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Biden’s Tax Proposals would tax Corporations and High-Income Earners

Posted on May 28th, 2021
Posted by Muhammad Akram, CPA

The US Treasury released a 114-page “Green Book” general explanation of tax proposals included in President Joe Biden’s fiscal year (FY) 2022 budget submission to Congress on May 28, 2021.

The President’s budget proposes to increase IRS funding by $1.3 billion to $13.2 billion as part of efforts to collect $778 billion over 10 years from increased tax compliance measures.  President Biden proposes key corporate and individual tax increases:

Corporate Tax Increase Proposals:

  • Increasing the corporate tax rate from 21% to 28%;
  • Increasing the GILTI tax rate to reducing the Section 250 deduction from 50% to 25% (to achieve a 21% GILTI rate assuming a 28% corporate income tax rate), applying GILTI on a per-country basis, and eliminating the 10% deduction for qualified business asset investment (QBAI);
  • Repealing the deduction for foreign derived intangible income (FDII) and using the resulting revenue to expand R&D investment incentives;
  • Imposing a 15% minimum tax on corporations with book income above $2 billion;
  • Eliminating tax preferences for fossil fuels (including the enhanced oil recovery credit, expensing for intangible drilling costs, and percentage depletion for oil and natural gas wells) and reinstating Superfund taxes;

Individual Tax Increase Proposals:

  • Increasing the current top individual income tax rate from 37% to 39.6%;
  • Taxing capital gain and qualified dividend income at ordinary rates for individuals with adjusted gross income above $1 million;
  • Limiting the current step-up in basis rule by treating transfers of certain appreciated property by gift or on death as realization events, with exclusions provided for certain transfers, a general $1 million exclusion (per spouse) indexed for inflation, and special rules provided for certain family-owned and -operated businesses;
  • Broadening application of the 3.8% net investment tax;
  • Ending “carried interest” capital gains treatment of certain partnership investment income;
  • Extending permanently the current limitation on certain excess business losses, and
  • Eliminating like-kind exchange tax treatment for real estate gains greater than $500,000 ($1 million for joint returns).
  • Key moderate Democrats in Congress have stated that they will not support increasing the US corporate tax rate above 25%. While reinstating the top individual income tax rate to the 39.6% level appears to have broad support among Congressional Democrats, a number of moderate Democrats in the House and Senate have expressed objections or concerns about President Biden’s proposals to sharply increase taxes on investment income and make changes to step-up in basis tax rules.

President’s Biden tax proposal uncertainty and proposed effective dates

While the overall outlook for action on President Biden’s tax proposals is uncertain, Congress in recent history has approved tax rate increase proposals only on a prospective basis. It is unusual for an administration to propose a retroactive effective date for a tax increase based on the release of a document like the American Families Plan, particularly when the document lacks important details, such as effective dates.

President Biden’s tax increase proposals will need the support of all 50 Democratic Senators and nearly all House Democrats to be enacted over the expected objections of Congressional Republicans. Moderate Democrats in the House and Senate may seek to scale back some of President Biden’s proposals and may seek to block others.

The President’s budget generally assumes that most of the tax increase proposals would be effective for tax years beginning after December 31, 2021, while some would be effective for tax years beginning after the date of enactment. However, the President’s proposal to increase capital gains tax rates is proposed to be retroactively effective “for gains required to be recognized after the date of announcement.” Biden administration officials have indicated that “date of announcement” is meant to be April 28, 2021 — the date President Biden announced his American Families Plan. 

The Administration proposal to increase the corporate tax rate from 21% to 28% is proposed to be effective for taxable years beginning after December 31, 2021. For taxable years beginning after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21 percent plus 7 percent times the portion of the taxable year that occurs in 2022.

The President’s proposal to treat transfers of appreciated property by gift or on death as realization events is proposed to be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.

Conclusion

Corporations and high-income earners should review the Treasury Green Book released on May 28, 2021 to evaluate and model the potential effect of President Biden’s tax proposals for the FY 2022 budget.


