Author: relanetAdmin (Page 9 of 10)

The IRS recently issued its annual update of special per-diem rates for substantiating ordinary and necessary business expenses incurred while traveling away from home. The new rates are in effect from October 1, 2021, to September 30, 2022. Specifically, the per-diem rates issued include the transportation industry meal and incidental expenses rates; the rate for the incidental-expenses-only deduction; and the rates and list of high-cost localities for purposes of the high-low substantiation method.

High-low substantiation method

For purposes of the high-low substantiation method, the per-diem rates are $296 for travel to any high-cost locality and $202 for travel to any other locality within the continental United States, both slightly higher than last year.

The amount of these rates that is treated as paid for meals is $74 for travel to a high-cost locality and $64 for travel to any other locality within continental United States, both also slightly higher than last year.

The notice contains a list of the localities that are high-cost localities (localities that have a federal per-diem rate of $249 or more, $4 higher than last year) for all or part of the calendar year.

Incidental expenses

Since 2012, incidental expenses have included only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. The per-diem rate for the incidental-expenses-only deduction remains unchanged at $5 per day for any locality of travel.

Transportation industry

The special meals and incidental expenses rates for taxpayers in the transportation industry are $69 for any locality of travel within continental United States and $74 for any locality of travel outside continental United States, both $3 more than last year.

Recent legislation includes several provisions to help individuals and businesses who give to charity. The new law generally extends four temporary tax changes through the end of 2021. Here’s an overview of these changes.

Deduction for individuals who don’t itemize

Taxpayers who take the standard deduction usually can’t deduct their charitable contributions. The law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations.

These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.

100% limit on eligible cash contributions made by taxpayers who itemize deductions in 2021

Taxpayers who itemize can generally claim a deduction for charitable contributions to qualifying organizations. The deduction is typically limited to 20% to 60% of their adjusted gross income and varies depending on the type of contribution and the type of charity.

The law now allows taxpayers to apply up to 100% of their AGI, for calendar-year 2021 qualified contributions. Qualified contributions are cash contributions to qualifying charitable organizations.

The 100% limit is not automatic, however. The taxpayer must choose to take the new limit for any qualified cash contribution. Otherwise, the usual limit applies. The taxpayer’s other allowed charitable contribution deductions reduce the maximum amount allowed under this election.

Corporate limit increased to 25% of taxable income

The law now permits C corporations to apply an increased corporate limit of 25% of taxable income for charitable cash contributions made to eligible charities during calendar year 2021. The increased limit is not automatic. C corporations must the choose the increased corporate limit on a contribution-by-contribution basis.

Increased limits on amounts deductible by businesses for certain donated food inventory

Businesses donating food inventory that are eligible for the existing enhanced deduction may qualify for increased deduction limits. For contributions made in 2021, the limit is increased to 25%. For C corporations, the 25% limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.

The Paycheck Protection Program (PPP) provided more than 11.7 million forgivable loans totaling nearly $800 billion to small businesses and other eligible entities hurt by the economic impacts of the COVID-19 pandemic. Almost $400 billion has been forgiven. According to the Small Business Administration (SBA), loans of $150,000 or less account for 93% of outstanding PPP loans.

Despite earlier moves to streamline the forgiveness process for those loans, many smaller PPP lenders have informed the SBA that they lack the technology and manpower to develop efficient electronic loan forgiveness platforms to process forgiveness applications.

In addition, the SBA said it has heard concerns from PPP lenders of all sizes that the requirement for borrowers to submit and lenders to review revenue reduction documentation at the time of forgiveness is delaying the forgiveness process for second-draw PPP loans of $150,000 or less.

To address these problems and ease the forgiveness bottleneck, the SBA is making two significant changes.

1. Introduction of a COVID Revenue Reduction Score

To streamline forgiveness of second-draw PPP Loans of $150,000 or less where the borrower did not submit documentation of revenue reduction at the time of the loan application, the SBA will offer an alternative form of revenue reduction confirmation.

Each second-draw PPP loan of $150,000 or less will be assigned a COVID Revenue Reduction Score created by an independent, third-party SBA contractor, based on a variety of inputs, including industry, geography, and business size, and current economic data on the economic recovery and return of businesses to operational status.

The score will be maintained in the SBA’s loan forgiveness platform and will be visible to lenders to use as an alternative to document revenue reduction. Additionally, the score will be visible to those borrowers that submit their loan forgiveness applications through the platform using the direct borrower forgiveness process described in the next section.

When the score meets or exceeds the value required for validation of the borrower’s revenue reduction, use of the score will satisfy the requirement for the borrower to document revenue reduction. When the score does not meet the value required for validation of the borrower’s revenue reduction, and if the borrower has not already provided documentation to the lender that validates the borrower’s revenue reduction, the borrower will have to provide documentation either directly to the lender (for those lenders that do not opt in to the direct borrower forgiveness process) or provide documentation to the lender by uploading it to the platform.

2. Launch of a direct borrower forgiveness process

On August 4, 2021, the SBA launched a new direct forgiveness process that provides PPP lenders with an optional technology solution that essentially will allow their borrowers to apply for loan forgiveness directly to the SBA through a new portal.

When a PPP lender opts in to the direct borrower forgiveness process, the new portal will provide a single secure location that integrates with the SBA’s PPP platform and allows borrowers with loans of $150,000 or less to apply for loan forgiveness using an electronic equivalent of SBA Form 3508S. Upon receipt of notice that a borrower has applied for forgiveness through the platform, lenders will review the loan forgiveness application and issue a forgiveness decision to the SBA inside the platform.

Despite the launch of this new portal, borrowers should continue to submit loan forgiveness applications to their lenders, rather than through the platform, under the following circumstances:

• The PPP lender does not opt in to use the direct borrower forgiveness process;
• The borrower’s PPP loan amount is greater than $150,000;
• The borrower does not agree with the data as provided by the SBA system of record, or cannot validate their identity in the platform (for example, if there is an unreported change of ownership); or
• For any other reason where the platform rejects the borrower’s submission.

Whether their business has one company car or a fleet of vehicles, many business owners find company-owned passenger vehicles to be an indispensible tool for running their businesses. Purchasing or leasing a vehicle can be a large expense, but this expense can be somewhat mitigated by depreciating the vehicle over the first several years that it is in service. The limits for how much of this expense can be depreciated each year is dictated by the government and revised annually for inflation.

As expected, the IRS recently issued its annual inflation-adjusted update of depreciation limitations for passenger automobiles (including passenger vans and trucks) placed in service in 2021. They also updated income inclusion amounts by lessees of passenger automobiles for vehicles with lease terms beginning in 2021.

For passenger automobiles to which the bonus first-year depreciation deduction applies and that are acquired after September 27, 2017, and placed in service during calendar year 2021, the depreciation limit is $18,200 for the first tax year (an increase of $100 from 2020); $16,400 for the second tax year (an increase of $300); $9,800 for the third tax year (an increase of $100); and $5,860 for each succeeding year (an increase of $100).

If bonus first-year depreciation does not apply, the depreciation limit for passenger automobiles is $10,200 for the first tax year; $16,400 for the second tax year; $9,800 for the third tax year; and $5,860 for each succeeding year.

The IRS limits deductions for the cost of leasing automobiles, expressed as an income inclusion amount. This limitation is intended to be substantially equivalent to the depreciation limitation. If your business is affected by this income inclusion amount, please refer to table 3 of Rev. Proc. 2021-31 which provides income inclusion dollar amounts for lessees of passenger automobiles with a lease term beginning 2021.

In an effort to capture income from household employees, the tax code requires you to obtain employee information, pay the related state and federal taxes, and withhold taxes for anyone you employ around the house. The requirement for this “nanny tax” comes into play if you pay any one individual $2,300 or more (in 2021). You must then submit a W-2 for each of these household employees.

Who is covered?

The household workers typically covered by this law include:

• babysitters
• caretakers
• house cleaners
• domestic workers
• drivers
• health aides
• housekeepers
• maids
• nannies
• private nurses
• yard workers

Employee or Not an Employee

Before you get too worried that the nanny tax might affect you, first determine whether your help is an employee or not. If in the eyes of the tax code, your help is not an employee the nanny tax rules do not apply. What does the IRS look for?

• Who controls how the work is done? If the worker clearly does, then the person is self-employed and not your employee.
• Whose tools are used? If the worker’s tools are used then they are more likely self-employed and not your household employee.
• Work exclusively for you? If the worker has a number of customers then they are less likely to be your household employee.
• Does an agency supply the worker? If an agency supplies the worker and controls what work is done and how it is done, the worker is not your employee.
• Daycare services at an offsite location. If your childcare is conducted in the worker’s home, that worker is generally not your employee.

Some Suggestions

Have your help become incorporated. The reporting rule only applies to hired individuals. If your household help is in a LLC or S-Corporation, it is up to that company to employ the worker and pay their employment taxes.

Be aware of the annual limit. Make sure your total payments do not exceed the reporting threshold each year.

Determine if the hired help are truly employees or self-employed.

Rotate services. If you have help with yard work consider employing a number of helpers to make sure no one person is paid above the reporting threshold.

The first advance payment from the newly expanded child tax credit was recently sent out by the IRS. Payments are scheduled to be made on the 15th of each month through December.
The idea of advance payments made for a refundable credit confuses a lot of people, so here’s what you need to know.

