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The IRS has released the annual inflation adjustments for 2025 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

For 2025, the Social Security wage cap will be $176,100, and social security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2025, the Social Security wage cap will be $176,100, and social security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2025, the wage base is $176,100. Thus, OASDI tax applies only to the taxpayer’s first $176,100 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $176,100.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2025

For workers who earn $176,100 or more in 2025:

• an employee will pay a total of $10,918.20 in social security tax ($176,100 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $21,836.40 in social security tax ($176,100 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2025

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2025 by 2.5 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS announced tax relief for certain individuals and businesses affected by terrorist attacks in the State of Israel throughout 2023 and 2024. The Treasury and IRS may provide additional relief in the future.

The IRS announced tax relief for certain individuals and businesses affected by terrorist attacks in the State of Israel throughout 2023 and 2024. The Treasury and IRS may provide additional relief in the future.

For taxpayers who were affected taxpayers for purposes of Notice 2023-71, I.R.B. 2023-44, 1191, the separate determination of terroristic action and grant of relief set forth in this notice will also postpone taxpayer acts and government acts already postponed by Notice 2023-71 if the taxpayer is eligible for relief under both notices.

Filing and Payment Deadlines Extended

Affected taxpayers will have until September 30, 2025, to file tax returns, make tax payments, and perform certain time-sensitive acts, that are due to be performed on or after September 30, 2024, and before September 30, 2025, including but not limited to:

• Filing any return of income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax), harbor maintenance tax, or employment tax;
• Paying any income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax), harbor maintenance tax, or employment tax, or any installment of those taxes;
• Making contributions to a qualified retirement plan;
• Filing a petition with the Tax Court;
• Filing a claim for credit or refund of any tax; and
• Bringing suit upon a claim for credit or refund of any tax.

The government is also provided until September 30, 2025, to perform certain time-sensitive acts, that are due to be performed on or after September 30, 2024, and before September 30, 2025, such as assessing any tax.

Taxpayers eligible for relief under Notice 2023-71 who are also eligible for relief under this notice have until September 30, 2025, to perform the time-sensitive acts that were postponed by Notice 2023-71. Taxpayers eligible for relief under Notice 2023-71 who are not also eligible for relief under this notice have until October 7, 2024, to perform the time-sensitive acts postponed by Notice 2023-71.

Government acts that were postponed by Notice 2023-71 until October 7, 2024, are also postponed by this notice until September 30, 2025, for taxpayers that are eligible for relief under Notice 2023-71 and this notice.

Notice 2024-72

IR-2024-252

The IRS has expanded the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) under Code Sec. 223(c)(2)(C) without a deductible, or with a deductible below the applicable minimum deductible for the HDHP, to include oral contraception, breast cancer screening, and continuous glucose monitors for certain patients.

The IRS has expanded the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) under Code Sec. 223(c)(2)(C) without a deductible, or with a deductible below the applicable minimum deductible for the HDHP, to include oral contraception, breast cancer screening, and continuous glucose monitors for certain patients.

Contraceptives

A health plan will not fail to qualify as an HDHP under Code Sec. 223(c)(2) merely because it provides benefits for over-the-counter (OTC) oral contraceptives, including emergency contraceptives, and male condoms before taxpayers satisfied the minimum annual deductible for an HDHP under Code Sec. 223(c)(2)(A). The HRSA-Supported Guidelines relating to contraceptives have been updated and no longer contain the "as prescribed" restriction.

Breast Cancer and Diabetes Care

The IRS has also clarified that all types of breast cancer screening for taxpayers (including those other than mammograms) who have not been diagnosed with breast cancer will be treated as preventive care under Code Sec. 223(c)(2)(C). Moreover, continuous glucose monitors for individuals diagnosed with diabetes are also treated as preventive care under Code Sec. 223(c)(2)(C).

Insulin Products Safe Harbor

The new safe harbor for absence of a deductible for certain insulin products under Code Sec. 223(c)(2)(G) will apply without regard to whether the insulin product was prescribed to treat taxpayers diagnosed with diabetes. or prescribed for the purpose of preventing the exacerbation of diabetes or the development of a secondary condition.

Effective Date

This guidance is generally effective for plan years (in the individual market, policy years) that begin on or after December 30, 2022.

Effect on Other Documents

Notice 2004-23 is clarified by noting the safe harbor for absence of a deductible for breast cancer screening.

Notice 2018-12 is superseded with respect to the guidance regarding male condoms.

Notice 2019-45 is clarified and expanded by noting the safe harbor for absence of a deductible for continuous glucose monitors and for certain insulin products pursuant to the Inflation Reduction Act of 2022.

Notice 2024-75

The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rate for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2024 for purposes of the taxation of fringe benefits. 

The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rate for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2024 for purposes of the taxation of fringe benefits. Further, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) was enacted, directing the Treasury Department to allot up to $25 billion for domestic carriers to cover payroll expenses via grants and promissory notes, known as the Payroll Support Program (PSP). Therefore, the IRS has provided the SIFL Mileage Rate. The value of a flight is determined under the base aircraft valuation formula by multiplying the SIFL cents-per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple provided in Reg. §1.61-21(g)(7) and then adding the applicable terminal charge.

For flights taken during the period from July 1, 2024, through December 31, 2024, the terminal charge is $54.30, and the SIFL rates are: $.2971 per mile for the first 500 miles, $.2265 per mile 501 through 1,500 miles, and $.2178 per mile over 1,500 miles.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be raised for slaughter, held for sporting purposes or be poultry.

Second, the taxpayer must have held the converted livestock for:

• draft.
• dairy, or
• breeding purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

• ends on August 31 in or after the last year of the four-year replacement period, and
• does not include any weekly period of drought.

What Areas are Suffering from Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/Maps/MapArchive.aspx

However, the IRS also provided a list of areas where the year ending on August 31, 2024, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

The IRS has taken special steps to provide more than 500 employees to help with the Federal Emergency Management Agency’s (FEMA) disaster relief call lines and sending IRS Criminal Investigation (IRS-CI) agents into devastated areas to help with search and rescue efforts and other relief work as part of efforts to help victims of Hurricane Helene. The IRS assigned more than 500 customer service representatives from Dallas and Philadelphia to help FEMA phone operations.

