Q & A

We’re getting lots of reader questions lately. Here are several queries…and our answers. 

Will the April 18 tax deadline be extended? 

We don’t think so, but it’s anyone’s guess. Some tax pros want IRS to extend this year’s due date for filing individual returns and paying income taxes, while other practitioners are adamantly opposed to it. IRS extended the filing season in 2020 and last year because of COVID-19. Two things that preparers can agree on if IRS does opt for a longer filing season: The agency must announce any decision early, and the additional time must apply to both filing returns and making tax payments. 

I use Venmo only to receive payments from friends and family members.  Will I get a Form 1099-K next year if I am paid $1,000 through the app? 

No, you shouldn’t. Starting in 2023, third-party payment settlement networks, such as PayPal and Venmo, must send Form 1099-K to payees who are paid over $600 in a year for goods or services, regardless of the number of transactions. (The reporting threshold for 2021 is higher…over $20,000 and 200 transactions.) The change in the rule means more people than ever will get 1099-K forms that they will use when filling out individual income tax returns for 2022 and later. The 1099-K reporting is for money received for goods or services, IRS says. Venmo says on its website that this doesn’t apply to friends-and-family payments. 

Are the monthly child tax credit payments that I received last year taxable? 

No. They are treated as advance payments of the 2021 child credit and must be reconciled with the actual credit you qualify for when filling out your 1040. 

I am thinking about donating an annuity contract to charity. Any tax issues? 

You’ll generally be treated as receiving taxable income equal to the difference between the annuity’s cash surrender value and your investment in the contract. Say you have a small variable annuity in which you invested $15,000 years ago, and it’s now worth $28,000. If you donate it to charity, you’ll have to report $13,000 of appreciation as additional income on your tax return in the year of the transfer. You will owe a 10% penalty on early distributions if you are under 59½. And you will get a charitable write-off if you itemize on Schedule A. The charitable deduction will equal the value of the annuity in most cases. 

Where does one find the updated required minimum distribution tables? 

We’re getting asked this a lot. Revised RMD tables for 2022 and beyond account for more-current individual mortality rates than the prior-year tables. Basing RMDs on longer life expectancies allows plan participants and IRA owners to take out smaller annual payouts, letting them keep money in their accounts longer. The new tables are in Appendix B of draft IRS Pub 590-B for 2021 returns.

Tax Filing Update

Filing Update

The 2022 tax filing season has barely begun. And IRS is already facing heat on many fronts. It has a backlog of unprocessed filings…From last year: 6 million 2020 Forms 1040, many of which were mailed in and requested refunds. 2.3 million amended returns filed on Form 1040-X. Plus millions more in business and payroll tax returns. Agency officials can’t even provide a time frame for when returns will be processed or refunds sent out. All they say is don’t file a second return or contact IRS. 

The Service isn’t timely responding to written correspondence from taxpayers or tax professionals who are representing their clients. Mailings continue to pile up or remain unanswered because of COVID and social distancing restrictions. IRS’s response time is dismal, far greater than its targeted 30- to 45-day goal. To make matters worse, it’s continuing to send out automated notices, sowing confusion among taxpayers. For example, some people who sent in documents in response to an IRS letter are getting erroneous notices from the agency, some of which even assess penalties for failure to timely respond. Other taxpayers who requested penalty abatement or other tax relief in writing now find themselves embroiled in IRS’s automated collection process, through no fault of their own. 

The Service is offering very narrow relief. It is suspending some notices, but only in cases in which it has credited taxpayers’ accounts for payments sent in but there is no record of a 2020 return being filed. IRS recognizes that these people likely filed paper 1040s by mail, and those filings have not yet been processed. But lawmakers, preparers and taxpayer advocacy groups want more. A coalition of tax preparer organizations is asking IRS to provide limited relief from the underpayment penalty, temporarily cease automated compliance actions, and put collection holds on accounts of taxpayers who request penalty relief, among other things. Approximately 200 House Democrats and Republicans echo these recommendations and are putting pressure on the Service to act fast. 