May 17 is deadline for more than just individual tax returns

Posted on May 10th, 2021
Posted by Muhammad Akram, CPA

Monday, May 17 is the deadline for more than just individual returns. Here is a list of some other May 17 tax deadlines:

  • Individual return extension requests– Extend beyond May 17 by filing Form 4868 or by making an electronic tax payment.
  • Contributions to IRAs and health savings accounts– 2020 contributions to individual retirement arrangements (IRAs), Roth IRAs, Health savings accounts, Archer medical savings accounts, and Coverdell education savings accounts.

Withdrawals of any 2020 contributions to an IRA, including excess 2020 contributions (if you didn’t request a filing extension). (Note that this rule doesn’t apply to the following retirement plans: 401(k), 403(b), SARSEP and SIMPLE IRA plans. That deadline was April 15, 2021.Self-employed persons retirement plan contributions– Contributions to a Solo 401(k) plan or Simplified Employee Pension (SEP) IRA for 2020 (if you didn’t request a filing extension).

  • Retirement plan distributions– Reporting and paying the 10% additional tax on amounts included in gross income from 2020 distributions from IRAs or workplace-based retirement plans.
  • Payroll taxes for household employees–  Form 1040, Schedule H (Household Employment Taxes), even if you aren’t required to file Form 1040 itself.
  • 2017 unclaimed refunds– The law provides a three-year window to claim a refund. To get the unclaimed refund, a taxpayer must properly address and mail the tax return, postmarked by May 17, 2021. If a taxpayer doesn’t file a return within three years, the money becomes property of the U.S. Treasury.
  • Foreign trusts and estates– Foreign trusts and estates with federal income tax filing or payment obligations, who file Form 1040-NR.
  • Returns for calendar year tax-exempt organizations– Forms in the 990 series, including  Form 990-T, Exempt Organization Business Income Tax Return.


IRS Offers Guidance on 100% Business Tax Deduction for Food and Beverages

Posted on April 12th, 2021
Posted by Gias Khan, CPA

The IRS has provided guidance on tax relief for deductions for food or beverages from restaurants. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages.

The temporary exception allows a 100% deduction from January 1, 2021 through December 31, 2022 for food or beverages from restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.

Under the temporary provision, restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption.

However, restaurants do not include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores.


2020 Individual Federal Income Tax Return (Form 1040) Deadline Extended to May 17, 2021

Posted on March 18th, 2021
Posted by Muhammad Akram, CPA

The Internal Revenue Service (IRS) announced yesterday that the deadline for filing 2020 individual income tax return has been extended to May 17, 2021 (from April 15, 2021). Taxpayers have more time to apply the tax relief and changes contained in recent stimulus legislation (American Rescue Plan). We have mentioned below key points for your consideration:

  • No penalties or interest will accrue on 2020 tax obligations prior to the May 17, 2021 deadline.
  • Penalties, interest and additions will begin to accrue on any remaining 2020 tax obligations not paid by May 17, 2021.
  • This change of federal tax deadline does not extend your state income tax deadline.
  • Taxpayers who put their returns on extension will have until October 15, 2021 to file, regardless of this change to the original deadline. However, payment of 2020 taxes are still due on May 17, 2021.
  • This extension applies only to individual taxpayers, including those who pay self-employment tax. This is an automatic extension and does not require notifying the IRS or filing any forms.
  • Estimated 2021 Q1 tax payments are still due on April 15, 2021.

We encourage taxpayers to file their 2020 tax returns by original due date (April 15, 2021) to avoid confusion between Federal (May 17) and State (April 15) filing deadlines especially those who are due a refund.

Akram will keep you informed of any updates as the IRS issues more guidance or changes to this information. If you have any questions please reach out to us.


