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U.S. House passes the Build Back Better Act

accountant, accounting, Advice, business advisory, consulting, cpa, irs, tax

The U.S. House of Representatives passed a crucial part of President Biden’s agenda by a vote of 220-213 on November 19. The Build Back Better Act (BBBA) includes numerous provisions related to areas ranging from health care, climate change and immigration to education, social programs and, of course, taxes.

Impact on the deficit

The House vote came after the Congressional Budget Office (CBO) released its score on the legislation on Nov. 18. The CBO estimates that the legislation will increase the deficit by $367 billion over a 10-year period.

However, the CBO score doesn’t take into account any additional revenues generated by improved compliance with federal tax laws. The BBBA allocates $80 billion for the IRS to heighten enforcement (which the CBO did include in its calculation), likely to target primarily high-wealth individuals, businesses and overseas transactions. The U.S. Treasury Department “conservatively” estimates increased IRS enforcement will lead to $400 billion in additional revenues over the 10-year period.

Significant tax proposals

Funding for the sweeping package largely comes from tax increases on high-income individuals and businesses, but the law also includes tax breaks for eligible taxpayers. Some of the most notable tax-related provisions include:

State and local taxes (SALT) deduction. The BBBA would amend the Tax Cuts and Jobs Act (TCJA) to raise the cap on the so-called SALT deduction from $10,000 to $80,000 ($40,000 for married taxpayers filing separately) for tax years 2021 through 2031. The limit would return to $10,000 in 2032.

Child tax credit (CTC). The American Rescue Plan Act (ARPA) expanded the CTC from $2,000 per child to $3,000 per child ages six through 17 and $3,600 per child under age six. The BBBA would extend the expansion through 2022.

Premium tax credits (PTCs). The ARPA expanded the availability of PTCs for health insurance purchased through Affordable Care Act exchanges (for example, Healthcare.gov) for 2021 and 2022. The BBBA would extend the expansion through 2025.

High-income surtax. The BBBA would create a 5% surtax on individuals with a modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for married taxpayers filing separately). It adds another 3% surtax on MAGI exceeding $25 million ($12.5 million for married taxpayers filing separately). The surtax would take effect for 2022.

Net investment income tax (NIIT). The BBBA would expand the 3.8% NIIT to apply to the trade or business income of high-income individuals, regardless of whether they’re actively involved in the business. The income thresholds are over $500,000 for joint filers, over $400,000 for single filers and over $250,000 for married couples filing separately. The NIIT currently applies to business income only if the income is passive.

Retirement savings. The BBBA includes several limitations on the ability of high-income taxpayers with large retirement account balances to take advantage of certain tax breaks. For example, beginning in 2029, it would prohibit additional contributions to a Roth IRA or traditional IRA for a tax year if a taxpayer’s income exceeds a certain amount and the contributions would cause the total value of an individual’s IRA and defined contribution accounts as of the end of the prior tax year to exceed $10 million. The bill also would impose new mandatory distribution requirements on such taxpayers. But some retirement-related provisions would go into effect as soon as 2022, such as ones that would restrict and, in some circumstances, eliminate Roth conversions.

Minimum corporate tax rate. The BBBA would impose a 15% minimum tax on the profits of corporations that report more than $1 billion in profits to shareholders (book income vs. tax income), for tax years beginning after 2022.

Excess business losses. The BBBA would make permanent the Tax Cuts and Jobs Act’s limit on the amount of excess business losses that pass-through entities and sole proprietors can use to offset ordinary income. It also would create a new carryforward for unused excess business losses, rather than carrying them forward as net operating losses.

Excise tax on stock buybacks. The BBBA includes a 1% excise tax on the fair market value of stock buybacks by publicly traded U.S. corporations, which would be effective for repurchases after 2021.

Business interest deduction. The BBBA would add a new limit on the amount of net interest expense that certain corporations that are part of an international financial reporting group can deduct, for tax years beginning after 2022.

Moving on to the Senate

Now that the bill has been passed by the House, it still must fight its way through the Senate, where it faces additional debate. A Senate vote isn’t expected to take place until late December. Most likely the Senate will make some changes to the bill, which could include changes to some of the tax provisions. We’ll keep you apprised of the important developments.

