The House of Representatives on Friday morning passed H.R. 5376, the Build Back Better Act, by a vote of 220–213.
The bill encompasses a wide range of budget and spending provisions and has been the focus of protracted negotiations for the past several weeks. The vote on the bill was held after the Congressional Budget Office (CBO) released its cost estimate for the bill. The CBO estimates the bill will cost almost $1.7 trillion and add $367 billion to the federal deficit over 10 years. The bill contains a wide variety of tax provisions, designed to provide incentives to taxpayers and to raise revenue to pay for the spending in the bill. H.R. 5376 now goes to the Senate for consideration; its fate there cannot be predicted.
The vote on the bill was held after the Congressional Budget Office (CBO) released its cost estimate for the bill. The CBO estimates the bill will cost almost $1.7 trillion and add $367 billion to the federal deficit over 10 years. Adding in $207 billion of nonscored revenue that is estimated to result from increased tax enforcement in the bill, the net total increase to the deficit would be $160 billion.
The bill contains a wide variety of tax provisions, designed to provide incentives to taxpayers and to raise revenue to pay for the spending in the bill. H.R. 5376 now goes to the Senate for consideration; its fate there cannot be predicted.
Treasury, IRS provide guidance on tax relief for deductions for food or beverages from restaurants
Businesses can temporarily deduct 100% beginning January 1, 2021
The Treasury Department and the Internal Revenue Service today issued Notice 2021-25 providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020. The Act added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100% deduction for food or beverages from restaurants.
Beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.
Where can businesses get food and beverages and claim 100%?
Under the temporary provision, restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. However, restaurants do not include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores.
Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.
IRS reminds taxpayers to make April 15 estimated tax payment
The Internal Revenue Service today reminded self-employed individuals, retirees, investors, businesses, corporations, and others who pay their taxes quarterly that the payment for the first quarter of 2021 is due Thursday, April 15, 2021.
The extension to May 17, 2021 for individuals to file their 2020 federal income taxes does not apply to estimated tax payments. The 2021 Form 1040-ES, Estimated Tax for Individuals, can help taxpayers estimate their first quarterly tax payment.
Income taxes are pay-as-you-go. This means, by law, taxes must be paid as income is earned or received during the year. Most people pay their taxes through withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation.
Most often, those who are self-employed or in the sharing economy need to make estimated tax payments. Similarly, investors, retirees and others often need to make these payments because a substantial portion of their income is not subject to withholding. Other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income. Paying quarterly estimated taxes will usually lessen and may even eliminate any penalties.
Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees and those who receive income unevenly during the year. See Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and its instructions for more information.
How to pay estimated taxes
Form 1040-ES, Estimated Tax for Individuals, includes instructions to help taxpayers figure their estimated taxes. They can also visit IRS.gov/payments to pay electronically. The fastest and easiest ways to make an estimated tax payment is by using IRS Direct Pay, the IRS2Go app or the Treasury Department's Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments. If paying by check, taxpayers should be sure to make the check payable to the "United States Treasury."
Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations.
IRS to recalculate taxes on unemployment benefits; refunds to start in May
To help taxpayers, the Internal Revenue Service announced today that it will take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.
The legislation, signed on March 11, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation up to $20,400 if married filing jointly and $10,200 for all other eligible taxpayers. The legislation excludes only 2020 unemployment benefits from taxes.
Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.
For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns.
There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.
For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund. However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income.
These taxpayers may want to review their state tax returns as well.
The IRS has worked with the tax return preparation software industry to reflect these updates so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns. See New Exclusion of up to $10,200 of Unemployment Compensation for information and examples. For others, instructions and an updated worksheet about the exclusion were available in March and posted to IRS.gov/form1040. These instructions can assist taxpayers who have not yet filed to prepare returns correctly.
Estimated tax payment due April 15
Notice 2021-21, issued today does not alter the April 15, 2021, deadline for estimated tax payments; these payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn't subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.
2021 AFSP deadline postponed to May 17
Tax preparers interested in voluntarily participating in the Annual Filing Season Program (AFSP) for calendar-year 2021 now have until May 17, 2021 to file their application with the Internal Revenue Service. The normal due date is April 15.
Details on this extension are in Notice 2021-21, posted on IRS.gov. For more information about the Annual Filing Season Program, visit the Tax Pros page on IRS.gov.
