Category: Tax

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Tax

Inflation-Adjusted Health Savings Account Thresholds Announced

The inflation-adjusted Health Savings Account (HSA) thresholds for next year have been announced by the IRS. For calendar year 2022, a high deductible health plan is one with:

  1. an annual deductible of at least $1,400 for individual coverage (unchanged from 2021), or $2,800 for family coverage (unchanged from 2021)
  2. maximum out-of-pocket expenses of $7,050 for individual coverage (up from $7,000 in 2021), or $14,100 for family coverage (up from $14,000 in 2021). For 2022, the maximum annual contribution to an HSA is $3,650 for self-only coverage (up from $3,600 in 2021) and $7,300 for family coverage (up from $7,200 in 2021).

Talk with your CPA if you have tax-related questions regarding your HSA.

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Tax

The American Families Plan Fact Sheet

President Biden outlined some of his tax proposals in his address to Congress on April 28. The White House also released a fact sheet on The American Families Plan, which contains tax breaks for low-and-middle-income taxpayers and tax increases on those making over $400,000 per year.

The proposals include: extending the increased 2021 Child Tax Credit through 2025; permanently raising the Child and Dependent Care Credit; increasing the top individual tax rate from 37% to 39.6% (applying to those in the top 1%); and increasing the tax on capital gains for households making over $1 million to 39.6%.

The proposals would have to be passed by Congress. The fact sheet: https://bit.ly/3gPrF5Y

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Child Tax Credit

The American Rescue Plan Act (ARPA) expands the child tax credit amounts and eligibility requirements for tax year 2021. The credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6). The definition of a qualifying child is expanded to include a child who has not turned 18 by the end of 2021. The credit is fully refundable for a taxpayer with a principal place of abode in the U.S. for more than one-half the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.

The additional $1,000 credit amount per qualifying child ($1,600 per qualifying child under age 6) begins to phase out at a rate of $50 for each $1,000 when a single filer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). A single filer with one qualifying child over age 6 will phase out of the increased credit amount if the taxpayer’s MAGI exceeds $95,000. Similarly, situated joint filers will phase out of the increased credit amount if their MAGI exceeds $170,000.

After application of the phase-out rules for the temporarily increased credit amount, the remaining $2,000 of credit is subject to the phaseout rules under existing law ($400,000 for joint filers and $200,000 for all other filers). A single filer with one qualifying child will phase out of the remaining credit if his or her MAGI exceeds $240,000, while joint filers with one qualifying child will phase out of the remaining credit if their MAGI exceeds $440,000.

The ARPA directs the IRS to establish a program in which monthly advance payments equal to 1/12th of the estimated 2021 Child Tax Credit amount will be paid to the taxpayer during the period July 2021 through December 2021. The remaining 50% of the annual estimated amount will be claimed on the 2021 tax return. Initially, the advanced amount will be determined based on a taxpayer’s 2019 or 2020 tax filing. However, upon receipt of a more recent tax filing or other taxpayer-provided eligibility information, the IRS may modify the advance amount.

The IRS announced on March 12, 2021 that it is reviewing implementation plans for the ARPA and that it will be issuing guidance on relevant provisions. We will share more news with clients as further guidance is released about 2021 child tax credits. Contact your ATA representative for any questions.

 

 

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IRS Issues Guidance for Claiming Employee Retention Credit in 2021

The IRS on April 2, 2021, issued additional guidance for employers claiming the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified in December 2020 by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act). The ERC is designed to help eligible businesses retain employees by offering a credit against employment taxes when qualified wages and healthcare expenses are paid during the COVID-19 pandemic.

Notice 2021-23 provides additional guidance for taxpayers to use when preparing credit claims and explains the changes to the employee retention credit for the first two calendar quarters of 2021, including:

Increased Credit Amount

  • Eligible employers may now claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages paid to employees after December 31, 2020 and before January 1, 2022.
  • The maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.

Broadened Eligibility Requirements

  • Employers who suffered a 20% decline in quarterly gross receipts compared to the same calendar quarter in 2019 are now eligible.
  • 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 some government instrumentalities, including colleges, universities, organizations providing medical or hospital care and certain organizations chartered by Congress.

Determination of Qualified Wages

  • Employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as “qualified wages.”
  • The Relief 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

  • Employers with fewer 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.

ERCs have become a regular discussion with ATA clients as they can be a relief to businesses who have been impacted by COVID-19. Please contact your ATA representative with further questions and guidance on this opportunity.

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Tax

IRS Provides Safe Harbor for PPP Loan Deductions

The IRS and the Treasury Department on April 22 released guidance that provides a safe harbor for businesses that received Paycheck Protection Program (PPP) loans in the first round of relief but did not deduct otherwise eligible business expenses because they relied on now-superseded guidance.

Under prior guidance, businesses that received PPP loans in 2020 to cover payroll costs, interest on covered mortgage obligations and covered utility payments could not deduct the corresponding expenses.

The new guidance – Rev. Proc. 2021-20 – provides a safe harbor in line with a provision in the Consolidated Appropriations Act, 2021, signed Dec. 27, 2020. Businesses now may deduct those expenses on their original federal tax return for the first taxable year following the 2020 taxable year, rather than filing an amended return or an administrative adjustment request.

To apply the safe harbor, taxpayers must make an election by attaching a statement with the information listed in the revenue procedure to their federal income tax return (or information return) for the first taxable year following the 2020 taxable year. The election may be made only on subsequent returns that are timely filed, including extensions.

An important limitation on the scope of the revenue procedure is that it applies only to returns that were originally filed on or before December 27, 2020.  Thus, the guidance applies only to fiscal-year taxpayers whose year ended during 2020, for which a return was filed on or before the Consolidated Appropriations Act, 2021, was signed into law. As a result, the new guidance may have limited applicability to S corporations, many of which are calendar-year taxpayers. It may be more broadly applicable to C corporations, but only if they are fiscal-year corporations, and may apply to partnerships that use a fiscal year.

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Tax

Tax Advantages of Hiring Your Child at Your Small Business

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll. Here are some considerations.

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings. Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year. However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.  Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes. A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact your ATA representative if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too. © 2021

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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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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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Tax

Can your business benefit from the enhanced Employee Retention Tax Credit?

COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

 

Background on the credit

The CARES Act, enacted in March of 2020, created the ERTC. The credit: Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter, Was subject to an overall wage cap of $10,000 per eligible employee, and Was available to eligible large and small employers.

 

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021. In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

 

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven. What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

 

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax-saving opportunity. © 2021