Posted on Jul 28, 2021

If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

The current rules

Under the current fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandmother bought stock in 1935 for $500 and it’s worth $1 million at her death, the basis is stepped up to $1 million in the hands of your grandmother’s heirs — and all of that gain escapes federal income tax.

The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

Gifting before death

It’s crucial to understand the current fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandmother decides to make a gift of the stock during her lifetime (rather than passing it on when she dies), the “step-up” in basis (from $500 to $1 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

Change on the horizon?

Be aware that President Biden has proposed ending the ability to step-up the basis for gains in excess of $1 million. There would be exemptions for family-owned businesses and farms. Of course, any proposal must be approved by Congress in order to be enacted.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning or after receiving an inheritance. We’ll keep you up to date on any tax law changes.

© 2021


Posted on Jul 26, 2021

Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.

Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes

If you’re starting or planning to launch a new business, keep these three rules in mind:

  1. Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. 
  2. Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
  3. No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to start earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Eligible expenses

In general, start-up expenses are those you make to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Plan now

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

© 2021


Posted on Jul 22, 2021

A critical deadline is approaching for many of the businesses that have received loans under the Paycheck Protection Program (PPP), which was created in March 2020 by the CARES Act. If these borrowers don’t take action before the deadline expires, their loans will become standard loans, and the borrowers could be responsible for repaying the full amount plus 1% interest before the maturity date. In addition, some borrowers could face audits.

PPP basics

PPP loans generally are 100% forgivable if the borrower allocates the funds on a 60/40 basis between payroll and eligible nonpayroll costs. Nonpayroll costs initially included only mortgage interest, rent, utilities and interest on any other existing debt, but the Consolidated Appropriations Act (CAA), enacted in late 2020, significantly expanded the eligible nonpayroll costs. For example, the funds can be applied to certain operating expenses and worker protection expenses.

The CAA also withdrew the original requirement that borrowers deduct the amount of any Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount. And it provides that a borrower doesn’t need to include any forgiven amounts in its gross income and can deduct otherwise deductible expenses paid for with forgiven PPP proceeds.

Forgiveness filings

PPP borrowers can apply for forgiveness at any time before their loans’ maturity date (loans made before June 5, 2020, generally have a two-year maturity, while loans made on or after that date have a five-year maturity). But, if a borrower doesn’t apply for forgiveness within 10 months after the last day of the “covered period” — the eight-to-24 weeks following disbursement during which the funds must be used — its PPP loan payments will no longer be deferred and it must begin making payments to its lender.

That 10-month period is coming to an end for many so-called “first-draw” borrowers. For example, a business that applied early in the program might have a covered period that ended on October 30, 2020. It would need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities.

Borrowers apply for forgiveness by filing forms with their lenders, who’ll then submit the forms to the SBA. The specific type of form needed to be filed is dependent on the amount of the loan and whether a business is a sole proprietor, independent contractor or self-employed individual with no employees.

If the SBA doesn’t forgive a loan or forgives only part of it, the lender will notify the borrower when the first payment is due. Interest accrues during the time from disbursement of the loan proceeds to SBA remittance to the lender of the forgiven amount, and the borrower must pay the accrued interest on any amount not forgiven.

Some businesses may have delayed filing their forgiveness applications to maximize their employee retention tax credits. That’s because qualified wages paid after March 12, 2020, through December 31, 2021, that are taken into account for purposes of calculating the credit amount can’t be included when calculating eligible payroll costs for PPP loan forgiveness. These businesses should pay careful attention to when their 10-month period expires to avoid triggering loan repayment.

Audit action

Borrowers also should be aware of the possibility that they’ll be audited by the SBA’s Office of Inspector General, with support from the IRS and other federal agencies. The SBA will automatically audit every loan that’s more than $2 million after the borrower applies for forgiveness, but smaller loans may be subject to scrutiny, too.

Although the SBA has established an audit safe harbor for loans of $2 million or less, that carveout applies only to the examination of the borrower’s good faith certification on the loan application that the “current economic uncertainty makes the loan request necessary to support the ongoing operations” of the business. The SBA also recently notified lenders that it’s eliminating the loan necessity requirement for loans of more than $2 million. Those borrowers will no longer need to complete a burdensome Loan Necessity Questionnaire.