IRS is promoting online accounts for individuals. Here are some features: You can check to see if you owe back taxes, and the amount of interest and penalties. You can make a payment online and review the various payment plan options. You can view the stimulus check amount and the monthly child tax credit payments that IRS says you received, as well as the total estimated tax payments that you made. But new security measures for accessing the accounts are getting flak, especially the need for individuals to submit a driver’s license or other photo ID and to take a selfie with a smartphone or computer webcam. These procedures also apply to individual taxpayers who request an online installment agreement, use IRS’s Get Transcript web tool, or who seek an identity protection PIN. Opponents of the ID.me facial recognition technology say the process is invasive. The intense pushback is causing IRS to explore other ways to increase online security.

Filing Season

The 2022 tax filing season is here.

The IRS started accepting returns on Jan. 24. The due date for most individual returns is April 18. People and businesses in a number of federally declared disaster areas have until May 16 to file and pay taxes. Calendar-year regular corporations (C corps) must also file by April 18. The deadline for calendar-year S corporations and partnerships is March 15. 

E-file your return early to help protect yourself from tax-related identity theft. 

Thieves who use stolen taxpayer identification numbers on fraudulent returns to seek improper refunds typically file the phony returns early in the filing season so that the Service receives them before legitimate taxpayers file their returns. If you file early, your return will likely arrive at IRS before a fake return does. You may want to apply for an identity-protection PIN as extra protection from identity theft. The IP PIN is a six-digit number assigned by the Service to help verify a taxpayer’s identity on returns filed either on paper or electronically. To apply for an IP PIN, use the “Get an Identity Protection PIN” tool on IRS’s website. IP PINs are valid for one calendar year, so you can’t use the one you had last year. 

Want to electronically file your return but don’t want to pay for it? 

IRS has two options. The agency’s Free File program lets taxpayers with adjusted gross income of $73,000 or less use free commercial tax software to prepare and e-file returns. (Note some of the firms set lower AGI requirements.) The Service’s Free File Fillable Forms are for people with higher AGIs who are knowledgeable about the changes in the tax laws and who are comfortable preparing their own returns. Although this second program does math calculations, it won’t ask a set of questions to determine which forms you need to file. Go to www.irs.gov/freefile to access both Free File and Free File Fillable Forms. 

The fastest way to get a refund is to file early, file electronically… And request for the money to be deposited directly into your account. 

These steps are more important than ever. IRS, taxpayer advocacy groups and accounting organizations are already warning that this year’s filing season will be another nightmare, akin to last year. If you file a paper federal tax return or request your refund in the form of a paper check, there is a very good chance you could be waiting months before you see the money or even know that IRS has received or processed your return. This can be very frustrating for taxpayers. 

The best ways to cope with this year’s filing season: Have lots of patience. 

Know that if you call IRS with questions, you will likely be on hold for a long time, so put your phone on speaker and work on other things while you wait for a live person. Set up an online account on IRS’s website. Once you’ve gone through the steps to verify your identity, you can check whether you owe taxes for past years, verify any child tax credit advance payments or stimulus checks you got, and more. Be sure to keep any letters you get from IRS and give them to your preparer. If amounts on your return don’t match IRS’s records, your refund will be delayed. Also, triple-check all figures on your tax return before you file it. 

Everything Tax

AN EASING FOR PEOPLE WANTING TO SETTLE TAX DEBTS FOR LESS THAN WHAT THEY OWE.

Beginning with offers in compromise accepted by IRS after Oct. 31, 2021, the Service is no longer recouping a taxpayer’s refund for the calendar year in which an OIC agreement is reached to offset tax debts covered by that agreement. For example, assume IRS accepts a man’s offer to settle his 2017 and 2018 tax debts on Dec. 10, 2021. Under the new policy, IRS won’t grab the man’s 2021 refund, shown on his 2021 Form 1040 that he files next year, and apply it as a payment to his 2017 and 2018 tax liabilities, which are subject to the OIC agreement. 

