Accrued Compensation & Inflation Adjustments

Hello all and Happy Halloween! With the election right around the corner, today’s topics include some thoughts and considerations regarding accrued wages and vacation as well as the recently issued inflation adjustments, and an upcoming tax filing reminder.

Accrued Wages and Vacation

As we approach the end of this year, business owners may be faced with circumstances they haven’t seen in the past. Due to the global pandemic, year-end compensation and vacation time could look substantially different than in prior years. Below are some issues to consider:

  • Employees may be willing to travel more around the holidays than they were earlier in the year and, as a result, take more vacation time, particularly if there is a “use it or lose it” policy. Business owners should be proactive in planning for any additional staffing needs or operational interruptions that might result from the increase in vacation to be taken towards year-end.
  • In the absence of a “use it or lose it” policy, business owners need to be prepared to either pay out unused vacation time (if your policy is to pay out unused time), or understand that only accrued vacation paid out in the first two and a half months of the following year is deductible.
  • If you are planning to accrue bonuses at year-end and pay them after year-end, the IRS has several criteria that must be met in order for the accrued bonuses to be deductible. The amount must be determined with reasonable accuracy, the services to which the bonus relates need to have been performed by year-end, and the amount must be paid out in the first two and a  half months of the following year.
  • There are additional limitations on deductibility of accrued bonuses to the owners; however, these limitations depend on the type of entity and the percentage ownership.

These issues can be quite complex. Please don’t hesitate to call your Bertz, Hess & Co. tax and business advisor to discuss in more detail.

Inflation Adjustments

The IRS recently issued Revenue Procedure 2020-45 which includes inflation adjustments for 2021. The tables below serve as a summary for some of the most notable adjustments. The full Revenue Procedure, which includes 2021 tax brackets, can found here. You can also view a summary of the 2021 Social Security adjustments here.

Standard Deduction
Married Filing Joint
Head of Household
Married Filing Sperate
Single
2020
$24,800
$18,650
$12,400
$12,400
2021
$25,100
$18,800
$12,550
$12,550
Max Cap Gain Rate of Zero
Married Filing Joint
Head of Household
Married Filing Separate
Single
2020
$80,000
$53,600
$40,000
$40,000
2021
$80,000
$54,100
$40,400
$40,400
The IRS also issued Notice 2020-79 which includes 2021 retirement contribution amounts. These amounts remain unchanged from the 2020 amounts.
Retirement Amounts
401(k) deferrals
401(k) catch up
Simple IRA
Simple IRA catch up
IRA and Roth IRA
IRA and Roth IRA catch up
2020
$19,500
$ 6,500
$13,500
$ 3,000
$ 6,000
$ 1,000
2021
$19,500
$ 6,500
$13,500
$ 3,000
$ 6,000
$ 1,000

Due Date Reminder

Federal Form 990 – Don’t forget that the extended due date for the Federal Form 990 for 2019 calendar year-end is Monday, November 16th!

Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.

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