2017 unclaimed refunds – deadline extended to May 17
For tax year 2017 Federal income tax returns, the normal April 15 deadline to claim a refund has also been extended to May 17, 2021. The law provides a three-year window of opportunity to claim a refund. If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. The law requires taxpayers to properly address, mail and ensure the tax return is postmarked by the May 17, 2021, date.
Additionally, foreign trusts and estates with federal income tax filing or payment obligations, who file Form 1040-NR, now have until May 17, 2021.
IRS extends additional tax deadlines for individuals to May 17
The Internal Revenue Service today announced that individuals have until May 17, 2021 to meet certain deadlines that would normally fall on April 15, such as making IRA contributions and filing certain claims for refund.
This follows a previous announcement from the IRS on March 17, that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021. Notice 2021-21 PDF provides details on the additional tax deadlines which have been postponed until May 17.
Time to make contributions to IRAs and health savings accounts extended to May 17
In extending the deadline to file Form 1040 series returns to May 17, the IRS is automatically postponing to the same date the time for individuals to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). This postponement also automatically postpones to May 17, 2021, the time for reporting and payment of the 10% additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans. Notice 2021-21 also postpones the due date for Form 5498 series returns related to these accounts to June 30, 2021.
Face masks and other personal protective equipment to prevent the spread of COVID-19 are tax deductible
The Internal Revenue Service issued Announcement 2021-7 today clarifying that the purchase of personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus are deductible medical expenses.
The amounts paid for personal protective equipment are also eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), health reimbursement arrangements (HRAs), or health savings accounts (HSAs).
How will taxpayers receive their stimulus payment?
Taxpayers with direct deposit information on file with the IRS will receive the payment that way. For those without direct deposit information on file with the IRS, the IRS will use federal records of recent payments to or from the government, where available, to make the payment as a direct deposit. This helps to expedite payment delivery. Otherwise, taxpayers will receive their payment as a check or debit card in the mail. If the direct deposit information is sent to a closed bank account, the payment will be reissued by mail to the address on file with the IRS. The IRS encourages taxpayers to check the Get My Payment tool for additional information.
Special reminder for those who don't normally file a tax return
People who don't normally file a tax return and don't receive federal benefits may qualify for these stimulus payments. This includes those experiencing homelessness and others. If you're eligible and didn't get a first or second Economic Impact Payment (that is, an EIP1 or EIP2) or got less than the full amounts, you may be eligible for the 2020 Recovery Rebate Credit, but you'll need to file a 2020 tax return.
The IRS reminds taxpayers that the income levels in this new round of stimulus payments have changed. This means that some people won't be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit. Payments will begin to be reduced for individuals making $75,000 or above in Adjusted Gross Income ($150,000 for married filing jointly). The payments end at $80,000 for individuals ($160,000 for married filing jointly); people above these levels are ineligible for a payment.
Watch the mail for paper checks, EIP Cards
Taxpayers should note that the form of payment for the third EIP may be different than earlier stimulus payments. More people are receiving direct deposits, while those receiving them in the mail may get either a paper check or an EIP Card – which may be different than how they received their previous stimulus payments. IRS and the Treasury Department urge eligible people who have not received a direct deposit to watch their mail carefully during this period.
Paper checks will arrive by mail in a white envelope from the U.S. Department of the Treasury. For those taxpayers who received their tax refund by mail, this paper check will look similar, but will be labeled as an "Economic Impact Payment" in the memo field.
The EIP Card will also come in a white envelope prominently displaying the seal of the U.S. Department of the Treasury. The card has the Visa name on the front and the issuing bank, MetaBank, N.A. on the back. Information included with the card will explain that this is an Economic Impact Payment. Each mailing will include instructions on how to securely activate and use the card. It is important to note that none of the EIP cards issued for any of the three rounds is reloadable; recipients will receive a separate card and will not be able to reload funds onto an existing card. EIP Cards are safe, convenient, and secure.
EIP Card recipients can make purchases online or in stores anywhere Visa Debit Cards are accepted. They can get cash from domestic in-network ATMs, transfer funds to a personal bank account, and obtain a replacement EIP Card if needed without incurring any fees. They can also check their card balance online, through a mobile app, or by phone without incurring fees. The EIP Card provides consumer protections against fraud, loss, and other errors. The EIP Card is sponsored by the Bureau of the Fiscal Service and is issued by Treasury's financial agent, MetaBank, N.A. The IRS does not determine who receives a prepaid debit card.