THE TAX BURDEN ON HIGH-INCOMERS HAS GONE DOWN, ACCORDING TO IRS STATISTICS. 

The top 1% of individual filers paid 38.77% of all U.S. income taxes for 2019, the most recent year IRS has analyzed. That’s a drop from 2018’s figure of 40.08%. They reported 20.14% of total adjusted gross income, lower than the year before. Filers needed AGIs of at least $546,434 to earn their way into the top 1% category. The highest 5% paid 59.44% of total income tax and accounted for 35.93% of adjusted gross income. Each filer in this group had an AGI of $221,572 or more. The top 10%, those with AGIs of at least $154,589, bore 70.81% of the burden, while bringing in 47.30% of all individuals’ total adjusted gross income for the year. The bottom 50% of filers paid 3.06% of the total federal income tax take. Their share is so low because the figures don’t include Social Security tax payments and because many of them get substantial income tax relief through refundable credits. Filers in this bottom half of all individual taxpayers have AGIs below $44,269.

IN BUSINESS TAXES, THE STANDARD MILEAGE ALLOWANCE FOR BUSINESS DRIVING IS RISING FOR 2022. 

The rate will increase to 58.5¢ per mile, up two and a half cents from 2021. If you use the standard mileage rate, you must reduce the basis of the vehicle by the depreciation component…26¢ per mile. Keep a contemporaneous and detailed log of the miles you drive for business. Business vehicle write-offs are an IRS audit red flag. The rate for 2022 medical travel and military moves is 18¢ a mile, up 2¢. The rate for charitable driving will stay put at 14¢ a mile. It is fixed by law. You also can claim the cost of parking and tolls. But you can’t add the cost of fuel or repairs. Nor can you use the rates if you depreciated or expensed the car. Expenses incurred before business starts aren’t deductible right away. An engineer bought vacant land with the intent to eventually farm and develop it. Although he spent time and money working on the land, began constructing a barn, and even came up with a business plan, he never got past the preparatory stage. All his pre-opening costs must be capitalized (Antonyan, TC Memo. 2021-138).  Firms can elect to deduct up to $5,000 of their start-up costs in the first year that they actively engage in business, with the remainder amortized over 180 months. 

A SPOUSE’S FORGED SIGNATURE DOESN’T NEGATE THE FILING OF A VALID JOINT RETURN, THE TAX COURT SAYS.

The husband and his son controlled the family’s finances. The wife viewed her marriage as traditional and stayed out of all financial matters. Her son routinely forged her signature on tax returns. IRS audited the couple’s 1040 and nixed a large loss deduction from one of the husband’s pass-through businesses. The wife claimed she never signed the 1040, so the jointly filed return isn’t valid and she shouldn’t be held liable for the additional tax due on her husband’s income. Tacit consent is sufficient here. The failure of one spouse to actually sign doesn’t always negate the intent to file a joint return by the non-signing spouse if the non-signor otherwise acquiesces or tacitly approves the document’s filing. The Court decided the wife was aware of her tax obligations and never objected to filing jointly. She just chose not to engage in tax matters (Soni, TC Memo. 2021-137). 

CALLBACK TECHNOLOGY COULD BE COMING TO IRS’S PHONE LINES IN THE NEXT YEAR  OR SO.

This would allow callers to leave their phone numbers for an operator to call them back, instead of waiting on hold. The president’s executive order on improving federal customer service mandates that IRS make callbacks available. 

THE REVENUE SERVICE EXTENDS A TEMPORARY CORONAVIRUS-RELATED EASING: 

Allowing electronic signatures on 43 paper-filed forms for which e-filing is not available. These forms may be mailed in with digital signatures. The relief was set to expire on Dec. 31, 2021, but IRS chose to extend it through Oct. 31, 2023. Filers can use most technologies to provide electronic or digital signatures. 

IT’S NOT TOO SOON TO START THINKING ABOUT THIS YEAR’S TAX FILING SEASON. 

