The 2021 tax season may still be lingering for some of us in the Gulf South, but it’s never too early to start preparing for next year’s tax return. Factors such as pandemic-related tax credits, unemployment benefits, and remote work, along with natural disasters, will make 2021 tax returns particularly complicated. In light of everything that happened this year, taxpayers will benefit from diligently tracking all the information they will need for their tax returns.
Maintaining proper documentation and tax records now will simplify your tax return preparation during the spring filing season. We have outlined some matters that are specifically important for the 2022 filing season.
Relevant payroll tax returns should be provided to your tax preparer in order to adjust 2021 salary deductions related to claiming any credits.
In the past, the IRS has allowed for an Employee Retention Tax Credit (ERTC) for employers who operated in a qualified disaster zone, became inoperable due to the disaster, and continued to pay employees. While it is too early to say if the IRS will allow this credit for Hurricane Ida or Hurricane Nicholas, it is still good practice to maintain records of the dates the business was inoperable and the amount employees were paid during that time in the event this is an allowable credit. This information will be needed to calculate the amount of the credit allowed.
Business interruption insurance is used to compensate for income that would have otherwise been earned and taxed. Therefore, this compensation is generally taxable.
However, taxed business interruption insurance payments may be offset by business casualty losses that could be tax-deductible, to the extent that those losses are not already covered by some type of insurance. In order to support a deduction, the taxpayer must be able to document or explain the loss and prove it was caused by the event that led to the business disruption.
Many taxpayers have continued working remotely due to the pandemic. Home office expenses can be deducted for qualifying self-employed taxpayers and independent contractors that use a portion of their home exclusively for conducting business on a regular basis. For these taxpayers, it is important to maintain records of eligible expenses as well as square footage of your workspace to provide to your CPA in order to calculate the correct expense amount.
In March of 2021, the federal government issued a third stimulus payment to those who qualified. Inform your CPA if you received this stimulus payment and its amount. In some cases, taxpayers who did not receive this stimulus based off of their 2020 tax return could qualify for it on their 2021 return.
Taxpayers should maintain records of their losses incurred due to either hurricane in order to calculate if the taxpayer can claim the loss as an itemized deduction.
Taxpayers eligible for the child tax credit will need to know the total amount of the advance credit dollars they received in 2021 and compare to the total amount the taxpayer is allowed to claim on their 2021 tax return
The IRS is expected to send out letters to taxpayers in January 2022, referred to as Letter 6419, stating the total amount of money the taxpayer received in 2021. Hold on to this notice as you will need this information when you file your 2021 tax return.
Though these bills are not final and subject to changes, taxpayers should begin considering the potential changes that could affect them. One potential change would be a significant update to the capital gains tax rate. While not final, in one proposal, the rate would increase from 20% to 25% and would be effective for transactions after September 13, 2021.
Do you need help navigating a tax season unlike any other? P&N advisors have been diligently analyzing the impacts that the pandemic, natural disasters, and legislative developments may have on a variety of tax situations. We're ready to help you work through these unusual circumstances. Please contact us or connect with your P&N advisor to discuss your organization’s questions, concerns, and priorities.