All borrowers, however, still might be audited on matters such as eligibility (for example, the number of employees), calculation of the loan amount, how the funds were used and entitlement to forgiveness. Borrowers that receive adverse audit findings may be required to repay their loans and, depending on the missteps uncovered, could face civil penalties and prosecution under the federal False Claims Act.

Businesses that received loans of more than $2 million shouldn’t wait to prepare for their audits. They can begin to work with their CPAs now to gather and organize the documents and information that auditors are likely to request, including:

  • Financial statements,
  • Income and employment tax returns,
  • Payroll records for all pay periods within the applicable covered period,
  • Calculation of full-time equivalent employees, and
  • Bank and other records related to how the funds were used (for example, canceled checks, utility bills, leases and mortgage statements).

Note that some of this documentation will overlap with that required when filing the application for loan forgiveness.

Act now

Businesses nearly always have a lot on their plates, so it’s not surprising that some might not have been laser-focused on the various dates relevant to their PPP loans. Now is the time to ensure that you file your forgiveness application in a timely manner and have the necessary documentation gathered to survive the SBA audit that may follow. Contact us for assistance.

© 2021


Posted on Jul 7, 2021

Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction. 

  1. It’s available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships and S corporations. It may also be claimed by trusts and estates.
  2. The deduction is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
  3. It’s taken “below the line.” That means it reduces your taxable income but not your adjusted gross income. But it’s available regardless of whether you itemize deductions or take the standard deduction.
  4. The deduction has two components: 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate; and 20% of the taxpayer’s combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
  5. QBI is the net amount of a taxpayer’s qualified items of income, gain, deduction and loss relating to any qualified trade or business. Items of income, gain, deduction and loss are qualified to the extent they’re effectively connected with the conduct of a trade or business in the U.S. and included in computing taxable income.
  6. QBI doesn’t necessarily equal the net profit or loss from a business, even if it’s a qualified trade or business. In addition to the profit or loss from Schedule C, QBI must be adjusted by certain other gain or deduction items related to the business.
  7. A qualified trade or business is any trade or business other than a specified service trade or business (SSTB). But an SSTB is treated as a qualified trade or business for taxpayers whose taxable income is under a threshold amount.
  8. SSTBs include health, law, accounting, actuarial science, certain performing arts, consulting, athletics, financial services, brokerage services, investment, trading, dealing securities and any trade or business where the principal asset is the reputation or skill of its employees or owners.
  9. There are limits based on W-2 wages. Inflation-adjusted threshold amounts also apply for purposes of applying the SSTB rules. For tax years beginning in 2021, the threshold amounts are $164,900 for singles and heads of household; $164,925 for married filing separately; and $329,800 for married filing jointly. The limits phase in over a $50,000 range ($100,000 for a joint return). This means that the deduction reduces ratably, so that by the time you reach the top of the range ($214,900 for singles and heads of household; $214,925 for married filing separately; and $429,800 for married filing jointly) the deduction is zero for income from an SSTB.
  10. For businesses conducted as a partnership or S corporation, the pass-through deduction is calculated at the partner or shareholder level.

As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation.

© 2021


Posted on Jun 30, 2021

The first advance payments under the temporarily expanded child tax credit (CTC) will begin to arrive for nearly 39 million households in mid-July 2021 — unless, that is, they opt out. Most eligible families won’t need to do anything to receive the payments, but you need to understand the implications and why advance payments might not make sense for your household even if you qualify for them.

Understanding the CTC, then and now

The CTC was established in 1997. Unlike a deduction, which reduces taxable income, a credit reduces the amount of taxes you owe on a dollar-for-dollar basis. While some credits are limited by the amount of your tax liability, others, like the CTC, are refundable, which means that even taxpayers with no federal tax liability can benefit. Historically, the CTC has been only partially refundable in that the refundable amount was limited to $1,400.

The American Rescue Plan Act (ARPA) significantly expands the credit, albeit only for 2021. Specifically, the ARPA boosts the CTC from $2,000 to $3,000 per child ages six through 17, with credits of $3,600 for each child under age six. Plus, the CTC is now fully refundable. It also affords taxpayers the opportunity to take advantage of half of the benefit in 2021, rather than waiting until tax time in 2022.