2021 individual tax returns are generally due April 18. Individuals get three more days to file because of D.C.’s Emancipation Day and the weekend. Calendar-year regular corporations (C corps) also must file by April 18. The deadline for calendar-year S corporations and partnerships is March 15. Tornado victims in Ky., Ill. and Tenn. have until May 16 to file returns and pay taxes, including estimated tax payments otherwise due in Jan. and April. We hope the 2022 filing season won’t be as problematic as 2021. But don’t count on it. IRS still has millions of unprocessed 2020 returns. 

Small businesses remain pessimistic about future business conditions

The share of small-business owners who expect economic conditions to worsen over the next six months has steadily increased in recent months.  Smalls are still struggling to find qualified workers. Nearly half of them report job openings they can’t fill, and the situation is even worse in some industries, such as construction, where 64% of smalls reported few or no qualified applicants. 

Many have scaled back hiring plans and raised compensation for current workers

Hiring challenges look set to continue for the foreseeable future.  Other inflationary pressures are also likely to persist. The share of smalls expecting to raise prices over the next three months is the highest since 1979. So far, most have been able to pass on rising material costs to their customers.  Nevertheless, there are some reasons for optimism. Sales remain strong, and many small businesses still plan to increase capital spending going forward. 

The courts will decide the fate of new surprise billing regulations from HHS... 

The Dept. of Health and Human Services…following a recent lawsuit from the American Medical Assn. and the American Hospital Assn. The recent rule prohibits surprise billing when a patient unknowingly receives emergency services or other care from a provider that is outside their health insurance network. 

At issue is the independent dispute resolution process for such cases

If a patient unknowingly receives care from an out-of-network provider, their insurer has 30 days to negotiate an acceptable out-of-network rate. Should negotiations fail, either party can opt to bring in a neutral arbiter to settle the issue. The administration says the arbiter should start with the assumption that the correct rate for a service is the median price usually paid for that service in the same geographic area. The AMA and AHA disagree, saying other factors, such as physician quality, must be considered. Surprise billing is especially common during medical emergencies, a time when patients often must use ambulance providers or receive care from providers outside of their insurance networks. But it can happen at in-network hospitals, too. 

Questions are on the uptick. Here are a few of them…and our answers. 

How do I report my fantasy sports winnings? 

Likely as gambling income. DraftKings, FanDuel and similar online sites let individual players vie for cash prizes that are based on the performance of professional athletes. According to IRS attorneys, the entry fee paid by the user is akin to a wager. So, as a result, the applicable tax rules for gambling should apply for these daily fantasy sports contests. You report winnings on Schedule 1 of the Form 1040. Losses are deductible by itemizers on Schedule A to the extent of reported winnings. Some gamblers can file Schedule C if their gambling activity is extensive enough to rise to the level of a trade or business, but this can be a difficult hill to climb. 

I just inherited from my mom EE savings bonds that haven’t reached maturity. Will I owe federal income tax on the accrued but untaxed pre-death interest? 

It depends. We assume your mom opted to defer reporting the bond interest as income until the earlier of the year the bonds mature or when they’re cashed in. Now that she has died, her executor can opt to include on her final income tax return all pre-death interest earned on the bonds. If this is done, then you would report only post-death interest on your 1040 in the year the bonds mature or are redeemed. If the executor doesn’t include the interest income on your mom’s final return, you will owe taxes on all bond interest in the year of maturity or redemption. 

What federal tax breaks are available if I decide to buy an electric vehicle? 

Presently, the federal income tax credit ranges from $2,500 to $7,500.It applies only to purchases of new electric cars, and there are various limitations. The House-passed Build Back Better bill would increase the tax break to a maximum of $12,500 for new electric vehicles bought in 2022 through 2031. The vehicle’s manufacturer’s suggested retail price can’t exceed $55,000 for sedans, or $80,000 for vans, SUVs or pickup trucks. The credit would begin to phase out for taxpayers with modified adjusted gross income over $500,000 for joint filers, $375,000 for household heads and $250,000 for single or married-filing-separate filers. The bill would also allow a lesser credit for people who buy used electric vehicles. 

