2021 Tax Law Changes for Small Business Owners

Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.

2021 Tax Law Changes for Small Business Owners

Another tax year is coming to a close. Planning ahead for year end is a good tax strategy in order to take advantage of additional tax savings to minimize tax liability. If you haven’t already started prepping your business for year end, it’s a good time to get started. There are several tax law changes that are effective for tax year 2021. And, these changes affect both pass-through filers (S Corporation, partnership, LLC, LLP or sole proprietor) as well as C Corp entities.

Standard Deduction

Following tax reform law in 2017, there has been an increase in the number of taxpayers that have elected the standard deduction rather than claiming itemized deductions. For those filers that do not itemize deductions, the standard deduction has increased to account for inflation for tax year 2021. Married couples will be allotted $25,100 (up from $24,800 in 2020). Single filers can take $12,550 (up from $12,400 in 2020). Head-of-household filers can claim $18,800 (up from $18,650 in 2020). And, for those filers age 65 and older, an additional standard deduction of $1,350 is available.


Qualified Business Income

Pass-through businesses can take advantage of the Qualified Business Income (QBI) deduction provided certain criteria are met. The deduction is based on total taxable income less the standard deduction; you must have positive taxable income to take the deduction. In addition, the deduction can never exceed 20% of your taxable income. For tax year 2021, taxable income must be under $164,900 for single filers (up from $163,300 in 2020) and under $329,800 for joint filers (up from $326,600 in 2020).

Business Meals

The deduction for business meals will see an increase from 50% to 100% in tax year 2021 as compared to year 2020. The deduction is available for food and beverage provided by a restaurant. The rule implies the business owner is present when the food and beverage is provided and the purchase is not excessive under the circumstances. Other expenses for business meals (including purchases from grocery stores, vending machines, and liquor stores), continue to be restricted to the 50% meal deduction.

Corporate Income Tax Rate

C Corporation filers will see an increase in the corporate income tax rate, 28% in tax year 2021 up from 21% in tax year 2020. The corporate income tax rate was previously reduced from 35% through the 2017 Tax Cuts and Jobs Act. Following individual income taxes and payroll taxes, corporate income tax is the third largest source of federal revenue. Pass-through entities are not subject to an entity level tax. Rather, owners are taxed under the individual income tax rates.

Alternative Minimum Tax (AMT)

High income earners are subject to the alternative minimum tax (AMT). Lowering adjusted gross income through contributions to a 401k or health savings plan can help to lower income subject to AMT. The exemption amount for married filing jointly is $114,600 for tax year 2021 (up from $113,400 in 2020). And, the exemption amount for single/head of household is $73,600 for tax year 2021 (up from $72,900 in 2020).