Taxes

A major takeaway from the last 20 months of living in a pandemic is the importance of planning and adaptability. As 2021 comes to an end, there is still so much unknown about what 2022 will bring. Will we ever get back to “normal” What new legislation will affect the way I do business? This is what we as CPAs hear from the business community as they continue navigating all the changes that keep coming their way. 

We do know this: Planning now can help businesses make more informed decisions, which leads to more success, profits and adaptability. Tax planning is a big piece of the planning pie. As much as we accountants love to crunch numbers, it can be difficult to plan for future taxes without a crystal ball next to the giant calculator on our desk. 

Federally, several proposed tax legislations are floating out there, and at the time of writing this, there is uncertainty about what will pass and when. For the state of Minnesota, we have what is called static conformity, which means federal tax law changes will not automatically translate to Minnesota tax law changes. If Minnesota does not formally adopt federal changes through the legislative process, there could be differences in the treatment of taxable items between the two systems.  

Let’s examine some hot topics, talking points and tax planning ideas for decision-makers to consider and discuss with their tax and financial advisers. 

Minnesota conformity

Lawmakers passed an omnibus tax bill on July 1, 2021, that retroactively conformed to recent federal tax provisions. Major provisions include:

• Exclusion from income of Paycheck Protection Program (PPP) loan forgiveness.
• Exclusion from income of Economic Injury Disaster Loans (EIDL), loan forgiveness and U.S. Small Business Administration (SBA) subsidy payments for 2020 only.
• Section 179 conformity to federal, meaning you can expense up to $1.05 million of eligible fixed assets such as equipment. Special rules apply to building improvements and vehicles. 

Takeaways

• If you have EIDL, SBA subsidies, Restaurant Revitalization or Shuttered Venue operator grant forgiveness, be prepared to pay Minnesota tax for the tax year 2021 unless future conformity is passed.
• If you had PPP loan forgiveness in 2021 you no longer need to budget MN taxes for it.
• Evaluate an opportunity for tax planning: Section 179 versus bonus depreciation. Bonus depreciation taken federally must be spread over five years for Minnesota but can create a tax loss. Section 179 expensing cannot create a loss but will not have add-back for MN purposes. Accelerated depreciation is a great way to manage your taxes, as there are various methods to accomplish your tax planning goals. Planning might be needed now to purchase and place new equipment in service before December 31, 2021.

Suppose you had already filed your 2020 Minnesota return before the conformity bill. In that case, the Minnesota Department of Revenue (DOR) is working through adjusting the returns and hopes to issue refunds without taxpayers needing to amend. Watch for a letter from the DOR if you were affected by late conformity. 

New Minnesota pass-through entity election (PTE) 

In 2018, the Tax Cuts and Jobs Act limited the State and Local Tax (SALT) deduction to $10,000 and increased the standard deduction. In a high tax state like Minnesota, individual taxpayers can easily surpass $10,000 of real estate and income taxes. Due to this, many individuals no longer itemize their deductions and instead take the standard deduction, effectively losing the federal tax benefit of paying state taxes. If the SALT cap still exists for the tax year 2021 and beyond (it is a hot topic in discussion with federal lawmakers), Minnesota will allow a workaround. The PTE election is an option for eligible PTEs that file as a partnership or an S corporation to pay the Minnesota tax on the business income at the entity level. This allows the business to deduct the Minnesota taxes, as they have no cap on state tax as individuals do. The IRS has blessed these SALT workarounds and almost half of the states have or will be enacting similar PTE options. 

Takeaway: Talk to your tax adviser to determine if your pass-through is eligible or possibly can become eligible to take advantage of this opportunity to save federal tax. This could change how or if you pay a fourth-quarter tax estimate. Action may need to be taken before December 31, 2021. 

Federal tax planning considerations

• For entities operating as C corporations, there could be a possible tax rate increase coming in 2022. Planning should be considered to accelerate income into 2021, or delay expenses to 2022 to take advantage of the current 21 percent flat rate.
• For entities operating as sole proprietors, S corporations or partnerships, the 20 percent qualified business income (QBI) deduction continues to be key in tax planning. The calculation is complex, and full-picture tax planning is needed to maximize it. It is possible that a year-end bonus or accelerated deduction into 2021 could help provide a more significant QBI deduction. 
• The estate and gift tax landscape could totally change. For those thinking of selling or gifting their business, you should be talking to your accountant and lawyer and be ready to adapt quickly in the event of a new tax bill.  
• Business entity election — should you consider changing your entity selection to maximize tax savings? 

There are many other proposed changes that could increase your tax bill for 2021 and future tax years. While it may not be avoidable, it could be helpful to plan for additional taxes when making financial decisions for budgeting purposes. Having trusted advisers in your corner is key to taking swift action when needed to adapt to the ever-changing world we are living in.