Note, however, that there are limits to eligibility. The $2,000 credit is subject to a phaseout when income exceeds $400,000 for joint filers and $200,000 for other filers, and this continues under the ARPA — for the first $2,000. A separate phaseout applies for the increased amount: $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers.

Receiving advance payments

The ARPA directed the U.S. Treasury Department to begin making monthly payments of half of the credit in July 2021, with the remaining half to be claimed in 2022 on 2021 tax returns. For example, a household that’s eligible for a $3,600 CTC will receive $1,800 ($300 in six monthly payments) in 2021 and would claim the balance of $1,800 on the 2021 return. The payments will be made on the 15th of each month through December 2021, except for August, when they’ll be paid on August 13.

To qualify for advance payments, you (and your spouse, if filing jointly) must have:

  • Filed a 2019 or 2020 tax return that claims the CTC or provided the IRS with information in 2020 to claim a stimulus payment,
  • A main home in the United States for more than half of the year or file a joint return with a spouse who has a U.S. home for more than half of the year,
  • A qualifying child who’s under age 18 at the end of 2021 and who has a valid Social Security number, and
  • Earned less than the applicable income limit.

If the IRS has your bank information, you’ll receive the payments as direct deposits.

Because the IRS will base the payments on your 2020 tax return (or, if not yet available, your 2019 return), it’s possible that you could receive excess payments over the amount you actually qualify for in 2021. In that case — unlike excess stimulus payments — you’ll be required to repay the excess. The IRS will either deduct the amount from your 2021 refund or add it to the amount you owe.

Opting out

The IRS will automatically enroll taxpayers for advance payments, but it’s also providing an online portal at irs.gov where taxpayers can opt out. You might consider opting out if, for example, you were near the income limits in 2019 or 2020, expect to earn more in 2021, and want to avoid excess payments. Be aware that couples filing jointly must both opt out, otherwise the spouse who doesn’t will receive half of the joint payment.

It’s not only a change in expected income that could lead to excess payments; it’s also a change in the number of dependents. For example, divorced couples who share joint custody may alternate the years in which they claim their children as dependents for CTC purposes. If 2021 is your former spouse’s year, consider opting out (your former spouse won’t receive the advance payments based on his or her 2020 tax return but, if eligible, can claim the credit on the 2021 return). Parents of children who will turn age 18 in 2021 also should consider opting out.

The deadline to opt out of the first payment was June 28, 2021, but you can still opt out for future payments.

Estimating — and reducing — 2021 income

When deciding whether to opt out, you can estimate your 2021 income using multiple methods. You could simply look at your modified adjusted gross income on your most recent tax return. You also could project your income for the year and reduce it by the standard deduction (for 2021, it’s $12,550 for individual taxpayers and $25,100 for married couples filing jointly).

If you estimate that your income will be near the eligibility threshold but want to receive the advance payments, you can take measures to reduce your income before year end. You might, for example, increase your 401(k) plan contributions (the contribution limit for 2021 is $19,500). Taxpayers with high deductible health plans and health savings accounts (HSAs) can similarly reduce their income with contributions. The HSA contribution limits for 2021 are $3,600 for individual health plans and $7,200 for family health plans.

Beyond 2021

The expanded CTC is available only for 2021 as of now. President Biden has indicated that he’d like to extend it through at least 2025, and some Democratic lawmakers hope to make it permanent. But it’ll be challenging to pass a bill to make either of these proposals happen. We’ll keep you informed about any developments that could affect your tax planning.

© 2021


Posted on Jun 29, 2021

The Employee Retention Tax Credit (ERTC) is a valuable tax break that was extended and modified by the American Rescue Plan Act (ARPA), enacted in March of 2021. Here’s a rundown of the rules.

Background

Back in March of 2020, Congress originally enacted the ERTC in the CARES Act to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020, and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.

The ARPA again extended and modified the ERTC to apply to wages paid after June 30, 2021, and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC against “applicable employment taxes” equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per 2021 calendar quarter. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.

For purposes of the ERTC, a qualified employer is eligible if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a government order. Employers with up to 500 full-time employees can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as explained below, employers with more than 500 full-time employees can only claim the ERTC with respect to employees that don’t perform services.

Employers who got a Payroll Protection Program loan in 2020 can still claim the ERTC. But the same wages can’t be used both for seeking loan forgiveness or satisfying conditions of other COVID relief programs (such as the Restaurant Revitalization Fund program) in calculating the ERTC. 