The American Rescue Plan of 2021

Posted on March 12th, 2021
Posted by Muhammad Akram, CPA

President Biden signed the American Rescue Plan Act (“ARPA”) of 2021 on March 11, 2021, a massive $1.9 trillion stimulus package intended to address the extraordinary impact of the coronavirus pandemic.  Important highlights are mentioned below:

HIGHLIGHTS:

  • Stimulus payments and additional supplemental unemployment benefits to individual taxpayers
  • Aid to states and municipalities, hospitals, and schools
  • Additional funding for the Emergency Injury Disaster Loan (EIDL) Program and the Paycheck Protection Program (PPP)
  • Vaccination, testing funding and health insurance subsidies
  • Aid to airlines / airports, restaurants and venue operators
  • Nutritional assistance and housing or rental aid

BUSINESS PROVISIONS : There are limited number of business tax provisions introduced in ARPA:

i) Employee Retention Credit (ERC)– The ARPA extends the ERC through December 31, 2021 and allows businesses to claim an ERC payroll tax credit of up to $7,000 per employee per quarter or $28,000 per employee for the entire year. Doubling the benefit of the already favorable 2021 ERC rules.

Business must experience either partially or fully suspended operations due to restrictions imposed by the government or a significant decline in gross receipts to qualify for the ERC. A “significant decline” in gross receipt occurs if an employer’s gross receipts for a given 2020 quarter are less than 50% of its gross receipts for the same calendar quarter in 2019. An eligible 2021 quarter requires a decline in gross receipts of more than 20% as compared to the same applicable quarter in 2019.

ii) Recovery Start-up business– The ARPA introduced a new tax provision for “recovery start-up businesses” (“RSBs”) that began carrying on a trade or business after February 15, 2020. An RSB meets the ERC eligibility test even if it does not meet the ERC requirement of either suspended operations or a significant decline in gross receipts. The ERC is limited to $50,000 per quarter for RSBs.

iii)   Relief for Restaurants and Similar Places of Business– The ARPA introduces substantial financial relief for restaurants and similar places of business in the form of “restaurant revitalization grants.” Gross income does not include amounts received as restaurant revitalization grants.

iv) Paid Sick and Family Leave Credit– The paid sick and paid family leave credits for employers under the Families First Coronavirus Response Act are extended to the period April 1-September 30, 2021. It also increases the amount of wages for which an employer may claim the family leave credit from $10,000 to $12,000 per employee per year.

Any amount so excluded from income under this provision is treated as tax-exempt income in the case of a partnership or S corporation. That allows the amounts excluded to increase the basis of partners or S corporation shareholders in their partnership/S corporation interests. No deduction is denied or no tax attribute is reduced and no basis increase is denied by reason of this exclusion from gross income.

v)         Treatment of Targeted EIDL – Gross income does not include amounts received as a targeted emergency economic injury disaster loan advance. As in the case of restaurant revitalization grants, any amount excluded from income under this provision is treated as tax-exempt income in the case of a partnership or S corporation. That allows the amounts excluded to increase the basis of partners or S corporation shareholders in their partnership or S corporation interests.

No deduction is denied, no tax attribute is reduced and no basis increase is denied by reason of this exclusion from gross income.

INDIVIDUAL PROVISIONS

i) Individual Recovery Rebates– The ARPA provides refundable credits for eligible individuals of up to $1,400 for single filers (and up to $2,800 for joint filers), plus $1,400 for child and non-child dependents.

Rebates are subject to phase-out thresholds beginning at $75,000 of adjusted gross income (“AGI”) for single filers / $112,500 for heads of household / $150,000 for joint filers. Rebates are not available for single filers with AGI over $80,000, heads of household with AGI over $120,000 and joint filers with AGI over $160,000.

