Business owners: Have you paused to consider how well your company initially responded to the COVID-19 pandemic? Update your disaster plan before the details fade.

It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.

Communicate optimally

Another critical factor during and after a crisis is communication, both internal and external. Review whether and how your business was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to concentrate on maintaining or restoring operations. Who communicated with employees and other stakeholders to keep them abreast of your response and recovery progress? Typically, these parties include:

• Staff members and their families,
• Customers,
• Suppliers,
• Banks and other financial stakeholders, and
• Local authorities, first responders and community leaders (as appropriate).

Look into the communication channels that were used — such as voicemail, text messaging, email, website postings and social media. Which were most and least effective? Would some type of new technology enable your business to communicate better?

Revisit and update

If the events of this past spring illustrate anything, it’s that companies can’t create a disaster response plan and toss it on a shelf. Revisit the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by spelling out the communication channels, contacts and procedures you’ll use in the event of a disaster. Everyone should sign a written confirmation that they’ve read the plan’s details, either when hired or when the plan is substantially updated.

In addition, go over disaster response measures during company meetings once or twice a year. You might even want to hold live drills to give staff members a chance to practice their roles and responsibilities.

Heed the lessons

For years, advisors urged business owners to prepare for disasters or else. This year we got the “or else.” Despite the hardships and continuing challenges, however, the lessons being learned are invaluable. Please contact us to discuss ways to manage costs and maintain profitability during these difficult times.

If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales 

You may already have made taxable “sales” of part of your mutual fund investment without knowing it.

One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping 

Carefully save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell.

You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.)

Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year.

Identify shares you sell 

If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

Contact us if you’d like to find out more about tax planning for buying and selling mutual fund shares.

A new law signed by President Trump on March 27 provides a variety of tax and financial relief measures to help Americans during the coronavirus (COVID-19) pandemic. This article explains some of the tax relief for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Individual cash payments

Under the new law, an eligible individual will receive a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).

Individuals who have no income, as well as those whose income comes entirely from Social Security benefits, are also eligible for the payment.

The AGI thresholds will be based on 2019 tax returns, or 2018 returns if you haven’t yet filed your 2019 returns. For those who don’t qualify on their most recently filed tax returns, there may be another option to receive some money. An individual who isn’t an eligible individual for 2019 may be eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the individual will be able to claim the credit when filing a 2020 return.

The income thresholds

The amount of the payment is reduced by 5% of AGI in excess of:

• $150,000 for a joint return,
• $112,500 for a head of household, and
• $75,000 for all other taxpayers.

But there is a ceiling that leaves some taxpayers ineligible for a payment. Under the rules, the payment is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.

Most eligible individuals won’t have to take any action to receive a cash payment from the IRS. The payment may be made into a bank account if a taxpayer filed electronically and provided bank account information. Otherwise, the IRS will mail the payment to the last known address.

Other tax provisions

There are several other tax-related provisions in the CARES Act. For example, a distribution from a qualified retirement plan won’t be subject to the 10% additional tax if you’re under age 59 ½ — as long as the distribution is related to COVID-19. And the new law allows charitable deductions, beginning in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.

Stay tuned

These are only a few of the tax breaks in the CARES Act. We’ll cover additional topics in coming weeks. In the meantime, please contact us if you have any questions about your situation.

In the last issue of the Funeral Business Advisor, we talked about stuff. Specifically, we acknowledged that as the owner of a funeral home, you’re constantly buying stuff for various reasons and among your considerations in choosing what stuff to buy are the tax implications. Will buying this stuff lower my taxes? The answer was (surprise!) “It depends”. In our previous article, we dealt with the small stuff; i.e. inventory, supplies, furniture, equipment and vehicles. In this issue, we’re going to focus on the big stuff: real estate.

Buying real estate will be one of the largest investments you’ll make as a business owner. Even with bank financing, you’ll likely need to make a substantial down payment to acquire a desired property. You would think that, having drained your bank account to make that big investment, there has to be some large tax write-off that goes with it, right? “WRONG!” Despite the big investment required to buy real estate, the annual write-off you get from real estate under the tax code is small in comparison. It all has to do with depreciation. Let me explain.

Generally under the tax code, property that you use over a number of years is not expensed immediately when it is purchased. Rather, you deduct the property’s cost over its depreciable life. The property’s depreciable life is determined under the tax code, and the annual deduction is called depreciation expense. For example, if you purchase a hearse (which has a depreciable life of 5 years) for $60,000, the annual deductible depreciation expense is $12,000 ($60,000 ÷ 5 years). As explained in our previous article, there are provisions in the tax code that allow you to immediately expense personal property rather than having to depreciate it over several years, but those exceptions rarely apply to real estate. As you’ve probably guessed by now, your depreciation deduction depends heavily on the depreciable life of the asset and therein lies the problem. Under the tax code, the depreciable life of a funeral home building is 39 years! Furthermore, if you make substantial capital improvements to your property, those improvements also need to be depreciated over 39 years. Considering you probably have a 15 or 20 year mortgage, you can see that your building will be paid off long before you will have completely written it off for your taxes. So what can you do to accelerate the deductible cost of your property? Here are some options.

Consider a Cost Segregation Study
One of the key strategies in maximizing and accelerating the depreciation deduction for your property is in the allocation of its cost. The cost of a property must first be allocated between land and building. Allocation here is important because land cannot be depreciated, so you will receive no tax benefit from the land cost until later when the property is sold. So it’s important to be aggressively reasonable when allocating a portion of your purchase price to land.

Once you’ve carved out the cost of the land, what remains is the building which, as previously mentioned, must be depreciated over 39 years. However, the tax regulations allow you to break out your property into various components which can be depreciated over shorter lives, thereby increasing and accelerating your depreciation deduction. To do this, you need to have a cost segregation study (CSS) performed on your property. The CSS is performed by engineers who will examine your property and provide you with a report which breaks out the cost of your property into several “asset classes” of varying depreciable lives. The result is that rather than having to depreciate the cost of your entire building over 39 years, portions of it will be depreciated over 5, 7 or 15 years thereby increasing and accelerating your depreciation deductions in the earlier years of ownership. By way of example, a client of mine purchased a property for $2.5M. By having a CSS performed on the property, my client was able to claim additional depreciation expense of approximately $330,000 over the first five years the property was owned thereby significantly reducing his tax liability during that time.

Although performing a CSS on your property sounds like a great idea, there are a few considerations to keep in mind. First, a properly done CSS will set you back $5,000 to $7,000 depending on the property. As such, it doesn’t make economic sense to do a CSS if the cost allocated to your building is less than $800,000. Second, a CSS only allows you to depreciate portions of your building faster. Once your building has reached the end of its depreciable life, the total depreciation you will have taken on that property will be no different regardless of how it was written off. If you paid $750,000 for your building, that’s all you’ll get to depreciate. The CSS just allows you to write off that $750,000 at a faster rate, and because a deduction today is worth more than a deduction five years from now, the CSS could be worth doing. Third, work closely with your tax advisor to ensure the accelerated depreciation will provide you the intended tax benefits. There are various other provisions within our complicated tax code that can lessen the tax benefits coming out of a CSS, so best to know those before you spend the money on a CSS.

Repairs vs Capital Improvements
So you are now the proud owner of a beautiful funeral home. For obvious reasons, funeral home owners are well known for meticulously maintaining their stuff, especially their properties. But that gets expensive. Whether all those costs are tax deductible depends on what you’re doing to the property and as you would expect, the IRS doesn’t make that easy. There are hundreds of pages of regulations which deal with this (known as “the repair regs”), but we’ll stick to the basics.

First, a repair is deductible immediately while a capital improvement needs to be depreciated. That makes a repair more tax advantageous than a capital improvement. So what’s the difference between a repair and a capital improvement? It really depends on nature of the “improvement” and here’s how it works.

The tax regulations require you to look at your building as a structure with a collection of “systems.” Examples of these systems are HVAC, electrical, plumbing, elevator, etc. If you restore or improve a substantial portion of the building structure or any of these systems, that will be a capital improvement which will need to be depreciated. If it’s not a substantial improvement, then it’s a repair that can be expensed immediately. I know what you’re asking; what does “substantial” mean? The IRS provides no clear definition of what substantial means, but the rule of thumb appears to be 30% of the repaired property. For example, your funeral home has thirty windows. You replace four windows. Since four windows comprise less than 30% of all your windows, you would treat the window replacement as a repair. But suppose you replace 20 windows. You’ve now replaced 66% of your windows, so the replacement cost would be a capital improvement which would need to be depreciated over 39 years.

What do we learn from this? For one thing, proper planning and timing of your building repairs can significantly affect your ability to expense the repair, so plan ahead. Spread projects out over time so you fall below the 30% repair threshold. Secondly, talk to your tax advisor when contemplating large repair or improvement projects. They can work with you to maximize possible write-offs associated with such projects. Finally, ensure your contractor will provide you detailed billing statements for your repair project so as to maximize possible write-offs.