Will these proposed higher credits survive in the Senate?

It’s too soon to tell. 

Will Congress limit the gain deferral from like-kind exchanges of realty? 

It’s looking very unlikely. When real property used in a business or held for investments is exchanged for like-kind real property, the gain that would otherwise be triggered if the realty were sold can be deferred. President Biden wanted to cap the amount of deferred gain each year at $500,000 for each taxpayer…$1 million in the case of married couples filing a joint return. Gains over the $500,000 and $1 million caps would then be immediately taxed. However, this idea didn’t make it into the House-passed $1.75 trillion spending bill.

Taxes and Education

Now that kids are back in college, let’s look at two tax breaks for education.  Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers and internet access. Funds can be withdrawn tax-free to cover off-campus housing, food and utilities, but the distribution can’t exceed the room and board allowance the college includes in the cost of attendance. You should be able to get this from the school’s website. 

The American Opportunity Tax Credit is worth up to $2,500 per student for each of the first four years of college. This break starts to phase out for joint filers with modified adjusted gross incomes above $160,000…$80,000 for single filers and household heads…and ends when modified AGI tops $180,000 and $90,000. The student must be in school at least half-time, and eligible expenses include tuition, books and required fees, but not the cost of room and board. 

Coordinating these two education tax breaks can be somewhat tricky because you cannot use the same college expenses for both benefits. For example, if you take $8,000 from a 529 plan for tuition, you can’t also use that same $8,000 as a qualifying education expense in figuring your American Opportunity Tax Credit. 

Feel free to reach out to our team if you have questions.

Where Is My Refund?

Individual Tax Returns and Refunds

Let’s take a look at the 2021 filing season. Millions of individuals still await refunds from timely filed 2020 tax returns. As of Sept. 18, IRS had a backlog of 7.8 million individual returns that require manual processing. Some need further review because of mistakes with refundable credits or math errors. About 9 million math error notices were mailed to taxpayers from June 1 through July 15, compared with 628,997 for the same period last year. Others are paper returns filed this year that need to be manually processed by IRS.  The good news is that IRS is making progress on processing returns. As of June 25, there were 16.7 million 2019 and 2020 Forms 1040 waiting for action.  Amended-return filers also need lots of patience this filing season. As of Sept. 18, IRS had more than 2.8 million Forms 1040-X yet to process. Unfortunately, there’s not much you can do if you’re affected by the delay, other than continuing to check the “Where’s My Refund” tool on IRS’s website.

Business Tax Returns

Business tax return filers are being caught up in the turmoil, too. IRS has 2.3 million unprocessed employment tax returns filed on Form 941. And it is way behind on reviewing Forms 1139 and 1045. The CARES Act reversed the general ban on carry-backs of net operating losses by requiring NOLs arising in 2018, 2019 or 2020 to first be carried back five years, unless the taxpayer elects to carry the NOLs forward. The law also expanded the 80% taxable income limit for utilizing NOLs for 2018 to 2020. After IRS temporarily let firms file claims via fax for quick refunds of NOL carry-backs or carry-forwards, the agency was inundated with such filings, and it’s still experiencing longer-than-normal processing backlogs. 

What You Can Do

Want to call IRS for help with a tax question or to check on your refund? You will be one of the lucky few if you can actually reach a live person. So far in 2021, only 9% of callers reached a live customer service representative. One reason for this dismal level of service is the historic number of callers. IRS has received over 200 million calls on its various phone lines so far in 2021, more than five times the usual number. In addition to the normal callers every year, people are calling IRS often and repeatedly about their delayed refunds, the status of their stimulus payments or monthly child tax credit payments, how to account for the numerous retroactive tax changes, and so much more. You might have better luck if you call this fall, say, in late Oct. or Nov. But don’t expect a detailed answer if your query relates to a delayed refund. The operator typically can’t say much beyond what you can see on “Where’s My Refund.”T

The Team at BJ Kane & Co. are always here to help. If you need help navigating though the Refund and Tax Return process please do not hesitate to reach out to our team.