An eligible individual must have a valid social security number and must not be a nonresident alien, an estate or trust, or an individual who is claimed as a dependent of another eligible individual. The rebate is not subject to reduction or offset by any other federal tax liability.

ii) Unemployment Benefits– Weekly supplemental unemployment benefits of $300 are generally extended through September 6, 2021. For any taxable year beginning in 2020, the first $10,200 of unemployment compensation (in the case of a joint return, up to $10,200 received by each spouse) is tax-free for taxpayers with AGI of less than $150,000.  Returns filed with unemployment benefits prior to the $10,200 exclusion should not be amended per IRS guideline. The IRS has indicated it will refigure taxes on these returns and adjust the taxpayer’s account accordingly. The IRS will then send any refund amount directly to the taxpayer.

iii)        Dependent Care Tax Credit– This credit is made refundable and is potentially worth up to $4,000 for one qualifying individual and $8,000 for two or more, subject to reduction based on a taxpayer’s AGI for 2021. The maximum credit is available to households with AGI of up to $125,000 (instead of $15,000 under pre-ARPA law).

The ARPA also increases the exclusion from income for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

iv)        Child Tax Credit– This credit is fully refundable if the credit exceeds taxes owed for 2021. It is increased to $3600 for children under six years old and to $3,000 for children six to seventeen, subject to phase-out. The full credit is available to married couples filing jointly (or a surviving spouse) with modified AGI of up to $150,000 ($112,500 in the case of heads of household and $75,000 in any other case).

The ARPA provides for an advance payment of approximately 50% of the credit, to be paid to the taxpayer in equal installments during 2021, with the remainder claimed on the 2021 tax return.

v)         Earned Income Tax Credit (“EITC”)– The ARPA expands the eligibility and amount of the EITC for taxpayers with no qualifying children (“childless EITC”) for 2021. The maximum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students and homeless/former foster youth), and the upper age limit for the childless EITC is eliminated.

The ARPA also allows a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed. In these instances, as a general rule, the EITC may be claimed by an individual on a separate return so long as the qualifying child lives with the taxpayer for more than six months of the year and the taxpayer

  • does not have the same principal place of abode as the taxpayer’s spouse for the last six months of the year or
  • has a separation instrument and is not a member of the same household with the spouse by the end of the year.

The ARPA also increases the limitation on disqualified investments for purposes of claiming the EITC from $3,650 to greater than $10,000. Taxpayers may compute the EITC by substituting their 2019 earned income for their 2021 earned income if the 2021 earned income is less than the 2019 amount.

vi)        Student Loan Forgiveness– Gross income does not include any amount which would be includible in gross income by reason of the discharge of indebtedness of eligible student loans in 2021-2025. The exclusion from income does not apply if the discharge of a loan made by certain lenders is on account of services performed for the lender.

vii)       Extension of Limitation on Excess Business Losses for Non-Corporate Taxpayers– The Tax Cuts and Jobs Act of 2017 (“TCJA”) contained a provision that limited the deductibility of current-year business losses for pass-through businesses and sole proprietorships. The limitation was $500,000 on a joint tax return and $250,000 for all other filers. A business loss in excess of these amounts was disallowed in the year in which it was incurred and was converted into net operating losses that could be utilized in a future tax year. The CARES Act suspended the implementation of this section until tax years beginning after December 31, 2020.

Under the TCJA, this provision did not apply to tax years beginning after December 31, 2025. The ARPA extends the application of this section one year, to include tax years beginning before January 1, 2027.


COVID Tax Relief for Individuals and Businesses

Posted on December 23rd, 2020
Posted by Muhammad Akram, CPA

Congress used the 2021 governmental funding legislation as the vehicle to pass much needed COVID-19 relief, and more.  Spanning 5593 pages, the mammoth $2.3 trillion legislation contains some $900 billion COVID relief including most popular PPP loans for small businesses. The COVID-related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), both part of the Consolidated Appropriations Act, 2021 (Act), contains provisions related to businesses, individuals, and energy related extenders.

Businesses Income Tax Provisions

i) PPP Loan Deductions Are Allowed

COVIDTRA clarifies taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This is effective as of the date of enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Taxpayers are allowed to deduct qualified expenses on their 2020 income tax returns which IRS disallowed earlier in the year.

ii)            $10,000 EIDL Advance is Not Gross Income

The CARES Act expanded access to Economic Injury Disaster Loans (EIDL) and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of CARES Act loans.