Background

For the 2021 tax year, an expanded child tax credit reduces your tax bill by $3,600 if you have a qualifying child that’s age 5 or under, or by $3,000 if you have a qualifying child from age 6 to 17.

If the total amount of the child tax credit for your family exceeds the total taxes you owe, you’ll receive the amount of the credit as a refund.

Child tax credit advance payments

Instead of waiting to file your tax return to receive the entire amount of your child tax credit, the IRS has been directed by Congress to send 50% of the credit to you in six monthly payments beginning in July 2021.

For example, consider the hypothetical example of a family that has three kids, ages 10, 12 and 16. Assume that this family’s income is not too high and that their children meet the IRS definition of a qualifying child. Instead of waiting until 2022 when they file their 2021 tax return to receive the entire $9,000 child tax credit, they can get paid half of the child tax credit amount, or $4,500, in 2021.

The advance payments began July 15 and continue for six months until December 15. The family in this example would receive six payments of $750 starting July 15, for a total of $4,500.

What you need to know

The monthly payments are automatic. You’ll automatically receive advance payments if:

• You filed a 2019 or 2020 tax return and claimed the credit, OR
• You gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool, AND
• The IRS thinks you are eligible, AND
• You did not opt-out of the early payments.

Register with the IRS. If you didn’t file a 2019 or 2020 tax return but are otherwise eligible for the child tax credit, you’ll need to register with the IRS to receive the child tax credit. You can use the IRS Child Tax Credit Non-filer Sign-up Tool to find out if you need to register.

Consider if you should opt out of the advance payments. Getting half of your child tax credit ahead of time may not be the right move for everyone. For example, if your 2021 income ends up higher than expected, you may need to pay back the advance payments when you file your tax return. To opt out, use the IRS Child Tax Credit Update Portal.

Now is the time to begin tax planning for your 2021 return. Here are some ideas:

Contribute to retirement accounts. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can save between now and December 31. If you are able, consider investing in an IRA or increasing your contributions to your employer-provided retirement plans. Remember, you can reduce your 2021 taxable income by as much as $19,500 by contributing to a retirement account such as a 401(k). If you’re age 50 or older, you can reduce your taxable income by up to $26,000!

Contribute directly to a charity. Even if you don’t have enough qualified expenses in order to itemize your deductions, you can still donate to your favorite charity and cut your tax bill. For 2021, you can reduce your taxable income by up to $300 if you’re single and $600 if you’re married by donating to your favorite charity.

Consider a donor-advised fund. With a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married, you may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below these dollar amounts. As an alternative, consider donating multiple years-worth of contributions to a donor-advised fund if you have the available cash so you can exceed the standard deduction this year. Then make your cash contributions from the donor-advised fund to your favorite charities over the next three years.

Increase daycare expenses. If you or your spouse work and have children in daycare, or have an adult that you care for, consider using a daycare so you and a spouse can both work. This might allow you to take advantage of a larger tax break available in 2021. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in daycare expenses while cutting your tax bill by $8,000. To receive the full tax credit, your adjusted gross income must not exceed $125,000.

Contribute to an FSA or an HSA. Flexible spending accounts (FSA) and health savings accounts (HSA) allow you to pay medical and dental expenses with pre-tax dollars and reduce your tax liability. If you have an FSA, you can contribute up to $2,750 in 2021, and unspent funds in an FSA can now be rolled from 2021 to 2022. If you have an HSA, you can contribute up to $3,600 if you’re single and $7,200 if you’re married.

If you have questions about any of these tips, or if you need help with tax planning for 2021, please contact our office so we can help.

The American Rescue plan signed in March, 2021 requires the IRS to pay out one half of enhanced Child Tax Credits (CTC) to eligible taxpayers beginning this month. If you or someone you know have children, here’s what you need to know:

Current status

IRS web-sites. The IRS has created two web sites to help administer this program – one to help ensure you will get your Child Tax Credit if you are a non-filer, and another to opt out of the monthly payments. Both can be accessed on the IRS website at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

The monthly payments are automatic. Beginning mid-July you will begin receiving payments for one half of your projected 2021 Child Tax Credit if all of the following is true:

• You filed a 2019 or 2020 tax return and claimed the credit or you gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool.
• The IRS thinks you are eligible.
• You did not opt-out of the early payments.

Opting-out

Although most people who receive the CTC advance payments should accept and make use of them, there are some good reasons why some might want to opt of of the advance payments.

If you do not qualify for the credit. The IRS is using past tax returns to estimate who should get advance payments of this credit. Since they are using past data, they might sometimes be wrong. If your 2021 income is too high, you may need to pay back the advance payments when you file your tax return.