The IRS has taken special steps to provide more than 500 employees to help with the Federal Emergency Management Agency’s (FEMA) disaster relief call lines and sending IRS Criminal Investigation (IRS-CI) agents into devastated areas to help with search and rescue efforts and other relief work as part of efforts to help victims of Hurricane Helene. The IRS assigned more than 500 customer service representatives from Dallas and Philadelphia to help FEMA phone operations.

Further, a team of 16 special agents from across the country were initially deployed last week by the IRS-CI to the Tampa area to help with search and rescue teams. During the weekend, the IRS team moved to North Carolina to assist with door-to-door search efforts. As part of this work, the IRS-CI agents are also assisting FEMA with security and protection for relief teams and their equipment.

Additionally, the IRS reminded taxpayers in Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia that they have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. The IRS is offering relief to any area designated by FEMA. Besides all of Alabama, Georgia, North Carolina and South Carolina, this currently includes 41 counties in Florida, eight counties in Tennessee and six counties and one city in Virginia.

The IRS provided guidance addressing long-term, part-time employee eligibility rules under Code Sec. 403(b)(12)(D), which apply to certain 403(b) plans beginning in 2025. The IRS also announced a delayed applicability date for related final regulations under Code Sec. 401(k).

The IRS provided guidance addressing long-term, part-time employee eligibility rules under Code Sec. 403(b)(12)(D), which apply to certain 403(b) plans beginning in 2025. The IRS also announced a delayed applicability date for related final regulations under Code Sec. 401(k).

Application of Code Sec. 403(b)(12)

The IRS provided guidance in the form of questions and answers on the requirement that 403(b) plans allow certain long-term, part-time employee to participate. The IRS clarified that the long-term, part-time employee eligibility rules only apply to 403(b) plans that are subject to title I of ERISA. Thus, a governmental plan under ERISA §3(32) is not subject to the long-term, part-time employee eligibility rules because it is not subject to title I pursuant to ERISA §4(b). The guidance also provides that 403(b) plans can continue to exclude student employees regardless of whether the individual qualifies under long-term, part-time employee eligibility rules.

Future Guidance

The guidance for 403(b) plans applies for plan years beginning after December 31, 2024. The IRS anticipates issuing proposed regulations applicable to 403(b) plans that are generally similar to regulations applicable to 401(k) plans.

Applicability Date for 401(k) Regulations

The IRS also addressed the applicability date of rules for 401(k) plans. Final regulations related to long-term, part-time employee eligibility rules will apply no earlier than to plan years beginning on or after January 1, 2026, the IRS said.

The Internal Revenue Service is estimated a slight decrease in the estimated tax gap for tax year 2022.

According to Tax Gap Projections for Tax Year 2022 report, the IRS is projecting the net tax gap to be $606 billion in TY 2022, down from the revised projected tax gap of $617 billion for TY 2021. The decrease track with a one-percent decrease in the true tax liability during that time.

he Internal Revenue Service is estimated a slight decrease in the estimated tax gap for tax year 2022.

According to Tax Gap Projections for Tax Year 2022 report, the IRS is projecting the net tax gap to be $606 billion in TY 2022, down from the revised projected tax gap of $617 billion for TY 2021. The decrease track with a one-percent decrease in the true tax liability during that time.

The TY 2022 gross tax is projected to be $696 billion, and includes the following components:

• Underreporting (tax understated on timely filed returns) - $539 billion
• Underpayment (tax that was reported on time, but not paid on time) - $94 billion
• Nonfiling (tax not paid on time by those who did not file on time) - $63 billion

For TY 2022, the projected net tax gap broken down by tax type includes:

• Individual income tax - $447 billion
• Corporation income tax - $40 billion
• Employment taxes - $119 billion
• Estate tax and excise tax – less than $500 million in each category

The size of the tax gap "vividly illustrates the ongoing need for adequate funding for the IRS," agency Commissioner Daniel Werfel said in a statement. "We need to focus both on compliance efforts to enforce existing laws as well as improving services to help taxpayers with their tax obligations to help address the tax gap."

From TY 2021 to TY 2022, the voluntary compliance rate slightly increased from 84.9 percent to 85.0 percent and the net compliance rate rose slightly from 86.9 percent from 86.8 percent.

The agency stated in the report that the relatively static voluntary compliance rate was "largely expected since the projection methodology assumes that reporting compliance behavior has not changed since the TY 2014-2016 time frame," although the voluntary compliance rate is projected to fall from 58 percent in TY 2021 to 55 percent in TY 2022.

By Gregory Twachtman, Washington News Editor

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. 

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. For individual taxpayers, the notice postpones to May 17, 2021, certain deadlines that would normally fall on April 15, 2021, such as the time for making IRA contributions and for filing federal income tax refund claims. The notice also extends the time for return preparers to participate in the Annual Filing Season Program for the 2021 calendar year.

The IRS has released this notice as a follow-up to a previous announcement 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. This notice provides details on the additional tax deadlines which have been postponed until May 17.

Federal Tax Returns and Tax Payments
For an affected taxpayer, the due date for filing federal income tax returns in the Form 1040 series having an original due date of April 15, 2021, and for making federal income tax payments in connection with one of these forms, is automatically postponed to May 17, 2021. Affected taxpayers do not have to file any form, including Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to obtain this relief.

This relief includes the filing of all schedules, returns, and other forms that are filed as attachments to the Form 1040 series, or are required to be filed by the due date of the Form 1040 series, including, for example, Schedule H, Household Employment Taxes, and Schedule SE, Self-Employment Tax, as well as:

• Form 965-A (Individual Report of Net 965 Tax Liability);
• Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts);
• Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts);
• Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations);
• Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund);
• Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs));
• Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships);
• Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments); and
• Form 8938 (Statement of Specified Foreign Financial Assets).

Additionally, elections that are made or required to be made on a timely filed Form 1040 series (or attachment to such form) will be timely made if filed on such form or attachment, as appropriate, on or before May 17, 2021.