COVIDTRA clarifies that gross income does not include forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income.

iii) Extension of Certain Deferred Payroll Taxes

Under a Presidential Memorandum issued on August 8, 2020, the Treasury was directed to defer the withholding, deposit and payment of certain payroll taxes paid from September 1, 2020 through December 31, 2020 through Notice. The IRS issued implementing guidance.  Specifically, the deferral applied to the employee portion of the old age, survivors, and disability insurance (OASDI) tax (6.2%) for any employee whose pre-tax wages or compensation payable during any bi-weekly pay period generally was less than $4,000 (or the equivalent with respect to other pay periods).  This was a deferral and not a tax holiday.  Thus, for those employees whose payroll taxes were in fact deferred, the obligation to pay was postponed until the period beginning January 1, 2001 and ending April 30, 2021, during which time the deferred taxes were to be withheld and collected ratably from wages paid (in addition to the normal payroll taxes on those wages).  Interest, penalties and additions to tax would begin to accrue on May 1, 2001.  The Act extends the due date for that deferral to be repaid to December 31, 2021, with interest, etc. to begin accruing as of January 1, 2022.

iv)           Temporary Allowance of Full Deduction for Business Meals

Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel. The deduction is generally limited to 50% of the otherwise allowable amount. The Act provides certain exceptions to this 50% limit. However, under pre-Act law, there was no exception for meals provided by a restaurant.

Under the Act, the 50% limit won’t apply to expenses for food or beverages provided by a restaurant that are paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.

v)           Waive Form 1099-C Reporting Requirements

A lender that discharges at least $600 of a borrower’s indebtedness is required to file a Form 1099-C, Cancellation of Debt, with IRS, and to furnish a payee statement to the borrower.

The COVIDTRA provision allows the Treasury Department to waive information reporting requirements for any amount excluded from income by the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income or the exclusion of certain loan forgiveness and other business financial assistance under the CARES act from income.

Vi)        Work Opportunity Credit Extended Through 2025

The Code provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit program. Under pre-Act law, the credit, which is based on qualified first-year wages paid to the hire, applied to hires before Jan. 1, 2021.

The Act extends the credit through 2025 and applies to individuals who begin work for the employer after Dec. 31, 2020.

vii)        Expensing Rules for Certain Productions

Under pre-Act law, taxpayers could claim a deduction for qualified film, television, and theatrical productions beginning before Jan. 1, 2021, of up to $15 million of the aggregate cost ($20 million for certain areas) of a qualifying film, television, or theatrical production in the year the expenditure was incurred. 

The Act extends this deduction through 2025 for productions commencing after Dec. 31, 2020.

viii)       Employer Credit for Paid Family and Medical Leave

Under pre-Act law, for tax years beginning before Jan. 1, 2021, the Code provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.

The Act extends this credit through 2025, applying to wages paid in tax years beginning after Dec. 31, 2020.

Individual Income Tax Provisions

i) Additional $600 Recovery Rebates

The CARES Act provided for direct payments/rebates to certain individual taxpayers are referred to as Economic Impact Payments (EIP). The COVIDTRA contains a new program, which it refers to as “additional 2020 recovery rebates.”

The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income. The term “eligible individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts.

Taxpayers without an eligible Social Security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a Social Security Number and one spouse does not are eligible for a payment of $600, in addition to $600 per child with a Social Security Number.

Additional $600 recovery rebate is in dispute by President Trump before signing the Act and he wants Congress to increase EIP to $2,000.

ii) Charitable Contributions deduction by Non-Itemizers

For 2020, individuals who normally do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations (deduction limits of $300 also applied to married filers). A 20% penalty applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.

The TCDTR extends the above rule through 2021, allowing individual cash contributions of up to $300, ($600 for married filers) to be deducted above-the-line for cash contributions to qualified charitable organizations.

