How Changes to the 2021 Tax Code Can Affect Your Business
While the last major change to the tax code occurred in 2018 with the Tax Cut and Jobs Act (TCJA), each year can bring updates and small changes that can easily get missed if you’re not keeping up with updates. To help you prepare and plan in 2021, our small business accountants in Raleigh are sharing the changes to the tax code in 2021 that may affect your business.
COVID-Related Tax Updates for 2021
Due to the COVID-19 pandemic, we saw numerous updates and changes to small business taxes in 2021. Some updates include:
- Families First Coronavirus Response Act (FFCRA) This requires some types of businesses to provide sick leave and family leave to employees who contracted COVID-19 or who had to quarantine or care for family members due to the illness. Businesses who paid out sick leave can get a tax credit for up to 100 percent of the cost of the sick leave pay plus qualified healthcare plan expenses as well as your share of FICA taxes for paid sick leave costs.
- Business Interest Expense Deduction Under the CARES Act, the business interest expense deduction was increased for some business entities from 30 percent to 50 percent of the adjusted taxable income.
- Paycheck Protection Program While there was uncertainty, Congress did roll back the IRS rule that any business expenses paid for with PPP loan money would not be tax deductible. For 2020 taxes and 2021 taxes any business expenses paid for with forgiven PPP loans can be deducted.
- Economic Injury Disaster Loan If you receive an EIDL loan in 2021, you must pay income taxes on this loan.
Inflation Adjustments Affect Income Tax Brackets
If you own a small business that’s a sole proprietorship or LLC, these are pass-through businesses, meaning the income passes through to your personal tax return.
In 2021, the standard deduction will be:
- $25,100 for married couples filing jointly ($300 increase);
- $12,550 for single tax payers and married people filing separately ($150 increase)
- $18,800 for heads of households ($150 increase)
The standard deduction for people whose parents or caregivers can claim them as a dependent can’t exceed either $1,100 or $350 plus the dependent’s earned income.
Updates to Tax Rates and Brackets
While the tax rates themselves aren’t changing, the brackets are, so, depending on your income, you may see some changes. In 2021, the brackets look like this:
- 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly)
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
The maximum earned income credit is $6,728 who have three or more qualifying children.
Retirement Tax Planning Changes
The contribution limits for Roth IRA, which is a common retirement savings account for self-employed people and business owners.
The updated filing status for the Roth IRA phase-out range is:
- Single: $125,000 – $140,000
- Married filing separately – $0 – $10,000
- Married filing jointly: $198,000 – $208,000
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