Claims for Refund
Individuals with a period of limitations to file a claim for credit or refund of federal income tax expiring on or after April 15, 2021, and before May 17, 2021, have until May 17, 2021, to file those claims for credit or refund. This postponement is limited to claims for credit or refund properly filed on the Form 1040 series or on a Form 1040-X. As a result of this postponement, the period beginning on April 15, 2021, and ending on May 17, 2021, will be disregarded in determining whether the filing of those claims is timely.

IRA and HSA Contributions
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers 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). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

For affected taxpayers that must file forms in the Form 5498 series, the due date for filing and furnishing the Form 5498 series is postponed to June 30, 2021. The period beginning on the original due date of those forms and ending on June 30, 2021, will be disregarded in the calculation of any penalty for failure to file those forms.

Estimated Tax Payments, Other Items Not Extended
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers 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). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

The IRS has provided guidance related to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022. All other food and beverage expenses are still subject to the 50 percent deduction limitation unless some other exception applies.

The IRS has provided guidance related to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022. All other food and beverage expenses are still subject to the 50 percent deduction limitation unless some other exception applies.

Restaurants Defined
According to the IRS’s guidance, a restaurant is a business that prepares and sells food or beverages to retail customers for immediate consumption. Note that the food and beverages do not need to be consumed on the premises for the 100-percent deduction to apply.

Restaurants are not businesses that predominantly sell pre-packaged food or beverages that are intended for later consumption. Food or beverages purchased from such businesses are still subject to the 50-percent deduction limitation. Examples of businesses that are not restaurants include grocery stores, specialty food stores, liquor stores, drug stores, convenience stores, newsstands, vending machines, or kiosks.

Restaurants are also not eating facilities located at an employer’s business that provide meals that are excluded from the employees’ gross income under Code Sec. 119, or that are considered a de minimis fringe under Code Sec. 132(e)(2). This also applies to eating facilities on the employer’s premises that are operated by a third party with regards to Reg. §1.132-7(a)(3).

Effective Date
This IRS guidance is effective for food and beverages purchases made after December 31, 2020, and before January 1, 2023.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, 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.

For calendar quarters beginning after 2020, an employer is generally eligible for the credit if it was carrying on a trade or business during the calendar quarter for which the credit is determined, and either (1) had operations that were fully or partially suspended during the calendar quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19, or (2) experienced a decline in gross receipts for the calendar quarter when compared to the same quarter in 2019.

The guidance explains changes made to the employee retention credit for the first two calendar quarters of 2021, including:

• the increase in the maximum credit amount,
• the expansion of the types of employers that may be eligible to claim the credit,
• modifications to the gross receipts test,
• revisions to the definition of qualified wages, and
• new restrictions on the ability of eligible employers to request an advance payment of the credit.

The guidance does not address the employee retention credit provided by Code Sec. 3134, enacted by the American Rescue Plan Act of 2021 ( P.L. 117-2), for wages paid after June 30, 2021, and before January 1, 2022. The IRS will address Code Sec. 3134 in future guidance.

Highlights of some of the items addressed in the guidance are summarized below.

Eligible Employers
While the employee retention credit is not available to most governmental employers, it is available to tax-exempt organizations described in Code Sec. 501(c)(1), and to any governmental entity that is a college or university or whose principal purpose is providing medical or hospital care. For this purpose, a college or university means an educational organization as defined in Code Sec. 170(b)(1)(A)(ii) and Reg. §1.170A-9(c)(1). An entity that has the principal purpose or function of providing medical or hospital care means an entity that has the principal purpose or function of providing medical or hospital care within the meaning of Code Sec. 170(b)(1)(A)(iii) and Reg. §1.170A-9(d)(1).

Decline in Gross Receipts
One way an employer can be eligible for the credit is if it experienced a decline in gross receipts. Whether an employer is an eligible employer based on a decline in gross receipts is determined separately for each calendar quarter, and is based on an 80 percent threshold compared to the same calendar quarter in 2019.

If an employer did not exist as of the beginning of the first calendar quarter of 2019, the employer generally determines whether the decline in gross receipts test is met in the first calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the first calendar quarter of 2020. If an employer did not exist as of the beginning of the second calendar quarter of 2019, the employer generally determines whether the test is met in the second calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the second calendar quarter of 2020. An employer may also elect to use an alternative quarter to calculate gross receipts.

Eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter an eligible employer elects to use in measuring the decline.

Qualified Wages
Whether wage payments by an eligible employer will be considered qualified wages depend, in part, on the average number of full-time employees an eligible employer employed during 2019. For the first and second calendar quarters of 2021, large eligible employers are those whose average number of full-time employees during 2019 was greater than 500. For these employers, qualified wages are wages paid to an employee for time that the employee is not working for the reasons the credit is allowed.

Small eligible employers are those whose average number of full-time employees during 2019 was 500 or less. For these employers, qualified wages are the wages paid an employee whether the employee is working or not working for the reasons the credit is allowed.

An employer may not claim a credit under Code Secs. 41, 45A, 45P, 45S, 51, or 1396 with qualified wages for which it claims the employee retention credit, but it may be able to take a credit under these provisions for wages for which it did not claim an employee retention credit if the particular credit’s requirements are met.

Claiming the Credit
Eligible employers may continue to access the employee retention credit for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits in anticipation of the credit. However, advance payment of the employee retention credit is available only to small eligible employers, who can may elect to receive an advance payment of not more than 70 percent of the average quarterly wages paid in calendar year 2019.

For this purpose, average quarterly wages generally means the average of wages or compensation determined without regard to the social security wage base, paid in each calendar quarter in 2019. The guidance provides details for calculating average quarterly wages. Small eligible employers that come into existence in 2021 are ineligible to receive advance payment.

Effect on Other Documents
Notice 2021-20, I.R.B. 2021-11, 922, is amplified.

The IRS has issued guidance clarifying that amounts paid for personal protective equipment—such as masks, hand sanitizer and sanitizing wipes—for the primary purpose of preventing the spread of the Coronavirus Disease 2019 (COVID-19 PPE) are treated as amounts paid for medical care under Code Sec. 213(d).

