The recently passed Infrastructure Investment and Jobs Act (HR 3684) was not focused primarily on tax but did include a provision ending the Employee Retention Tax Credit (ERC) earlier than planned.

Under pre-Act law, eligible employers can claim the ERC for wages paid before January 1, 2022 against applicable employment taxes. For each calendar quarter in 2021, the amount of the credit is 70% of qualified wages paid (up to $10,000) for each employee. However, under the new law, the credit will not apply to wages paid in the fourth quarter of 2021. Exceptions to this will include employers who fit the definition of a recovery start-up business, which is generally a business with gross receipts of less than $1 million that began their trade or business after February 15, 2020. IRS Notice 2021-49 outlines more detailed requirements to qualify as a recovery start-up business.

We will be watching for updated guidance from the IRS on the treatment of penalties for late deposit of payroll taxes for those companies who anticipated the credit and reduced their payroll tax deposits.

ERC is still applicable to wages paid through September 30, 2021, and is a significant tax break eligible businesses should not ignore. We have assisted many clients in determining eligibility and computing the credit potential for 2020 and 2021.

To discuss any questions you may have, please contact a member of your engagement team or reach out to us via our website.

Low interest rates and other factors have caused global merger and acquisition (M&A) activity to reach new highs in 2021, according to Refinitiv, a provider of financial data. It reports that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year. If you’re considering buying or selling a business — or you’re in the process of an M&A transaction — it’s important that both parties report it to the IRS and state agencies in the same way. Otherwise, you may increase your chances of being audited.

The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. See our summary blog post on the CAA or contact us if you have questions about your situation.

© 2021

The Consolidated Appropriations Act of 2021 (the CAA 2021) signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic. The CAA 2021 include-along with spending and other non-tax provisions, and tax provisions primarily affecting individuals-the numerous business tax provisions briefly summarized below. The provisions are found in two of the several acts included in the CAA 2021, specifically, (1) the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the TCDTR) and (2) the COVID-related Tax Relief Act of 2020 (the COVIDTRA).

The TCDTR makes permanent without other changes (1) the railroad track maintenance credit and (2) the exclusion of the aging period in determining the mandatory interest capitalization period in producing beer, wine or distilled spirits,

The TCDTR extends the following tax credits without other changes: (1) the new markets tax credit, (2) the work opportunity credit, (3) the employer credit for paid family and medical leave that was provided by the 2017 Tax Cuts and Jobs Act (2017 TCJA), (4) the carbon sequestration credit, (5) the business energy credit (the “Code Sec. 48 credit”) both as regards termination dates and phase-downs of credit amounts, (6) the credit for electricity produced from renewable resources (the “Code Sec. 45 credit”) and the election to claim the Code Sec. 48 credit instead for certain facilities (but the phase-down of the amount of the Code Sec. 45 credit for wind facilities isn’t deferred), (7) the Indian employment credit, (8) the mine rescue team training credit, (9) the American Samoa development credit, (10) the second generation biofuel producer credit, (11) the qualified fuel cell motor vehicle credit as applied to businesses, (12) the alternative fuel refueling property credit as applied to businesses, (13) the two-wheeled plug-in electric vehicle credit as applied to businesses, (14) the credit for production from Indian coal facilities, and (15) the energy efficient homes credit.
Additional provisions extended by the TCDTR without other changes are the following:,(1) the exclusion from employee income of certain employer payments of student loans, (2) the 3-year recovery period for certain racehorses, (3) favorable cost recovery rules for business property on Indian reservations, (4) the 7-year recovery period for motor sports entertainment complexes, (5) expensing for film, television and live theatrical productions, (6) empowerment zone tax incentives except for the increased section 179 expensing for qualifying property and the deferral of capital gain for dispositions of qualifying assets, and (7) the exclusion from being personal holding company income for certain payments or accruals of dividends, interest, rents, and royalties from a related person that is a controlled foreign corporation.

The TCDTR makes changes to energy provisions in addition to making them permanent or extending them.