The Five Main Reasons Professional Athletes Go Broke

Spoiler: lack of education and/or business savvy isn't among them.

Below is an article by Adam Hess published yesterday on Wealth Management.com. We had to share it.

Professional athletes know they can go broke if they are not careful, but that knowledge alone may not be enough. They hear it from agents, teammates, and even the leagues they play in. Sports Illustrated estimates 78% of NFL players face financial trouble within two years of leaving the game, and another 60% of NBA players are in the same boat five years after retirement. On average, NFL players last 3.3 years in the league, while NHL, MBA, and MLB careers last 3.5, 4.8, and 5.6 years, respectively.

Despite the warnings, athletes keep running through their money. Why? Is it a lack of education or business savvy? Demonstrably not. Lots of business builders are college or even high-school dropouts. And establishing, for example, a successful chain of convenience stores does not confer an automatic understanding of investment principles and financial prudence, just as playing a sport for a living does not preclude it.

But athletes face a challenge early in life that other standout achievers encounter later, something called a "liquidity event." This life-altering infusion of assets can be jarring even for those with decades of adult experience in business,” says Nate Johnson, my colleague at CW Boss. “They still have to weigh opportunities to help loved ones, have fun with friends and colleagues, and build more wealth.”

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To help young athletes dodge obstacles and navigate their careers with a solid understanding of what can go wrong, we present the five most dangerous financial pitfalls for pro athletes.

1.The “need” to support everyone

Supporting an entourage and extended family is a big temptation for the newly wealthy, particularly if they come from an impoverished background. as is not uncommon among pro athletes. But over time, it is stressful, and it can still leave a client feeling guilty for not providing even more support. This is not fair to an athlete whose career can end suddenly with injury. Who is going to support the athlete then? To be in a position to help loved ones, your clients must pay themselves first, and then pay their future selves second. Only then can they consider continuing to provide support to the relatives and friends who made sacrifices to help them early on.

2.Children are expensive

Pro athletes get going early on launching their careers and making good money. This can lead to marriage, homeownership, and having kids—planned or not—earlier than most of their peers. Raising a child to age 18 in the US costs $233,610, according to the U.S. Department of Agriculture. That's without college, which typically costs more than $25,000 a year. A U.S. private high school costs on average $16,000 a year ($37,000-plus for boarding schools). In short, children are expensive, so where planning is feasible, athletes should view these costs as though the big paychecks have already stopped. When planning for children, financial projections should be based on what the athlete has right now in savings, not what may come in in the future.

3.Divorce is expensive

Half of the first marriages end in divorce, and the likelihood of this outcome increases for pro athletes. Without a prenuptial agreement, an athlete can take a huge financial hit. Further, divorce settlements are based on a snapshot in time. An athlete who divorces in the middle of a successful career may have no problem meeting alimony and/or child support obligations while the big paychecks are rolling in; but once a career is over and their income shrinks, your client may need a good lawyer to renegotiate the terms of the divorce to reflect their new financial reality.

4.Keeping up with the Joneses

Athletes who prioritize material wealth—cars, houses, jewelry, etc.—over financial discipline, strategic investing, and cultivating additional revenue sources tend to have money troubles. “Things get worse when there's competition among teammates to own the most eye-catching luxuries,” says Johnson. “Especially when some teammates make 10, 15, or even 30 times what an impressionable rookie earns.” While it is hard to watch colleagues buying and enjoying luxury possessions, a young athlete who prioritizes saving and investing stands a greater chance of being able to enjoy the good life later, confident he or she will not break the bank.

5.Overconfidence

Athletes who think the money will never stop, either because their career will be long or they will smoothly move to another lucrative field, should remember what COVID-19 taught us about the unpredictable. No one can foresee the length of a particular athlete's playing career or guarantee a soft landing in the next phase of his life. Athletes who save understand that a cautious and respectful approach to their finances confers more financial freedom, and more career choices, later on.