The IRS has issued guidance clarifying that amounts paid for personal protective equipment—such as masks, hand sanitizer and sanitizing wipes—for the primary purpose of preventing the spread of the Coronavirus Disease 2019 (COVID-19 PPE) are treated as amounts paid for medical care under Code Sec. 213(d).

Therefore, amounts paid by an individual taxpayer for COVID-19 PPE for use by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s) that are not compensated for, by insurance or otherwise, are deductible under Code Sec. 213(a) if the taxpayer’s total medical expenses exceed 7.5 percent of adjusted gross income.

Since amounts paid for COVID-19 PPE are medical care expenses under Code Sec. 213(d), they 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).

Note, however, that amounts paid or reimbursed under one of these arrangements or accounts are not deductible under Code Sec. 213.

Group Health Plans
If COVID-19 PPE expenses may not be reimbursed under the terms of a group health plan (including a health FSA and an HRA), the plan can be amended under this IRS guidance to provide for reimbursements of expenses for COVID-19 PPE incurred for any period beginning on or after January 1, 2020. Such an amendment will not be treated as causing a failure of any reimbursement to be excludable from income under Code Sec. 105(b), or as causing a cafeteria plan to fail to meet the requirements of Code Sec. 125.

Group health plans can be amended under this IRS guidance if:

• the amendment is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective,
• no amendment with retroactive effect is adopted after December 31, 2022, and
• the plan is operated consistent with the terms of the amendment, including during the period beginning on the effective date of the amendment through the date the amendment is adopted.

The U.S. Department of Labor has published a new webpage with guidance implementing the Continuation of Health Coverage premium assistance provisions of the American Rescue Plan (ARP), to provide full COBRA premium assistance to certain individuals who experienced a reduction in hours or involuntary termination of employment.

The U.S. Department of Labor has published a new webpage with guidance implementing the Continuation of Health Coverage premium assistance provisions of the American Rescue Plan (ARP), to provide full COBRA premium assistance to certain individuals who experienced a reduction in hours or involuntary termination of employment. This guidance, from the Labor Department’s Employee Benefits Security Administration, includes documents to implement these provisions, such as FAQs about COBRA premium assistance, FAQs on COBRA continuation health coverage for workers, and model notices.

COBRA Premium Subsidy
COBRA allows employees and their families who would otherwise lose their group health coverage due to certain life events to continue their group health coverage, known as COBRA continuation coverage. The ARP provides a 100 percent premium subsidy between April 1, 2021 and Sept. 30, 2021, for individuals whose reduction in hours or involuntary termination of employment makes them eligible for COBRA continuation coverage during this period. The ARP also requires group health plans to provide notices to individuals losing health coverage to inform them about premium assistance that may be available to them.

The IRS has announced that, under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the Premium Tax Credit (excess APTC) is suspended for tax year (TY) 2020.

The IRS has announced that, under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the Premium Tax Credit (excess APTC) is suspended for tax year (TY) 2020. A taxpayer’s excess APTC is the amount by which the taxpayer’s advance payments of the Premium Tax Credit (APTC) exceed his or her Premium Tax Credit (PTC). Eligible taxpayers with excess APTC for 2020 are not required to file Form 8962, Premium Tax Credit, or report an excess advance Premium Tax Credit repayment on their 2020 Form 1040 or Form 1040-SR when they file. Taxpayers claiming a net PTC must file Form 8962 when they file their TY 2020 return.

Taxpayers who have already filed their TY 2020 return and who have excess APTC do not need to file an amended tax return or contact the IRS. Taxpayers who enrolled, or enrolled a family member, in health insurance coverage for TY 2020 through the marketplace should have received Form 1095-A, Health Insurance Marketplace Statement, from the marketplace. Taxpayers can check with their tax professional or use tax software to figure the amount of allowable PTC and reconcile it with their APTC received using the information from Form 1095-A.

The Premium Tax Credit helps pay for health insurance coverage bought from the health insurance marketplace. If the taxpayer’s PTC computed on the return is more than the APTC paid on the taxpayer’s behalf during the year, the difference is a net PTC.

The IRS has extended the penalty relief provided in Notice 2020-22, I.R.B. 2020-17, 664, for failure to deposit employment taxes, to eligible employers that reduce their required deposits in anticipation of the following credits.

The IRS has extended the penalty relief provided in Notice 2020-22, I.R.B. 2020-17, 664, for failure to deposit employment taxes, to eligible employers that reduce their required deposits in anticipation of the following credits:

• the paid sick and family leave credits under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), as amended by the COVID-related Tax Relief Act of 2020 (Tax Relief Act) (Division N of P.L. 116-260), for qualified leave wages paid with respect to the period beginning January 1, 2021, and ending March 31, 2021;
• the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, added by the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), for qualified leave wages paid with respect to the period beginning April 1, 2021, and ending September 30, 2021;
• the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for qualified wages paid with respect to the period beginning January 1, 2021, and ending June 30, 2021;
• the employee retention credit under Code Sec. 3134, added by ARP, for qualified wages paid with respect to the period beginning July 1, 2021, and ending December 31, 2021; and
• the COBRA Continuation Coverage Premium Assistance credit under Code Sec. 6432, added by ARP, for continuation coverage premiums not paid by assistance eligible individuals under section 9501(a)(1) of the ARP, during the period beginning April 1, 2021, and ending September 30, 2021.

Background
Eligible employers claim the paid sick and family leave credits under the Families First Act, and the employee retention credit under the CARES Act, against the employer’s share of the Old Age, Survivors, and Disability Insurance (Social Security) portion of FICA tax under Code Sec. 3111(a). Employers that are eligible for the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, the employee retention credit under Code Sec. 3134, or the COBRA Continuation Coverage credit under Code Sec. 6432, can claim the credit(s) against the employer’s share of the Hospital Insurance (Medicare) portion of FICA tax under Code Sec. 3111(b). The credits are also available to eligible railroad employers for the attributable Railroad Retirement Tax Act (RRTA) taxes under Code Sec. 3221(a).