More Economic Impact Payments set for disbursement in coming days; taxpayers should watch mail for paper checks, debit cards
The Internal Revenue Service announced today that the next batch of Economic Impact Payments will be issued to taxpayers this week, with many of these coming by paper check or prepaid debit card.
For taxpayers receiving direct deposit, this batch of payments began processing on Friday and will have an official pay date of Wednesday, March 24, with some people seeing these in their accounts earlier, potentially as provisional or pending deposits. A large number of this latest batch of payments will also be mailed, so taxpayers who do not receive a direct deposit by March 24 should watch the mail carefully in the coming weeks for a paper check or a prepaid debit card, known as an Economic Impact Payment Card, or EIP Card.
No action is needed by most people to obtain this round of Economic Impact Payments (EIPs). People can check the Get My Payment tool on IRS.gov on to see if the their payment has been scheduled.
"The IRS continues to send the third round of stimulus payments in record time," said IRS Commissioner Chuck Rettig. "Since this new set of payments will include more mailed payments, we urge people to carefully watch their mail for a check or debit card in the coming weeks."
22-March-2021 marks the second batch of payments, with additional payments anticipated on a weekly basis going forward. The vast majority of taxpayers receiving EIPs will receive it by direct deposit. In addition, the IRS and the Bureau of the Fiscal Service leveraged data in their systems to convert many payments to direct deposits that otherwise would have been sent as paper checks or debit cards. This accelerated the disbursement of these payments by weeks.
Federal Tax Day for individuals extended to May 17, BUT IRS urges taxpayers to check with their state for State Tax Filing Deadline
The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days.
Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.
The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds associated with e-filed returns are issued within 21 days.
State tax returns
The federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and are not always the same as the federal filing deadline. The IRS urges taxpayers to check with their state tax agencies for those details.
New Exclusion of up to $10,200 of Unemployment Compensation
If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.
The exclusion should be reported separately from your unemployment compensation. See the updated instructions and the Unemployment Compensation Exclusion Worksheet to figure your exclusion and the amount to enter on Schedule 1, lines 7 and 8.
House passes PPP deadline extension in 415-3 vote
A bill to move the Paycheck Protection Program application deadline from March 31 to May 31 sailed through the U.S. House of Representatives on Tuesday night, passing in a 415-3 vote that sends the legislation to the Senate for consideration.
The nearly unanimous vote came after several dozen business groups, including the AICPA, endorsed the PPP Extension Act of 2021, H.R. 1799, which extends the filing deadline for PPP applications by 60 days and provides an additional 30 days for the U.S. Small Business Administration (SBA) to finish processing applications received by May 31.
The bill was introduced March 11 in the U.S. House of Representatives by four members of the chamber’s Committee on Small Business: Reps. Nydia Velázquez, D-N.Y., the committee’s chair; Blaine Luetkemeyer, R-Mo., the committee’s ranking member; Carolyn Bourdeaux, D-Ga.; and Young Kim, R-Calif. Companion legislation was announced for the Senate by Ben Cardin, D-Md.; Susan Collins, R-Maine; and Jeanne Shaheen, D-N.H.
The AICPA sent a letter Tuesday thanking those sponsors for introducing the legislation. The letter, signed by AICPA President and CEO Barry Melancon, CPA, CGMA, said that a 60-day deadline extension would give the SBA much needed time to address processing delays and technical challenges with its PPP platform and produce needed guidance for PPP and other COVID-19 business relief programs. The letter also emphasized the benefit of giving CPAs a longer period to assist as many clients as possible with the PPP and other COVID-19 business relief programs.
“CPA practitioners, who play a substantial role in assisting small businesses and not-for-profit entities navigate the PPP, are working with clients to evaluate which programs are best, given the unique circumstances of the client,” Melancon said in the letter. “Navigating the interplay of programs such as the employee retention tax credit, Shuttered Venue Operators Grant, and the Restaurant Revitalization Fund is challenging, as guidance for these programs is incomplete, complicating the efforts of CPAs to assist their small business and not-for-profit clients.”
The bills were announced the day after an expert panel including the AICPA’s vice president for Firm Services, Lisa Simpson, CPA, CGMA, testified before the House Small Business Committee that a 60-day delay would give the SBA time to resolve processing problems with its PPP platform and to issue needed guidance on lingering questions regarding the program.