The TCDTR adds “waste energy recovery property” to the types of property that qualify for the Code Sec. 48 credit (above). And the credit rate assigned is 30%. “Waste energy recovery property” is property (1) the construction of which begins before 2024, (2) that has a capacity of no more than 50 megawatts, and (3) generates electricity solely from heat from buildings or equipment if the primary purpose of that building or equipment isn’t the generation of electricity. But it doesn’t include property eligible for the Code. Sec. 48 credit for cogeneration property unless the taxpayer doesn’t take the Code Sec. 48 credit for that property.

For wind facilities that are “qualified offshore wind facilities” the TCDTR relaxes the rules under which wind facilities that are eligible for the Code Sec. 45 credit can, by election (see above), be eligible instead for the Code Sec. 48 credit.

The TCDTR makes permanent the energy efficient commercial buildings deduction. Additionally, the TCDTR indexes for inflation the per-square-foot dollar caps on the full and partial versions of the deduction. And the TCDTR provides that to the extent that deductibility depends on specified recognized energy efficient standards, the referred-to standards will be standards issued within two years of construction (rather than the standards bearing now-stale dates that applied under pre-TCDTR law).

The COVIDTRA clarifies that the non-taxable treatment of Payroll Protection Program (PPP) loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations.

Also, the COVIDTRA clarifies that taxpayers whose PPP loans or other obligations are forgiven as described above are allowed deductions for otherwise deductible expenses paid with the proceeds and that the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.

The COVIDTRA allows IRS to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. Note: IRS had already waived, before enactment of the COVIDTRA, information returns and payee statements for loans guaranteed by the Small Business Administration under section 7(a)(36) of the Small Business Act.

The TCDTR extends the CARES Act credit, allowed against the employer portion of the Social Security (OASDI) payroll tax or of the Railroad Retirement tax, for qualified wages paid to employees during the COVID-19 crisis. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit rate is increased from 50% to 70% of qualified wages and qualified wages are increased from $10,000 for the year to $10,000 per quarter. Many other rules are also relaxed. And the TCDTR makes some retroactive clarifications and technical improvements to the credit as initially enacted.

The COVIDTRA extends (1) the credits provided by the Families First Coronavirus Response Act (FFCRA) against the employer portion of OASDI and Railroad Retirement taxes for qualifying sick and family paid leave and (2) the equivalent FFCRA-provided credits for the self-employed against the self-employment tax. Under the extension of the employer credits, wages taken into account are those paid before April 1, 2021 (instead of January 1, 2021). Under the extension of the credits for the self employed, the days taken into account are those before April 1, 2021 (instead of January 1, 2021).

The COVIDTRA also makes retroactive clarifications of (1) the employer (but not self-employed equivalent) FFCRA paid leave credits that were extended as discussed above, (2) the exclusion of qualifying paid leave in calculating the employer portion of Railroad Retirement taxes and (3) and the increase in the amount of the FFRCA paid leave credits against the employer portion of Railroad Retirement taxes by the amount of the Medicare payroll taxes on qualifying paid leave.

Additionally, the COVIDTRA directs IRS to extend the Presidentially ordered deferral of the employee’s share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to $4,000 every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four month period ending on April 30, 2021).

The TCDTR provides that expenses for business-related food and beverages provided by a restaurant are fully deductible through 2022 instead of being subject to the 50% limit that generally applies to business meals.

The TCDTR temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code).

With a view to layoffs in the current economic climate, the TCDTR relaxes rules that would otherwise cause a partial qualified retirement plan termination if the number of active participants decreases.

Because of market volatility during the Covid-19 pandemic, the COVIDTRA relaxes, if certain conditions are met, the funding standards that if met allow a defined benefit pension plan to transfer funds to a retiree health benefits account or retiree life insurance account within the plan.

The CARES Act’s relaxed rules for “coronavirus-related distributions” are retroactively amended by the COVIDTRA to additionally provide that a coronavirus-related distribution that is a during-employment withdrawal from a money purchase pension plan meets the distribution requirements of Code Sec. 401(a).

And under a provision of narrow applicability, the TCDTR lowers to 55 years from the usually applicable 59 1/2 years the age at which certain employees in the building or construction trades can, though still employed, receive pension plan payments under certain multiple employer plans without affecting the status of trusts that are part of the pension plans as qualified trusts.

For tax years beginning after December 31, 2017, the TCDTR assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 (when the 2017 TCJA first applied the more-favorable 30 year period) if the property (1) is held by a real property trade or business electing out of the limitation on business interest deductions and (2) before January 1, 2018 wasn’t subject to the ADS.

The COVIDTRA allows farmers who had in place a two-year net operating loss carryback before the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. It also allows farmers who before the Cares Act waived the carryback of a net operating loss to revoke the waiver.

The TCDTR provides a 4% per year credit floor for buildings that aren’t eligible for the 9% per-year credit floor. (Both floors are alternatives to the calculation under which the per-year credit is generally a percentage, prescribed by IRS, that is intended to result in a credit that, in the aggregate over the 10-year credit period, has a present value of 70% of the qualified basis for certain new buildings and 30% of the qualified basis for certain other buildings.)

The TCDTR changes the interest rate assumptions that determine whether a contract meets the cash value and premium caps for qualifying as a life insurance contract. The change is to designated floating rates from the respective 4% and 6% rates fixed by prior law.

The TCDTR includes several provisions targeted at “qualified disaster areas,” some of which affect individuals and some which affect businesses as described below. “Qualified disaster areas” are areas for which a major disaster was Presidentially declared during the period beginning on January 1, 2020 and ending 60 days after the day of enactment of the TCDTR. The incidence period of the disaster must begin after December 27, 2019 but not after the day of enactment of the TCDTR. Excluded are areas for which a major disaster was declared only because of COVID-19.

The relief includes relief for retirement funds that consists of the following: (1) waiver of the 10% early withdrawal penalty for up to $100,000 of certain withdrawals by individuals living in a qualified disaster area and that have suffered economic loss because of the disaster (qualified individuals), (2) a right to re-contribute to a plan distributions that were intended for home purchase but not used because of a qualified disaster, and (3) relaxed plan loan rules for qualified individuals. Changes to plan amendment rules facilitate the relief.

The relief also provides to employers in the harder-hit parts of a qualified disaster area an up-to-$2,400-per-employee employee retention credit, subject to coordination with certain other employer tax credits. Generally, tax-exempt organizations can enjoy the credit by taking it as a credit against FICA taxes.

Corporations are provided with relaxed charitable deduction rules for qualified-disaster-related contributions, and individuals are provided with relaxed loss allowance rules for qualified-disaster-related casualty.

The low income housing credit is modified to allow, subject to various limitations, increases in the state-wide credit ceilings to the extent allocations are made to harder-hit parts of qualified disaster areas.

The TCDTR makes various excise tax changes for beer, wine and distilled spirits. The TCDTR also provides that the temporary increase in the Black Lung Disability Trust Fund tax won’t apply to coal sales after 2021 (instead of after 2020). And the end of the liability imposed because of the Oil Spill Liability Trust Fund Rate is deferred until after 2025. Additionally, the alternative fuels credit against the diesel and special motor fuels tax is extended.

To discuss any questions you may have, please contact a member of your engagement team or reach out to us via our website.

Here is an overview of key provisions in the COVID relief legislation (the Consolidated Appropriations Act of 2021, or “the Act,” signed into law on Dec. 27, 2020) that affect individuals.

The Act provides for a refundable recovery rebate credit for 2020 that will be paid in advance to eligible individuals, often automatically, early in 2021. (Code Sec. 6428A, as added by COVIDTRA Sec. 272) These payments are in addition to the direct payments/rebates provided for in earlier Federal legislation, the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136, 3/27/2020), which were called Economic Impact Payments (EIP).

The amount of the rebate is $600 per eligible family member-$600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. Thus, a married couple with two qualifying children will receive $2,400, unless a phase-out applies. The credit is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their EIPs by providing information through the nonfiler portal on IRS’s website will also receive these additional payments.

Nonresident aliens, persons who qualify as another person’s dependent, and estates or trusts don’t qualify for the rebate. Taxpayers without a Social Security number are likewise ineligible, but if only one spouse on a joint return has a Social Security number, that spouse is eligible for a $600 payment. Children must also have a Social Security number to qualify for the $600-per-child payments.

Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer’s 2020 return exceeds the amount of the advance payment, taxpayers receive the difference as a refundable tax credit.

Advance payments of the rebates are generally not subject to offset for past due federal or state debts, and they are protected from bank garnishment or levy by private creditors or debt collectors.

The CARES Act provided for direct payments/rebates to certain individuals; the payments were called Economic Impact Payments (EIPs). As with the new additional recovery rebate, the amount of the EIP refundable credit is determined on the taxpayer’s 2020 return.

The Act makes the following changes to the CARES Act EIP:

The Act provides that eligible educators (i.e., kindergarten-through-grade-12 teachers, instructors, etc.) can claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were bought after March 12, 2020. IRS is directed to issue guidance to that effect by Feb. 28, 2021. (COVIDTRA Sec. 275; Code Sec. 62(a)(2)(D)(ii))

Under the above change, teachers who provide masks, disinfecting wipes, etc., for the classroom can receive an above-the-line deduction of up to $250 for these and other qualifying expenses that they pay.

The Act makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was to have increased to 10% of adjusted gross income after 2020.

The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years. (Code Sec. 213(a), as amended by Act Sec. 101)

The Act extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer’s adjusted gross income. (Code Sec. 163(h)(3)(E)(iv)(I), as amended by Act Sec. 133)

Above-the-line charitable contribution deduction is extended through 2021; increased penalty for abuse. For 2020, individuals who don’t itemize deductions can take up to a $300 above-the-line deduction for cash contributions to “qualified charitable organizations.” The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers). (Code Sec. 170(p), as added by Act Sec. 212(a)) Taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%). (Code Sec. 6662(l), as added by Act Sec. 212(b))

In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income. (The usual limit is 60% of adjusted gross income.) The Act extends this rule through 2021. (Code Sec. 170(b)(1)(G), as amended by Act Sec. 213)

Emergency workers who are members of a “qualified volunteer emergency response organization” can exclude from gross income certain state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020, but the Act made it permanent. (Code Sec. 139B, as amended by Act Sec. 103)

Usually, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. But under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of discharge-of-debt income if “qualified principal residence debt” is discharged. The Act extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately). (Code Sec. 108(a)(1)(E), as amended by Act Sec. 114(a))

Qualifying educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136, 3/27/2020) added to the types of payments that are eligible for this exclusion, “eligible student loan repayments” made after Mar. 27, 2020, and before Jan. 1, 2021. These payments, which are subject to the overall $5,250 per employee limit for all educational payments, are payments of principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. The Act extends the exclusion for eligible student loan repayments through the end of 2025. (Code Sec. 127(c)(1)(B), amended by Act Sec. 120)

If an individual’s child tax credit (CTC) exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer’s taxable “earned income” for the tax year as exceeds $2,500. And the earned income credit (EIC) equals a percentage of the taxpayer’s “earned income.” For both of these credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. But for determining the refundable CTC and the EIC for 2020, the Act allows taxpayers to elect to substitute the earned income for the preceding tax year, if that amount is greater than the taxpayer’s earned income for 2020. (Act Sec. 211(a))

A refundable credit (known as the health coverage tax credit or “HCTC”) is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals (i.e., individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pension Benefit Guaranty Corporation). The HCTC was due to expire at the end of 2020, but the Act extended it through 2021. (Code Sec. 35(b)(1)(B), amended by Act Sec. 134)

Briefly explained, the New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities. This credit was due to expire at the end of 2020, but the Act extended it through the end of 2025. Carryovers of the credit were extended, as well. (Code Sec. 45D(f)(1)(H), amended by Act Sec. 112(a))

A credit is available for purchases of “nonbusiness energy property”-i.e., qualifying energy improvements to a taxpayer’s main home. The Act extends this credit, which was due to expire at the end of 2020, through 2021. (Code Sec. 25C(g)(2), amended by Act Sec. 141)