Partial Asset Dispositions
So you’ve concluded that your project is indeed a capital improvement and you are now stuck depreciating it over the next 39 years. However, all hope may not be lost. There is another opportunity to possibly get a substantial write-off associated with a large improvement project. However, it applies only to a refurbishment or improvement of a currently existing property; it does not apply to a building addition or expansion. In tax jargon it’s called a “partial asset disposition” and it’s a relatively new option under the tax code. Here’s how it works.

Suppose you decide to renovate the inside of your funeral home to expand viewing rooms, add bathrooms, etc. You are not expanding your facility, you are simply renovating the current structure. Obviously, such a large project is a capital improvement that must be depreciated. However, what about the structures and systems that you have removed from the building? When you purchased the building, you paid for all those former walls, flooring, electrical systems and other portions of the building. Granted you were depreciating them along with the rest of your building, but they no longer exist. Seems unfair that you would be forced to continue depreciating something that no longer exists, doesn’t it? Furthermore, you should be able to write off the remaining undepreciated portion of the building that has been replaced by the renovation. That’s exactly what you can do through a partial asset disposition (PAD).

A PAD allows you to write off the undepreciated portion of property that has been replaced through a renovation or refurbishment. The amount of the write off will depend on the age and cost of your property. It is unlikely that the write-off will equal the cost of the renovation, but it could be substantial nonetheless and is certainly worth investigating. Finally, demolition costs can be expensed immediately, so be sure your contractor bills you separately for demolition.

Section 179 Election
In our previous article on the tax treatment of stuff (see July/August edition of Funeral Business Advisor) we talked about the Section 179 election. This provision of the tax code allows you to immediately expense the entire cost of property that would otherwise need to be depreciated. It normally doesn’t apply to real estate. However, the recent tax law changes expanded Sec 179 to allow the immediate write-off of certain real estate improvements such as roofs, HVAC property, security systems, etc. It’s important to remember that Sec 179 cannot be used for rental activities. So if you own your building in a separate entity and rent it to your funeral home business, you may not be able to claim an immediate write-off using Sec 179. It’s worth discussing this with your tax advisor.

Of all the stuff you will ever buy, it’s likely that real estate will be your biggest investment. How profitable it may be depends on many factors including the tax benefits or ramifications of owning real estate. As with all investment decisions, knowledge is power so be smart and always speak with your tax advisor before you invest in real estate. FBA

This article is meant to provide general information and should not be construed as legal or tax advice or opinion and is not a substitute advice of counsel, CPAs or other professionals.

A company’s strategic plan can look good on paper but never really work out in real life. Here’s how to ensure your business accomplishes its goals.

In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.

Start with people

After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.

First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)

Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.

Watch out for roadblocks

On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.

One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.

To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.

Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.

Succeed at the important part

Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.

Did you make large gifts to your heirs in 2018? If so, it’s important to determine whether you’re required to file a gift tax return by April 15 (Oct. 15 if you file for an extension). Generally, you’ll need to file one if you made 2018 gifts that exceeded the $15,000-per-recipient gift tax annual exclusion (unless to your U.S. citizen spouse) and in certain other situations. But sometimes it’s desirable to file a gift tax return even if you aren’t required to. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.

Did you make large gifts to your children, grandchildren or other heirs last year? If so, it’s important to determine whether you’re required to file a 2018 gift tax return — or whether filing one would be beneficial even if it isn’t required.

Filing requirements

Generally, you must file a gift tax return for 2018 if, during the tax year, you made gifts:

• That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,
• That exceeded the $152,000 annual exclusion for gifts to a noncitizen spouse,
• To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2018,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.18 million for 2018). As you can see, some transfers require a return even if you don’t owe tax.

No return required

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Be ready for April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2018 returns, it’s April 15, 2019 — or October 15, 2019, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid surprise capital gains

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller beware

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond just taxes

Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

Many variables

A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill.

For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

Certainty vs. uncertainty

Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. And additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning.

But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks.

The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies.

Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

Now and throughout the year

To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.

While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

June 15

• File a 2017 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
• Pay the second installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 17

• Pay the third installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 1

• If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2017 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 15

• File a 2017 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
• Make contributions for 2017 to certain retirement plans or establish a SEP for 2017, if an automatic six-month extension was filed.
• File a 2017 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

• Make 2018 contributions to certain employer-sponsored retirement plans.
• Make 2018 annual exclusion gifts (up to $15,000 per recipient).
• Incur various expenses that potentially can be claimed as itemized deductions on your 2018 tax return. Examples include charitable donations, medical expenses and property tax payments.

But remember that some types of expenses that were deductible on 2017 returns won’t be deductible on 2018 returns under the Tax Cuts and Jobs Act, such as unreimbursed work-related expenses, certain professional fees, and investment expenses. In addition, some deductions will be subject to new limits. Finally, with the nearly doubled standard deduction, you may no longer benefit from itemizing deductions.

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

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

The IRS has released this notice as a follow-up to a previous announcement on March 17 that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021. This notice provides details on the additional tax deadlines which have been postponed until May 17.

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

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

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

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

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

IRA and HSA Contributions
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

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

Estimated Tax Payments, Other Items Not Extended
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

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

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

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

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

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

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

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

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

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Since amounts paid for COVID-19 PPE are medical care expenses under Code Sec. 213(d), they are also eligible to be paid or reimbursed under:

• health flexible spending arrangements (health FSAs),
• Archer medical savings accounts (Archer MSAs),
• health reimbursement arrangements (HRAs), or
• health savings accounts (HSAs).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continuing an ongoing effort to help those experiencing homelessness during the pandemic, the IRS has reminded people who do not have a permanent address or a bank account that may still qualify for Economic Impact Payments (EIP) and other tax benefits.

Continuing an ongoing effort to help those experiencing homelessness during the pandemic, the IRS has reminded people who do not have a permanent address or a bank account that may still qualify for Economic Impact Payments (EIP) and other tax benefits.

While EIPs are made automatically to most people, payments cannot be issued to eligible Americans when there is no information available in the tax agency’s systems. For this reason, the IRS urges employers and others to share information about EIPs and encourage the rural poor and other historically under-served groups to file returns so they can receive the benefits they are entitled to.

Individuals who do not normally file tax returns should nevertheless file a basic 2020 tax return with the IRS. Returns can be filed for free using the Free File tool available on IRS.gov. Once the return is processed, the IRS can send stimulus payments to an address that is selected by the eligible individual. Importantly, people do not need a permanent address, bank account, or a job. Payments are issued to eligible individuals even if the person has not filed returns in years.

Individuals in this category can still qualify for the first two EIPs when they file their 2020 return by claiming recovery rebate credit. For the current round of payments, individuals who are experiencing homelessness may qualify to receive $1,400 for themselves. If they are married or have dependents, they can get an additional $1,400 for each of their family members.

In addition, some eligible workers experiencing homelessness may qualify for Earned Income Tax Credit (EITC). To be eligible, the worker must have lived in the U.S. for more than half of the year and meet other requirements. For 2020, the income limit is $15,820 for individuals with no children, and $21,710 for couples with no children.

If individuals want to receive their payments through direct deposit, many financial institutions are helping them open a low-cost or no-cost bank account. Those that open accounts will then have an account and routing number available when they claim a direct deposit of their EIP. Those with a prepaid debit card may be able to have their refund applied to the card.

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

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

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

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

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

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

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

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

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

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

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

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

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

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health expenses

Health FSAs are designed to reimburse participants for certain health care expenditures, typically expenses that qualify for the medical and dental expense deduction. Medical supplies, such as eye glasses and bandages, are usually treated as qualified expenses. However, nonprescription medicines (other than insulin) are not considered qualified medical expenses.

Health FSAs are often funded through voluntary salary reduction agreements with the participant's employer under a cafeteria plan. In that case, they are very taxpayer-friendly because no federal employment or federal income taxes are deducted from the employee's contribution. The employer may also contribute to a health FSA. However, there are special rules which govern employer contributions.

Typically, participants designate at the beginning of the year the amount they want to contribute to their health FSA and these amounts are deducted from their pay. For 2014, an employee's salary reduction contributions cannot exceed $2,500. The $2,500 cap is very important because cafeteria plans that do not limit health FSA contributions to $2,500 are not treated as cafeteria plans, and all benefits offered under the plan are included in the participants' gross income.

Use-or-lose rule

As mentioned, the use-or-lose rule is a drawback to health FSAs. Unused amounts remaining in the health FSA at year-end are forfeited. Employers are not allowed to refund any unused funds in a health FSA. Critics of the use-or-lose rule argue that it has discouraged participation in health FSAs because many employees do not want to risk forfeiting unused funds. Often, participants have to scramble at year-end to use their health FSA dollars

Grace period option

A few years ago, the IRS modified the use-or-lose rule. The IRS allowed cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.

Carryover option

At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.

The maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. As we discussed, the carryover is optional. Employers can choose not to offer any carryover.

Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. The employer and not the participant decides. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.

