Due to cost-of-living adjustments (COLAs), various limitations and amounts used for tax deductions, credits, and other purposes, the tax rules for 2021 will be slightly different than in 2020. Because inflation has been so low, some rules are unchanged. To help you prepare for the year ahead, the following are some of the key changes to know for 2021.
Changes for deductions and credits
Various dollar amounts for 2021 have been increased slightly. Key items for small businesses include:
- Small employer health insurance credit: Average annual payroll amount is $27,800 (up from $27,600 in 2020)
- Adoption assistance program: $14,440 (up from $14,300 in 2020)
- Section 179 deduction: $1,050,000 (up from $1,040,000 in 2020)
- Qualified business income deduction: taxable income limits increased to $329,800 for joint filers, $164,925 for married persons filing separately, and $164,900 for other filers (up from $326,600 for joint filers and $163,300 for all other filers in 2020)
- Excess business loss threshold is $524,000 for joint filers and $262,000 for other filers (this limit was suspended for 2020)
- Qualified small employer health reimbursement arrangements (QSEHRAs): $10,700 for family coverage and $5,300 for self-only coverage (up from $10,600 for family coverage and $5,250 for self-only coverage in 2020)
Some items that are unchanged for 2021 include:
- Medical FSAs: $2,750, with a carryover limit of $550.
- Gross receipts test for using the cash method and for other purposes: average annual gross receipts in the 3 prior years not exceeding $26 million
Changes for retirement plans
The IRS announced that some dollar limits on contributions, benefits, and other rules have increased slightly, while other amounts remain the same.
Changes for 2021
- Contribution limits for profit-sharing and other defined contribution plans: $58,000 (up from $57,000 in 2020)
- Compensation on which contributions and benefits are figured: $290,000 (up from $285,000)
- Compensation for SEPs: employees who attained age 21, worked for the business in at least 3 of the past 5 years and earned $650 (up from $600) for the year are eligible to participate in the plan
Amounts unchanged for 2021
- Defined benefit plan annual benefit amount: $230,000
- Elective deferrals to 401(k) plans: $19,500 (plus $6,500 catch-up for those age 50 or older by year end)
- Elective deferrals to SIMPLE IRAs: $13,500 (plus $3,000 catch-up for those age 50 or older by year end)
Changes for payroll taxes
Looking ahead to payroll taxes for 2021, note that the Social Security wage base has increased to $142,800 (up from $137,700). This change increases the employer and employee portion of FICA for Social Security taxes on employees earning up to the new limit.
Review these upcoming changes with your CPA or other tax advisor so you can prepare for them. Keep in mind that COLAs are only part of the changing tax landscape for 2021. New tax rules that go into effect, as well as those expiring at the end of 2020, will affect tax planning for the coming year.