New payments differ from earlier Economic Impact Payments
The third round of stimulus payments, those authorized by the 2021 American Rescue Plan Act, differs from the earlier payments in several respects:
Highlights of the third round of Economic Impact Payments; IRS will automatically calculate amounts
In general, most people will get $1,400 for themselves and $1,400 for each of their qualifying dependents claimed on their tax return. As with the first two Economic Impact Payments in 2020, most Americans will receive their money without having to take any action. Some Americans may see the direct deposit payments as pending or as provisional payments in their accounts before the official payment date of March 17.
Because these payments are automatic for most eligible people, contacting either financial institutions or the IRS on payment timing will not speed up their arrival. Social Security and other federal beneficiaries will generally receive this third payment the same way as their regular benefits. A payment date for this group will be announced shortly.
The third round of Economic Impact Payments (EIP3) will be based on the taxpayer's latest processed tax return from either 2020 or 2019. This includes anyone who successfully registered online at IRS.gov using the agency's Non-Filers tool last year, or alternatively, submitted a special simplified tax return to the IRS. If the IRS has received and processed a taxpayer's 2020 return, the agency will instead make the calculation based on that return.
In addition, the IRS will automatically send EIP3 to people who didn't file a return but receive Social Security retirement, survivor or disability benefits (SSDI), Railroad Retirement benefits, Supplemental Security Income (SSI) or Veterans Affairs benefits. This is similar to the first and second rounds of Economic Impact Payments, often referred to as EIP1 and EIP2.
For those who received EIP1 or EIP2 but don't receive a payment via direct deposit, they will generally receive a check or, in some instances, a prepaid debit card (referred to as an "EIP Card"). A payment will not be added to an existing EIP card mailed for the first or second round of stimulus payments.
Under the new law, an EIP3 cannot be offset to pay various past-due federal debts or back taxes.
The IRS reminds taxpayers that the income levels in this new round of stimulus payments have changed. This means that some people won't be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit. Payments will begin to be reduced for individuals making $75,000 or above in Adjusted Gross Income ($150,000 for married filing jointly.) The reduced payments end at $80,000 for individuals ($160,000); people above these levels are ineligible for a payment. More information is available on IRS.gov.
IRS begins delivering third round of Economic Impact Payments to Americans
The Internal Revenue Service announced today that the third round of Economic Impact Payments will begin reaching Americans over the next week.
Following approval of the American Rescue Plan Act, the first batch of payments will be sent by direct deposit, which some recipients will start receiving as early as this weekend, and with more receiving this coming week.
Additional batches of payments will be sent in the coming weeks by direct deposit and through the mail as a check or debit card. The vast majority of these payments will be by direct deposit.
No action is needed by most taxpayers; the payments will be automatic and, in many cases, similar to how people received the first and second round of Economic Impact Payments in 2020. People can check the Get My Payment tool on IRS.gov on Monday to see the payment status of the third stimulus payment.
"Even though the tax season is in full swing, IRS employees again worked around the clock to quickly deliver help to millions of Americans struggling to cope with this historic pandemic," said IRS Commissioner Chuck Rettig. "The payments will be delivered automatically to taxpayers even as the IRS continues delivering regular tax refunds. We urge people to visit IRS.gov for the latest details on the stimulus payments, other new tax law provisions and tax season updates."
Senate passes amended $1.9 trillion COVID-19 stimulus bill
A $1.9 trillion U.S. coronavirus relief package took a step forward Saturday when the Senate voted 50–49 to approve a bill that will be sent back to the House of Representatives because the Senate changed the legislation originally approved by the House.
Known as the American Rescue Plan Act, H.R. 1319, the bill will be sent to President Joe Biden’s desk to be signed into law if it passes the House without changes. Congress is under pressure to get Biden’s signature on the bill before legislation authorizing $300 a week in federal funds added to unemployment checks expires on March 14.
The Senate bill retains most of the tax provisions in the House bill unchanged. However, under the Senate bill eligibility for the recovery rebate credits (to be paid to most taxpayers in advance as economic impact payments) would phase out more quickly than it did in the two previous rounds.
For single taxpayers, the phaseout will begin at an adjusted gross income (AGI) of $75,000 and the credit will be completely phased out for taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of households, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
Under the House bill, the phaseout range was $25,000 for single taxpayers (i.e., from AGI of $75,000 to AGI of $100,000), $50,000 for joint filers, and $37,500 for heads of household.
The Senate bill also:
PPP processing delays continue - The heavy volume of applications and validation checks
The computer systems the SBA uses to process PPP applications produce dozens of different error codes related to failed validation checks and other issues. Those codes are causing a significant percentage of applications to be held up, according to Asgeirsson. The goal of protecting taxpayer money is well intentioned, but the sheer volume of applications is overwhelming, he said.