Let's take a look at an example: Jacob participates in a health FSA under his employer's cafeteria plan. At year-end, Jacob has $255 remaining in his health FSA. Jacob's employer never offered a grace period but opted to allow participants to carry over up to $300 of unused health FSA dollars. Jacob can carry over all of his $255 in unused health FSA dollars.

If you have any questions about the new carryover option or health FSAs, please contact our office.

Notice 2013-71

The IRS has made several changes to its examination (aka, "audit") functions that are designed to expedite the process and relieve some burden on business taxpayers. These include the expansion of the Fast Track Settlement (FTS) program for small business, self-employed (SB/SE) taxpayers and a new process for issuing information document requests (IDRs) in large case audits.

The IRS has made several changes to its examination (aka, "audit") functions that are designed to expedite the process and relieve some burden on business taxpayers. These include the expansion of the Fast Track Settlement (FTS) program for small business, self-employed (SB/SE) taxpayers and a new process for issuing information document requests (IDRs) in large case audits.

Fast Track Settlement

The IRS launched the FTS program in 2005 to help small business taxpayers expedite case resolution. Small business FTS is modeled on a similar program for taxpayers in the IRS Large Business and International (LB&I) Division.

The goal of small business FTS is to complete cases within 60 days of their acceptance into the program. Under FTS, taxpayers under examination with issues in dispute work directly with IRS representatives from SB/SE's Examination Division and Appeals to resolve those issues. An Appeals Officer, trained in mediation, serves as a neutral party and employs dispute resolution techniques to facilitate settlement between the parties.

Application. To request to participate in small business FTS, the taxpayer and the SB/SE Group Manager submit Form 14017, Application for Fast Track Settlement. The taxpayer or the IRS examination representative may initiate Fast Track for eligible cases, usually before a 30-day letter is issued.

If the case is accepted and an agreement is reached, the IRS will use established issue or case closing procedures and applicable agreement forms, including preparation of a Form 906 specific matters closing agreement, if appropriate. If the case is not accepted the IRS explained that SB/SE or Appeals will inform the taxpayer of the basis for this decision and discuss other dispute resolution opportunities.

Qualifying issues. Small business FTS is generally available if:

• Issues are fully developed;
• The taxpayer has stated a position in writing or filed a small case request for cases in which the total amount for any tax period is less than $25,000; and
• There are a limited number of unagreed issues.

Small business FTS is unavailable for Collection Appeals Program, Collection Due Process, Offer-In-Compromise and Trust Fund Recovery cases, except as provided in any guidance issued by the IRS; correspondence examination cases worked solely in a Campus/Service Center site; and cases in which the taxpayer has failed to respond to IRS communications.

Information Document Requests

The IRS Large Business & International (LB&I) Division has issued a new directive (LB&I-04-1113-009) that expands on an earlier directive from in June (LB&I-04-0613-004) by itemizing the requirements for IRS agents preparing information document requests (IDRs). The new directive also outlines the mandatory three-part enforcement process for taxpayers that do not timely respond to an IDR. While IDRs are common for large business taxpayers, the IRS also uses them in auditing certain small business issues.

June directive. The original June 2013 directive set forth general principles and several mandatory actions that examiners must take while issuing IDRs. These principles are reiterated in the November directive.

The June directive also provided that IDRs issued after June 30, 2013 must comply with these principles. In particular, the IRS reported that the mandatory training emphasized that employees must focus their IDRs on specific issues relevant to the exam. IRS employees are required to discuss the IDRs and issues with the taxpayer, as well as what would be an appropriate deadline for the response to the request. The deadline must fall within a "reasonable timeframe" and be "mutually agreed upon." If the examiner does not receive a response by this date, and the IDR otherwise met the requirements listed under the directive, the case will proceed into the enforcement process outlined in the new directive from November 2013.

November directive. If a taxpayer does not respond to the IRS by the date indicated in the IDR, the case must proceed to the graduated, three-step enforcement process outlined in Attachment 2 of the November directive. This process, assuming the taxpayer could not respond to the IDRs by the dates specified at each step, would involve first a delinquency notice, then a pre-summons letter, and finally a summons.

The IRS has recently promoted the revised IDR enforcement process as a "win-win" for both the IRS and taxpayers. However, some practitioners have expressed concerns that the rigid deadlines in the new enforcement process will have the opposite effect and result in more summonses being issued. Practitioners recommend that taxpayers proactively involve themselves in the initial IDR process to ensure that the IDR, once issued, provides them with enough time to supply the requested information.

If you have questions relating to the IRS's new FTS or IDR programs, please contact our offices.