Modifications

Beginning in the third quarter of 2021, the following modifications apply to the ERTC:

  • Applicable employment taxes are the Medicare hospital taxes (1.45% of the wages) and the Railroad Retirement payroll tax that’s attributable to the Medicare hospital tax rate. For the first and second quarters of 2021, “applicable employment taxes” were defined as the employer’s share of Social Security or FICA tax (6.2% of the wages) and the Railroad Retirement Tax Act payroll tax that was attributable to the Social Security tax rate.
  • Recovery startup businesses are qualified employers. These are generally defined as businesses that began operating after February 15, 2020, and that meet certain gross receipts requirements. These recovery startup businesses will be eligible for an increased maximum credit of $50,000 per quarter, even if they haven’t experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
  • A “severely financially distressed” employer that has suffered a decline in quarterly gross receipts of 90% or more compared to the same quarter in 2019 can treat wages (up to $10,000) paid during those quarters as qualified wages. This allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not employees actually provide services.
  • The statute of limitations for assessments relating to the ERTC won’t expire until five years after the date the original return claiming the credit is filed (or treated as filed). 

Contact us if you have any questions related to your business claiming the ERTC.

© 2021


Posted on May 20, 2021

If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.

Fundamentals of self-employment tax

The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.

What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.  

Keep your salary “reasonable”

Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C corporation 

There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.

Many factors to consider

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.

© 2021


Posted on May 5, 2021

President Biden recently announced his $1.8 trillion American Families Plan (AFP), the third step in his Build Back Better policy initiative. The announcement followed the previous releases of the proposed $2.3 trillion American Jobs Plan and the Made in America Tax Plan. These plans propose major investments in various domestic initiatives, such as expanded tax credits for families, offset with tax increases on high-income individual taxpayers and corporations.

Proposed tax changes for the wealthy

The AFP would reverse many of the provisions in 2017’s Tax Cuts and Jobs Act and other parts of the tax code that benefit higher-income taxpayers. These taxpayers could be hit by changes to the following:

Individual tax rates. The plan proposes to return the tax rate for the top income bracket to Obama administration levels, going from the current 37% to 39.6%. It’s not clear whether the income tax brackets will be adjusted. For 2021, the top tax rate begins at $523,601 for single taxpayers and $628,301 for married taxpayers filing jointly.

Capital gains and qualified dividend income. For those with income of more than $1 million in a tax year, the AFP would tax long-term capital gains and qualified dividend income as ordinary income — in other words, at 39.6%. Long-term capital gains currently are taxed at a maximum rate of 20% (effectively 23.8%, when combined with the net investment income tax), depending on taxable income and filing status.

Net investment income tax (NIIT). This tax applies to net investment income to the extent that a taxpayer’s modified adjusted gross income (MAGI) exceeds $200,000 for single tax filers, $250,000 for joint filers and $125,000 for married taxpayers filing separately. If a taxpayer meets the applicable MAGI threshold and has net investment income, the amount of NIIT liability is 3.8% of the lesser of 1) the amount by which the MAGI exceeds the threshold or 2) the net investment income.

The AFP proposes to broaden the NIIT by applying it to all types of income greater than $400,000, rather than only investment income. On top of the hike in capital gains, these taxpayers would face a tax of 43.4% at the federal level. With state and local capital gains taxes, high-income individuals could face an overall capital gains tax rate that tops 50%.

Stepped-up basis. Under existing law, the income tax basis of an inherited asset is the asset’s fair market value at the time of the deceased’s death, not the deceased’s original cost for it. This is referred to as “stepped-up basis.” As a result of this rule, the gain on appreciated assets isn’t subject to taxation if the heir disposes of the assets at death.

To reduce the incentive to hold appreciated assets until after death — rather than subjecting them to capital gains taxes — the AFP imposes limits on stepped-up basis. Specifically, it ends the practice for gains that exceed $1 million, or $2.5 million per couple when combined with existing real estate exemptions. The Biden administration has indicated that it would carve out exceptions for property donated to charities and family-owned businesses and farms.

Carried interest. A “carried interest” is a hedge fund manager’s contractual right to a share of a partnership’s profits. Currently, it’s taxable at the capital gains rate if certain conditions are satisfied. The Biden administration would tax carried interests at ordinary tax rates.