If you need the large credit. If you use this credit to balance out your year-end tax bill, you may find yourself owing money at the end of the year.

If your circumstances change. If your tax life changes, advance payments of the credit will complicate things. For example, if you are in the middle of a separation or divorce, the advanced payments could become a source of conflict.

Action to take

Look for notices. The IRS is sending out notices in the mail to those they think should receive the Advance Child Tax Credit payments. If you have not received one, the IRS may not think you should receive payments. But don’t worry, if you are owed the credit you will receive it when you file your tax 2021 tax return, even if you don’t receive advance payments.

Opt-out, if needed. If you do not want to receive the early Child Tax Credit payments, use the opt-out portal immediately to opt-out of the payments.

Keep track of payments. You will need to know how much you receive in advanced payments when you file your tax return next year. Do not assume the IRS is going to accurately keep track of this for you.

Tell your friends. Finally, remember that the Child Tax Credit is now a fully refundable credit. So if you know of anyone that does not pay income tax and has children, tell them. The new Child Tax Credit might help them make ends meet.

The American Rescue Plan Act of 2021 (ARPA) retroactively excluded up to $10,200 in unemployment compensation per taxpayer paid in 2020. Since this new law was signed after some tax returns had already been filed, some people who received unemployment compensation in 2020 paid too much tax and were due a refund. After the law was signed, the IRS quickly clarified that no action needed to be taken to claim these refunds. Any adjustments that were necessary would be handled automatically by the IRS.

So far, the IRS has identified 13 million taxpayers that may be eligible for some adjustment to their tax bill due to this issue. Some will receive refunds, which will be issued periodically through the summer, and some will have the overpayment applied to taxes due or other debts. For some there will be no change.

The IRS started issuing some refunds in early June, sending out more than 2.8 million refunds in the first week of June to those who were entitled to them, and then issued the next set of refunds in mid-June. The review of returns and processing corrections will continue during the summer as the IRS continues to review the simplest returns and then turns to more complex returns.

Affected taxpayers will receive letters from the IRS, generally within 30 days of the adjustment, informing them of what kind of adjustment was made (such as refund, payment of IRS debt payment or payment offset for other authorized debts) and the amount of the adjustment.

If you have questions about whether you are entitled to an adjustment to your tax due to this issue, or if you are confused by a letter that you received from the IRS, please contact our office so we can help.

Tax-advantaged accounts like 401(k)s and IRAs are convenient ways to save for your retirement. These types of accounts allow to you defer paying taxes on the amount you save until you start withdrawing your savings. The government does want to see that tax revenue eventually, though.

To ensure that the government receives its share of tax revenue, these account include a feature called Required Minimum Distribution (or “RMD”). RMD is an amount that a saver is required to withdraw from a tax-advantaged retirement account (and pay tax on). The RMD for a saver changes each year, based on his or her age.

Here’s what you need to know about RMD in 2021, even if you’re not yet of retirement age:

RMD are back in effect in 2021. The required minimum distribution rules were suspended in 2020, as part of coronavirus relief. They are back in effect for 2021, so if you or a family member are affected by RMD rules, start making your plan now.

Penalties are high if you fail to take RMD. Rules require you to withdraw a certain amount of money every year from tax-deferred retirement plans like 401(k)s and traditional IRAs after you reach age 72, whether you want to or not. These withdrawals are then taxed as ordinary income. If you don’t follow these rules, the IRS can assess a penalty equal to 50 percent of the amount that should have been withdrawn, on top of the regular tax due.

Make a plan early. One of the biggest mistakes people make regarding RMD, is waiting until age 72 to start thinking about required distributions. Remember, you can start withdrawing funds from retirement accounts without penalty after you reach age 59½. If you start planning a tax-efficient withdrawal strategy before required distribution rules kick in, you can manage what tax rate will be applied to your retirement distributions.

Distribution amounts are based on several factors. How much you’re required to withdraw is based in part on the average life expectancy of someone your age. A calculation based on IRS life expectancy tables, plus your prior year retirement account balance, is used to determine your required withdrawals. The good news is that the financial institution handling your retirement account will usually do the calculation for you.

There are exceptions to distributions if you still work. If you reach age 72 and you’re still working for an employer providing you with a 401(k), you usually don’t have to take a distribution from that account as long as you don’t own 5 percent or more of the company. However, you still must take funds from other plans where you have assets.

Not all accounts require distributions. Not all retirement accounts require you to take a required minimum distribution. Roth IRA accounts, for example, avoid the minimum distribution requirement while giving you some extra flexibility to manage your other taxable withdrawals during retirement.

RMD rules can be confusing, and are a good example of why tax planning is such an important component of a retirement strategy. Please call if you have questions about any tax obligations related to your retirement accounts.