An increased penalty of 50% applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.

iii) $250 Educator Expense Deduction Applies to PPE

Eligible educators are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them. COVIDTRA provides that, not later than February 28, 2021, the IRS must, by regulation or other guidance, clarify that personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19.

iv)           Emergency Financial Aid Grants

An individual taxpayer may claim the American opportunity tax credit and/or the Lifetime Learning credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses, and their dependents. However, under higher education expenses paid for by tax exempt income can’t be used to claim either of these credits.

COVIDTRA excludes certain CARES Act emergency financial aid grants from the gross income of college and university students. This provision also holds students harmless for purposes of determining their eligibility for the American Opportunity and Lifetime Learning tax credits.

Energy-Related Tax Provisions

TCDTR contains numerous tax extenders related to energy credits. A summary of the energy-related extenders and excise tax provisions is below.

i)             Electricity Produced from Certain Renewable Resources

An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities (the “renewable electricity production credit”). Qualified energy resources mean wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources.

The Act extends the date by which construction of a qualifying facility must begin, to before Jan. 1, 2022, for the following facilities: wind facilities, qualifying closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities

ii) Wheeled Plug-in Electric Vehicle Credit

The Code provides a 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500). Battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours. The Act extends this credit so that it applies to vehicles acquired before Jan. 1, 2022.

iii) Energy-Efficient Homes Credit

The Code provides a credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.

The Act extends the credit for energy-efficient new homes by one year, to homes acquired before Jan. 1, 2022.

iv) Other Energy Credits are Extended through 2021

Second generation Biofuel Producer credit ($1.01 for each gallon), Non-business Energy Efficient Property Credit ($50 to $300), and Qualified Fuel Cell refueling property credit ($4,000 to $40,000) are extended through 2021.


Paycheck Protection Program (PPP) Second Draw Loans

Posted on December 22nd, 2020
Posted by Muhammad Akram, CPA

Congress has passed its spending bill, the “Consolidated Appropriations Act (CAA), 2021” on December 21, 2020 which includes Additional Coronavirus Response and Relief (ACRR). The President Trump has signaled he will sign the bill. ACRR includes a provision that provides $284 billion for paycheck protection program second draw loans. 

Eligibility Criteria for Second Draw PPP Loans

Prior PPP borrowers must meet the following conditions to be eligible for the second draw loans

  • Fewer than 300 eligible employees, on an affiliated company basis (or fewer than 500 eligible employees for businesses with multiple locations).
  • Have used or will use the full amount of their first PPP loan; and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible Entities

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Specifically excluded are public companies, lobbying entities, entities with China-based ownership and venue operators receiving aid under the venue grant section of the Act.

PPP Loan Criteria and Improvements

The maximum loan amount an eligible entity can receive is the lesser of $2 million- or 2.5-times monthly payroll costs incurred during the one-year period before the loan is made, or during calendar year 2019 (3.5 times monthly payroll if the entity’s NAICS code is 72: Accommodation and food Services). ACRR maintains the 60% payroll (40% non-payroll) expense requirement of the PPP Flexibility Act.

ACRR also makes the following improvements that can be retroactively applied to all PPP loans:

  1. Tax deductibility of all qualified expenses paid with PPP funds is allowed.
  2. PPP allowable and forgivable expenses are expanded to include operating expenses, property damage costs (caused by acts of civil unrest), supplier costs and worker protection costs (both operating and capital costs).
  3. Borrowers can now choose any 8- to 24-week period as their loan forgiveness covered period.
  4. Economic Injury Disaster Loan (EIDL) grants will no longer reduce PPP forgiveness.
  5. A simplified forgiveness application for PPP loans of less than $150,000 will be limited to borrower certifications.
  6. Forgiven PPP loan funds will be considered tax-exempt income and will increase owners’ basis in pass-through entities.

Application of exemption based on employee availability.

ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

CAA also modifies or extends other individual and business-friendly provisions, including the employee retention tax credit, business meal deductions, retirement plan distribution relief and more.