“What you have occurring here is [the SBA] saying, ‘We don’t want fraudulent applications,’ and then you put in place a process that’s generating validation checks that have just inundated the lenders — and also the SBA — in trying to process hundreds of thousands of applications,” he said, adding that despite initial predictions of error codes being cleared in a week, some applications are languishing for a month or more.
The SBA attempted to speed up the process by giving lenders the authority to clear certain codes and not have to submit supporting documentation in selected cases until the borrower applies for loan forgiveness. This has not spared the lenders from still having to do a lot of work on the front end to push flagged applications through the system, said Lisa Simpson, CPA, CGMA, vice president–Firm Services for the AICPA.
“The SBA has delegated authority to the lenders to clear some of these codes, but the lenders are still trying to navigate how to clear some of these codes and what documentation is going to be adequate because they’ll be submitting that information at forgiveness,” Simpson said. “They want to make sure they are clearing the codes the way the SBA intends and that they are getting the documentation they need, so this is a very time-intensive, manual process on the part of the lenders.”
Tax provisions in the American Rescue Plan Act - Child tax credit
The bill expands the Sec. 24 child tax credit in several ways. It makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.
The bill increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others.
The IRS is directed to estimate taxpayers' child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.
The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.
The taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year's return and increase taxable income by the excess of the advance payment amount over the actual credit allowed. But taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.
Tax provisions in the American Rescue Plan Act - COBRA continuation coverage
Subtitle F of the bill, titled "Preserving Health Benefits for Workers," provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 21, 2021. The bill creates a new Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against the Sec. 3111(b) Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.
The credit applies to premiums and wages paid after April 1, 2021.
Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.
Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.
Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient's gross income.
Tax provisions in the American Rescue Plan Act
The $1.9 trillion stimulus plan passed by the House of Representatives early Saturday contains many tax provisions, including a new round of economic impact payments, a tax credit for COBRA continuation coverage, and the expansion of several other tax credits. The House passed the bill, the American Rescue Plan Act of 2021, H.R. 1319, by a vote of 219–212, and it now goes to the Senate for consideration.
Recovery rebates
Subtitle G of the bill, titled "Promoting Economic Security," enacts a new Sec. 6428B that provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021. As with the two recovery rebates enacted in 2020, the IRS will make advance payments, which the Service has been calling economic impact payments.
The recovery rebate credit phases out for taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for married filing jointly).
The bill uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
PPP processing delays continue
Measures implemented by the U.S. Small Business Administration (SBA) to screen for potential fraud in Paycheck Protection Program (PPP) applications continue to cause stress and delays in the system, AICPA executives said during an online Town Hall.
The discussion about processing delays took place before the White House issued a statement Monday morning saying that it would make a series of moves to improve PPP access to the smallest businesses. The Biden administration said it would allow only businesses with fewer than 20 employees to apply for PPP loans during a two-week period starting Wednesday. The statement also said the administration would change the PPP loan calculation formula to help sole proprietors, independent contractors, and self-employed individuals receive more financial support.
Stung by reports of widespread fraud during the first iteration of the PPP last year, the SBA instituted dozens of validation checks for the $284 billion PPP round that opened last month. The screenings have resulted in some PPP applications being delayed for weeks, said Erik Asgeirsson, president and CEO of CPA.com, the AICPA’s technology subsidiary.
“Things aren’t working as well as they need to work, and also there possibly needs to be some modification of expectations,” said Asgeirsson, one of the leaders in the AICPA’s efforts to provide PPP support to CPAs and small businesses seeking much-needed funding with the economy still faltering amid the COVID-19 pandemic.
The delays have plagued the PPP since the program reopened Jan. 11. The AICPA sent a letter Feb. 3 urging the SBA to address the problems, which were causing the SBA’s E-Tran and PPP Loan Processing system to either reject or require more documentation for about 30% of PPP applications. The SBA announced changes Feb. 10 to speed up the flow of funds to PPP applicants while “maintaining the integrity” of the program.
Asked about the performance of its PPP processes, SBA responded with a statement referring to the Feb. 10 notice of changes: “The SBA is focused on increasing equitable access to underserved small businesses, ensuring the integrity of the program, and promoting rapid and efficient distribution of funds. The Agency has issued a detailed notice that enables lenders to directly certify the eligibility of businesses so that small businesses have as much time as possible to access vital Paycheck Protection Program funds, while maintaining the integrity of the program.”
