To Our Clients and Friends:
As we approach year-end, it’s time to think about steps you can take to help reduce your 2021 tax bill. In what appears to be the new normal, 2021 is shaping up to be a year with plenty of tax law changes. COVID-related disaster relief signed into law last December made several favorable (mostly temporary) changes to the 2021 rules. Then, in March, the American Rescue Plan Act, with another set of tax law changes, was enacted. We’ll highlight some of the planning opportunities these provide.
In addition to all the known changes impacting 2021, it looks like we may end the year with some other big (and probably not so favorable) tax law changes. As you undoubtably know, President Biden has proposed raising the ordinary income and capital gains tax rates on individuals. The ordinary income tax rate increase is proposed to take effect in 2022. Some members of the House are trying to make any increase in the capital gains rate retroactive to sales after 9/13/21, but there’s no guarantee that will happen. A corporate tax rate hike has also been proposed for tax years beginning after 2021. Currently, the House is negotiating to come up with a bill based on the President’s proposals.
Even though we don’t know yet what, if anything, will become of President Biden’s proposals, there are still many things you might consider doing before year-end to minimize your 2021 tax bill. We’ll point out some strategies and things to consider in light of potentially higher tax rates in 2022. Clearly, uncertainty makes tax planning challenging, but putting it off until we know the fate of these proposals may leave you with too little time to make any moves before year end. It’s best to have a plan in case of a tax increase, so that you can pull the trigger if need be.
Year-end Planning Moves for Individuals
• Make Your Plan for Possible Higher Income Tax Rates. If you think that you will be in a higher tax bracket in 2022 than in 2021, the conventional wisdom of deferring income and accelerating deductions is flipped upside down. Instead, you generally should try to accelerate income into 2021 (where it will be taxed at the lower rate) and defer deductions until 2022, when they will generate a bigger tax benefit. Of course, whenever you accelerate income, you have to keep the time value of money in mind and realize that you are giving up some deferral to have the income taxed at a lower rate. We can help you determine whether the tax savings associated with accelerating income into 2021 to have it taxed at a lower rate exceeds the cost of giving up the tax deferral.
• Bunch Itemized Deductions to Maximize Their Worth. For 2021, the standard deduction amounts are $12,550 for singles and those who use Married Filing Separate (MFS) status, $25,100 for Married Filing Joint (MFJ) couples, and $18,800 for Heads of Household (HOH). If your total annual itemizable deductions for 2021 will be close to your standard deduction amount, consider bunching your expenditures for itemized deductions so that they exceed the standard deduction in one year, and then use the standard deduction in the following year. Note that if you decide to take the standard deduction in 2021 (and bunch itemized deductions in 2022), you can still take an “above the line” deduction for charitable contributions in 2021, up to $300 ($600 if MFJ).
• Decide Whether Selling Investment Assets before Year-end Makes Sense. Regardless of whether you think you will be in a higher tax bracket in 2022, you should look at your investment portfolio held in a taxable account and see if selling before year end could make tax sense. To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from before 2021 (or you have some capital losses you can trigger), selling winners before year-end will not result in any tax hit. Triggering short-term capital gains that can be sheltered with capital losses is a sweet deal because net short-term gains would otherwise be taxed at higher ordinary income rates. If you have investments that have declined in value, you might want to take the resulting capital losses this year. Those losses would shelter capital gains, including high-taxed short-term gains, from other 2021 sales.
• Take Advantage of Tax Credits Extended through 2021. Credits are still available for: (1) energy-efficient home improvements, (2) residential energy efficient property (including solar energy equipment), (3) fuel-cell vehicles, (4) electric motorcycles, and (5) alternate fuel vehicle refueling equipment. If you’re thinking about purchasing any of these, let us know. We can help you determine whether your expenditure qualifies for a credit.
• Consider a Roth IRA Conversion. This may be the perfect time to make that Roth conversion you’ve been thinking about, especially if you think you will be in a higher tax bracket in 2022. Although you will pay tax as if the assets had been distributed from the traditional IRA, your future Roth IRA distributions can potentially be tax-free. And, unlike traditional IRAs, Roth IRAs don’t have minimum distribution requirements during the account owner’s lifetime.
• Claim the 100% Gain Exclusion for Qualified Small Business Stock. 100% of the gain on eligible sales of Qualified Small Business Stock (QSBS) that was acquired after 9/27/10 can be excluded from income. QSBS must be held for more than five years to be eligible for the gain exclusion. Either 50% or 75% of the gain (depending on when the QSBS was acquired) can be excluded for stock acquired before 9/28/10. Contact us if you think you own stock that could qualify.
• Consider Intrafamily Loans. Interest rates are at a historic low. This scenario creates an attractive opportunity for those interested in assisting family members financially and transferring assets in a tax-efficient manner. Intrafamily loans, along with proper gift tax planning, may be a smart move.