2020 Tax Planning Strategies to Consider

Posted on November 24th, 2020
Posted by Gias Khan, CPA

2020 tax planning strategies have been difficult to advise. The COVID-19 pandemic made 2020 a year of uncertainty. To top it off the election results, on January 5, 2021 for run off senate seats in Georgia, may bring future tax changes. Before the close of the tax year there are effective steps to take now to save on your income taxes. These strategies can help for current and future returns, maximize retirement funds, reduce future estate taxes, and aid in cash flow management.

CARES Act

Firstly, the Coronavirus Aid, Relief, and Economic Security, CARES, Act made changes for both individuals and businesses.

  • Postponement of the required minimum distribution, RMD, in 2020
  • Changes to deductible charitable contributions in 2020
  • Waiver of 10% Penalty for early distribution for anyone under age 59½ for those who are diagnosed with COVID-19 experiencing adverse financial consequences resulting from quarantine, inability to work due to lack of child care, reduction of work, furlough, lay-off, or owner or operation of business forced to reduce hours due to COVID-19
  • Changes to certain retirement plan loans applying to those impacted by COVID-19

SECURE Act

Secondly, Setting Every Community Up for Retirement Enhancement, SECURE, Act also made change.

  • Increased required minimum distribution in 2020 to 72
  • Repealed maximum age for contributing to a traditional IRA
  • Repealed Kiddie tax rules from Tax Cuts and Jobs Act, TCJA, of 2017

TCJA

Thirdly, the TCJA brought many changes to individuals and businesses.

Changes for individuals includes:

  • lower tax rates
  • no personal exemptions
  • higher standard deduction
  • reduced alternative minimum tax (AMT)
  • increased child tax credit

Business changes include:

  • reduced corporate tax rate of 21%
  • limits on business interest deductions
  • no corporate AMT
  • overly generous depreciation and expensing rules. A special 20% deduction rate for non-corporate taxpayers who had qualified business income from a pass-through entity

2020 Year End Tax Strategies

For this unusual year 2020 tax planning strategies we advise clients to be aware of the tax uncertainty that is possible. The uncertainty with a new president in office and the senate status left unknown may cause higher tax rates in the coming years than for tax year 2020. Here are other actions to take in order to reduce 2020 tax liabilities.  

  • Prepaying mortgage payment to accelerate the interest deduction
  • Accelerate purchases of business equipment and place in service for intended year
  • Pay any margin interest, at year end is only deductible if paid
  • Take advantage of the 20% deduction for qualified business income
  • Convert traditional IRAs to Roth IRAs, especially if loss of value with hopes to increase again
  • Best tax use of capital gains and losses, taxable gains apply $3,000 against ordinary income and carry forward the balance
  • Year-end gifts of appreciated property in order to shift taxable gain to lower bracket family
  • Gift money today to reduce future estate tax
  • Maximize health savings account, HSA, by contributing can lower your taxes
  • Dispose of passive activities for suspended losses
  • Increase withholding on salaries and wages to avoid estimated tax underpayment penalties
  • Planning for beneficiaries of qualified retirement plans and IRAs
  • Gift money in 2020 rather than later, probability of eliminating the at-death step-up in the basis of inherited assets, gift and estate tax exemption reduction possible as well
  • Strategize qualified charitable distributions, CARES Act raised limit of charitable donations to public charities from 60% to 100% of AGI
  • Donate proceeds of depreciated investments to offset realized gains, if itemize add to charitable contributions

Conclusion

These planning moves should be made by year-end to achieve maximum overall tax savings for 2020 and later tax years. Please reach out to us before the year end to see how we can help you!


PPP Loan Deductions

Posted on November 23rd, 2020
Posted by Gias Khan, CPA

Recently, the IRS released Revenue Ruling 2020-27 and Revenue Procedure 2020-51. The IRS provides guidance regarding the tax deduction of expenses in relation to PPP loan forgiveness.

Revenue Ruling 2020-27 Scenarios of Disallowance

Two scenarios where disallowance can occur. Taxpayers receive the PPP loan and incur eligible expenses within the proper time period previously mentioned.