Like-kind exchanges. Also known as Section 1031 exchanges, like-kind exchanges allow a taxpayer to defer the recognition of a gain on the exchange of real property held for use in a business or for investment if the property is exchanged solely for similar property. The AFP would end such deferrals for gains of more than $500,000.

Tax relief for individuals and families

While the AFP would increase the tax liability of high-net-worth individuals, it’s also designed to help those less well off. It would do so through a variety of tools, including the following:

Child Tax Credit (CTC). The American Rescue Plan Act (ARPA), passed in March 2021, temporarily increased the CTC from $2,000 to $3,000 for eligible taxpayers for each child age six through 17, with credits of $3,600 for each child under age six. It also makes the credit fully refundable in most cases.

The current $2,000 credit is subject to a phaseout when income exceeds $400,000 for joint filers and $200,000 for other filers, and it’s generally refundable up to $1,400 per qualifying child. The ARPA continues the typical phaseout treatment for the first $2,000 of the credit in 2021 but applies a separate phaseout for the increased amount — $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers. Under the ARPA, the U.S. Treasury Department will make monthly advance payments for the CTC beginning in July and running through December 2021, based on taxpayers’ most recently filed tax returns.

The AFP would extend these CTC increases through 2025 and make the credit fully refundable on a permanent basis. The proposed extension would include the regular advance payments from the U.S. Treasury Department.

Child and dependent care tax credit. The ARPA expands this credit for 2021. Taxpayers can claim a refundable 50% credit for up to $8,000 in care expenses for one child or dependent and up to $16,000 in expenses for two or more children or dependents — making the credit ultimately worth up to $4,000 or $8,000. It begins phasing out when household income levels exceed $125,000; for households with income over $400,000, the credit can be reduced below 20%.

The AFP would leave this increase in place permanently. Families with an income between $125,000 and $400,000 would receive a partial credit.

Health insurance tax credit. The ARPA also increases the availability and the amount of premium tax credits (PTCs) under the Affordable Care Act (sometimes referred to as ACA subsidies or cost-sharing), retroactive to January 1, 2021. It extends PTCs to anyone who receives, or was approved to receive, unemployment benefits in 2021. It also limits the amount that anyone who obtains insurance through the federal or state marketplaces must pay for premiums to 8.5% of their MAGI — regardless of their income. The AFP would make this expansion permanent.

Corporate tax proposals

In addition to the individual tax proposals, the Biden administration has proposed a swath of changes in the taxation of businesses. For example, the AFP would make permanent the limit on excess business loss deductions.

The Made in America Tax Plan contains many more provisions relevant to businesses. Among other things, it proposes to raise the corporate tax rate to 28%, the midpoint between the 21% rate enacted during the Trump administration and the Obama administration level of 35%. The plan also proposes several changes to international taxation rules, including raising the tax rate on global intangible low-taxed income to 21%.

The Made in America Tax Plan would also impose a 15% minimum tax on book income (as opposed to the income reported on corporate tax returns) on large companies that report high profits with little or no taxable income. Note, too, that Treasury Secretary Janet Yellen has stated that the United States is working with other countries to set a global minimum tax rate.

The American Jobs Plan, on the other hand, provides several tax incentives and other support for businesses. For example, it would provide $52 billion to promote domestic manufacturing and $31 billion for small business programs to expand access to credit, venture capital, and research and development funding. It proposes targeted credits related to clean energy generation and storage and expanding the Section 45Q carbon credit. And it would provide an expanded credit for employers that provide workplace childcare facilities.

IRS-related proposals

In a recent study, the IRS found that the top 1% of individual taxpayers failed to report 20% of their income and failed to pay nearly $175 billion in taxes owed annually. The Biden administration proposes providing the IRS with the resources and information it needs to address the “tax gap” (that is, the difference between the tax owed by taxpayers and the amount that’s actually paid on time).

The AFP calls for a significant boost in the funding of IRS tax enforcement — $80 billion over 10 years, which, on an annual basis, nearly doubles the agency’s 2021 enforcement budget. The closer scrutiny would focus on large corporations, partnerships and wealthy individuals. It also would require financial institutions to report information on balances and account flows to better track earnings from investment and business activities. The Biden administration has stated that the enforcement efforts won’t target households with less than $400,000 in annual income.

