A lot of our small-business owners often are eligible for the Earned Income Credit in some of their low-profit years (caused by large equipment purchases or other one-time expenditures of their business). In determining the Earned Income Credit for 2021, taxpayers can use their 2019 earned income if that amount is higher than their 2021 earned income to use in calculating the Earned Income Credit. For self-employed small-business owners there is often a conflict between taxable income and earned income on the tax return (they want a small taxable income BUT a large earned income). In order to get a decent Earned Income Credit in normal years, the small-business owner needs decent taxable income, which causes the small-business owner to pay self-employment tax, which reduces the owner’s overall refund. By taking advantage of this special rule for 2021, the small-business owner can now have low taxable income in 2021 and pay no self-employment tax and still get a large Earned Income Credit, and thereby a larger refund.
Accounting and Consulting