The credit for purchases of new qualified fuel cell motor vehicles, which was due to expire at the end of 2020, was extended by the Act through the end of 2021. (Code Sec. 30B(k)(1), as amended by Act Sec. 142)

The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the Act. (Cod Sec. 30D(g)(3)(E)(ii), amended by Act Sec. 144)

Individual taxpayers are allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. The REEP credit was due to expire at the end of 2021, with a phase-down of the credit operating during 2020 and 2021.The Act extends the phase-down period of the credit by two years-through the end of 2023; the REEP credit won’t apply after 2023. (Code Sec. 25D(h), as amended by Act Sec. 148(a))

The Act also adds qualified biomass fuel property expenditures to the list of expenditures qualifying for the credit, effective beginning in 2021. (Code Sec. 25D(a), as amended by Act Sec. 148(b)).

A 10% early withdrawal penalty generally applies to, among other things, a distribution from employer retirement plan to an employee who is under the age of 59 1/2. The Act provides that the 10% early withdrawal penalty doesn’t apply to any “qualified disaster distribution” from an eligible retirement plan. The aggregate amount of distributions received by an individual that may be treated as qualified disaster distributions for any tax year may not exceed the excess (if any) of $100,000, over the aggregate amounts treated as qualified disaster distributions received by that individual for all prior tax years. (TCDTR Sec. 302(a))

Generally, a loan from a retirement plan to a retirement plan participant cannot exceed $50,000. Plan loans over this amount are considered taxable distributions to the participant. The Act increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets various other requirements. (TCDTR Sec. 302(c)(3))

To discuss any questions you may have, please contact a member of your engagement team or reach out to us via our website.

S corporations provide possible tax advantages over C corporations in the right circumstances. This can be the case if you expect a business will incur losses in its early years, as shareholders in a C corporation generally receive no tax benefit from these losses. Conversely, as an S corporation shareholder, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and any shareholder loans (debt) you personally lend to the entity.

Losses that cannot be deducted (as they exceed your stock and debt basis) are carried forward and can be deducted by you at a future point when there is sufficient basis to do so.

Therefore, tax planning services that evaluate your ability to utilize losses that pass through from an S corporation depends upon your basis in the corporation’s stock and debt. Basis is also crucial for other purposes, such as determining the amount of gain or loss you recognize if you sell the stock of the corporation. Your basis in the corporation is adjusted to reflect various events such as contributions made to the corporation, distributions received from the corporation, and the corporation’s income or loss each year.

However, some shareholders may not be aware of several elections available to an S corporation or its shareholders that can affect the basis adjustments caused by distributions and other events. Ensure that your tax planning services provider addresses all the elections possible for an S Corporation. Here is some information about four particular elections that could prove useful:

1. An S corporation may elect to reverse the ordering of basis adjustments, potentially changing the amount of basis to be used when applying against losses. Making this election may permit the shareholder to deduct more pass-through losses in a given year.

2. S corporations with significant “passive income” and accumulated earnings and profits (E&P) from prior C corporation years, may benefit by reducing their E&P to avoid certain taxes or loss of S status. A “deemed dividend election.” can be useful if the corporation is seeking to reduce or eliminate E&P, but cannot (or does not want to) make an actual dividend distribution in cash.

3. When a shareholder’s interest in the corporation is transferred or terminates during the year the corporation and all affected shareholders can elect to treat the corporation’s tax year as two separate tax years: the first short year as having ended on the date the shareholder’s interest terminated, and the second short year as having begun on the date following the termination of the shareholder’s interest. This election affords flexibility in the allocation of the corporation’s income or loss to the shareholders (and perhaps the category of accumulated income out of which a distribution is made) for each newly-created short tax year.

4. The election to bifurcate the S corporation’s tax year (into two “short” tax years in a similar structure as noted above) may also be available if there has been a disposition by (or redemption of) a shareholder of 20% or more of the corporation’s stock within a 30-day period, or if stock equal to or greater than 25% of the previously outstanding corporate stock is issued to one or more new shareholders within a 30-day period. All shareholders of the corporation must consent to this particular election.