When I played pro basketball overseas, I tried not to overspend, because I knew my already tenuous career could end abruptly. After my playing days, I went into financial planning and quickly understood that the tendency to splurge was not specific to athletes. The impact of a significant liquidity event can turn the head of a 60-year-old accountant as readily as that of a young sports prodigy. The young athlete simply has had fewer opportunities and less time to prepare for the responsibilities and rewards of lasting wealth. That's where you come in.

Adam Hess is vice president of CW Boss at Cyndeo Wealth Partners, an RIA in St. Petersburg, Fla. He was a professional basketball player in Europe and Asia from 2004 through 2016.

Our firm works with many professional athletes and we and our partner Comprehensive Wealth Advisors are well versed on how to guide professional athletes to have a long life of wealth and happiness.

Happy Memorial Day

Three ways to support families of the fallen this Memorial Day.

Thank you to all of the men and women who protect our freedom everyday.

Tax Change Highlights

Joe Biden wants to cut a cherished tax break: Stepped-up basis for inherited property

Currently, a decedent’s unrealized gains aren’t hit with income tax at death, and heirs step up their basis in the assets they receive, equal to fair market value on death. Biden’s plan calls for an end to the effects of stepped-up basis for many wealthy individuals.

What would Biden’s proposal do exactly?

It doesn’t adopt a carryover basis regime by which the heir would take the same tax basis in the asset as the decedent. That rule applies to gifts.

It would instead treat death as a realization event for income tax purposes…essentially a deemed taxable sale of the decedent’s assets at fair market value, with any gains and losses reported on the decedent’s final individual tax return. The heirs would continue to get a fair-market-value basis in assets they receive.

Gains of less than $1 million would not be taxed. Plus other exceptions:

Property donated to charity would be exempt. Family-owned businesses and farms would escape tax, provided heirs run them. And the existing gain exclusion of $250,000 (or $500,000) on sales of primary residences would continue to apply.

Let’s illustrate the current rules and Biden’s proposal with a simple example

John’s mother owns stock that she bought years ago for $500,000. When his mom dies, John inherits the stock, which is worth $3 million. Under current law, neither John nor his mom owe income tax on the $2.5 million unrealized gain, and John’s basis in the shares is stepped up to $3 million. Let’s say John sells the stock five years later for $3.6 million. John pays tax at that time on his $600,000 long-term capital gain. If Biden’s proposal is enacted, the stock would be deemed sold upon the death of John’s mom. Her final tax return would reflect gain of $1.5 million ($2.5 million less $1 million exemption) and would show capital gains tax due from the deemed sale.

Taxing unrealized capital gains at death may sound simple, but it’s not

There are lots of complexities that come along with such a sea change: Figuring basis would be tricky, especially for non-marketable assets owned many years. Liquidity issues could lead to forced sales of assets to pay income tax due at death. Asset valuation. A slew of logistic and administrative difficulties. Last but not least, getting all Democrats on board to curtail one of the biggest tax breaks is not a given.

Happy Tax Day

Tax Return and Refund Update

Biden’s plan is a starting point and will not pass Congress as-is.

It is bound to evolve, with many compromises expected to be made over time.  Enacting tax hikes will be difficult in general. There is zero GOP support for higher taxes. Senate Democrats would again have to turn to budget reconciliation to allow tax increases on individuals to pass the Senate with a simple-majority vote. And getting all Democratic senators to support tax increases is not a given.  But even if tax hikes do pass this year, we don’t think they’ll be retroactive.

Consider asking for a penalty waiver under IRS’s first-time abatement policy.

IRS will OK a waiver of the late filing or late payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied. You have to request the waiver. The abatement isn’t provided automatically. Also, check to see if you have reasonable cause to get the penalty dismissed. 

Filed your 2020 return and awaiting your refund? It could be delayed. 