These refundable tax credits are reported on the employer’s employment tax return for reporting its FICA tax liability, which for most employers is the quarterly Form 941. Certain employers may claim an advance payment of the refundable credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Code Sec. 6656 imposes a penalty for failure to timely deposit required tax amounts, unless the failure is due to reasonable cause and not willful neglect. Failure to deposit employment taxes required under Code Sec. 6302 generally subjects an employer to the penalty. The various legislative acts and provisions implementing the refundable employment tax credits described above either instruct the IRS to waive the penalty or authorize guidance that provides penalty relief.

Paid Leave Credit Penalty Relief
An employer can reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the applicable paid sick or family leave credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer paid qualified leave wages, qualified health plan expenses, or qualified collectively bargained contributions, for the period beginning on April 1, 2021, and ending on September 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
• the amount of employment taxes that the employer does not timely deposit is less than or equal to its anticipated applicable paid leave credits claimed for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of the deposit reduction cannot be more than the total amount of the employer’s anticipated paid leave credits as of the time of the required deposit, minus any amount of those anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Employee Retention Credit Penalty Relief
After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of its applicable employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer paid qualified retention wages for the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
• the amount of employment taxes that the employer does not timely deposit— reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits claimed— is less than or equal to the amount of the employer’s anticipated applicable employee retention credits for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated employee retention credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

COBRA Credit Penalty Relief
After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits and the anticipated employee retention credit, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the employer’s COBRA continuation coverage credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer is a “person to whom premiums are payable,”
• the amount of employment taxes that the employer does not timely deposit— reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits and the employee retention credits claimed—is less than or equal to the amount of the employer’s anticipated credits under Code Sec. 6432 for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated COBRA continuation coverage credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Effect on Other Documents
Notice 2020-22, I.R.B. 2020-17, 664, is amplified.

Death benefits that an S corporation provided to its sole shareholder under a split-dollar life insurance arrangement were employee compensation rather than a corporate distribution. In reaching this decision, the Tax Court firmly rejected the contrary conclusion reached by the Sixth Circuit Court of Appeals in J.J. Machacek, CA-6, 2018-2 U.S.T.C. 50,447.

Death benefits that an S corporation provided to its sole shareholder under a split-dollar life insurance arrangement were employee compensation rather than a corporate distribution. In reaching this decision, the Tax Court firmly rejected the contrary conclusion reached by the Sixth Circuit Court of Appeals in J.J. Machacek, CA-6, 2018-2 U.S.T.C. 50,447.

Background
The taxpayers were a medical doctor and his wife. The doctor was the sole owner of his practice, which was organized as an S corporation that employed him and his wife. The taxpayers received wages from the S corporation, as well as fringe benefits from an employee welfare benefit plan.

The fringe benefits included death benefits that the Tax Court had previously concluded were provided under a compensatory split-dollar life insurance program ( R. De Los Santos, Dec. 61.270). However. the taxpayers responded by seeking summary judgment that the economic benefits provided by the program actually constituted a corporate distribution.

Tax Court Rejects Machacek
In Machacek, the Sixth Circuit had relied on Reg. §1.301-1(q), which states that economic benefits that a corporation provides to a shareholder under a split-dollar life insurance policy are treated as distributions of property. The Sixth Circuit emphasized that the regulation’s cross reference to Reg. §1.61-22(b) meant that it applied to both compensatory and noncompensatory split-dollar arrangements.

The Tax Court rejected this analysis. Instead, it determined that Code Sec. 301 clearly requires distributions to be made to a shareholder in the shareholder’s capacity as a shareholder. Because the compensatory split-dollar life insurance arrangement afforded benefits to the doctor in his capacity as an employee of the S corporation, the Tax Court concluded that the economic benefits he received under the arrangement could not be characterized as “distributions” under Code Sec. 301.

S Corporation Fringe Benefits
The benefits also were fringe benefits paid by an S corporation under Code Sec. 1372. As such, they were treated as guaranteed partnership payments that were ordinary income, and not a corporate distribution.

The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.

The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.

Empowerment Zone Designation Termination Dates
Empowerment zone designations generally continue until the termination date selected by the government that nominated the zone (the designated termination date), or the termination date established by legislation (the statutory termination date).

The statutory termination date has been extended multiple times, with each extension deemed to extend the designated termination date as well. Most recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) extended the statutory termination date to December 31, 2025. Thus, the designated termination dates for all empowerment zones are also deemed to be extended to December 31 2025.

A state or local government may decline the extension via a written notification to the IRS by May 25, 2021. The notification must be faxed to Bruce Chang, CC:ITA:B07, at (855) 576-2341.

Rev. Proc. 2020-16, I.R.B. 2020-27, 10, is obsoleted for tax years beginning after 2020.

The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. 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.

The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. 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 those 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.

The IRS has informed taxpayers that they do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until October 15 by filing Form 4868 through their tax professional or tax software, or by using the Free File link on the IRS website. Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return, but does not grant an extension of time to pay taxes due.

Not for Estimated Taxes, Other Items

This relief does not apply to estimated tax payments that are due on April 15, 2021. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. Also, 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. The IRS urges taxpayers to check with their state tax agencies for details on state filing and payment deadlines.

Winter Storm Relief

The IRS had previously announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June deadline.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

• 2021 Recovery Rebate Credits of $1,400 for eligible individuals ($2,800 for joint filers) plus $1,400 for each eligible dependent. Credit begins to phase out at adjusted gross income of $150,000 for joint filers, $112,500 for a head of household, $75,000 for other individuals. The IRS has already begun making advance refund payments of the credit to taxpayers.
• Exclusion of up to $10,200 of unemployment compensation from income for tax year 2020 for households with adjusted gross income under $150,000.
• Enhancements of many personal tax credits meant to benefit individuals with lower incomes and children.
• Exclusion of student loan debt from income, for loans discharged between December 31, 2020, and January 1, 2026.
• For tax years after December 31, 2026, the $1,000,000 deduction limit on compensation of a publicly-held corporation’s covered employees will expand to include the five highest paid employees after the CEO and CFO. The rule in current law applies to the CEO, the CFO, and the next three highest paid officers.
• For the payroll credits for paid sick and family leave: The credit amounts are increased by an employer’s collectively bargained pension plan and apprenticeship program contributions that are allocable to paid leave wages. Also, paid leave wages do not include wages taken into account as payroll costs under certain Small Business Administration programs.