Contact us if you would like to go over how these elections, as well as other S corporation planning strategies, can help maximize the tax benefits of operating as an S corporation.

Last May, we shared with you the release of IRS Notice 2020-32 which provided initial guidance that expenses paid from PPP proceeds allocable to a forgiven portion of the loan will not be deductible and its position being inconsistent with bipartisan publicly stated positions.  Chairman Grassley (R) of the Senate Finance Committee and his counterpart Chairman Neal (D) in the House, Ways and Means Committee stated this treatment was not within the spirit of the law.

The U.S. Treasury Department and the IRS released guidance on November 18^th, clarifying what they believe is the appropriate taxpayer treatment where a PPP loan has not been forgiven by the end of the year the loan was received.  Essentially if a taxpayer reasonably believes that a PPP loan will be forgiven, whether requested by the end of the year or not, the expenses are not deductible.  Also issued was safe harbor rules to allow for deductions if subsequent to year end a taxpayer either was denied forgiveness or irrevocably decides not to seek forgiveness. See Revenue Ruling 2020-27 and Revenue Procedure 2020-51.

As in May, bipartisan backlash was quick.  The top Republican and Democrat for the Senate Finance Committee, in charge of taxation, released a joint statement stating that the Treasury has “missed the mark” with their view of limits on tax benefits to small businesses when they need it most.

We are monitoring the situation closely, and look forward to providing updates. In the meantime, if you believe businesses need the relief, call or email your Senators and Representatives to express the need for the intent of the law to be applied by the Treasury and the IRS.  To discuss any questions you may have, please contact a member of your engagement team or reach out to us via our website.

The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations.

The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred.)

President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of certain payroll tax obligations.
For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.

Be aware that under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.

Contact us if you have questions about the deferral and how to proceed at your business.

© 2020

The CARES Act, passed by Congress and signed into law by President Trump on March 27, 2020, waived required minimum distribution requirements for 2020, and further guidance released by the IRS has now provided additional taxpayer-friendly relief.

Before the passage of the CARES Act, existing tax law under IRC §401(a)(9) required that retirement plan participants or IRA owners begin withdrawing an annual amount, referred to as a required minimum distribution (RMD), starting April 1 of the calendar year following the calendar year in which the employee turns 72 (prior to January 1, 2020, age 70 1/2). Following a taxpayer’s first RMD, each subsequent year’s annual RMD must be withdrawn by December 31 of that year.

Sec. 2203 of the CARES Act waived RMD requirements for calendar year 2020, and this waiver applies to distributions that would be due by December 31, 2020, and also to distributions that would be due by April 1, 2020 (if the plan participant/owner turned 70 1/2 in 2019).

Since distributions from retirement plans or IRAs are taxed at ordinary income rates (up to 37% Federal and 13.3% for California), skipping the RMD for 2020 can substantially reduce a taxpayer’s 2020 tax burden. However, for those taxpayers that withdrew their RMDs for 2020 prior to or despite of the CARES Act RMD waiver, it was initially unclear whether there was any relief available, allowing them to “undo” those withdrawals and exclude the withdrawals from 2020 taxable income.

The IRS clarified this question on June 23, 2020, when it released Notice 2020-51, providing further guidance regarding the waiver of 2020 RMDs. Among other items, the Notice confirmed that a plan participant who has already received an RMD in 2020 may utilize a provision under §402(c)(3) to “roll over” the distributed amount by contributing it to an eligible pre-tax retirement account. This would effectively remove the distribution from taxable income for 2020. Generally, indirect rollovers must be completed within 60 days of the original distribution; however, the Notice states that the Treasury Department and the IRS are extending the 60-day rollover period to August 31, 2020. The Notice provides a good example in that “if a participant received a single-sum distribution in January 2020, part of which was treated as ineligible for rollover because it was considered an RMD, that participant will have until August 31, 2020, to roll over that part of the distribution.”

It is important to note that taxpayers are limited to one 60-day indirect rollover each year.