The problems have persisted, however. And while Asgeirsson said he sees signs of improvement, a few factors are preventing faster fixes.
House passes $1.9 trillion stimulus bill with a variety of small business relief
The U.S. House of Representatives passed, by a vote of 219–212, a $1.9 trillion COVID-19 relief package early Saturday morning that includes $1,400 stimulus checks to individuals, an extension of unemployment benefits, and tens of billions in aid for small businesses and not-for-profits.
The bill, titled the American Rescue Plan Act of 2021, H.R. 1319, also includes phased increases in the minimum wage that would bring it to $15 an hour by 2025. That part of the bill likely will not be considered in the bill's next stop, the Senate. That's because the Senate parliamentarian ruled Thursday that the minimum wage hike could not be part of the bill because it is being considered using budget-reconciliation rules, which clears the way for the Senate to pass the legislation by a simple majority.
Vice President Kamala Harris could overrule the Senate parliamentarian but was not expected to do so. This would guarantee that any bill passed by the Senate would be different from the House version, requiring changes and likely follow-up votes by both chambers in March.
Proponents of the bill have been pushing to have it passed and signed into law by March 14, which is when a $300-per-week federal supplement to unemployment checks is scheduled to expire. The American Rescue Plan Act moves the expiration date to Aug. 29 and increases the total number of weeks eligible for the supplement to 73 weeks per individual from 50 weeks (basically dating back to when the COVID-19 pandemic disrupted the U.S. economy). The act also boosts the federal supplement to $400 per week.
The American Rescue Plan Act includes numerous tax provisions, including a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021. Advance payments of the credit will be sent to individuals as economic impact payment checks. For more details, see the JofA article "Tax Provisions in the American Rescue Plan Act."
There are 9 US states with no income tax, but 2 of them still taxed investment earnings in 2020
In general, you have to file a federal tax return if your total income is more than the standard deduction, which varies based on your age and filing status. Some instances require you to file even if your income is less than the standard deduction, such as having self-employment income, being claimed as a dependent on someone's tax return and having earned or unearned income above certain thresholds, and filing separately as a married couple with gross income of $5 or more.
Some people, however, are off the hook when it comes to filing a state tax return. That's because seven US states didn't impose state income tax for the 2020 tax year — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
New Hampshire and Tennessee didn't tax earned income either, but they did tax investment income — in the form of interest and dividends — at 5% and 1%, respectively, for the 2020 tax year. If you lived in either state last year and received income from your investments, you may need to file a state return for tax year 2020.
As of 2021, Tennessee has fully repealed its state income tax on income earned from interest and dividends. The states that do tax income have either a flat income tax — meaning everyone, regardless of how much they earn, pays the same percentage of their income to the government — or a progressive income tax, which means their tax rate is determined by how much they earn.
This legislation does not cover certain uncommon types of employees, such as professional entertainers, professional athletes, qualified production employees, and certain public figures. They remain subject to each state’s laws.
Bipartisan support from Senate regarding Mobile Workforce State Income Tax Simplification Act
The Mobile Workforce State Income Tax Simplification Act provides for a uniform, fair, and easily administered law and helps to ensure that the correct amount of tax is withheld and paid to the states without the undue burden that the current system places on employees and employers. The Act provides a uniform 30-day threshold before the liability attaches and withholding is required.
After 30 days, existing state laws will apply. Consistent with current law, the Act provides that an employee’s earnings are subject to full tax in his or her state of residence. Further, an employee’s earnings would be subject to income tax in the state(s) in which the employee is present and performing duties for more than 30 days during the calendar year.
Nonresident employees who visit a state and perform employment duties for more than 30 days during a calendar year are subject to tax—and employers are required to withhold taxes—in the nonresident state from the commencement of the duties performed by the employee in the nonresident state.
As under current law, nonresident employees who visit a state for longer than 30 days (and are therefore subject to that state’s nonresident filing and withholding rules) will still be able to take a credit against their resident state personal income tax liability for amounts paid to other states.
This legislation does not cover certain uncommon types of employees, such as professional entertainers, professional athletes, qualified production employees, and certain public figures. They remain subject to each state’s laws.
Double-check for missing or incorrect Forms W-2, 1099 before filing taxes
With some areas seeing mail delays, the Internal Revenue Service reminds taxpayers to double-check to make sure they have all of their tax documents, including Forms W-2 and 1099, before filing a tax return.
