax credit. This tax credit is
available to eligible employers for two consecutive tax years.
4.
Credit for Small Employer Pension Plan Start-Up Costs
This
credit is for the cost of setting up an employee pension plan, including a new
401(k) plan, 403(b) plan, defined benefit plan (a traditional employee pension
plan), profit-sharing plan, SIMPLE IRA or SIMPLE 401(k), or SEP-IRA.
The
costs covered by the credit include the expenses to establish and administer
the plan and to educate employees about retirement planning.
5.
Credit for Employer-Provided Childcare Facilities and Services
This
little-used credit is intended to encourage employers to provide childcare to
their employees. There are two ways to get the credit:
1.
Build,
acquire, rehabilitate, or expand an on-site childcare facility for your
employees’ children, and help pay to operate it.
2.
Contract
with a licensed childcare program, including a home-based provider, to provide
childcare for your employees.
The
second option is more realistic for smaller businesses. Businesses often
partner with childcare companies such as the Learning Care Group, Bright
Horizons, and KinderCare to offer this benefit.
6.
Empowerment Zone Employment Credit
Is
your business located in one of the designated empowerment zones?
These
are areas of high poverty and unemployment identified by the U.S. Department of
Housing and Urban Development or the secretary of agriculture.
You
can claim a credit equal to 20 percent of the first $15,000 in wages you pay to
full- or part-time employees who both live and work in an empowerment zone.
Thus, the maximum credit is $3,000 per employee (20 percent x $15,000). The
employees must work for you for at least 90 days.
7.
Credit for Employer Differential Wage Payments to Military Personnel
This
credit is available if you have an employee in the military reserves who is
called to active duty for more than 30 days. If you continue to pay the
employee all or part of that employee’s wages while he or she is on active
duty, you can claim a credit equal to 20 percent of the payments, up to
$20,000.
8.
Indian Employment Credit
This
credit is available only if you hire an enrolled member of an American Indian
tribe who both lives and works on an Indian reservation. If this is the case,
you may claim a tax credit equal to 20 percent of the wages and health
insurance benefits you provide the employee. The Indian employment credit ends
December 31, 2021.
When Is a Partner
in a Partnership a 1099 Worker?
When
the individual production activity of a partner is outside his or her capacity
as a member of the partnership, the partnership has two choices:
1.
Allocate
the production income to the partner, and have the partner treat the expenses
as unreimbursed partner expenses (UPE).
2.
Treat
the partner as a 1099 independent contractor for the individual production.
Unreimbursed
Partner Expenses
As
a partner in a partnership, you generally can’t deduct any of the partnership
expenses on your individual tax return—the partnership should pay for and
deduct its own business expenses.
But
if your partnership agreement or business policy forces you as an individual
partner to pay for expenses out of pocket, with no reimbursement available,
then you can deduct the business expenses in full on your individual tax return
as UPE.
Because
the UPE is a trade or business expense, it also reduces your self-employment
tax.
Treatment
as a 1099 Independent Contractor
The
tax code is clear on how this works. IRC Section 707(a)(1) states:
If
a partner engages in a transaction with a partnership other than in his
capacity as a member of such partnership, the transaction shall, except as
otherwise provided in this section, be considered as occurring between the
partnership and one who is not a partner.
Thus,
under this treatment, you would treat that activity as independent contractor
activity and report the income to the partner on IRS Form 1099-NEC, Nonemployee
Compensation.
The
partnership agreement should clearly define how it will treat a
partner’s individual production.
Make Extra
“Catch-Up” Contributions to Retirement Accounts
After
reaching age 50, you can make additional “catch-up” contributions to certain
types of tax-advantaged retirement accounts. For the 2021 tax year, this opportunity
is available if you’ll be age 50 or older on Friday, December 31, 2021.
Specifically,
with an employer-sponsored 401(k), 403(b), 457, or SIMPLE plan, you can make
extra salary-reduction catch-up contributions to your account—assuming the plan
allows catch-up contributions.
If
you are self-employed and have set up a 401(k) plan or SIMPLE IRA for yourself,
you can also make extra catch-up contributions to your account.
Finally,
you can make extra catch-up contributions to a traditional or Roth IRA.
These
catch-up contributions can carry a hefty punch because they are above and
beyond the “regular” annual contribution limits that otherwise apply.
The
following table shows maximum allowable catch-up contributions for the 2021 tax
year:
|
Maximum Catch-Up
Contribution Amounts for 2021 |
||
|
401(k), 403(b), and 457 Plans |
SIMPLE Plan |
Traditional and Roth IRAs |
|
$6,500 |
$3,000 |
$1,000 |
If
you’re married and both you and your spouse are age 50 or older, the amounts
shown above can potentially be doubled, assuming both spouses have accounts set
up in their respective names.
But
with an employer-sponsored plan, maximum salary-reduction catch-up
contributions to your account might be less than the indicated
amounts—depending on employee participation levels and the terms of the plan.
The
Question: How Much Are Catch-Up Contributions Worth?
This
is where it gets interesting. While some folks eagerly embrace any chance to
contribute more money to tax-advantaged retirement accounts, others might need
some encouragement. Those in the latter category may dismiss catch-up
contributions as inconsequential unless proven otherwise. Fair enough. So let’s
prove otherwise.
Proof:
Make 401(k), 403(b), or 457 Plan Catch-Up Contributions
Assume
you turn 50 during 2021 and contribute an extra $6,500 to your account for this
year, and then you do the same for the subsequent 15 years (for a total of 16 years),
up to age 65. Here’s how much extra you could accumulate by that age in your
401(k), 403(b), or 457 account (rounded to the nearest $1,000), assuming the
annual rates of return indicated below:
|
4% Return |
6% Return |
8% Return |
|
$142,000 |
$167,000 |
$197,000 |
These
are substantial amounts. Of course, we are talking before-tax numbers
here.
Proof:
Make SIMPLE Plan Catch-Up Contributions
Say
you turn 50 during 2021 and contribute an extra $3,000 for this year, and then
you do the same for the subsequent 15 years (for a total of 16 years), up to
age 65. Here’s how much extra you could accumulate by that age in your SIMPLE
plan account (rounded to the nearest $1,000), assuming the annual rates of
return indicated below:
|
4% Return |
6% Return |
8% Return |
|
$65,000 |
$77,000 |
$91,000 |
Not
bad! Once again, remember that these are before-tax numbers.
Proof:
Make IRA Catch-Up Contributions
Say
you turn 50 during 2021 and contribute an extra $1,000 for this year, and then
you do the same for the subsequent 15 years (for a total of 16 years), up to
age 65. Here’s how much extra you could accumulate by that age in your IRA
(rounded off to the nearest $1,000), assuming the annual rates of return
indicated below:
|
4% Return |
6% Return |
8% Return |
|
$22,000 |
$26,000 |
$30,000 |
These
are before-tax numbers for traditional IRAs but after-tax numbers for Roth
IRAs.
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