If you have any questions regarding the August 31, 2020 deadline for rolling over RMDs, we encourage you to reach out to a member of your engagement team or reach out to us via our website.

Restaurants and entertainment venues have been hard hit by the novel coronavirus (COVID-19) pandemic. One of the tax breaks that President Trump has proposed to help them is an increase in the amount that can be deducted for business meals and entertainment.

It’s unclear whether Congress would go along with enhanced business meal and entertainment deductions. But in the meantime, let’s review the current rules.

Before the pandemic hit, many businesses spent money “wining and dining” current or potential customers, vendors and employees. The rules for deducting these expenses changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs. And keep in mind that deductions are available for business meal takeout and delivery.

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

Currently, you can deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

1. The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.

2. The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.

3. You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.

It’s a good idea to set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.

What if you spend money on food and beverages at an entertainment event? The IRS has clarified that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.
Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.
Plan ahead
As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. It’s possible the deductions could increase substantially under a new stimulus law, if Congress passes one. We’ll keep you updated. In the meantime, we can answer any questions you may have concerning business meal and entertainment deductions.

© 2020

Most business owners look at profitability as a one-way street, as a simple equation where more revenue equals more profitability. While there’s some truth to that, there’s much more to consider.

As business advisors and CPAs, at Haskell & White we spend our time buried in profit and loss statements. We’ve found that often, the key to increasing profitability is more about decreasing waste than it is about top-line growth.

Stick with me on this one. There’s merit to increasing revenue. It’s the most straightforward way to drive growth. More cash flow at the top trickles down and creates more money at the bottom. However, to create profitable growth, it’s essential to look at the entire picture, not just the incoming revenue.

Many business owners do a great job at landing new clients. Their lead generation pipeline is solid, and their sales teams are talented. But, every dollar of revenue a company earns has to make its way through the income statement. You have to buy equipment, pay employees, purchase inventory, and more.

The result? More revenue creates more work for the business, and it doesn’t often result in much money in the business owner’s pocket. This is where the difference lies: Top-line growth puts an emphasis on increasing revenue. Profitable growth focuses on margins, decreasing waste, and creating sustainable long-term growth.

Both are important. But, as business advisors, we see our clients consistently losing thousands of dollars due to unnecessary waste. This disconnect is why we advise all our clients who are looking to increase profitability to start with a waste audit.

A waste audit involves looking at your company’s profit and loss statement and finding areas where you’re spending more money than necessary. First, let’s talk about waste.

What constitutes waste? As business advisors (in addition to our assurance and tax planning services), we like to use Toyota’s eight most prevalent wastes as a guideline. Though originally developed for Toyota’s production system, we’ve found that these types of waste apply to almost every business.

You simply need to remember the acronym DOWNTIME, which represents the following:

Each company’s application of these eight wastes varies dramatically. If you’re a manufacturing company, defects are typically associated with equipment. If you’re a retailer, defects may be associated with bad products. Whatever your industry, it’s simple to apply these eight areas of waste to your organization and begin seeing where you might be hemorrhaging potential profit.

Recent amendments to the corporate alternative minimum tax (“AMT”) have simplified the business tax preparation and filing process, and have created opportunities to re-inject cash back into corporations.

Prior to the 2017 Tax Cuts and Jobs Act, corporations were forced to conduct two calculations on corporate income tax. The first calculation determined the tax burden under regular corporate income tax requirements. Then, corporations were required to calculate income tax again under the AMT guidelines. Once completed, corporations had to pay the higher of the two.

The corporate AMT is designed to ensure that corporations pay at least a minimum tax amount. This is done by establishing limitations on—or eliminating entirely—certain deductions, credits, and other tax preference items. Under prior regulations, corporations received a minimum baseline tax credit for any AMT the company paid previously. This credit would be applied against regular tax in the future if the regular tax was greater than AMT tax, but was limited to the AMT tax amount in that year; therefore, the AMT essentially acted like a pre-payment. As such, it could take years to recover the AMT “pre-payment” represented by the minimum tax credit.

