Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
February 1 (The usual deadline of January 31 is a Sunday)
March 1 (The usual deadline of February 28 is a Sunday)
Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.
The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.
Deductions vs. credits
Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit and the American Opportunity Tax Credit.
Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.
First, let’s look at the deduction
For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:
As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.
Two credits aligned
Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.
Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).
Best for you
Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account.
Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.
For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.
Of course, Congress could pass legislation to extend or revise the above rules.
2. Bonus depreciation is available for new and most used property
In the past, used property didn’t qualify. It currently qualifies unless:
3. Taxpayers should sometimes make the election to turn down bonus depreciation
Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.
Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.
4. Bonus depreciation is available for certain building improvements
Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:
The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.
However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.
5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”
If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.
We can help
The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.