The Tax Landscape for 2021

As seen in Crain's New York Business

With President Joe Biden beginning his first term in office and the second stimulus bill in motion, 2021 will usher in a number of changes to the tax environment that will affect businesses and individuals.

Building on the Consolidations Appropriations Act, which was signed into law in December in the second stimulus round, Biden recently unveiled a third stimulus plan, for $1.9 trillion, to fight the pandemic, roll out vaccines and help individuals who are struggling financially. His American Rescue Plan would bring changes to the tax landscape. In addition to expanding the child tax credit, it would add to the $600 stimulus check (also claimable as a refundable tax credit) that the second stimulus law provided for each eligible family member, bringing the total to $2,000 per family member. He plans to seek this initiative in the first few months of his presidency.

The second stimulus will bring a number of changes to the tax landscape. A big one is the Employee Retention Tax Credit, a refundable tax credit for wages. It was to have ended in December, but it will continue until July 1. In addition, the package provides a five-year extension for the Work Opportunity Tax Credit, which incentivizes employers to hire workers from disadvantaged groups. Meanwhile, the New Markets Tax Credit, created to encourage investment in low-income communities has been extended through 2025. This new law temporarily allows for a 100% allowance for deductions for business meals, although some critics have questioned how easy it will be for businesses to use it, with dining out limited during the pandemic.

For individual taxpayers, the second stimulus also has made permanent the Health Coverage Tax Credit, a deduction for medical expenses above 7.5% of their income, rather than 10%, the percentage that people under 65 years old previously could claim. In addition, the second stimulus extends the $300 charitable deduction for people who don’t itemize their taxes.

Beyond these laws, businesses will be busy at tax time taking into account pandemic aid received in 2020 under the Coronavirus Aid, Relief and Economic Security Act, the original $2.2 trillion stimulus bill passed by Congress and signed into law in March 2020. For instance, businesses can now deduct eligible expenses they covered with a Paycheck Protection Program loan that has been forgiven, or they anticipate will be forgiven, under a recent guidance. Many will juggle applications for forgiveness with applications for a new round of PPP funding authorized under the Cares Act.

To provide clarity on what’s ahead during tax season and beyond, Crain’s spoke with three certified public accountants with expertise in taxes at the beginning of the year.

Here's what Citrin Cooperman Partner and Tax Practice Leader Joe Bublé had to say:

Crain’s: What tax incentives should employers keep in mind when planning their 2021 workforce?

Bublé: It should be noted that the Employee Retention Tax Credit applies to eligible employers whose business operations were fully or partially suspended because of Covid-related issues. The credit is applied against employment taxes. The credit was to have expired Dec. 31, but it was extended with various modifications.

Crain’s: If a business is applying for loan forgiveness through the Paycheck Protection Program, will this affect its 2021 tax obligation?

Bublé: The Consolidated Appropriations Act of 2021 overturned a previous IRS ruling and now clarifies that expenses paid with the proceeds of a PPP loan that is forgiven are deductible. This is a major victory for taxpayers.  

Crain’s: For people looking to start a new business this year, are there any new or imminent issues they should consider when choosing an entity structure?

Bublé: As a result of the Tax Cuts and Jobs Act and the Cares Act, business owners have a number of items to consider when determining the most advantageous way to structure a new business venture. The Tax Cuts and Jobs Act resulted in a decrease in corporate tax rates from a maximum rate of 35% to a flat rate of 21%. The issue of double taxation on distributions, however, continues to have a major effect on shareholders, since the dividend rate is generally 20%, plus an additional net investment income tax at a rate of 3.8%. Companies that will not distribute out profits, however, may benefit by this reduced rate.

Regarding pass-through entities, the Qualified Business Income deduction allows certain business owners to deduct up to 20% of income taxed at the individual level. For example, an individual taxed at a 37% marginal tax rate will have an effective tax rate of 29.6% with the QBI deduction. Although this rate is higher than the 21% corporate rate, the issue of double taxation is minimized. In addition, the Biden administration has said the corporate tax rate may increase to 28%, along with other additional rate increases at the individual level.

Crain’s: With the Georgia Senate runoff election decided, what does the tax landscape look like for the small business in a global market?

Bublé: With the runoff election now decided and the Democratic Party in control of the Oval Office and both chambers of Congress, cross-border small businesses may well be in for another turbulent tax ride. The Tax Cuts and Jobs Act of 2017 put in place a one-size-fits-all set of federal international tax rules that do not seem to consider the practical impact to cross-border small businesses. President Biden’s tax proposals would appear to modify or eliminate some of these provisions, resulting in a potential increase to the current tax burden on the U.S. cross-border small business community. Without any targeted carve-outs or revisions to these rules for such businesses as part of any future tax reform, the U.S. tax burden will likely rise. This includes U.S.-based businesses with foreign subsidiaries and U.S. individuals living abroad with foreign businesses—they should anticipate that their U.S. tax burden will go up.

Crain’s: In light of the Georgia runoff results, what are some of the planning considerations people should be thinking about for income taxes and estate and gift taxes?

Bublé: The results of the Georgia Senate runoff election, in many people’s opinion, make it more likely that there will be substantial changes in estate and gift taxes. The lifetime exemption might be decreased, the estate and gift tax rate might be increased, and the step up in basis rules could be repealed. We believe that uncertainty will likely affect the decisions that clients make with respect to planning. The approach at the outset, however, should still be the same. We believe the best place to start the conversation with clients is to gather their financial information and current legal documents, then speak to the clients about what their objectives are.

Crain’s: Many individuals left their primary residences in New York City in the pandemic, an action that can have tax implications. What should taxpayers be aware of as they prepare to file in 2021?

Bublé: Historically, New York has devoted significant resources to auditing taxpayers claiming a change in domicile, while other states, New Jersey among them, have devoted few resources. New York’s vigorous enforcement efforts will likely continue if not increase. At this time it is unclear whether a state such as New Jersey can and will increase its audit activity on this issue. Regardless, taxpayers should take the time to understand fully the laws and requirements related to changing a domicile, and they should carefully maintain detailed documentation supporting their claim. If a state decides to audit a taxpayer claiming a change in domicile in 2020, the notification of the audit may not be sent until 2024. Therefore, it is important to create an audit file contemporaneously as opposed to years after the change. As with all tax matters in a fast-changing and complex environment, excellent record keeping is essential.