© 2021


2021 individual taxes: Answers to your questions about limits

accountant, accounting, Advice, business advisory, consulting, cpa, irs, tax

 

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

© 2021

 

2021 individual taxes: Answers to your questions about limits

accountant, accounting, Advice, business advisory, consulting, cpa, irs, tax

 

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

© 2021

 

RE: Paycheck Protection Program — Tax Implications of Expenses Paid with a Forgiven PPP Loan

Uncategorized

The Internal Revenue Service (IRS) recently issued Revenue Ruling 2020-27 which provides that expenses paid with Paycheck Protection Program (PPP) loan proceeds are not deductible in the tax year paid or incurred, if at the end of the tax year the taxpayer has a “reasonable expectation of forgiveness.” As a result, many calendar-year taxpayers that received a PPP loan will have additional income to report on their 2020 tax return if they wish to be in accord with IRS guidance.

The IRS states in Rev. Rul. 2020-27 that a taxpayer has a reasonable expectation of forgiveness if he/she intends to apply for loan forgiveness. Therefore, unless a taxpayer has decided not to file for loan forgiveness, the taxpayer is presumed to have a reasonable expectation of forgiveness.

Subsequent to the IRS’s ruling, several members of Congress have expressed concern with the IRS’s position and have made it clear that the congressional intent in the CARES Act was to ensure that PPP loan recipients whose loans are forgiven are not required to treat the proceeds as taxable income. Thus, they are strongly encouraging the IRS to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most. In addition, there may be state income tax implications as many states have not conformed to the federal government’s tax treatment of PPP loans or related forgiveness.

Although there is a possibility that congressional action could reverse the IRS position, its likelihood remains uncertain. Given the potential of penalties for underpayment of estimated tax because of the disallowance of the related expenses, our firm believes impacted taxpayers should take proactive action. In order to avoid underpayment of estimated tax penalties, taxpayers should increase their withholding or estimated tax payments to satisfy the prior-year tax safe harbor rules (100% / 110% of 2019).

If you have applied, intend to apply, or are undecided as to whether to apply for PPP loan forgiveness, then, absent further guidance, you should consider the following options for the filing of your 2020 federal income tax return:

1. Extend your tax return to allow additional time for congressional action in opposition to the IRS position.
2. File your tax return based on Notice 2020-32 and Revenue Ruling 2020-27 guidance by NOT deducting expenses paid with forgiven PPP loan proceeds. If the current IRS position is reversed, you can file an amended return to claim these deductions.
3. File your tax return taking a deduction for expenses but disclose (i.e., file IRS Form 8275) a position that is contrary to current IRS guidance. Disclosure helps to avoid the imposition of penalties if the IRS ultimately disagrees with the position but likely increases the taxing authority’s scrutiny of your return.
4. Choose not to apply for the PPP loan forgiveness and deduct the expenses as usual.
Immediate Action Required
Given the uncertainty that exists with the conflict between the current tax guidance as promulgated by the IRS and the congressional intent of the PPP, we strongly encourage you to reach out to us as soon as possible for some tax planning guidance to help minimize your risk for the potential underpayment of estimated tax penalties because of the disallowance of the related PPP expenses. Again, to avoid underpayment of estimated tax penalties, you may need to increase your estimated tax payments for the 2020 tax year as soon as possible to satisfy the prior-year tax safe harbor rules.

If you have any questions regarding this communication or if you need assistance in determining the impact of these rules to your specific tax situation, please contact us. We recognize that these are difficult and uncertain times, and we remain committed to supporting you.

CAA 2021 Extension and Expansion on Employee Retention Credit

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Scope

This  is to alert Vertical Advisors’ clients about Expansion and extension of Employee Retention Credit (ERC) provided by the Consolidated Appropriations Act, 2021 (CAA, 2021) which was signed on December 27, 2020. This credit is also available for the period March 12, 2020 to January 1, 2021 based on the prior bill called Families First Coronavirus Response Act. However, if a business received a PPP related to the prior period, generally the credit will not apply.

Under the CARES Act, the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before Jan. 1, 2021. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the ERC provided by the CARES Act until June 30, 2021 (Sec. 207).

This credit will generally benefit businesses that have employees that did not receive PPP money. However, if a business has received PPP money, the ERC could still be applied related to wages not included in the PPP covered period.

Highlights

ERC Calculation:

As noted above, the credit applies to wages paid in both 2020 and 2021.

For wages paid prior to 12/31/2020, the credit amount is 50% of qualified wages, up to $10,000 in total per employee. Thus, the maximum Retention Credit in total amount is $5,000 per employee. The Retention Credit applies to:

  • The employer’s share of Social Security tax under IRC Section 3111(a) (6.2% of wages)
  • The portion of the employer’s and employee representative’s share of RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due.

If the Retention Credit exceeds the employer’s Social Security or RRTA tax liability for the quarter, the excess may be refunded to the employer. The credit will need to be claimed on IRS Form 941 (Quarterly Payroll form).  Please see Item D of this section for details on how to claim and report the credit.