• Contribute to a Traditional IRA. Individuals over the age of 70½ who are still working in 2021 can contribute to a traditional IRA. However, if you’re over age 70½ and considering making a charitable donation directly from your IRA (known as a Qualified Charitable Distribution or QCD) in the future, making a deductible IRA contribution for years you are age 70½ or older will affect your ability to exclude future QCDs from your taxable income.
Year-end Planning Moves for Small Businesses
If you own a business, consider the following strategies, in addition to planning for possibly higher tax rates in 2022 as discussed above. Note that proposed tax rate increases would potentially affect income earned by sole proprietors, pass-through entities, and corporations.
• Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Contact us for more information on small business retirement plan options, and be aware that if your business has employees, you may have to cover them too.
• Plan Asset Purchases. 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar-year 2021 (and unless something changes, 2022). That means your business might be able to write off the entire cost of some or all of your 2021 asset additions on this year’s return. Some assets that don’t qualify for bonus depreciation are eligible for Section 179 expensing. For qualifying property placed in service in tax years beginning in 2021, the maximum Section 179 deduction is $1.05 million. The Section 179 deduction begins to phase-out when the cost of Section 179-eligible property placed in service during the year exceeds $2.62 million.
This letter only covers some of the year-end tax planning moves that could potentially benefit you, your family, and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for you.
We are writing to let you know about the significant enhancements made to the child tax credit (CTC) by the American Rescue Plan Act of 2021 (ARPA). These enhancements temporarily expand the eligibility for, and the amount of, the child tax credit (CTC) for tax years beginning in 2021 and require IRS to make monthly advance payments of the credit to taxpayers in July through December of 2021.
Under pre-ARPA law, the CTC was $2,000 per "qualifying child." A qualifying child was defined as an under-age-17 child whom you could claim as a dependent (i.e., a child related to you who, generally, lived with you for at least six months during the year), and who was a U.S. citizen or national, or a U.S. resident.
The $2,000 CTC was phased out (reduced) if your modified adjusted gross income (AGI) was over $200,000, or over $400,000 if you filed jointly, at a rate of $50 per $1,000 (or part of a $1,000) by which modified AGI exceeded the threshold amount.
The CTC was also partially refundable—to the extent of 15% of your earned income in excess of $2,500. An alternative formula for determining refundability applied for taxpayers with three or more qualifying children. But, the maximum refundable credit for 2021 was $1,400 per qualifying child.
A $500 nonrefundable credit (per dependent) (so called "family credit") is also allowed for each qualified dependent who isn't a qualifying child under the CTC definition.
CTC temporarily expanded for 2021. For 2021, ARPA expands the CTC as to eligibility and amount, as follows:
1. The definition of a qualifying child is broadened to include 17 year-olds (i.e., children who haven't turned 18 by the end of 2021).
2. The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year). But, the increased credit amounts are subject to their own phase-out rule.
So, for 2021, the CTC is subject to two sets of phase-out rules:
o The increased CTC amount (the $1,000 or $1,600 amount) is phased out for taxpayers with modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses; and
o After applying the above phase-out rule to the increased amount, your remaining $2,000 of CTC is subject to the existing phase-out rules (i.e., the $2,000 of credit is phased out for taxpayers with modified AGI of over $200,000/$400,000 for joint filers).
If you aren't eligible to claim an increased CTC in 2021, you can still claim the regular $2,000 CTC, subject to the existing phase-out rules.
3. The CTC is fully refundable for 2021 for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.
A member of the U.S. Armed Forces stationed outside the U.S. while serving on extended active duty is treated as having a principal place of abode in the U.S.
The phase-out rules apply regardless of refundability, and the $500 family credit for dependents other than qualifying children remains nonrefundable.
Advance payments of the 2021 CTC. IRS must establish a program to make monthly (periodic) advance payments (generally by direct deposits) which in total equal 50% of IRS's estimate of the eligible taxpayer's 2021 CTCs. These payments will be made in July 2021 through December 2021. To determine your advance CTC payments, IRS will look at your 2020 return, or, if it's not yet filed, your 2019 return.
If you receive advance CTC payments that are in excess of the CTC actually allowable to you for 2021, you'll have to repay those excess amounts (by increasing the tax liability reported on your 2021 returns). But, for certain low- and moderate-income taxpayers, the excess may be reduced by a safe harbor amount, limiting the amount by which they'll have to increase tax liability, and allowing them to keep a portion of the excess amount.
Application of the CTC in U.S. territories. For 2021, the CTC is made fully refundable for taxpayers who are Puerto Rico bona fide residents for the tax year, claimed by filing a tax return with the IRS. But, IRS won't make advance payments to residents of Puerto Rico.