The president is conducting a nationwide tour to explain and promote the over 600-page, $1.9 trillion legislation.

Stimulus Payments

Many of the 158.5 million American households eligible for the payments from the stimulus package can expect to receive them soon, White House Press Secretary Jen Psaki said the same afternoon Biden signed the legislation into law. Payments are coming by direct deposit, checks, or a debit card to those eligible.

FTC: Beware of Scams

Scammers are right now crawling out from under their rocks to fleece businesses and consumers receiving the aid, the Federal Trade Commission warned on March 12.

It is important for business owners and consumers to know that the federal government will never ask them to pay anything up front to get this money, said the FTC: "That’s a scam. Every time." The regulatory agency also cautioned that the government will not call, text, email or direct mail aid recipients to ask for a Social Security, bank account, or credit card number.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

"I hope Treasury will say something very soon: FAQs, press release, something. IRS undoubtedly will have to write new regs," commented Urban-Brookings Tax Policy Center Senior Fellow Howard Gleckman. He stressed IRS certainly will have to figure out how to make the retroactive tax exemption for some 2020 unemployment benefits work. Gleckman also said he suspects the Child Tax Credit will require new guidance.

Gleckman claimed a new form this late in the tax season is unlikely. "Amended returns seems easiest," said the veteran IRS observer.

To help implement the tax-related changes in the American Rescue Plan, a colleague at the Tax Policy Center, Janet Holtzblatt, said that she, as well, is looking for guidance from the IRS on what taxpayers would do if they received unemployment benefits in 2020. Holtzblatt noted the law would exclude $10,200 of those benefits from adjusted gross income if the taxpayers’ adjusted gross income is less than $150,000.

What people will want to know, Holtzblatt stated, is:

• What to do if they already filed their tax return and paid income taxes on those benefits? Do they have to file an amended tax return just to get the tax refund for that reason, or will the IRS establish a simpler method to do so?
• And going forward, what about people who have not yet filed their tax return? If a new form is not released, what should they report on the existing return—the full amount or the partial amount? And how will the IRS know when the tax return is processed whether the taxpayer reported the full amount or the partial amount? (Eventually, the IRS could—when, after the filing season is over and tax returns are matched to 1099s from UI offices—but that could be months before taxpayers would be made whole.)

For the CARES Act, Holtzblatt said the IRS generally provided guidance through FAQs on their website which was insufficient for some tax professionals and later voided. "Some of their interpretations raised questions—and in the case of the treatment of prisoners, was challenged in the courts and led to a reversal of the interpretation in the FAQ," she explained.

National Association of Tax Professionals Director of Marketing, Communications & Business Development Nancy Kasten said new rules are musts and the agency will have to issue new FAQs, potentially on all of the key provisions in the legislation. The NATP executive asserted that old forms are going to need to be revised for Tax Year 2021. "Regarding 2020 retroactive items, we are waiting on IRS guidance," said Kasten.

National Conference of CPA Practitioners National Tax Policy Committee Co-Chair Steve Mankowski said the primary rules that will need to be written ASAP relate to the changes in the 2020 unemployment, especially since it appears to be income based as well as the increased child tax credit with advanced payments being sent monthly unless a taxpayer opts out. He added there will most likely need to be a worksheet added to the 2020 tax returns to show the unemployment received and adjusting UE income down to the taxable amount.

Mankowski, immediate past president of NCCCPAP said the primary items for new FAQs include the unemployment and the income limit on the non-taxability, changes in the child tax credit; and changes in the Employee Retention Credit.

In response to an email seeking what the agency plans to do to help implement the pandemic relief measure, an IRS spokesman forwarded the following statement released on March 10:

"The IRS is reviewing implementation plans for the American Rescue Plan Act of 2021 that was recently passed by Congress. Additional information about a new round of Economic Impact Payments and other details will be made available on IRS.gov, once the legislation has been signed by the President."

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Creating new incentives and making temporary ones permanent are particularly critical for helping American competitiveness in semiconductors, batteries and other high-tech products, Senate Banking Chair Ron Wyden (D-Ore) and Ranking Minority Party Member Mike Crapo (R-Idaho) stressed at the session.

Wyden said it is urgent business for elected officials to create conditions for the American semiconductor industry to thrive for years as part of a Congressional job creation toolkit. "I have seen too many short-term tax policies and mistakes," the Senate Finance Chair said. His sentiment was echoed by Crapo, the committee’s top Republican: "This is an area of bipartisan interest, and I welcome the opportunity to work with Chairman Wyden on this."

Crapo: Don’t Raise Corporate Rate

At the same time, Crapo cautioned Congress should not offset losses in federal revenue from increasing the stability of investment importance of protecting tax credit credits by raising the overall corporate tax rate. He said he is "very concerned" by reports he has heard that the White House is preparing to propose just that. Currently at 21 percent, the corporate tax rate was 35 percent before the 2017 Tax Cut and Jobs Act took effect.

Massachusetts Institute of Technology Sloan School Of Management Accounting Professor Michelle Hanlon told the hearing raising corporate tax rates would put American industry at a competitive disadvantage globally. She said the 2017 tax cuts should be built upon to expand manufacturing.

While saying expanding tax breaks for tech including clean energy is critical, Senator Tom Carper (D-Del) warned the federal government is looking at an avalanche of debt. To lessen that surge, he said it is important to go after the tax gap: money that taxpayers owe but they are not paying.

Senator Todd Young (R-Ind) warned that left unchanged, starting in 2022 companies will no longer be able to expense research and development expenses in the year incurred. "This would come at the expense of manufacturing jobs," he said. Young has introduced legislation to let businesses write up R&D as they are currently allowed.

