From IRS News – IR-2021-67, March 29, 2021
The Internal Revenue Service today announced that individuals have until May 17, 2021 to meet certain deadlines that would normally fall on April 15, such as making IRA contributions and filing certain claims for refund.
This follows a previous announcement from the IRS on March 17, that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021. Notice 2021-21 provides details on the additional tax deadlines which have been postponed until May 17.
Time to make contributions to IRAs and health savings accounts extended to May 17
In extending the deadline to file Form 1040 series returns to May 17, the IRS is automatically postponing to the same date the time for individuals to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). This postponement also automatically postpones to May 17, 2021, the time for reporting and payment of the 10% additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans. Notice 2021-21 also postpones the due date for Form 5498 series returns related to these accounts to June 30, 2021.
Estimated tax payment due April 15
Notice 2021-21, issued today does not alter the April 15, 2021, deadline for estimated tax payments; these payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn’t subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.
Updates regarding tax relief as a result of the COVID-19 pandemic can be found at IRS.gov.
Last week, President Biden signed the most recent government stimulus bill, the American Rescue Plan Act of 2021. This $1.9 trillion stimulus package was passed with hopes of speeding up an economic recovery due to the Pandemic. Two key elements of the bill focused on addressing unemployment benefits and issuing a third stimulus payment for qualifying taxpayers.
With federally assisted unemployment benefits set to expire the week of March 14, this bill extends the subsidized program until the week of September 6. People collecting state unemployment benefits and Pandemic Unemployment Assistance (PUA) will continue to receive the additional federal unemployment assistance of $300 per week in addition to the state unemployment benefit for an additional six months.
Furthermore, for the 2020 tax year, taxpayers can exclude their first $10,200 of unemployment benefits received in 2020 from their taxable income on their tax return. To qualify, the taxpayer’s modified adjusted income on the tax return must be less than $150,000. For joint filers, each spouse will separately qualify for the $10,200 exclusion. As of now, this exclusion is for tax year 2020 only. This exclusion is only for federal taxes and each state will need to determine if they will allow the exemption as well. For taxpayers that have already filed their 2020 tax return and qualify for this exclusion, an amended tax return can be filed to claim the benefit.
A third round of stimulus checks is also part of the package. Beginning the weekend of March 13, the government began sending out stimulus checks in the amount of $1,400 per person. This special payment is not income but is an advance payment of the 2021 Recovery Rebate Tax Credit to be included on taxpayers’ 2021 federal tax returns. The prior two stimulus checks excluded dependents over the age of 16. Stimulus checks being sent under this bill include all dependents listed on a taxpayer’s tax return – children over the age of 16 as well as parents and others that qualify as dependents for a taxpayer.
Phase out of the checks are based upon filing status and income levels:
- For a single filer the income phase-out range is between $75,000 – $80,000
- For a joint filer the income phase-out range is between $150,000 – $160,000
- For a head of household filer the income phase-out range is between $112,500 – $120,000
The income threshold for taxpayers will be based upon the 2020 tax return, if already filed. If the 2020 tax return has not been filed yet then then the threshold will be based upon the taxpayer’s 2019 tax return. If your income is above the phase-out range in 2020 but below the range as reported on your 2019 tax return, then you should consider delaying your 2020 tax return filing until your stimulus check is received.
If the IRS has a taxpayer’s bank info from a prior tax return, the payment will be via direct deposit. Otherwise, a check or debit card will be sent to the recipients. Taxpayers can check the status of their stimulus payment by going to the following IRS link: Get My Payment | Internal Revenue Service (irs.gov)
The IRS has issued guidance on the Employee Retention Credit (IRS Notice 2021-20).
In short, the current rules require that employers looking to claim the ERTC must amend the applicable 2020 quarterly payroll tax filings (Form 941) and must also reduce the deduction claimed for their staff salaries on their 2020 practice tax return by the amount of the credit. You can read all 102 pages of this IRS Notice at: https://www.irs.gov/pub/irs-drop/n-21-20.pdf.
Here are some highlights:
- No deduction allowed for wages included in ERTC Calculation as follows: a similar deduction disallowance applies under section 2301(e) of the CARES Act with regard to the employee retention credit, such that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit.
- Family members don’t count as follows: wages paid to related individuals may not be taken into account for determining qualified wages for the employee retention credit.
- No Credit for Schedule C Income as follows: Self-employed individuals are not eligible for the employee retention credit with respect to their own self-employment earnings. However, a self-employed 21 individual who employs other individuals in the self-employed individual’s trade or business and who otherwise meets the requirements to be an eligible employer may be eligible for the employee retention credit with respect to qualified wages the self-employed individual pays to the employees.
The IRS Notice (on page 87) details how to file for the ERTC for wages paid in 2020 as follows:
An eligible employer that received a PPP loan and did not claim the employee retention credit may file a Form 941-X for the relevant calendar quarters in which the employer paid qualified wages…[employers] should not use a subsequent Form 941 to claim an employee retention credit for qualified wages paid in the second quarter of 2020.