  1. A taxpayer applies to the lender for forgiveness of the PPP loan. By the end of 2020 the lender does not communicate with the taxpayer the status of the loan’s forgiveness.
  2. A taxpayer did not apply for forgiveness in 2020.  However, the taxpayer expects to qualify in 2021 for forgiveness.

Since both taxpayer situations expect to receive full loan forgiveness in both of the above scenarios. Deduction of the expenses is not allowed in 2020. This is in accordance with the Coronavirus Aid, Relief, and Economic Security, CARES, Act provisions. Taxpayers who receive PPP loans and incur or pay expenses eligible for forgiveness are non-deductible if expect to receive forgiveness of the loan. Does not matter if the taxpayer submitted the loan forgiveness application by the end of the table year or not.

Revenue Procedure 2020-51 Provides Safe Harbor

This procedure provides a safe harbor for taxpayers. It allows them to claim those expense as deductions in the following year. On 2021 tax return, if the PPP loan forgiveness is denied. If original income tax return for 2020 is filed in a timely manner, including extensions, the below taxpayers described can deduct some of all of the eligible expenses on the return. To meet the criteria for safe harbor a taxpayer must meet the following requirements:

  1. Eligible expenses the taxpayer incurs or pays in 2020 with no deductions on return because expectation is to receive forgiveness of the PPP loan.
  2. PPP loan forgiveness application submitted prior to end of 2020 or intends to with year end of 2020 in the following year.
  3. In the following year the taxpayer is notified by the lender that the PPP loan forgiveness was denied.

If a taxpayer meets the first two criteria but decides not to apply for PPP loan forgiveness in the following year, they are eligible under the safe harbor. The taxpayer can deduct a portion or all of the eligible expenses for the original 2020 income tax return, amended 2020 or following year return.


How PPP Forgiveness Could Impact 2020 Taxes

Posted on November 13th, 2020
Posted by Iris Wang, CPA

The Paycheck Protection Program (PPP) loan forgiveness left many unanswered questions. Businesses were left with questions on how the PPP loan forgiveness will affect borrowers’ 2020 tax obligations. The key challenges are the timing of income recognition and deductibility of expenses.

Forgiveness Application Timeline

Each borrower can choose a covered period of 8 or 24 weeks or a cutoff date between that range. From the end of their chosen covered period, borrowers have 10 months to apply for forgiveness. The entire decision-making progress can take up to 150 days. Then the lender has 60 days to complete the review of the application and issue a decision to SBA. From that point, the SBA has 90 days to remit the forgiveness amount plus any interest accrued through the payment date back to the lender. It’s the lender’s responsibility to notify the applicant of the forgiveness amount received from the SBA. Then the borrower has 30 days to notify the lender that they requested the SBA review. The SBA does not have to accept the application in review, if the forgiveness application is denied by the lender.

It’s possible, considering this timeline, that borrowers will not know until 2021 how much of their loan will be forgiven.

Forgiveness in 2020 & 2021

The IRS issued Notice 2020-32 stated that the allowed expenses funded by PPP loan forgiveness are not tax-deductible because it would create a “double tax benefit”. The 2020 income tax return can reflect these expenses if the PPP loan forgiveness is denied. If you are able to apply and receive forgiveness in 2020, you have nontaxable income and nondeductible expenses in the same period for federal tax purposes. However, If you cannot get your final forgiveness notification before filing your 2020 tax return, questions on when these non-deductible expenses should hit the tax return are still unanswered. If you have deducted those expenses in 2020, you may need to file a 2020 amended tax return when you receive forgiveness as nontaxable income in 2021.

2020 Estimated Tax

In addition, 2020 estimated tax for pass-through entity owners should be based on 110% of their 2019 income taxes. For C Corporations, their 4th quarter estimated tax will be calculated and paid according to the calculated amounts.

We’re Here to Help

Lastly, we suggest taxpayers to refrain from filing their tax returns by the original due date. The IRS has not finalize the rule on how non-deductible expenses should be treated. For more information on your tax implications or if you have any PPP questions, please contact us.


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