If businesses are not allowed to continue to amortize their research and development expenses in the year they are incurred, it would significantly increase the cost to perform R&D in the U.S., Intel Chief Financial Officer George Davis warned the panel.

Ford Embraces Biden Proposal

Ford Motor Company Vice President, Global Commodity Purchasing And Supplier Technical Assistance Jonathan Jennings told the Senate that the auto maker embraces President Joe Biden’s proposal to provide a 10 percent advanceable tax credit for companies creating U.S. manufacturing jobs.

As businesses weather challenging economic times, one boost can come from depreciation.  The term “depreciation” is often associated with complicated accounting and tax transactions but the fundamental concept is fairly simple. Depreciation should not be overlooked as a valuable tool.

As businesses weather challenging economic times, one boost can come from depreciation.  The term “depreciation” is often associated with complicated accounting and tax transactions but the fundamental concept is fairly simple. Depreciation should not be overlooked as a valuable tool.

Basics

Depreciation is essentially an income tax deduction.  Depreciation allows you to recover the cost or other basis of qualified property. The rules for depreciation vary depending on the type of property.  In recent years, these rules have been made more complex by tax legislation for bonus depreciation and special treatment of certain property.  We’ll discuss bonus depreciation later.

Generally, tangible property is depreciable. Tangible property is depreciable if it is subject to wear and tear. Tangible property includes machinery and equipment, motor vehicles, and furniture.  Land, however, is not tangible property for depreciation purposes.  Intangible property also may qualify for depreciation.  One of the most widely used types of intangible property in every business activity is computer software.  Copyrights and patents, which are intangible property, are also depreciable.  Many types of property are not depreciable (although there are always exceptions). One type of business property that is not depreciable is inventory.

Use

To be depreciable, the property, whether tangible or intangible, must be used for business or in other income-producing activities. It is not the nature of the property itself which is determinative but rather the purpose for which the property is held. If you use property for business and for personal purposes, you can only deduct depreciation based only on the business use of that property.

Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property must have a determinable useful life of more than one year. Property that is placed in service and disposed of in the same year cannot be depreciated. Property ceases to be depreciable when you have fully recovered the property’s cost or other basis or when you retire it from service, whichever happens first.

Let’s look at an example: Olivia owns a small candy company.  Olivia purchases a new candy-making machine. The machine is delivered in November 2012. However, the machine is not installed and operational until February 2013. If the machine had been ready and available for use when it was delivered, it would be considered placed in service in 2012 even if it was not actually used until 2013.

Methods

Generally, the method for calculating depreciation is determined by the type of property and when the property was placed in service. For tangible property, there are currently three systems of depreciation in effect, depending on when the property was placed in service. They are the modified accelerated cost recovery system (MACRS) for property placed in service after 1986, the accelerated cost recovery system (ACRS) for property placed in service after 1980 but before 1987, and the pre-1981 system (which included the straight-line method, declining-balance method, and certain other methods based on useful life and salvage value) for property placed in service before 1981.

Bonus depreciation

Bonus depreciation is intended to encourage businesses to make capital investments by enabling them to write these investments off more quickly. Under current law, 50 percent bonus depreciation is available for qualified property acquired after December 31, 2007 and placed in service before January 1, 2013 (before January 1, 2014 in the case of certain property with a long production period and certain noncommercial aircraft).  A 100 percent bonus depreciation rate applies to property acquired after September 8, 2010 and placed in service before January 1, 2012 (before January 1, 2013 for certain property with a long production period and certain noncommercial aircraft).  Several bills are pending in Congress to extend 100 percent depreciation through 2012.

Let’s look at an example:  ABC Co., a calendar-year taxpayer, acquires and places in service business equipment that costs $1 million on June 1, 2012. Under current law, ABC may claim an additional first-year depreciation deduction of 50 percent of the basis of the property, or $500,000. The remaining $500,000 of adjusted basis is recovered under the depreciation provisions other than the additional allowance.

Other considerations

While the basic concept of depreciation itself may be simple, strategies in its implementation to minimize tax liability sometimes may not be so straightforward.  Decisions over whether to classify a particular asset within one or another depreciation “class,” whether certain components of a building can be depreciated faster than the building itself, whether something is an improvement that requires depreciation or a repair that may be deducted immediately in full, and whether early disposition of a particular asset raised the pitfall of depreciation recapture are some of the many “fine points” surrounding depreciation that can make a significant difference in a business’ taxable income.

If you have any questions about depreciation, please contact our office.

Education tax incentives are often underutilized because the rules are so complex. Some of the incentives are tax credits; other deductions. There are also savings plans for education costs. Making things even more complicated is the on-again, off-again nature of the education tax incentives.  Under current law (as of June 2012), several taxpayer-friendly features of the incentives are scheduled to expire.

Education tax incentives are often underutilized because the rules are so complex. Some of the incentives are tax credits; other deductions. There are also savings plans for education costs. Making things even more complicated is the on-again, off-again nature of the education tax incentives.  Under current law (as of June 2012), several taxpayer-friendly features of the incentives are scheduled to expire.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is an enhanced version of the old Hope credit. The AOTC offers eligible taxpayers a credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000.  That means the credit reaches a maximum of $2,500.   

Four years. The AOTC can be claimed for the first four years of a student’s post-secondary education (including college and university, vocational school and other qualified institutions of learning).

The full AOTC is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). If your modified adjusted gross income is above that amount, the credit begins to phase out.  Eligible individuals may receive a refund of 40 percent of the AOTC. 

Sunset.  The AOTC is scheduled to expire after 2012.  At that time, the old Hope credit will return.

Lifetime Learning Credit

The Lifetime Learning Credit is often in the shadow of the AOTC.  One reason may be that the Lifetime Learning Credit and the AOTC cannot be claimed in the same year. The Lifetime Learning Credit reaches $2,000 for qualified educational expenses.

Key difference. There is one very valuable difference between the Lifetime Learning Credit and the AOTC. There is no limit on the number of years the Lifetime Learning Credit can be claimed.  This requires careful planning.  Individuals who are considering graduate school may want to use the AOTC for undergraduate expenses and the Lifetime Learning credit for graduate school expenses.