Under the 2017 tax act, AMT tax was repealed and no longer exists, as of December 31, 2017. Under the new law, AMT credit carryforwards may still be used to offset a corporation’s regular tax liability in any year. Additionally, the new law allows for a partial refund of AMT credits. Read on to discover how your business may benefit.

The 2017 Act repeals the AMT regime for tax years beginning after December 31, 2017. For tax years beginning in 2018, 2019, 2020, and 2021 the AMT credit carryforward can be utilized to offset regular tax with any remaining AMT carryforwards eligible for a refund of 50%. Beyond that, any remaining AMT credit carryforwards will become fully refundable beginning in the 2022 tax year.

These revisions have streamlined the calculation process and created provisions to issue refunds for prior-year AMT paid directly to corporations, not carried forward in the form of future credits. In short: companies are now able to offset regular tax liability with previously paid AMT tax credit and receive refunds that directly inject capital back into the business.

For companies with existing deferred tax assets for prior AMT credit carryforwards, the final bill would provide your business a means of realizing the deferred tax asset without generating future income that is subject to tax. The benefit associated with the reversal of valuation allowances against existing AMT credit carryforwards would be recognized discretely in the period in which the change in judgment occurs.

While recent startup companies that have been operating at a loss may not benefit from this new AMT, if yours is a medium to large corporation that has been profitable and paid AMT tax for years, the refund amounts in question can be huge.

Speak with your CPA to discuss filing the proper tax returns to claim usage of the AMT credit and to request applicable refunds. Evaluate your current plan for business tax preparation and discuss whether your currently recorded AMT credit carryforwards should be reclassified to a current or long-term receivable. Your tax partner should also get to work determining the implications of the AMT repeal on your ASC 740.

Changes to the AMT are a win/win situation for corporations. Refunds immediately nudge up the profitability and value of public companies, demonstrating capital increases on both financial statements and balance sheets. For smaller businesses, this capital injection can provide much-needed resources to fund important upcoming projects. Take advantage of these opportunities as soon as possible. After all, this is a refund of your corporation’s money. You are entitled to it.

December 2017’s tax reform bill changed the taxation landscape dramatically, impacting the entire spectrum of taxpayers, from individual rates to corporate structures. Income taxes generally comprise a significant cost, negotiation point and hot topic for real estate operators, so understanding these changes and how they can impact the after-tax return on investment is crucial.

A few of the significant updates to the tax code that will influence tax planning strategies related to real estate investment and development are discussed below.

Tax code revisions resulted in not only a reduced corporate rate of 21% (down from 35%), but a new 20% pass-through deduction has been established for non-corporate taxpayers (partnerships, LLCs, S-Corps, and sole proprietorships) on qualified business income.  Numerous limitations exist, yet opportunities remain that expand the limitation threshold.

The relationship between carried interest (promote, kicker, sweat equity) and capital gain treatment has long been a point of contention between the real estate industry, Wall Street and Congress. As of January 1, 2018, a partnership interest held for less than three years will have its allocation of promote gain re-characterized as short-term capital gains which are taxed at ordinary rates. Regulations are forthcoming. Therefore a large gray area exists related to planning opportunities prior to the effective date of any regulations.

Congress voted to maintain 1031 exchanges for real property, the section of the tax code that allows tax-free property sales generally as long as proceeds are invested into new property purchases. This provision applies to real property only, and no longer will apply to personal property. Additional due diligence is needed to assess the impact of cost segregations and the potential allocation of purchase price to personal property.

Deduction of net business interest expense may be limited to 30% of adjusted taxable income (new term to be assessed) for companies or combined groups with gross receipts of greater than $25 million.  Does this mean that parking the old and cold partnership asset with a highly leveraged and structured deferred lease is no longer as strong of a tax deferral option?  How will this impact leverage ratios?  Exceptions exist but at the cost of slower depreciation.

Bonus depreciation and section 179 has been expanded. This treatment may not always be beneficial so make sure to conduct the analysis.

New amendments to the tax code can deliver significant benefits to real estate investors, but it’s important to take a close look at the details of how these changes will impact your specific operation before making any major decisions.