Page 60 - BusinessWest November 24, 2021

Dollars
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limit is based on their taxable income. For other businesses, including sole proprietorships, part- nerships, and S-corporations, the limit is based on their aggregate net income for the year from the businesses from which the contributions are made.
Paycheck Protection Program
If your business had a PPP loan forgiven during 2021, the amount forgiven should be reported as debt-forgiveness income on your income state- ment. As a reminder, PPP loan forgiveness income is non-taxable federally.
Principal and interest payments on loan pay- ments made by the SBA established by the CARES Act and revised by the Economic Aid Act are not taxable for federal income-tax purposes. The
SBA is authorized to automatically pay up to six months of principal and interest.
Net Operating Losses
Generally, net operating losses (NOL) arising in 2021 or later cannot be carried back and must be carried forward indefinitely.
Net operating losses arising in tax years 2018 through 2020 can be caried back five years and then carried forward indefinitely. The NOL car- ryforwards beginning in 2018 can offset only 80% of taxable income for taxable years beginning in 2021.
NOL carryforwards arising in taxable years prior to 2018 can first offset 100% of 2021 taxable income. If all pre-2018 NOLs are used in 2021 and taxable income remains, any NOL carryovers from
2018-20 can offset only 80% of any remaining tax- able income.
Bonuses
With the current improvement in the economy, and employees being harder to find and retain, a net-income-reduction measure (in turn tax reduc- tion), businesses should consider bonuses for employees, whether through incentives or through setting work goals. Bonuses should also be contin- gent on cash flows and the current net income of the company.
For bonuses paid to a controlling shareholder (an individual who owns directly or indirectly greater than 50% of the value of a corporation’s stock), the bonus is considered paid in the year the controlling shareholder reports the income. Thus, in order to deduct the controlling share- holder’s 2021 bonus, it must be paid to the shareholder prior to the end of 2021.
Bonuses subject to a contingency cannot be accrued in 2021 and paid in 2022 even if paid within two and a half months of year-end. There- fore, if employees cannot receive their deferred bonuses for performance in 2021 unless they are still employed in the year 2022 bonus payment date, the company’s liability for the bonus is sub- ject to a contingency and cannot be deducted for tax purposes in 2021, even if paid within two and a half months of year-end.
Similarly, the IRS has held that bonuses are not fixed in the year of service when the amount of individual awards are finalized but revert back to the company if an employee left before receiv- ing the bonus, even though the forfeited amounts could be considered insignificant.
IRS rulings provide that an employer can
establish the liability under the first prong of the all-events test for bonuses payable to a group of employees even though the employer does not know the identity of any particular bonus recipi- ent, or the amount payable to that recipient, until after the end of the tax year if the amount of bonuses payable under the program is determin- able through a formula that was fixed prior to the end of the year, or through other corporate action that fixed the amount payable to the employees as a group.
“
strategy for year-end is an important part of business decision-making processes.”
Any bonus amount allocable to an employee who was not employed on the date on which bonuses were paid and was reallocated among the other eligible employees and did not revert back to the company is deductible up to the amounts paid within two and a half months of year-end.
Bottom Line
Having a well-thought-out tax-planning strat- egy for year-end is an important part of business decision-making processes. Contact your CPA to help you develop a plan specific to your goals and needs. u
Jim Moran, CPA is an accountant in the Greenfield office of Melanson; (413) 773-5405.
Having a well-thought-out tax-planning
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ACCOUNTING & TAX PLANNING
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