Other special rules apply for residents of Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands (the so-called "Mirror Code territories"), and American Samoa.
Social security number still required to claim CTCs for 2021. Not changing for 2021: to claim the CTC, you must include each qualifying child's name and social security number (SSN) on your tax return, and those SSNs must have been issued before the return's filing due date. If a qualifying child doesn't have an SSN, you will be able to claim the $500 family credit for that child—using an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).
The changes made by the Act should make the CTC more valuable and more widely available to many taxpayers in 2021. If you have children under 18, or other dependents, and would like to determine if these changes can benefit you in 2021, please give me a call.
Very truly yours,
FPM & Associates
Right now your highest priority continues to be the health of those you love and yourself.
But you may have read a letter that we recently sent that summarized the Coronavirus Aid, Relief, and Economic Security (CARES) Act tax provisions.
That letter included a brief discussion of the CARES Act’s deferral of and changes to the limit on excess business losses. Here is more about the deferral and changes.
Deferral of the excess business loss limits. The Tax Cuts and Jobs Act (the 2017 Tax Law) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss carryforwards in the following tax year. The covered taxpayers are individuals (or estates or trusts) that own businesses directly or as partners in a partnership or shareholders in an S corporation.
The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the 2017 Tax Law to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.
The postponement means that we will be amending
1. Any filed 2018 returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
2. Any filed 2019 returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).
If you filed any such return(s), let us know at your convenience if there are other changes we should reflect on the amended return(s).
Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).
Changes to the excess business loss limits. The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 Tax Law.
Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to performing services as an employee aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you are planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.
Another change provides that an excess business loss is taken into account in determining any net operating loss (NOL) carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (the qualified business income deduction that effectively reduces income taxes on many businesses).
And because capital losses of non-corporations can’t offset ordinary income under the NOL rules,
1. Capital loss deductions are not taken into account in computing the excess business loss, and
2. The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.
We will be pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not.
We continue to wish all of you the very best in a difficult time,
As many of you are aware the CARES Act recently passed by congress has provided loans to assist small businesses. Below please find links to the borrow guide and the application.
We encourage you to review this information and contact us if we can assist you with any documents required.
We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19 (commonly referred to as the Coronavirus). Along with those paramount health concerns, you may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout. In addition to the summary of IRS actions and earlier-enacted federal tax legislation that I previously sent you, I now want to update you on the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress’s gigantic economic stimulus package that the President signed into law on March 27, 2020.
Recovery rebates for individuals.
To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).
Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ‘‘phase-in’’—all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.
The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.
Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.
Waiver of 10% early distribution penalty.
The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.
Charitable deduction liberalizations.
The CARES Act makes four significant liberalizations to the rules governing charitable deductions:
1. Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
2. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
3. Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
4. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.
Break for remote care services provided by high deductible health plans.
For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.
Break for nonprescription medical products.
For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.
Business only provisions
Employee retention credit for employers.
Eligible employers can qualify for a refundable credit against, generally, the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis.
The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.
For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren’t providing services because of the business suspension or reduction in gross receipts described above.
For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven’t been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.
Wages don’t include
1. Wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave,
2. Wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S) or
3. Wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51).
An employer can elect to not have the credit apply on a quarter-by-quarter basis.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.
Delayed payment of employer payroll taxes.
Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn’t available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).
Net operating loss liberalizations.
The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.
The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for:
1. A 100% deduction of NOLs arising in tax years before 2018, and
2. A deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.
Deferral of noncorporate taxpayer loss limits.
The CARES Act retroactively turns off the excess active business loss limitation rule of the TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.)
The CARES Act clarifies, in a technical amendment that is retroactive, that an excess loss is treated as part of any net operating loss for the year, but isn’t automatically carried forward to the next year. Another technical amendment clarifies that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (qualified business income deduction).
Still another technical amendment clarifies that business deductions and income don’t include any deductions, gross income or gain attributable to performing services as an employee. And because capital losses of non-corporations cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the Code Sec. 461(l) loss and the amount of capital gain taken into account cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Acceleration of corporate AMT liability credit.
The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.
Relaxation of business interest deduction limit.
The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation.
Technical correction to restore faster write-offs for interior building improvements.
The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats
1. A wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or
2. If required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years.
The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.
Accelerated payment of credits for required paid sick leave and family leave.
The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.
Pension funding delay.
The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.
Certain SBA loan debt forgiveness isn’t taxable.
Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.
Suspension of certain alcohol excise taxes.
The CARES Act suspends alcohol taxes on spirits withdrawn during 2020 from a bonded premises for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARSCoV- 2 or COVID-19.
Suspension of certain aviation taxes.