The IRS reminds taxpayers that many of these forms may be available online. When other options aren't available, taxpayers who haven't received a W-2 or Form 1099 should contact the employer, payer or issuing agency directly to request the missing documents before filing their 2020 federal tax return. This also applies for those who received an incorrect W-2 or Form 1099.
Those who don't get a response, are unable to reach the employer/payer/issuing agency or cannot otherwise get copies or corrected copies of their Forms W-2 or 1099 must still file their tax return on time by the April 15 deadline (or October 15 if requesting an automatic extension). They may need to use Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. to avoid filing an incomplete or amended return.
New PPP changes attempt to ease smallest businesses' access
The administration of President Joe Biden announced Monday that it would institute a two-week period starting Wednesday during which only businesses with fewer than 20 employees will be able to apply for Paycheck Protection Program (PPP) loans.
The exclusive application window is one of several moves the White House said it is making to further target the PPP to the smallest businesses. The administration also will:
Foreign Tax Credit
If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.
If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.
Credit for Child and Dependent Care Expenses
To be able to claim the credit for child and dependent care expenses, you must file Form 1040, 1040-SR, or 1040-NR, and meet the following tests:
You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit.
Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Deduct foreign taxes on Schedule A (Form 1040), Itemized Deductions
If you elect to exclude either foreign earned income or foreign housing costs under IRC §911, you cannot take a foreign tax credit for taxes on income you exclude. If you do take the credit, one or both of the elections may be considered revoked.
Qualifying Person Test:
The care must be for one or more qualifying persons who are identified on Form 2441.Earned Income Test:
You (and your spouse if filing jointly) must have earned income during the year.Work-Related Expense Test:
You must pay child and dependent care expenses so you (and your spouse if filing jointly) can work or look for work.Joint Return Test:
Your filing status may be single, head of household, or qualifying widow(er) with dependent child. If you are married, you must file a joint return, unless an exception applies to you.Provider Identification Test:
You must identify the care provider on your tax return.
Education Credits - AOTC and Lifetime Learning Credit
An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American Opportunity Tax Credit and the Lifetime Learning Credit.
Who can claim an Education Credit?
There are additional rules for each credit, but you must meet all three of the following for either credit:
If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. You can't claim the AOTC if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. For more information about AOTC and foreign students, visit American Opportunity Tax Credit - Information for Foreign Students.
The law requires that both you and your qualifying student have a valid Social Security number or Individual Taxpayer Identification Number, issued before the due date for your tax return, in order to claim the AOTC.
Earned Income Tax Credit (EITC) Relief
If your earned income was higher in 2019 than in 2020, you can use the 2019 amount to figure your EITC for 2020. This temporary relief is provided through the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
You may claim the EITC if your income is low- to moderate. The amount of your credit may change if you have children, dependents, are disabled or meet other criteria.
To qualify for the EITC, you must:
To qualify for the EITC, everyone you claim on your taxes must have a valid Social Security number (SSN). To be valid, the SSN must be:
Finding the amount of my Economic Impact Payments
If eligible for the Recovery Rebate Credit, you will need the amount of any Economic Impact Payments you received to calculate your Recovery Rebate Credit amount using the RRC Worksheet or your tax preparation software.
Recovery Rebate Credit
Most individuals eligible for the Recovery Rebate Credit have already received the full amount in two rounds of payments, known as Economic Impact Payments.
If you received the full amount of each Economic Impact Payment, you won’t need to claim the Recovery Rebate Credit or include any information related to it when you file your 2020 tax return because your Recovery Rebate Credit is already issued as Economic Impact Payments.
If you’re eligible for the credit, and either didn’t receive any Economic Impact Payments or received less than the full amounts, you must file a 2020 tax return to claim the Recovery Rebate Credit even if you are not required to file a tax return for 2020.
Economic Impact Payments were based on your 2018 or 2019 tax year information. The Recovery Rebate Credit is similar except that the eligibility and the amount are based on 2020 information you include on your 2020 tax return.
Finding the amount of my Economic Impact Payments
If eligible for the Recovery Rebate Credit, you will need the amount of any Economic Impact Payments you received to calculate your Recovery Rebate Credit amount using the RRC Worksheet or your tax preparation software.
Unemployment Compensation is Taxable
Millions of Americans received unemployment compensation in 2020, many of them for the first time. This compensation is taxable and must be included as gross income on their tax return.
