Tax Changes In 2021 - Business Owners

S-Corp and Partnership Basis Calculations

S corporation shareholders may be required to file their stock and debt basis calculations with their tax returns.

The S corporation shareholder must provide stock and debt basis calculations if he or she:

· Reports a loss

· Receives a distribution

· Disposes of stock or

· Receives a loan payment from the S corporation

The S corporation shareholders must attach their stock and debt basis calculations to Schedule E (Form 1040).

Partnerships may be required to calculate and report each partner’s capital account balance for 2020 on a Schedule K-1 (Form 1065).

Pay your spouse or children if they work for your business

If you operate your business as a sole proprietorship or a single person LLC and you have children under the age of 18 who work for the business, pay your child/children wages (need a W-2). By doing so, you will 1. not have any payroll taxes on the wages paid 2. The child (depending on the amount paid) will not have any income tax to pay on the wages and 3. The child will be able to establish an IRA.

If you operate as a corporation, both the corporation and the child will pay payroll taxes. In 2020, the standard deduction for the child is $12,400. The child can earn this amount and not pay any income tax. The child can also establish an IRA.

Paycheck Protection Program (PPP) Loan Updates

The CARES Act also tried to help struggling small business owners stay afloat by offering them Paycheck Protection Program (PPP) loans. As long as these loans were used on certain business expenses—payroll, rent or interest on mortgage payments, and utilities, to name a few—these loans were designed to be “forgiven.”

Pending legislation, expenses paid with money from those PPP loans are deductible from your taxable income. Plus, you will have to get your loan forgiveness application approved by the Small Business Administration before you are off the hook for the amount you borrowed. But since the SBA is processing the applications for $525 billion in loans given to 5.2 million borrowers at the speed of a sloth wearing ankle weights, we don’t recommend holding your breath[1].

Qualified Business Income Deduction taxable income rate increases

The deduction applies to qualified: business income, real estate investment trust dividends, publicly traded partnership income.

The income threshold for the Qualified Business Income Deduction has increased for tax year 2020. The new thresholds are:

Married Filing Joint -$326,600

All other filing statuses - $163,300

If your income is above the threshold, or you have a 1099-PATR, the deduction will be calculated on form 8995-A. If your income is below the threshold, form 8995 will be used[2].

Form 1099-MISC & Form 1099-NEC

The 1099-NEC will now be used to report contractor income. Although 1099-MISC is still in use, contractor payments made in 2020 and beyond will be reported on the new 1099-NEC form.

[1] Ramsey Solutions. “Tax Season 2021: What You Need to Know.” Daveramsey.com, Ramsey Solutions, 8 Dec. 2020, www.daveramsey.com/blog/tax-season-what-you-need-to-know. [2] “Increased Income Thresholds for 2020 Qualified Business Income Deduction (QBID).” Support, support.taxslayer.com/hc/en-us/articles/360036149592-Increased-Income-Thresholds-for-2020-Qualified-Business-Income-Deduction-QBID-.