IRS is holding 16 million individual returns for manual processing. These include returns using 2019 income to figure the 2020 earned income tax credit, returns showing inconsistencies between IRS’s records on stimulus checks paid and the recovery rebate credit reported on the 1040, plus returns with other errors or potential fraud issues. 11 million business and other returns are also delayed. And believe it or not, IRS is still processing some 2019 individual returns. 

Calling IRS’s toll-free line about your refund or other tax queries? 

Good luck in reaching a live person. The agency’s phone service is dismal. As of April 10, IRS employees have answered only 2% of calls to the 1040 number. This means that only one out of 50 calls have gotten through to a live operator, and the average wait time on hold for these lucky callers was 20 minutes. And if you are calling about a delayed refund, expect even more frustration. Even if you can reach a live person, it’s unlikely the operator can help you much. IRS systems don’t give a reason for why a return is needed for further manual review.

New Law Extends COVID Tax Credit for Employers Who Keep Workers On Payroll

According to the IRS published on January 26, 2021;

The Internal Revenue Service urges employers to take advantage of the newly-extended Employee Retention Credit, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.

As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% 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 ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or

2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%).

Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

In addition, effective January 1, 2021, the definition of qualified wages was changed to provide:

• For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.

• For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.

Retroactive to the March 27, 2020, enactment of the CARES Act, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

For more information, see COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs​​​​​​.

Second Draw PPP Loans

The Paycheck Protection Program reopened for the second round for those who qualify. According to the U.S. Small Business Administration:

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Notice: Paycheck Protection Program resumed January 11, 2021 at 9am ET

SBA, in consultation with the U.S. Treasury Department, reopened the Paycheck Protection Program (PPP) for First Draw PPP Loans the week of January 11, 2021. SBA will begin accepting applications for Second Draw PPP Loans on January 13, 2021.

To promote access for smaller lenders and their customers, SBA will initially only accept Second Draw PPP Loan applications from participating community financial institutions (CFIs), which include Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), Certified Development Companies (CDCs), and Microloan Intermediaries. Paycheck Protection Program lending will reopen to all participating lenders shortly thereafter. At least $25 billion is being set aside for Second Draw PPP Loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods.

Borrowers can be matched with qualified PPP lenders using SBA Lender Match.

Loan details

The Paycheck Protection Program (PPP) now allows certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP Loan with the same general loan terms as their First Draw PPP Loan. 

Second Draw PPP Loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.

Maximum loan amount and increased assistance for accommodation and food services businesses

For most borrowers, the maximum loan amount of a Second Draw PPP Loan is 2.5x average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector (use NAICS 72 to confirm), the maximum loan amount for a Second Draw PPP Loan is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million.

Who may qualify

A borrower is generally eligible for a Second Draw PPP Loan if the borrower: 

• Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses

• Has no more than 300 employees; and

• Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

How and when to apply

You can apply for a Second Draw PPP Loan from January 13, 2021, until March 31, 2021. To promote access for smaller lenders and their customers, SBA will initially only accept Second Draw PPP Loan applications from participating community financial institutions (CFIs). All Second Draw PPP Loans will have the same terms regardless of lender or borrower. 

To be matched with a participating lender, visit SBA Lender Match.

If you wish to begin preparing your application, you can download the following PPP borrower application form to see the information that will be requested from you when you apply with a lender:

• Paycheck Protection Program Second Draw Borrower Application Form (released 01-08-21)

Supplemental materials

• Top-line Overview of Second Draw PPP Loans

• Frequently Asked Questions for Lenders and Borrowers (12-09-20)

• How to Calculate Loan Amounts (06-26-20)

• Frequently Asked Questions for Faith-Based Organizations Participating in the PPP and Economic Injury Disaster Loan Program

• PPP Myth vs. Fact

Affiliation rules

• Paycheck Protection Program Affiliation Rules

• Interim Final Rule for Applicable Affiliation Rules

If you have question or need assistance with the second round PPP application feel free to reach out to our team.