Category: Helpful Articles

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COBRA Premiums

A 100% subsidy of COBRA premiums for involuntarily terminated employees is part of the recently enacted American Rescue Plan Act. The law establishes the subsidy for certain “assistance eligible individuals” (AEIs) from April 1, 2021, through Sept. 30, 2021.

An AEI is a qualified beneficiary who elects COBRA for a period of coverage within the subsidy period due to the involuntary termination or reduction of hours.

The employer (or, in some cases, the plan or insurer) will pay 100% of an AEI’s COBRA premium during that period and will be reimbursed by the U.S. government through a credit against payroll taxes, or for credit amounts exceeding payroll taxes, as a refund of an overpayment.

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Unemployment Benefits

For tax purposes, unemployment compensation (UC) generally is included in gross income. Under the American Rescue Plan Act (ARPA), for tax years beginning in 2020, taxpayers with adjusted gross income (AGI) under $150,000 may exclude UC of up to $10,200.

The $150,000 AGI limit applies for single filers, heads of household and joint filers. But for joint filers below the AGI limit, the $10,200 exclusion applies separately to each spouse. Under the ARPA, eligible individuals will also receive an additional $300 per week in unemployment benefits through Sept. 6, 2021. The ARPA was passed by Congress on March 10 and is expected to be signed into law on March 12. Contact us with questions.

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Didn’t contribute to an IRA last year? There may still be time.

If you’re getting ready to file your 2020 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2021 filing date and benefit from the tax savings on your 2020 return.

Who is eligible? You can make a deductible contribution to a traditional IRA if:

You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or you (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.

For 2020, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $104,000 to $124,000 of modified AGI. If you’re single or a head of household, the phaseout range is $65,000 to $75,000 for 2020. For married filing separately, the phaseout range is $0 to $10,000. For 2020, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $196,000 and $206,000.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).

IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. (There are also income limits to contribute to a Roth IRA.)

Here are two other IRA strategies that may help you save tax.

1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2020? That may help you in the future when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn a Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.

2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you are a homemaker. In this case, you may be able to take advantage of a spousal IRA. What’s the contribution limit? For 2020 if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).

In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2020, the maximum contribution you can make to a SEP is $57,000.

If you want more information about IRAs or SEPs, contact one of our partners or ask about it when we’re preparing your tax return. We want to help you save the maximum tax-advantaged amount for retirement. © 2021

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How To Get Stuff Done

Businesses face disruption on multiple fronts, and they are struggling to get things done. Company leaders must contend with the pandemic’s health threat and the challenges of managing a remote workforce, as well as supply chain disruptions, demand shifts, resource constraints and more, all while devising critical plans for the road ahead. Combined with uncertainty about how long the pandemic will continue to disrupt daily life and the economy, companies are having trouble prioritizing their needs and adapting to the constantly shifting environment.

Here are actionable steps organizations should consider for getting things done in the current business climate. Using these best practices will increase the likelihood of completing your strategic initiatives in 2021.

Determine Priorities

Figure out what you need to focus on and develop a plan for getting it done.

  • Identify priority projects for the next quarter.
  • Ensure projects align with the broader organization’s strategic plans.
  • Sort those projects into individual workstreams with dedicated teams.
  • Make actionable checklists for each project.
  • Create project benchmarks and define KPIs.
  • Establish a monthly/quarterly review cadence for the initiatives with the executive team. Review all major initiatives, progress to date and the current business environment. Reprioritize where appropriate.

Assign the Right People

Identify your dedicated team—with the appropriate combination of skillsets and personalities—to ensure the project gets the attention it needs to be accomplished successfully, on time and on budget.

  • Designate a specific person or team to be responsible for a project.
  • Identify a senior-level champion for the project/initiative to help ensure firm-wide buy-in.
  • Ensure the project team has productive group chemistry and the right combination of skillsets. At minimum, you’ll need a big-picture visionary, a strategist to turn that vision into an action plan and a tactical executor.
  • When building the team, look for high performers outside of your regular circles to spread the opportunity to more professionals and provide them the opportunity to expand their skillsets.
  • Be judicious about who is on the team. Keep only those who believe in the project and want it to succeed.
  • Be realistic about team members’ workloads. Try to offload less important work that project members may be doing so they can dedicate more time to their assignments on the project.

Build a Bird’s-Eye View

You’ll need a method of communicating all the projects happening throughout the business to company leadership and other parts of the organization. Getting a big-picture view also allows you to assess how your people’s time is being used, whether you are relying too heavily on a few professionals and if the organization is taking on more than it can handle.

  • Track all the various projects in your organization in a centralized location, using common metrics for monitoring success, with the help of dashboards to provide the big picture. Ensure all dashboards are easy to use and are fed by accurate, real-time data. Don’t rely solely on dashboards, however. Remain in regular communication with the project team who can provide more context to the data and share qualitative updates that aren’t as easily tracked.

Foster a “Fail Fast” Mindset

In the current environment, it is more important to act swiftly than to wait and strive for perfection. If you try to plan for every eventuality, you may be too slow to respond adequately to a crisis or seize a new opportunity.

  • Don’t wait for perfection—start executing. Encourage a “fail fast” organizational culture, and not just for times of crisis.
  • Assess the progress and value of all projects on ongoing basis—at least monthly and, if feasible, bi-weekly.
  • Are they moving the needle for your business?
  • Evaluate the progress of each project against predetermined KPIs and milestones. Is the project meeting those KPIs, and do they bring the expected ROI? ROI comes in many forms (e.g., revenue protection, revenue generation, increased profitability, cost avoidance, etc.), so define the ROI you’re aiming for to measure the project’s success and try to identify quick wins in the early stages.
  • Based on this evaluation of impact and ROI, determine whether projects need to be discontinued, reprioritized or require more investment and support.

Develop the Next Generation

Even in a crisis period, make sure you are still taking steps to train your people and provide them with new opportunities.

  • As you address immediate needs, don’t neglect your organization’s future. Provide avenues for junior staff to get exposure to opportunities that further their growth.
  • Include at least one junior person on every project team. Even if they are just involved in project management, expose them to strategic conversations that are beneficial for their development.
  • Teach them to be students—and, ultimately, champions—of the “fail fast” mindset you’re encouraging in the organization. The next generation of leaders will take up that mantle.

Whether you are trying to overcome financial challenges, capitalize on a new opportunity or adapt to shifting market conditions, how swiftly and effectively you act in the next few months could have significant implications for your business’ long-term success. Don’t wait, get started today.

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Take Advantage of FSA Grace Period

FSA written on a wooden cubes.

Flexible Spending Account (FSA) rules just got more flexible.

FSAs allow employees to use tax-free dollars to pay qualified expenses, subject to limits. Due to the pandemic, the Consolidated Appropriations Act (CAA) temporarily loosens some limits for health FSAs and dependent care FSAs.

One such change is a longer grace period after the end of a plan year, when employees can apply unused funds for expenses incurred in the grace period. Under prior law, the grace period was 2 ½ months, before unused funds may be forfeited. The CAA gives employers the option to amend their FSA plans, extending the grace period to 12 months after the end of 2020 and 2021.

Visit this link for more details: https://bit.ly/3avwrSj

If you would like more information or guidance with your FSA, contact one of ATA’s locations today!

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What are the tax implications of buying or selling a business?

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19, but analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling a business, it’s important to understand the tax implications. 

Two ways to arrange a deal 

Under current tax law, a transaction can be structured in two ways: 

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive.

  1. C corporation pros: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive.

  1. S corporation pros: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier. Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two. 

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines, and it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

  1. Preferences of buyers. For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes. A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.
  2. Preferences of sellers. In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets. With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).
  3. Obtain professional advice. Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results.

Get in touch with one of our partners about your upcoming business endeavors and the tax implications regarding your plans. © 2021

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Taxpayer Opportunity to Accelerate Depreciation Expense Relating to RPTOB Election for Residential Rental Property

The December 27, 2020 emergency coronavirus relief package introduced a taxpayer-favorable change related to the real property trade or business (RPTOB) election made by taxpayers that own residential rental property. As a refresher, taxpayers that make the RPTOB election are exempt from the Section 163(j) business interest expense deduction limitation, but must depreciate nonresidential real property, residential rental property and qualified improvement property over longer recovery periods under the alternative depreciation system (ADS).

Prior to the amendment made by the Consolidated Appropriations Act, 2021, taxpayers making the RPTOB election were required to use an ADS recovery period of 40 years with respect to residential rental property placed in service before January 1, 2018, and 30 years for residential rental property placed in service after December 31, 2017. The Act changed the recovery period for residential rental property placed in service before 2018 to 30 years, thereby making the ADS life consistent for all residential rental property for an electing RPTOB, regardless of the placed-in-service date. Note that this modification only affects taxpayers that made (or will make) the RPTOB election, and only with respect to residential rental property placed in service before 2018. Accordingly, taxpayers that elect or are required to use ADS for reasons other than making the RPTOB election will continue to amortize pre-2018 residential rental property using a 40-year recovery period.

As the amendment applies retroactively to taxable years beginning after December 31, 2017, taxpayers that made the RPTOB election on their 2018 or 2019 tax returns and depreciated residential rental property using the 40-year recovery period are now considered to be on an impermissible method of accounting. To correct this issue, Rev. Proc. 2019-8 indicates that an electing RPTOB that fails to depreciate its nonresidential real property, residential rental property and qualified improvement correctly under the ADS (including using an impermissible recovery period) must file an automatic Form 3115 (DCN #88) with a timely filed (including extensions) federal income tax return for the year of change and a copy of the Form 3115 must be filed with the IRS Ogden, UT office no later than the filing date of that return. Thus, it is not necessary to amend prior year tax returns. The additional depreciation allowed as a result of the modification will be reflected entirely on the tax return for the year of change as a favorable Section 481(a) adjustment. As it is possible that the IRS will issue new procedural guidance to address this specific fact pattern in the near future, taxpayers should check for any additional updates before they begin preparing method changes.

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One reason to file your 2020 tax return early

The IRS announced it is opening the 2020 individual income tax return filing season on February 12. (This is later than in past years because of a new law that was enacted late in December.) Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year.

Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How is a person’s tax identity stolen? In a tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund. The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund. Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can get your individual tax return prepared by us before February 12 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

When will you receive your W-2s and 1099s? To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2020 Form W-2 to employees and, generally, for businesses to issue Form 1099s to recipients of any 2020 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors). If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

How else can you benefit by filing early? In addition to protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account. Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays. If you haven’t received an Economic Impact Payment (EIP), or you didn’t receive the full amount due, filing early will help you to receive the amount sooner. EIPs have been paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Amounts due that weren’t sent to eligible taxpayers can be claimed on your 2020 return.

Do you need help? If you have questions or would like to discuss your return in more detail, please contact us via our website or call your local office. We can help ensure you file an accurate return that takes advantage of all of the breaks available to you. © 2021

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New Stimulus Package Extends and Expands Employee Retention Credit

The Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the Employee Retention Credit (ERC).  The ERC, which was created by the CARES Act on March 27, 2020, is designed to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.

Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits.


ERC for 2020

The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:

  • Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan.
  • The Act clarifies how tax-exempt organizations determine “gross receipts.”
  • Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.

 

Insights

  • Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.
  • With respect to the retroactive measures in the Act, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020.

 

ERC for 2021 (January 1 – June 30, 2021)

In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to June 30, 2021:
Increased Credit Amount

  • The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.

Broadened Eligibility Requirements

  • The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
  • A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
  • Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
  • The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.

Determination of Qualified Wages

  • The 100-full time employee threshold for determining “qualified wages” based on all wages paid to employees is increased to 500 or fewer full-time employees.
  • The Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

Advance Payments

  • Under rules to be drafted by Treasury, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019.

 

Insights

  • Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
  • Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
  • Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. Previously this rule was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.

The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.

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2021 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. 

 January 15 

-Pay the final installment of 2020 estimated tax.

-Farmers and fishermen: Pay estimated tax for 2020. 

February 1 (The usual deadline of January 31 is a Sunday.) 

-File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees. 

-Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required. 

-File 2020 Forms 1099-MISC, reporting nonemployee compensation payments in Box 7 with the IRS. 

-File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it; however, if you deposited the tax for the year in full and on time, you have until February 10 to file the return. 

-File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)

-File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all non-payroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return. 

March 1 (The usual deadline of February 28 is a Sunday.) 

-File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans. 

Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

© 2020