6 Tax-Planning Ideas for the End of the Year
As usual, year-end tax planning is complicated by uncertainty as Congress debates new tax-related legislation. But laws passed during the pandemic — including the CARES Act, the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA) — provide a foundation for 2021. Here are six year-end strategies for business owners to consider.
1. Keep workers on the payroll
Initially, the CARES Act authorized the employee retention credit (ERC) for businesses that kept workers on the books throughout the pandemic in 2020. Then the CAA extended the ERC through June 30, 2021, with some enhancements. Finally, the ARPA extended it again through December 31, 2021, with a maximum annual ERC of $28,000 per worker in 2021.
The 2021 credit equals 70% of the first $10,000 of qualified wages per worker per quarter. The ARPA also allows the ERC for “recovery startup businesses” that began operations after February 15, 2021, and have annual gross receipts of $1 million or less. (One caveat: By the time you read this, Congress may have eliminated the ERC for the fourth quarter of 2021 as part of an infrastructure bill. Consult your tax advisor for the most current information.)
2. Harvest capital gains or losses
Generally, investors use capital gains and losses from sales of securities and other capital assets to offset each other. Long-term capital gains for securities held longer than a year are taxed at a maximum 20% rate (15% for most investors). Capital losses offset gains before any excess is applied to the first $3,000 of ordinary income. Any remaining loss is carried over.
Depending on your situation, you might harvest losses to offset high-taxed short-term capital gains or realize gains that may be absorbed by losses from earlier in the year. Review your portfolio before year end and make adjustments accordingly.
3. Set up charitable giving
If you’ll be itemizing deductions this year, donating to charities at year end will bolster your charitable deduction. Generally, you can deduct the full amount of monetary donations that are properly substantiated. Under the latest legislation, the deduction limit for 2021 is 100% of your adjusted gross income (AGI).
The CARES Act also authorized a maximum $300 charitable deduction for monetary gifts by non-itemizers, increased to $600 for joint filers in 2021 by the CAA. 
4. Start using business property
Tax law provides a unique one-two punch for business property placed in service before January 1, 2022:
Section 179 deduction. You can claim a current deduction of up to $1.05 million of the cost of qualified property placed in service in 2021 (with the deduction phased out once the cost of qualified property exceeds $2.62 million). However, the deduction can’t exceed your overall business income.
Bonus depreciation deduction. You might also be able to claim 100% first-year bonus depreciation on qualified property placed in service in 2021. Be aware that the CARES Act fixed a tax law glitch that previously barred bonus depreciation for qualified improvement property.
To reiterate, these two tax breaks aren’t mutually exclusive. So, you may qualify for both tax breaks on the same property.
5. Take RMDs in time
Generally, participants in qualified retirement plans and traditional IRAs must take required minimum distributions (RMDs) annually after reaching age 72 (recently increased from age 70½). This also applies to inherited accounts. The amount is based on account balances at the end of the previous year.

The CARES Act suspended the RMD rules — but only for 2020. If you must take RMDs this year, arrange to receive the money before December 31, 2021. Otherwise, you’ll be liable for a tax penalty equal to 50% of the amount that should have been withdrawn — in addition to regular income tax.
6. Diagnose a medical deduction
If you have substantial unreimbursed medical expenses in 2021 and you itemize, you may be in line for some relief. The threshold for deducting medical expenses was temporarily lowered to 7.5% of AGI by recent legislation. Now the CAA preserves the lower threshold for 2021 and beyond — permanently.

Consider whether it makes sense, tax-wise, to opt for elective medical expenses before 2022 if you’re near or above the threshold. For instance, you might move up your annual physical into this year.
Consult a professional
These are just a half-dozen ideas to consider. Meet with your tax advisor to tailor these and other strategies to your specific situation.
Sidebar: Nail down the difference between repairs and improvements
Now that your employees may be returning to the office or another physical location, does your business need to make some minor repairs? If so, act before year end.

Generally, the cost of repairs is currently deductible, so you can still offset your company’s 2021 tax bill. Conversely, capital improvements must be capitalized and written off over time. It’s important to know the distinctions.
The rule of thumb is that repairs keep property in efficient operating condition, while improvements prolong the property’s useful life, enhance its value or adapt it for a different use. For example, fixing a broken window is a currently deductible repair.
To provide further guidance, the IRS recently issued regulations that include several safe-harbor rules. Contact your tax professional for details.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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