For wages paid after 12/31/2020, the credit amount is 70% of qualified wages, up to $10,000 per quarter (up from $10,000 total) of qualified wages paid to an employee. Thus, the maximum ERC amount available for 2021 is $14,000 per employee ($7,000 per quarter).  This would apply to Q1 and Q2, 2020 payroll form 941.  If you have already filed the forms, it can be amended.

CAA also allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year (Sec. 207(e)(1)).

Qualified Wages:

CARES Act section 2301 created the ERC for wages paid from March 13, 2020 to December 31, 2020, by employers that are subject to closure or significant economic downturn due to COVID-19. The CAA extends the ERC to include wages paid before July 1, 2021 (from January 1, 2021). Qualifying wages are based on the average number of a business’s employees.

Prior to 12/31/2020, for employers of 100 or fewer employees, qualified wages are wages paid to any employee during a COVID-19 shutdown or during a calendar quarter with a significant decline in gross receipts, without regard to whether the employee is providing services; For employers of more than 100 employees, qualified wages remain wages (as defined under the Federal Insurance Contributions Act) paid for services an employee is not providing due to a COVID-19 shutdown or a significant decline in gross receipts.

CAA increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees (Sec. 207(e)(1) for period beginning after 1/1/2021.

The CARES Act previously contained a limitation that qualified wages paid or incurred by large employers could not exceed what the employee would have been paid for an equivalent amount of work in the 30 days immediately preceding the period for which the employer claimed the credit. The expanded ERC eliminates this limitation.

Eligible Employer:

All employers are eligible for the employee retention credit, including tax-exempt organizations. There is no size limitation or threshold.

Prior to 12/31/2020, to be eligible for the Retention Credit for the period, an employer must carry on a trade or business in 2020 that experiences one of the two following COVID-19-related occurrences:

(1) COVID-19 Shutdown: operations were fully or partially suspended on orders from a governmental authority due to COVID-19, or

(2) Gross Receipts Decline: the business experienced a 50% reduction in gross receipts for a calendar quarter as compared to the same calendar quarter in the prior year.

  • For 1/1/2021-6/30/2021, CAA Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility (Sec. 207(d)(2)(B))

 

Employers who received forgiven PPP loans can still qualify for ERC: As originally enacted, employers who received PPP loans were not eligible to claim the ERC. Retroactive CAA, 2021 provisions retroactively clarifying the limitation such that employers who receive PPP loans may elect to treat payroll costs paid during the loan-covered period as qualified wages to the extent the wages are not paid for with forgiven PPP loan proceeds (Sec. 206(c)). As a result, for that portion of wages the employer may claim the ERC.

How to Claim ERC:

Form 941, Employer’s Quarterly Federal Tax Return, will be used to report total qualified wages and claim ERC for each calendar quarter. The nonrefundable portion of the ERC will be reported on line 11c and the refundable portion, if applicable, which is the amount that exceeds the employer’s social security or RRTA tax liability for the quarter will be reported on line 13d.

Wages paid by forgiven PPP loans are excluded from qualified wages. Therefore, if you have applied for PPP loan and did not pay it back, the portion of the loan used to pay wages will be subtracted from total qualified wages.

Please ensure the quarterly qualified wages and ERC are properly reported and claimed on Form 941. 2020 Q4 Form 941 is due by 1/31/2021.

Tax deduction offset: Please also note that ERC reduces the expenses that could otherwise deducted because CARES Act Sec. 2301(e) provides that rules similar to Code Sec. 280C(a) apply for purposes of applying the employee retention credit. Code Sec. 280C(a) generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the tax year. As such that an employer’s aggregate deductions would be reduced by the amount of the ERC.

Next Steps:

If you are interested in VA running some numbers for your business related to the ERC, we will need the following items?

  1. Did you receive a PPP? If so, we will need the amount of the PPP, your covered period, and information about the loan forgiveness.
  2. We will need payroll reports for the ERC covered period.
  • Please provide the quarterly wages report for Q2, Q3 and Q4.
  • For Q1, please provide payroll report covering 3/13/2020-3/31/2020.
  • Alternatively, you can share your payroll access with us.
    1. Please let us know if you need our assistance in the filing to claim the ERC.

If you have filed Form 941 without claiming the ERC for 2020 Q2-Q4, you can still claim the credit for by filing Form 941-X for each corresponding quarter. Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later.

Form 941-X cannot be electronically filed. If you did not claim ERC for Q2 and Q3 but have not file the 4th quarter Form 941, we recommend claim the credit on the original Q4 Form 941 as the claim is generally processed quicker on original returns. Then consider filing Form 941-X for Q2 and Q3 to claim remaining eligible credit.