No sunset.  The Lifetime Learning Credit is not scheduled to expire after 2012.  It is one of the few tax incentives that have essentially remained unchanged in recent years.

Student Loan Interest Deduction

Individuals who took out loans to finance their post-secondary education may qualify for a deduction. Student loan interest is interest you paid during the year on a qualified student loan. The loan proceeds must have been used for qualified higher education expenses, including tuition and room and board.

Above-the-line. The student loan interest deduction (and the expired higher education deduction discussed below) is an above-the-line deduction. This means you can claim the deduction even if you do not itemize deductions.

Sunsetting features. Under current law, there is no limitation as to the number of months during which interest paid on a student loan is deductible.  After December 31, 2012, a 60-month limitation is scheduled to return. The student loan interest deduction is subject to income limits.  Under current law, the   deduction is reduced when modified adjusted gross income exceeds $60,000 for single individuals ($125,000 for married couples filing a joint return) and is completely eliminated when modified adjusted gross income is $75,000 or more for single individuals ($155,000 for married couples filing a joint return). After December 31, 2012, these income limitations are scheduled to be significantly lower.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESAs) are similar to IRAs. Contributions are not tax-deductible but the funds grow tax-free until distributed. Distributions are tax-free if they are used for qualified education expenses of the beneficiary.

Not just post-secondary.  Under current law, funds in a Coverdell ESA can be used for elementary and secondary school expenses as well as post-secondary education costs.  Coverdell ESAs are the only education tax incentive to offer this feature.  The AOTC, Lifetime Learning Credits and 529 plans (discussed below) are limited to post-secondary education.  However, this special feature of Coverdell ESAs is scheduled to expire after 2012.  At that time, Coverdell ESA dollars will only be available for post-secondary expenses.

Contribution limitation.  Total contributions to a Coverdell ESA cannot be more than $2,000 in any year for the beneficiary. This rule applies no matter how many Coverdell ESAs are established. However, the $2,000 amount is scheduled to fall to $500 after 2012. Income limitations also apply. If you use the funds in a Coverdell ESA for a non-qualified purpose, there is a 10 percent additional tax.

529 Plans

States and institutions of higher learning can create so-called “529 plans.” Funds in a 529 plan can be used for qualified post-secondary expenses, such as tuition and room and board, of the designated beneficiary.  Contributions are not tax-deductible but distributions are tax-free, so long as they pay qualified expenses. There are many 529 plans. Before selecting one, please contact our office.  We can help you select the 529 plan that meets your expectations.

No income limitations. 529 plans are similar to Coverdell ESAs with one very important difference. There are no income limitations for contributors. 

Higher education deduction

Finally, there is the higher education deduction.  This popular deduction allows eligible individuals to claim a deduction for certain higher education costs.  The higher education tuition deduction reaches $4,000.  That’s the good news....the bad news is that the deduction expired after 2011.

May be renewed.  There have been several attempts in Congress to renew the deduction for 2012 but they have failed to pass.  Congress could renew the deduction late in 2012 or early in 2013 and make the deduction retroactive to January 1, 2012.

Like other education incentives, the higher education deduction had some restrictions.  One of the most important is income.  An individual’s modified adjusted gross income could not exceed $80,000 ($160,000 if married filing a joint return).

We have covered a lot of ground discussing these education tax incentives.  Please contact our office for more details and to discuss how we can create a plan using some or all of these incentives that delivers the most value.

Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee.  Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers.  Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.

Testimony

The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. “This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.

An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.

Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.

JCT report

In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, “Present Law and Background Relating to the Tax Treatment of Retirement Savings” (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:

Automatic enrollment payroll deduction IRA.  President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs.  An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.

Expand the saver's credit.  The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver’s credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.

Consolidate plans.  The JCT also reviewed two retirement proposals from the Bush administration:  Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).

The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. ”Consolidating all types of defined-contribution type plans into one type of plan would not be simplification,” the ASPPA cautioned. “It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures.”

The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.

Interfamily gifts

Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.

Capital or services

The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.

If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.

Investment partnerships

The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).

If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.

Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Everybody knows that tax deductions aren’t allowed without proof in the form of documentation.  What records are needed to “prove it” to the IRS vary depending upon the type of deduction that you may want to claim.  Some documentation cannot be collected “after the fact,” whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS.  This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return.  We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Charitable contributions.  For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee.  “Contemporaneous” for this purpose is defined as obtaining an acknowledgment before you file your return.  So save those letters from the charity, especially for your larger donations.

Tip records.  A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income.  Employees receiving tips must also report the correct amount to their employers.  The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received.

Wagering losses.  Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation.  The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks.

Vehicle mileage log.  A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle.  If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use.  If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each.

Material participation in business activity.  Taxpayers that materially participate in a business generally can deduct business losses against other income.  Otherwise, they can only deduct losses against passive income.  An individual’s participation in an activity may be established by any reasonable means.  Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation.  To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries.

Hobby loss.  Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income.  Maintaining accurate books and records can itself be an indication of a profit motive.  Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive.  Contemporaneous records can be an important indicator.

Travel and entertainment.  Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

As the result of being “disregarded,” the SMLLC does not file a separate tax return.  Rather, its income and loss is reported on the tax return filed by the single member.

• If the sole owner is an individual, the SMLLC's income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
• If the owner is a corporation, the SMLLC's income or loss is reported on the corporation's Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.

An SMLLC is not the only entity treated as a disregarded entity. Two corporate forms are also disregarded: a qualified subchapter S subsidiary and a qualified REIT subsidiary. However, SMLLCs are by far the most common disregarded entity currently in use.

For federal tax purposes, the SMLLC does not exist. All its assets and liabilities are treated as owned by the acquiring corporation.

Even though a disregarded entity’s tax status is transparent for federal tax purposes, it is not transparent for state law purposes. For example, an owner of an SMLLC is not personally liable for the debts and obligations of the entity. However, since the entity is disregarded, the owner is generally treated as the employer of disregarded entity employees for employment tax purposes.

For further details on disregarded entities or how this tax strategy may fit into your business operations, please contact our offices.