The CARES Act suspends excise taxes on air transportation of persons and of property and on the excise tax imposed on kerosene used in commercial aviation. The suspension runs from March 28, 2020 to December 31, 2020.
IRS information site. Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at www.irs.gov/coronavirus.
I will be pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not.
I wish all of you the very best in a difficult time.
Right now, your highest priority is the health of those you love and yourself. But if you have time to read about some non-medical but important matters related to the health crisis, here is a summary of IRS action already taken and federal tax legislation already enacted to ease tax compliance burdens and economic pain caused by COVID-19 (commonly referred to as Coronavirus).
I’ll be sending you summaries of additional developments as they take place.
Filing and payment deadlines deferred.
After briefly offering more limited relief, the IRS almost immediately pivoted to a policy that provides the following to all taxpayers—meaning all individuals, trusts, estates, partnerships, associations, companies or corporations regardless of whether or how much they are affected by COVID-19:
1. For a taxpayer with a Federal income tax return or a Federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.
2. The taxpayer doesn’t have to file Form 4686 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.
3. The relief is for
A. Federal income tax payments (including tax payments on self-employment income) and Federal income tax returns due on April 15, 2020 for the person’s 2019 tax year, and
B. Federal estimated income tax payments (including tax payments on self-employment income) due on April 15, 2020 for the person’s 2020 tax year.
4. No extension is provided for the payment or deposit of any other type of Federal tax (e.g. estate or gift taxes) or the filing of any Federal information return.
5. As a result of the return filing and tax payment postponement from April 15, 2020, to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.
Favorable treatment for COVID-19 payments from Health Savings Accounts .
Health savings accounts (HSAs) have both advantages and disadvantages relative to Flexible Spending Accounts when paying for health expenses with untaxed dollars. One disadvantage is that a qualifying HSA may not reimburse an account beneficiary for medical expenses until those expenses exceed the required deductible levels. But IRS has announced that payments from an HSA that are made to test for or treat COVID-19 don’t affect the status of the account as an HSA (and don’t cause a tax for the account holder) even if the HSA deductible hasn’t been met. Vaccinations continue to be treated as preventative measures that can be paid for without regard to the deductible amount.
Tax credits and a tax exemption to lessen burden of COVID-19 business mandates.
On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes the four tax credits and one tax exemption discussed below.
Payroll tax credit for required paid sick leave (the payroll sick leave credit). The Emergency Paid Sick Leave Act (EPSLA) division of the Act generally requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee that is a caregiver.
The tax credit corresponding with the EPSLA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit can be increased by
1. The amount of certain expenses in connection with a qualified health plan if the expenses are excludible from employee income and
2. The employer’s share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA.
Credit amounts earned in excess of the employer’s 6.2% Social Security (OASDI) tax (or in excess of the Railroad Retirement tax) are refundable. The credit is electable and includes provisions that prevent double tax benefits (for example, using the same wages to get the benefit of the credit and of the current law employer credit for paid family and medical leave). The credit applies to wages paid in a period
1. Beginning on a date determined by IRS that is no later than April 2, 2020 and
2. Ending on December 31, 2020.
Income tax sick leave credit for the self-employed (self-employed sick leave credit). The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.
Accordingly, the self-employed person can receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. However, those amounts are decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid sick leave from an employer under the Act. The credit applies to a period
1. Beginning on a date determined by the IRS that is no later than April 2, 2020 and
2. Ending on December 31, 2020.
Payroll tax credit for required paid family leave (the payroll family leave credit). The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The leave generally is available when an employee must take off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either
1. Closes a school or childcare place or
2. Makes a childcare provider unavailable.
Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee’s pay rate and pay hours. However, the paid leave can’t exceed $200 per day and $10,000 in the aggregate per employee.
The tax credit corresponding with the EFMLEA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.
Income tax family leave credit for the self-employed (self-employed family leave credit). The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed above. Thus, a self-employed person is treated as both an employer and an employee for purposes of the credit and is eligible for the credit to the extent that an employer would earn the payroll family leave credit if the self-employed person were an employee.
Accordingly, the self-employed person can receive an income tax credit with a maximum value of $10,000 as per the payroll family leave credit. However, under rules similar to those for the self-employed sick leave credit, that amount is decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid family leave from an employer under the Act. The credit applies to a period
1. Beginning on a date determined by IRS that is no later than April 2, 2020 and
2. Ending on December 31, 2020.
Exemption for employer’s portion of any Social Security (OASDI) payroll tax or railroad retirement tax arising from required payments. Wages paid as required sick leave payments because of EPSLA or as required family leave payments under EFMLEA aren’t considered wages for purposes of the employer’s 6.2% portion of the Social Security (OASDI) payroll tax or for purposes of the Railroad Retirement tax.
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