Taxpayers can elect to have federal taxes withheld from their unemployment benefits or make estimated tax payments, but many do not take these options. In that case, taxes on those benefits will be paid when the 2020 tax return is filed. Taxes can be paid throughout the year.
IRS Refund Interest is Taxable Income
Many individual taxpayers who received a refund on their 2019 tax returns also received interest from the IRS. The interest payments were largely the result of the postponed filing deadline of July 15 due to the COVID-19 pandemic.
The 2019 refund interest payments are taxable, and taxpayers must report the interest on their 2020 federal income tax return.
The IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10. The average refund interest amount is $18, but the amount for each taxpayer varies based on the tax refund that the taxpayer received. Form 1099-INT will be issued no later than February 1, 2021.
Charitable Donation Deduction for people who don't Itemize
Individuals who take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.
Workers moving into the gig economy
Many people found different employment in 2020, including jobs in the gig economy. Taxpayers must report income earned in the gig economy on their tax return. However, gig-economy workers generally do not have taxes withheld from their pay as salaried workers normally do. The IRS encourages people earning income in the gig economy to consider making quarterly estimated tax payments to stay current with their federal tax obligations.
Home office Deduction
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy.
However, the Tax Cuts and Jobs Act suspended the business-use-of-home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. IRS Publication 587, Business Use of Your Home, provides more on the home office deduction.
The Internal Revenue Service today explained how corporations may qualify for the new 100% limit for disaster relief contributions and offered a temporary waiver of the recordkeeping requirement for corporations otherwise qualifying for the increased limit.
Under the new law, qualified disaster areas are those in which a major disaster has been declared under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This does not include any disaster declaration related to COVID-19. Otherwise, it includes any major disaster declaration made by the President during the period beginning on January 1, 2020, and ending on February 25, 2021, as long as it is for an occurrence specified by the Federal Emergency Management Agency as beginning after December 27, 2019, and no later than December 27, 2020.
Qualified contributions must be paid by the corporation during the period beginning on January 1, 2020 and ending on February 25, 2021. Cash contributions to most charitable organizations qualify for this increased limit. Contributions made to a supporting organization or to establish or maintain a donor advised fund do not qualify.
A corporation elects the increased limit by computing its deductible amount of qualified contributions using the increased limit and by claiming the amount on its return for the tax year in which the contribution was made.
Corporations must meet the usual recordkeeping requirements that apply to charitable contributions, including obtaining a contemporaneous written acknowledgment (CWA) from the charity. The CWA must be obtained before the corporation files its return, but no later than the due date, including extensions, for filing that return.
The latest stimulus package allows employers to make tax-free contributions of up to $5,250 a year to their employees’ education debt.
The provision will expire in five years, although experts say it’s likely to become permanent.
Each year, 70% of college graduates start off their lives in the red, and the average balance has climbed to $30,000, from $10,000 in the early 1990s. The typical monthly student loan payment is $400.
The Covid relief bill grants borrowers in the Paycheck Protection Program their wish: tax-free forgiveness of the loan, along with the ability to deduct covered expenses.
Whether states will permit those write-offs, along with tax-free forgiveness, remains up in the air. That means businesses may still face surprise taxes on their state tax returns.
Small businesses may decide to go on extension when they file their 2020 taxes next year.
The Internal Revenue Service has started sending letters to taxpayers that may need to take additional actions related to Qualified Opportunity Funds (QOF).
Taxpayers who attached or indicated they attached a Form 8996 to their return may receive Letter 6250, Self-certifying as Qualified Opportunity Fund (QOF). This letter lets them know that if they intended to self-certify as a QOF they may need to take additional action to meet the annual self-certification requirement.
To correct a 2018 self-certification as a QOF, these taxpayers should file an amended return or an administrative adjustment request (AAR). If an entity that receives the letter fails to take action to self-certify as a QOF, the IRS may refer its tax account for examination. Investors who made an election to defer tax on eligible gains invested in that entity may also be subject to examination for an invalid election.
The Internal Revenue Service and the Treasury Department has begun delivering a second round of Economic Impact Payments as part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 to millions of Americans who received the first round of payments earlier this year.
The initial direct deposit payments may begin arriving as early as December 29 for some and will continue into next week. Paper checks will begin to be mailed December 30.
The IRS emphasizes that there is no action required by eligible individuals to receive this second payment. Some Americans may see the direct deposit payments as pending or as provisional payments in their accounts before the official payment date of January 4, 2021. The IRS reminds taxpayers that the payments are automatic, and they should not contact their financial institutions or the IRS with payment timing questions.