The path forward

The Biden administration and the slim Democratic majority in Congress have already demonstrated with the ARPA their willingness to use the budget reconciliation process to pass fiscal policy legislation on a majority basis in the U.S. Senate. That approach, however, requires unanimous Democratic support.

Moderate Democrats in Congress could demand the trimming of certain proposals regarding tax increases or reject them altogether (for example, the higher taxes on investment income and changes to the step-up in basis). We’ll keep you up to date on the provisions that survive and any that might be added during negotiations, such as an elimination of the limit on the state and local tax deduction.

© 2021


Posted on Apr 29, 2021

President Biden’s proposals for individual taxpayers were outlined in an April 28 address to Congress and in an 18-page fact sheet released by the White House. The “American Families Plan” contains tax breaks for low- and middle-income taxpayers and tax increases on those “making over $400,000 per year.”

Here’s a summary of some of the proposals.

Extended tax breaks

Extend the Child Tax Credit (CTC) increases in the American Rescue Plan Act (ARPA) through 2025 and make the credit permanently fully refundable. The ARPA made several changes to the CTC for 2021. For example, it expanded the credit for eligible taxpayers from $2,000 to $3,000 per child ages six and above, and $3,600 per child under age six. It also made 17-year-olds eligible to be qualifying children for the first time and made the credit fully refundable. It also provides for monthly advance payments of the credit that will be paid from July through December 2021.

The American Families Plan would make permanent the full refundability of the CTC, while extending the other expansions of it through 2025. “The credit would also be delivered regularly,” the fact sheet states, meaning that monthly payments would continue to families rather than waiting until tax season to claim the credit.

Permanently increase the Child and Dependent Care Credit. The ARPA increased the amount of the credit for many taxpayers and made it refundable. The American Families Plan would make these changes permanent.

Extend expanded Affordable Care Act tax credits for premiums. The ARPA expanded the premium credit that’s available to many people enrolled in an exchange-purchased qualified health plan, which in effect, lowers plan premiums for them. This expansion applies to 2021 and 2022. The American Families Plan would make the premium reductions permanent.

Make the Earned Income Tax Credit (EITC) expansion for childless workers permanent. The ARPA made changes that roughly tripled the EITC for childless workers for 2021. The American Families Plan would make the changes permanent.

Tax increases

Increase the top tax rate to 39.6%. The proposed plan would restore the top tax bracket to what it was before the 2017 Tax Cuts and Jobs Act, returning it to 39.6% from 37%. This would apply to taxpayers in the top 1%.

Increase the capital gains tax for “households making over $1 million.” They would pay the same 39.6% rate on all income, rather than the current maximum 20% tax rate on long-term capital gains. (Short term capital gains from investments held less than one year currently are taxed at the top individual tax rate of 37%.)

Reduce the “step-up in basis” at death for some taxpayers. The proposed plan would end the practice of stepping up the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) at death and would tax the gains if the property isn’t donated to charity. The fact sheet states that this “will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.”

Revise the taxation of carried interest. The proposed plan would close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income.

Cut back the rule for like-kind exchanges. President Biden would like to eliminate the Section 1031 like-kind exchange rule with respect to gains greater than $500,000 on real estate exchanges.

Make the excess business loss rules permanent. Under the tax code, for noncorporate taxpayers in tax years beginning after December 31, 2020, and before January 1, 2026, any “excess business loss” of a taxpayer for the tax year is disallowed. The American Families Plan would make this rule permanent.

Close loopholes in the 3.8% net investment income tax. Certain unearned income of high-income individuals, estates and trusts is subject to a surtax of 3.8%. The fact sheet states that the application of this provision is “inconsistent across taxpayers due to holes in the law” and proposes to “apply the taxes consistently to those making over $400,000.”

A challenging road ahead

These are only some of the proposals in the American Families Plan. Keep in mind that for any of these proposals to become reality, President Biden’s plan would have to be approved by Congress and that will be challenging. No matter what lies ahead, we can help you implement planning strategies to keep your tax bill as low as possible.

© 2021


Posted on Apr 23, 2021

Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Determining reasonable compensation

There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

  • Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay). 
  • In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts. 
  • Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
  • If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.

© 2021