Please note that calculating the ERTC goes hand in hand with filing for the PPP Loan forgiveness. The rules seem to imply that you can re-figure the allowable payroll costs for the ERTC calculation even if you offset 100% of the PPP Loan with payroll costs for the forgiveness calculation. See examples starting on page 73 of the IRS notice at: https://www.irs.gov/pub/irs-drop/n-21-20.pdf.
Lastly, unlike other subsidies offered during the past 12 months including the PPP Loans and HHS Provider Relief Funds that provided relatively short windows to apply for those subsidies, practice owners eligible for the ERTC have 3 years to file an amended payroll tax form – 941-X. Our plan is to help our clients file for the ERTC this spring. Waiting until then will not risk your losing out on this valuable payroll tax credit offered by the federal government. You might also reach out to your payroll service to see when they will be ready to help their clients with the revised ERTC rules.
The SBA announced on 2/22/21 at: https://www.sba.gov/article/2021/feb/22/sba-prioritizes-smallest-small-businesses-paycheck-protection-program:
- The SBA will Allow sole proprietors, independent contractors, and self-employed individuals to receive more financial support by revising the PPP’s funding formula for these categories of applicants
Since first being introduced last March, the PPP formula required that sole proprietors, independent contractors, and self-employed individuals base their PPP loan calculation on their net income as reflected on the Schedule C filed as part of their personal tax returns. Anyone earning $100k or more generally qualifies for the maximum PPP loan of $20,833.
The new formula is based on gross Schedule C revenue instead of net income. Any business earning less than $100k that has expenses, therefore, should be able to get a higher PPP loan with this formula.
According to an article written by the American Institute of CPAs on 3/3/21 available at: https://www.journalofaccountancy.com/news/2021/mar/ppp-borrowers-can-use-gross-income-sba-rules.html:
The new IFR allows a Schedule C filer who has yet to be approved for a PPP first- or second-draw loan in the current, $284.5 billion phase of the program to elect to calculate the owner compensation share of its payroll costs based on either net profit (as reported on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C). If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either net profit or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C. If a Schedule C filer has no employees, the borrower may simply choose to calculate its loan amount based on either net profit or gross income.
And according to an article written by the American Institute of CPAs on 3/5/21 available at: https://www.journalofaccountancy.com/news/2021/mar/aicpa-calls-on-sba-to-change-unfair-ppp-guidance-deadline.html, there are some pitfalls with the new rules, including:
- The new formula only applies to new PPP loans. Loan already approved can’t be increased.
- “The March 31 deadline for PPP applications to be pushed back, in part because the changes mandated by the new IFR are significant enough that lenders won’t be able to implement them into their PPP portals for at least a week”.
Please reach out to your bank or PPP1 lender for more info.
Is a 1031 exchange (like-kind exchange) something you’ve been pondering with regard to your rental real estate investment? A significant tax benefit from transacting a 1031 exchange results in deferring taxes on the gain from the sale until a later year – when the taxpayer ultimately sells the replacement rental property or properties in a future year. In addition to the significant tax benefit there are a few other advantages of selling your rental property through a 1031 exchange:
- Diversification: Restructuring your investments. Examples of diversification include by geographic regions, residential rental for commercial rental, single family rental for multi-family rental, single family rental for two single family rentals.
- Leverage: Re-investment without loss of capital (that would result from capital gain tax paid on an investment sale) into a higher valued property or multiple properties with the investment potential for higher returns on the investment.
There is a strict timeline which must be met when entering into a section 1031 exchange. First the replacement property must be identified within 45 days of the sale date of the original property. Second, the purchase of replacement property must occur within 180 days of the sale date of the original property. Also, the entire transaction, sale of the original property and purchase of the replacement property, must be transacted through a qualified Intermediary – an independent third party that facilitates the transactions by holding the original property sale funds and then transfers the funds to the replacement property seller to complete the 1031 exchange with the purchase of the replacement property.
A few final items to note. Only business properties qualify. 1031 exchanges do not apply to the sale of your personal residence and purchase or a replacement residence. And generally, you will need to purchase a replacement property of equal or greater value than the property being sold. Cashing out will result in a portion of the transaction being a taxable capital gain to the seller.
With so many workers relocating their offices to their homes as a result of the pandemic, a common question for many taxpayers is “Do I qualify to claim my home office as a tax deduction?”
The answer is – it depends.
Unfortunately, for salaried employees (workers who are paid via a W-2), the Tax Cuts and Jobs Act of 2017 took this deduction away from this category of workers. That being said, W2 employees working from home might check with their employers to see if they will reimburse them for costs associated with maintaining a home office as allowed under Section 139. We posted info on this valuable employee benefit available only during a time of crisis at:
However, independent contractors and self-employed individuals will qualify to claim this deduction on their tax return. To qualify for the home office tax deduction, a taxpayer must have a segregated workspace in their house used regularly and exclusively for work purposes.
Taxpayers have two options for claiming the deduction. The first method allocates a percentage of actual home expenses (mortgage payments, homeowners’ insurance, utilities, repairs and maintenance) as a home office expense. For those less diligent in keeping records, the “simplified method” allows taxpayers to use a standard $5 per square foot, capped at 300 square feet of allowed office space, to determine the deduction for a home office.
More info on the home office deduction is available at: https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction