The 2022 Inflation Reduction Act

The 2022 Inflation Reduction Act (the Act) includes numerous tax provisions – most notably an array of new tax credits relating to energy efficient homes, businesses, and vehicles. It also provides several new healthcare and prescription drug benefits for individuals, including a $2,000 Medicare out-of-pocket cap for prescription drugs, a $35 Medicare monthly insulin cap, and a three-year extension of the expanded Affordable Care Act health insurance subsidy.

The following is a summary of the Act’s key provisions that may affect you.

Extension and Modification of Plug-In Electric Vehicle Tax Credit (Renamed Clean Vehicle Credit)

While favorable changes to the credits for “clean” vehicles, including a new credit for used vehicles, are a significant part of the legislation, there is also a new requirement that a certain percentage of vehicle components be manufactured or assembled in North America and a provision that vehicles with battery components that were manufactured or assembled by certain foreign entities will not qualify. The Act also imposes new income limits on who can claim the credit as well as price limits based on vehicle type.

Currently, buyers of qualifying plug-in electric vehicles (EVs) are eligible for a nonrefundable tax credit of up to $7,500. The tax credit phases out once a vehicle manufacturer has sold 200,000 qualifying vehicles. Also, through 2021, a tax credit of up to $8,000 was allowed for fuel cell vehicles (the base credit amount was $4,000, with up to an additional $4,000 available based on fuel economy). Heavier fuel cell vehicles qualified for up to a $40,000 credit.

The Act modifies the tax credit for plug-in EVs, allowing certain clean vehicles to qualify and eliminating the current per manufacturer limit. The credit is renamed the clean vehicle credit and the modified credit is $3,750 for any vehicle meeting a critical-minerals requirement, and $3,750 for any vehicle meeting a battery-components requirement. The maximum credit per vehicle is $7,500. Clean vehicles include plug-in EVs with a battery capacity of at least 7 kilowatt hours and fuel cell vehicles. Qualifying vehicles include those that had their final assembly occur in North America. Sellers are required to provide taxpayer and vehicle information to the Treasury Department for tax credit eligible vehicles. Only vehicles made by qualified manufacturers, who have written agreements with, and provide periodic reports to, the Treasury Department qualify.

For vehicles placed in service after 2023, qualifying vehicles do not include any vehicle with battery components that were manufactured or assembled by certain foreign entities. For vehicles placed in service after 2024, qualifying vehicles do not include any vehicle in which applicable critical minerals in the vehicle’s battery are from certain foreign entities. Taxpayers must include the vehicle identification number (VIN) on their tax return to claim a tax credit.

To receive the $3,750 critical-minerals portion of the credit, the vehicle’s battery must contain a threshold percentage (in value) of critical minerals that were extracted or processed in a country with which the United States has a free trade agreement or recycled in North America. The threshold percentage is 40 percent through 2023, increasing to 50 percent in 2024, 60 percent in 2025, 70 percent in 2026, and 80 percent after 2026.

To receive the $3,750 battery-components portion of the credit, the percentage of the battery’s components manufactured or assembled in North America must also meet certain threshold amounts. For vehicles placed in service through 2023, the percentage is 50 percent. The percentage increases to 60 percent for 2024 and 2025, 70 percent for 2026, 80 percent for 2027, 90 percent for 2028, and 100 percent after 2028.

Certain higher-income taxpayers are not eligible for the credit. Specifically, no credit is allowed if the current year or preceding year’s modified adjusted gross income (AGI) exceeds $300,000 for married taxpayers ($225,000 in the case of head of household filers; $150,000 in the case of other filers).

Credits are only allowed for vehicles that have a manufacturer’s suggested retail price of no more than $80,000 for vans, SUVs, or pickup trucks, and $55,000 for other vehicles. Taxpayers are only allowed to claim the credit for one vehicle per year. Starting in 2024, taxpayers purchasing eligible vehicles can elect to transfer the tax credit to the dealer, so long as the dealer meets certain requirements. This provision does not apply to vehicles acquired after December 31, 2032.

Credit for Previously-Owned Clean Vehicles

The Act creates a new tax credit for buyers of previously owned qualified clean (plug-in electric and fuel cell) vehicles. The maximum credit is $4,000 and is limited to 30 percent of the vehicle purchase price. No credit is allowed for taxpayers above certain modified AGI thresholds. Married taxpayers filing a joint return cannot claim the credit if their modified AGI is above $150,000 ($112,500 in the case of head of household filers; $75,000 in the case of other filers). The taxpayer’s modified AGI is the lesser of modified AGI in the tax year or prior year.

Credits are only allowed for vehicles with a sale price of $25,000 or less with a model year that is at least two years earlier than the calendar year in which the vehicle is sold. This credit can only be claimed for vehicles sold by a dealer and on the first transfer of a qualifying vehicle. Taxpayers can only claim this credit once every three years and must include the VIN on their tax return to claim a tax credit.

Starting in 2024, taxpayers purchasing eligible vehicles can elect to transfer the tax credit to the dealer, so long as the dealer meets certain registration, disclosure, and other requirements. The credit does not apply to vehicles acquired after December 31, 2032.

Extension, Increase, and Modifications of the Nonbusiness Energy Property Tax Credit (Renamed as the Energy Efficient Home Improvement Credit)

For years before 2022, a 10 percent tax credit, subject to a $500 per taxpayer lifetime limit, was available for qualified energy-efficiency improvements and expenditures for residential energy property on an individual’s primary residence.

The Act extends the credit through 2032. In addition, beginning in 2023, the Act modifies and expands the credit, by:

  • increasing the credit rate to 30 percent and increasing the annual per-taxpayer limit from $600 to $1,200, with a $600 per-item limit;
  • for geothermal and air source heat pumps and biomass stoves, there is an annual credit limit of $2,000, and limits for expenditures on windows and doors are also increased, while biomass stoves are now eligible for tax credits;
  • allowing a 30 percent credit, of up to $150, for home energy audits.

Restoration of 30 Percent Residential Energy Efficient Tax Credit (Renamed the Residential Clean Energy Credit)

A tax credit is currently provided for the purchase of solar electric property, solar water heating property, fuel cells, geothermal heat pump property, small wind energy property, and qualified biomass fuel property. Initially, the credit rate was 30 percent through 2019. It was then reduced to 26 percent through 2022, and was scheduled to be reduced to 22 percent in 2023 before expiring at the end of that year.

The Act extends the credit through December 31, 2034, restoring the 30 percent credit rate, beginning in 2023 through 2032, and then reducing the credit rate to 26 percent in 2033 and 22 percent in 2034. Qualified battery storage technology is also added to the list of eligible property.

Alternative Fuel Refueling Property Credit

Through 2021, taxpayers were allowed a tax credit for the cost of any qualified alternative fuel vehicle refueling property installed at a taxpayer’s principal residence. The credit was equal to 30 percent of these costs, limited to $30,000 for businesses at each separate location with qualifying property, and $1,000 for residences. The Act extends this credit through December 31, 2032, and makes certain additional modifications.

Please let me know if you have questions or would like to meet to discuss the ramifications of the Act’s various tax credit provisions or any of the Act’s other provisions.

Extension of Health Insurance Subsidy

A health insurance subsidy is available through a premium assistance credit for eligible individuals and families who purchase health insurance through Exchanges offered under the Patient Protection and Affordable Care Act (PPACA). The premium assistance credit is refundable and payable in advance directly to the insurer on the Exchange. Individuals with incomes exceeding 400 percent of the poverty level ($54,360 for a one-person household in 2022) are normally not eligible for these subsidies. However, legislation passed in 2021 eliminated this limitation for 2021 and 2022 so that anyone can qualify for the subsidy. That legislation also limited the percentage of a person’s income paid for health insurance under a PPACA plan to 8.5 percent of income. The Act extends these provisions through 2025.

Prescription Drug and Vaccine Cost Improvements

The Act –

  • eliminates beneficiary cost-sharing above the annual out-of-pocket spending threshold under the Medicare prescription drug benefit beginning in 2024;
  • caps Medicare annual out-of-pocket spending for prescription drugs at $2,000 beginning in 2025 (with annual adjustments thereafter);
  • establishes a program, beginning in 2025, under which drug manufacturers provide discounts to beneficiaries who have incurred costs above the annual deductible;
  • eliminates cost-sharing under the Medicare prescription drug benefit for adult vaccines that are recommended by the Advisory Committee on Immunization Practices, and requires coverage, without cost-sharing, of such vaccines under Medicaid and the Children’s Health Insurance Program (CHIP); and
  • caps cost-sharing under the Medicare prescription drug benefit for a month’s supply of covered insulin products at (1) for 2023 through 2025, $35; and (2) beginning in 2026, either $35, 25 percent of the government’s negotiated price, or 25 percent of the plan’s negotiated price, whichever is less.

Feel Free to Call

If you would like to talk about how you might be able to take advantage of the Act’s energy incentives or have questions about any of its provisions, please call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC provides year round tax and estate planning to individuals and small businesses.

Why I Can Not Disinherit My Spouse in Pennsylvania

Although Pennsylvania generally allows deceased spouse (Testator) to give their property to anyone they wish, this right is limited by a law referred to as an elective share which is designed to protect surviving spouses from being disinherited.   Before any property is distributed, the spouse is entitled to a family exemption of $3,500 from the estate.  A spouse can then inherit anything left to her in her deceased spouse’s will. However, if the decedent disinherited her (left her out of the will), she is still entitled to inherit and claim her “elective share.” Section 2203 of the Pennsylvania Code sets the elective share at one-third of the decedent’s estate. If the spouse was left out of the will or was left less than one-third of the estate, she has the right to request her elective share from the orphan’s court in the county the estate was probated in.  The Elective share will only be paid if the surviving spouse claims it within six months of the Testators death the date of probate whichever is later.  The disinherited spouse must notify the Orphans’ Court and the Executor or Administrator of her intention to claim an elective share, in writing.

When determining how to pay the elective share the Orphans’ Court will attempt to honor the Testator’s will as much as possible. For instance, if the will makes a specific gift and there are sufficient assets to pay the elective share without using the specific gift, the beneficiary of the specific gift will likely receive that item.  If there is not enough probate property to satisfy the full amount of the elective share, all of the remaining probate property is subject to the claim and any  gifts or bequests will be reduced proportionately to pay the remaining balance.

The elective share is equal to one-third of the combined value of the following types of property:

1. Property passing by the Testator’s will.

2. Annuity rights transferred by the deceased spouse.

3. Property transferred within one year of the spouse’s death, to the extent that its value exceeds $3,000.

a. receive income from the property.
b. use the property.
c. take back the transferred property.
d. regain ownership by a right of survivorship.
e. transfer the property by acting alone.

4. Property the deceased spouse transferred during the marriage, but retained the right to:

In addition the disinherited spouse would receive any jointly owned property with the Testator.

Please call Gregory Spadea at 610-521-0604 if you need assistance in claiming the elective share or have any other estate questions.

How to Apply for a Pardon in Pennsylvania

The only way to get a felony or misdemeanor conviction expunged from your record in Pennsylvania is to get a pardon from the Governor.  Before you start filling out your application, you must obtain the following documents from the Court of Common Pleas in the county where you were convicted:

  1. Criminal Complaint
  2. Affidavit of Probable Cause
  3. Criminal Information/Indictment
  4. Final Plea or Verdict
  5. Sentencing Order
  6. Proof of Payment of Financial Obligations such as fines, costs, restitution, supervision fees. If you have an outstanding balance, provide a receipt showing your current balance and the date of your last payment.
Pennsylvania State Capitol Architecture Building Panorama
Pennsylvania State Capitol Architecture Building Panorama

You can download an application from our website resource page or hire our firm to help you complete it and represent you at the hearing.  Once you send in the application to the Board of Pardons office and is complete and accurate the Board will send you a letter confirming the filing of the application.  Staff from the Pennsylvania Board of Probation and Parole conduct investigations for the Board of Pardons. They will report all criminal history and driving violations found.  They will also conduct a telephone interview or an in-person interview in your home to provide the Board with your present personal status.

The following is a list of items you will need to gather in advance of the meeting with the investigating staff:

  • Residence: rental agreement, mortgage statements, rent receipts, etc. as applicable;
  • Marital Status and Family Composition: marriage decrees, divorce decrees, birth and or death certificates, etc. as applicable;
  • Employment: pay stubs, W2’s, evidence of income to include alimony, unemployment, VA benefits, etc. as applicable;
  • Resources: investment statements, life insurance policies, checking and savings account statements, total family income, value of all property to include vehicles, vacation property, rental property; etc. as applicable;
  • Liabilities and Indebtedness: loan statements, mortgage statements, installment (credit card) statements, delinquency on any utilities, etc. as applicable;
  • Membership in Organizations and/or other Civic Organizations: membership cards for any volunteer, civic, church related organizations, etc. as applicable;
  • Religious interests: interests and activities of the Applicant, as applicable;
  • Mobility and Travel: addresses and dates of residences for the past ten years;
  • Employment History: record of jobs held for the past ten years as shown by W2’s, pay stubs, etc. as applicable;
  • Educational History: history of education as shown by diplomas, certificates, transcripts, etc. as applicable;
  • Military Service: branch of service, dates of entry and discharge, type of discharge, rank attained as shown by a DD-214; as applicable;
  • Community Reputation and Reference: names and contact information of at least 3-5 references to be contacted by the investigating Agent, or letters of support.

Please Note:  Before submitting your application, please be sure that you are willing to make yourself available to the parole staff. The Board has determined the interview and verification of the information provided as requirements and you must adhere to them.  Failure to make yourself available to parole staff either by telephone or the in-person interview and/or to provide the requested information will result in your application being administratively withdrawn.
If you do not reside in Pennsylvania, parole staff’s standard procedure is to send you a worksheet to complete followed up by a telephone interview to confirm the information contained in the worksheet.

You should expect a delay from the time your application is filed until you are interviewed.  This will ensure that the information regarding your present personal status is current and accurate when it is reviewed by the Board.

Department of Corrections – This agency is responsible for preparing a report for incarcerated individuals only.

District Attorney/President Judge – The District Attorney and President Judge in the county where the crimes occurred are given a chance to provide an opinion on the merits of every application. In cases involving more than one jurisdiction, a copy of the application will also go to the appropriate District Attorney and President Judge in that county.

Once all of the necessary reports have been received, the Board Secretary and staff will send to each Board Member in advance an applicant’s file to be reviewed for a hearing. The Board will grant a hearing if two (2) of the five Board members approve. Hearings for lifers or prisoners serving time for crimes of violence may only be granted upon approval of three (3) Board members. Attempted crimes of violence are included in this and offenses committed while in visible possession of a firearm, for which sentencing was imposed, will also require a three (3) member vote. If the required number of votes are not obtained, the process has ended and the applicant will not receive a pardon/commutation.

If a hearing is granted, a calendar is prepared, listing each application to be heard at the specified public session and the following individuals/agencies will be notified of the time and place of the hearing:

1.  Applicant/Representative

2.  Board of Probation and Parole

3.  Department of Corrections (If incarcerated)

4.  District Attorney, President Judge

5.  Victim(s) or Victim(s) Next of Kin

6.  Newspaper in the county where an applicant committed the crime(s) for which he/she is seeking clemency. At least one week prior to the public hearing, notice must be published stating the applicant’s name, the crimes(s) with respect to which the applicant has applied for clemency, clemency type, the institution, if any, in which the applicant is confined and the time and place of the hearing at which the application will be heard. Newspaper publication is required for every application to be heard by the Board.

The Hearing:

Hearings are held in the Supreme Court Courtroom in Harrisburg. The Board meets on a regular basis, as determined by the Board. On the scheduled day, the Board convenes at 9:00 A.M. for morning sessions or 1:00 P.M. for afternoon sessions. The Board’s secretary will call the session to order and the Board’s chairman will present opening remarks. Following the opening remarks, the first case, as listed on the calendar, is called to present their case. No more than fifteen minutes is allowed for each applicant’s presentation. Each case is called in consecutive order with each informal presentation adhering to the following format:

Applicant’s and  Supportive speakers’ presentation.

Victim’s or victim’s next of kin’s presentation or anyone who would like to speak in opposition of the application.

The Results:

Following the public hearing session, the Board meets in Executive Session. The Board reconvenes to vote in public. If a majority of the Board vote in favor of an application, the Board recommends favorable action to the Governor. If less than a majority of the Board vote in favor, the result is a denial by the Board and the application is not forwarded to the Governor. Life or Death sentence cases require a unanimous vote by the Board to be recommended to the Governor. The Governor, at his discretion, may approve or disapprove any favorable recommendation submitted by the Board. When the Secretary of the Board has received the Governor’s action, all interested parties will be notified of the decision.

Post Result Actions:

Reconsideration – A request for reconsideration of any decision may be made to the Board. The applicant must show a change in circumstances since the application was filed, or other compelling reasons, sufficient to justify reconsideration. Dissatisfaction with the Board’s decision is not grounds to request reconsideration.

Reapplication – An application may not be filed before the expiration of 12 months from a final adverse decision on any prior application. If an application receives two consecutive adverse decisions, an application may not be filed before the expiration of 24 months from the last adverse decision.

Gregory J. Spadea, Esq., Named an ACCREDITED ESTATE PLANNER® Designee

Gregory J. Spadea, Esq., Named an ACCREDITED ESTATE PLANNER® Designee by the National Association of Estate Planners & Councils on June 1, 2021

Ridley Park, PA – Gregory J. Spadea, Esq. is newly certified as an Accredited Estate Planner® (AEP®) designee by the National Association of Estate Planners & Councils (NAEPC). His office is the law Offices of Spadea & Associates, LLC located in Ridley Park, PA 19078.

Gregory J. Spadea is a former IRS Agent and Pennsylvania Certified Public Accountant. Mr. Spadea has over 25 years of tax and estate planning experience. Mr. Spadea graduated from Widener University School of Law, and started the Law Firm Spadea & Associates, LLC in June 2001. The law firm focuses on estate and tax planning, estate administration. Mr. Spadea probates estates and drafts wills, trusts, powers of attorney and health care directives. The firm also helps clients with Medicaid planning, business succession, entity formation and corporate governance issues.

The Accredited Estate Planner® (AEP®) designation is a graduate level, multi-disciplinary specialization in estate planning, obtained in addition to already recognized professional credentials within the various disciplines of estate planning. The AEP® designation is available to actively practicing attorneys (JD) and Certified Public Accountants (CPA); or those currently designated as a Chartered Life Underwriter® (CLU®); Chartered Financial Consultant® (ChFC®); Certified Financial Planner (CFP®); Chartered Financial Analyst (CFA); Certified Private Wealth Advisor® (CPWA®); Chartered Advisor in Philanthropy® (CAP®); Certified Specialist in Planned Giving (CSPG); or Certified Trust & Financial Advisor (CTFA).

It is awarded by the National Association of Estate Planners & Councils to recognize estate planning professionals who meet stringent requirements of experience, knowledge, education, professional reputation, and character. An AEP® designee must embrace the team concept of estate planning and adhere to the NAEPC Code of Ethics, as well as participate in an annual renewal and recertification process.

NAEPC is a national organization of professional estate planners and affiliated local estate planning councils dedicated to the cultivation of excellence in estate planning. NAEPC fosters the multi-disciplinary approach to estate planning by serving estate planning councils and their credentialed members and delivering exceptional resources and unsurpassed education.

For more information or to schedule an appointment with Gregory J. Spadea, Esq., AEP®, please call 610- 521-0604 or email Gregory@SpadeaLawfirm.com.

Four Reasons To File an Extension for your 2020 1040 Income Tax Return

Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
  1. The most important reason to file an extension is that if you do not file one by the May 17, deadline, you might face a failure-to-file penalty if you owe money. Without a valid extension, a late filed return is subject to a 5% penalty per month on any unpaid balance. This penalty tops out after 5 months or 25% of your tax. The exception to this failure to pay penalty is if you file an extension and you pay at least 90% of your actual tax liability by May 17, then you will not be assessed the failure-to-pay penalty if the remaining balance is paid by the extended due date which is October 15. By having 90% of your tax liability paid in, filing an extension gives you several extra months to come up with the remaining 10% balance owed to the government at a relatively low interest rate of 3%.
  2. A second reason to file an extension is if you do not pay all the tax due by the due date, you could face a failure-to-pay penalty. The failure-to-pay penalty is ½ of 1% of your unpaid taxes for each month the taxes are not paid after the due date which is 6% per annum. This penalty is assessed on any taxes not paid by May 17 if the outstanding amount is more than 10% of the total tax due. It can increase to up to 25% of the unpaid taxes. The failure-to-file penalty is generally more than the failure-to-pay penalty. So, if you cannot pay all the taxes you owe, you should still file an extension to avoid the failure to pay penalty. Keep in mind that if both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty.
  3. The third reason is if you do not pay all the tax due by May 17, interest will be due on any amount not paid. Currently the interest rate on underpayments is 3% per year. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
  4. The fourth reason to file an extension is even if you expect a refund, filing a valid extension permits you to defer funding a self-employed retirement plan (SEP IRA). Note than this does not apply to a regular IRA, Roth IRA or Coverdell Education Savings Account. It also enables self-employed individuals to even delay opening a SEP IRA as late as the extended due date as a well as funding it. One strategy we often implement for our self-employed individual clients is to pay all taxes deemed due with an extension and then funding the retirement later by the extended due date of October 15.

Keep in mind you will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect. Extensions until May 17 are automatic in 2021, or until June 15 for those affected by winter storms in Texas, Louisiana, and Oklahoma. The IRS might provide administrative relief and waive the penalties if you qualify under its First Time Penalty Abatement policy. To qualify, you must not have had any penalties in the prior three tax years. You must also have filed your current year’s tax return on time and paid any tax you might owe. As mentioned above, the IRS might waive the late-payment penalty if you can show there is a reasonable and justifiable reason for not paying on time.

There is a simple way to extend the filing deadline, just file an extension using form 4868, and make sure it is postmarked by May 17. It is only one page and does not even require a signature. If our firm filed your return 2019 1040 return and we did not hear from you, we will automatically file the extension for you. If you have any questions or need help preparing your taxes call Gregory J. Spadea at 610-521-0604.

2021 American Rescue Plan Act

The American Rescue Plan Act (the Act) approved by Congress on March 9, 2021 not only extends the current $300 weekly federal unemployment assistance through September 6, with the potential for some of those payments to be excluded from taxable income, it also includes substantial increases in child tax and earned income credits, $1,400 rebates for a large segment of the population, expanded dependent care assistance, an extension of refundable payroll tax credits for employers paying emergency sick and family leave to employees affected by COVID-19 and similar special payroll tax credits for self-employed individuals, an exclusion from income for certain student loan forgiveness, an additional year under which noncorporate taxpayers can take deductions for excess farm and business losses, an extension of the paycheck protection program (PPP) to certain entities not previously included in the program, and tax-free restaurant revitalization and economic injury disaster loan (EIDL) grants.

Specifically, the Act:

  • Provides $1,400 rebate checks for individuals ($2,800 in the case of joint returns and $1,400 for dependents) to be phased out for individuals with adjusted gross income of $75,000 – $80,000 ($150,000 – $160,000 for married filing jointly and $112,500 – $120,000 for head of household);
  • Extends the time period for which individuals are eligible for additional federal unemployment assistance of $300 so that instead of such assistance expiring on March 14, 2021, it does not expire until September 6, 2021;
  • Provides that up to $10,200 ($20,400 for joint return filers) of unemployment assistance received in 2020 may be exempt from tax depending on the individual’s income for the year;
  • For 2021, increases the child tax credit amount, increases the age at which a child qualifies for the credit; increases the refundable amount of the child tax credit, provides a program for distributing the credit monthly, and provides for payments to be made to “mirror code” territory for the cost of such territory’s child tax credit;
  • For 2021, nearly triples the amount of the earned income tax credit (EITC) available for workers without qualifying children, expands the eligible age range for individuals who qualify for the EITC, increases the amount of investment income an individual can have before being ineligible for the EITC, allows the credit in the case of certain separated spouses, modifies the disqualified investment income test, provides a special rule for calculating the EITC, and provides payments to U.S. possessions for the cost of their EITC;
  • For 2021, enhances the child and dependent care tax credit by making it refundable, increases expenses eligible for the credit, increases the maximum rate of the credit, increases the applicable percentage of expenses eligible for the credit; and increases the exclusion from income for employer-provided dependent care assistance;
  • Allows taxpayers other than corporations to deduct excess farm losses and excess business losses through 2027, instead of through 2026;
  • Extends the refundable payroll tax credit for paid sick time and paid family leave payroll tax credits for both employers and self-employed individuals through September 30, 2021;
  • Expands the paid family leave credit to allow employers to claim the credit for leave provided to obtain a COVID-19 vaccine or to recover from an injury, disability, illness, or condition related to a COVID-19 immunization, resets the ten-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee, and increases the value of the credits by the amount equal to the OASDI and HI employer-share tax imposed on qualified paid family and medical leave wages for purposes of this credit;
  • Extends the employee retention credit to January 1, 2022;
  • Temporarily expands the premium tax credit provided under Code Sec. 36B, modifies the applicable percentages used to determine the taxpayer’s annual required share of premiums, and provides a special rule allowing a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 to be treated as an applicable taxpayer;
  • Repeals the election to allocate interest, etc. on a worldwide basis;
  • Excludes from income the receipt of EIDL grants;
  • Excludes from income the receipt Restaurant Revitalization Grants;
  • Lowers the threshold for Code Sec. 6050W reporting for third party settlement organizations;
  • Modifies the tax treatment of student loans forgiven in 2021 through 2025 to provide that certain discharges are not includible in income;
  • Expands the limitation on the deductibility of certain executive compensation; and
  • Extends access to PPP loans to certain nonprofit entities as well as internet publishing organizations.

2021 Recovery Rebates to Individuals

Section 9601 of the Act adds Code Sec. 6428B to provide a refundable tax credit in the amount of $1,400 per eligible individual.

Eligible Individuals: An eligible individual is any individual other than (1) a nonresident alien, (2) a dependent of another taxpayer, and (3) an estate or trust. The credit is $1,400 per taxpayer ($2,800 in the case of a joint return) and $1,400 per dependent of the taxpayer for the tax year. For purposes of the recovery rebate, the term “dependent” has the same meaning given the term by Code Sec. 152 and thus can include a qualifying relative. The credit begins phasing out starting at $75,000 of adjusted gross income (AGI) for an individual ($112,500 for heads of household and $150,000 in the case of a joint return or surviving spouse) and is completely phased out where an individual’s AGI is $80,000 ($120,000 for heads of household and $160,000 in the case of a joint return or surviving spouse).

Advanced Payment Based on 2019 or 2020 Tax Returns: The provision also provides for the Department of Treasury to issue advance payments based on the information on 2019 tax returns or 2020 tax returns if the taxpayer has filed a tax return for 2020. If an advance payment is issued to a taxpayer based on the 2019 return, and the taxpayer files his or her 2020 tax return before the earlier of (1) 90 days after the 2020 calendar year filing deadline, or (2) September 1, 2021, the taxpayer will receive an additional payment equal to the excess (if any) of the amount to which the individual is entitled based on the 2020 return over the amount of the payment made based on the 2019 return. The “2020 calendar year filing deadline” means the date specified in Code Sec. 6072(a) with respect to returns for calendar year 2020 (i.e., April 15, 2021), determined after taking into account any period disregarded under Code Sec. 7508A if such disregard applies to substantially all returns for calendar year 2020. Solely for purposes of advance payments, a tax return is not treated as filed until the return has been processed by the IRS.

Valid Identification Numbers Generally Required: A taxpayer is not eligible for the recovery rebate unless the taxpayer includes a valid identification number on the tax return for the tax year. A valid identification number means a social security number (SSN) or, in the case of a dependent who is adopted or placed for adoption, the dependent’s adoption taxpayer identification number. For married taxpayers filing jointly, where the social security number of only one spouse is included on the tax return for the tax year, the payment amount is reduced to $1,400, in addition to $1,400 per dependent with a valid identification number. However, a special rule applies to members of the armed forces. For married taxpayers filing jointly, the payment amount is $2,800 if at least one spouse was a member of the armed forces at any time during the tax year and at least one spouse includes his or her SSN on the joint return for the tax year. Any individual who was deceased before January 1, 2021, is treated as if his or her SSN was not included on the return for the tax year. In the case of a joint return where only one spouse is deceased before January 1, 2021, where the deceased spouse was a member of the armed forces, and the deceased spouse’s SSN is included on the tax return for the tax year, the SSN of one (and only one) spouse is treated as included on the return for the tax year for purposes of determining the rebate amount. No payment will be made with respect to any dependent of the taxpayer if the taxpayer (both spouses in the case of a joint return) was deceased before January 1, 2021.

Returns Not Filed for Either 2019 or 2020: Individuals who do not file returns for either 2019 or 2020 (i.e., nonfilers) will receive advance payments on the basis of information available to the Treasury Department, and the payment amount may be determined with respect to such individual without regard to the AGI phaseouts. Payments may be made to a nonfiler’s representative payee or fiduciary for a federal benefit program and the entire amount of the payment will be used only for the benefit of the nonfiler. Payments to nonfilers may not be made by reloading any previously issued prepaid debit cards.

No Administrative Offset: Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. Additionally, the provision instructs the Treasury Department to make payments to the United States territories that relate to each territory’s cost of providing the credits.

Extension of Unemployment Assistance; Exclusion of 2020 Benefits

Section 9011 and Section 9013 of the Act extends the pandemic unemployment assistance and the federal pandemic unemployment compensation, originally enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), so that eligible individuals will receive, or continue to receive, $300 per week of unemployment payments. These payments were scheduled to end on March 14, 2021, but will now be available through September 6, 2021.

Section 9042 of the Act provides that up to $10,200 ($20,400 for joint return filers if both receive unemployment) of 2020 unemployment assistance may be exempt from tax if the taxpayer’s adjusted gross income is less than $150,000. Section 9042 does not provide a phaseout range, so taxpayers with income above the cut-off by any amount will lose the exclusion entirely.

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Expansion of Child Tax Credit for 2021

Section 9611 of the Act adds Code Sec. 24(i), which significantly expands the child tax credit available to qualifying individuals by:

  • increasing the credit from $2,000 to $3,000 or, for children under 6, to $3,600;
  • increasing from 16 years old to 17 years old the age of a child for which the credit is available; and
  • increasing the refundable amount of the credit so that it equals the entire credit amount, rather than having the taxpayer calculate the refundable amount based on an earned income formula.

Eligibility for Child Tax Credit: The refundable credit applies to a taxpayer (in the case of a joint return, either spouse) that has a principal place of abode in the United States for more than one-half of the tax year or is a bona fide resident of Puerto Rico for such tax year.

Phaseout of Child Tax Credit: As under current law, the 2021 child tax credit is phased out if a taxpayer’s modified adjusted gross income exceeds certain thresholds. For 2020, the credit is phased out for a taxpayer with modified adjusted gross income in excess of $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. The $2,000 child tax credit otherwise allowable for 2020 must be reduced by $50 for each $1,000, or fraction thereof, by which the taxpayer’s modified adjusted gross income exceeds such threshold amounts. For 2021, however, special phase-out rules apply to the excess credit available for 2021 (i.e., either the $1,000 excess credit or, for children under 6, the $1,600 excess credit). Under these modified phase-out rules, the modified adjusted gross income threshold is reduced to $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in any other case. This special phase-out reduction is limited to the lesser of the applicable credit increase amount (i.e., either $1,000 or $1,600) or 5 percent of the applicable phase-out threshold range.

Monthly Payments of Child Tax Credit: Section 9611 of the Act adds Code Sec. 7527A which provides a special program under which individuals with refundable child tax credits can receive advance payments equal to one-twelfth of the annual advance amount, thus potentially receiving up to $300 per month for children under 6 and $250 per month for children 6 years and older. However, these payments would only be made from July 2021 through December 2021. In essence, the taxpayer would receive one-half of the total child tax credit in the last six months of 2021 and the other half of the credit after filing his or her tax return.

The “annual advance amount” is the amount (if any) which is estimated as being equal to the amount which would be treated as allowed as a child tax credit if (i) the taxpayer meets the requirement of living in the United States for more than one-half of the tax year or being a bona fide resident of Puerto Rico for such tax year; (ii) the taxpayer has modified adjusted gross income for such tax year that is equal to the taxpayer’s modified adjusted gross income for 2019 or, if no return was filed for 2019, then modified adjusted gross income for 2018 (i.e., the reference tax year); (iii) the only children of the taxpayer for such tax year are qualifying children properly claimed on the taxpayer’s return of tax for the reference tax year, and (iv) the ages of such children (and the status of such children as qualifying children) are determined for such tax year by taking into account the passage of time since the reference tax year. If the annual advance amount is modified, the Secretary of Treasury may adjust the amount of any monthly payment made after the date of such modification to properly take into account the amount by which any monthly payment made before such date was greater than or less than the amount that such payment would have been on the basis of the annual advance amount as so modified.

Excess Advance Payments: If the aggregate amount of advance payments exceeds the amount of the credit allowed for 2021, the excess increases the taxpayer’s tax liability for 2021. However, a safe harbor based on the taxpayer’s modified adjusted gross income may apply to reduce this amount. Under this safe harbor, in the case of a taxpayer whose modified adjusted gross income for the tax year does not exceed 200 percent of the applicable income threshold, the amount of the increase in tax due to the excess advance payments is reduced (but not below zero) by the safe harbor amount. The applicable income threshold is $60,000 in the case of a joint return or surviving spouse, $50,000 in the case of a head of household, and $40,000 in any other case. The safe harbor amount is the product of $2,000 multiplied by the excess (if any) of the number of qualified children taken into account in determining the annual advance amount with respect to months beginning in such tax year, over the number of qualified children taken into account in determining the credit allowed for the tax year.

If information contained in the taxpayer’s tax return for the reference tax year does not establish the status of the taxpayer as being eligible for the child tax credit, the Secretary of Treasury may infer such status (or the lack thereof) from other information sources. A child will not be taken into account in determining the annual advance amount if the death of such child is known to the Secretary of Treasury as of the beginning of 2021.

On-Line Portal: The Secretary of Treasury must establish an online portal which (i) allows taxpayers to elect not to receive the payments on a monthly basis, and (ii) allows taxpayers to provide information relevant to determining the amount of an advance payment, such as a change in the number of qualifying children or a change in the taxpayer’s marital status.

Notice of Payments: Generally, by January 31, 2022, the Secretary of Treasury must provide to any taxpayer to whom child tax credits were made during 2021 written notice which includes the taxpayer’s taxpayer identity, the aggregate amount of such payments made, and such other information as may be appropriate.

Exception from Offset: The advance child tax credit payments are generally excepted from reduction or offset, including where the taxpayer owes federal taxes that would otherwise be subject to levy or collection.

Application of Child Tax Credit in Possessions: Section 9612 of the Act instructs the Treasury Department to make payments to each “mirror code” territory for the cost of such territory’s child tax credit. This amount is determined by Treasury based on information provided by the territorial governments. Puerto Rico, which does not have a mirror code, will receive the refundable credit by having its residents file for the child tax credit directly with the IRS, as they do currently for those residents of Puerto Rico with three or more children. For American Samoa, which does not have a mirror code, the Treasury Department is instructed to make payments in an amount estimated as being equal to the aggregate amount of benefits that would have been provided if American Samoa had a mirror code in place.

Increase in Earned Income Credit for 2021

Section 9621 of the Act adds Code Sec. 32(n), which expands the universe of individuals eligible for the earned income tax credit (EITC) in 2021 while also increasing the amount of the credit available. Among other changes, the Act:

  • nearly triples the amount of the EITC available for workers without qualifying children;
  • expands the eligible age range for individuals who qualify for the EITC, and
  • increases the amount of investment income an individual can have before being ineligible for the EITC.

Special Rules for 2021 for Individuals without Qualifying Children: Code Sec. 32(n) expands the eligibility and the amount of the EITC for taxpayers with no qualifying children (i.e., “childless EITC”) for 2021. In particular, under Code Sec. 32(n)(1), the applicable minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless EITC is eliminated. The applicable minimum age in the case of a specified student (other than a qualified former foster youth or a qualified homeless youth) is 24, while the applicable minimum age in the case of a qualified former foster youth or a qualified homeless youth is 18. A “specified student” is, with respect to any tax year, an individual who is an eligible student (as defined in Code Sec. 25A(b)(3)) during at least five calendar months during the tax year. The term “qualified homeless youth” means, with respect to any tax year, an individual who (i) is certified by a local educational agency or a financial aid administrator during such tax year as being either an unaccompanied youth who is a homeless child or youth, or as unaccompanied, at risk of homelessness, and self-supporting, and (ii) provides consent for local educational agencies and financial aid administrators to disclose to the Treasury Secretary information related to the status of such individual as a qualified homeless youth. Code Sec. 32(n)(2) eliminates, for 2021, the age 65 cut-off for being eligible for the credit.

Code Sec. 32(n)(3) increases the childless EITC amount by (i) increasing the credit percentage and phase-out percentage from 7.65 to 15.3 percent, (ii) increasing the income at which the maximum credit amount is reached from $4,220 to $9,820, and (iii) increasing the income at which the phase out begins from $5,280 to $11,610 for non-joint filers. Under these parameters, the maximum EITC for 2021 for a childless individual is increased from $543 to $1,502.

Eligibility for Childless EITC Where Children Do Not Meet Identification Requirements: Section 9622 of the Act repeals Code Sec. 32(c)(1)(F), which prohibited an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he or she could not claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN for qualifying children). Accordingly, for tax years beginning after December 31, 2020, individuals who do not claim the EITC with respect to qualifying children due to a failure to meet the identification requirements can now claim the childless EITC.

Credit Allowed in Case of Certain Separated Spouses: Section 9623 of the Act amends Code Sec. 32(d) to allow, for tax years beginning after December 31, 2020, a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed. Thus, the EITC may be claimed by the individual on a separate return. This rule only applies if the taxpayer lives with a qualifying child for more than one-half of the tax year and either does not have the same principal place of abode as his or her spouse for the last six months of the year, or has a separation decree, instrument, or agreement and doesn’t live with his or her spouse by the end of the tax year. This change aligns the EITC eligibility requirements with present-day family law practice.

Modification of Disqualified Investment Income Test: Section 9624 of the Act amends Code Sec. 32(i) and increases the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 (2020) to $10,000. This change is applicable for tax years beginning after December 31, 2020.

Application of EITC in Possessions of the United States: Section 9625 of the Act adds new Code Sec. 7530, which instructs the Treasury Department to make payments to the territories that relate to the cost of each territory’s EITC. In the case of Puerto Rico, which has an EITC, the payment is structured as a matching payment, wherein the Treasury Department will provide a match of up to three times the current cost of the Puerto Rico EITC, if Puerto Rico chooses to expand its current EITC. The other territories receive cost reimbursements of 75 percent of their EITC expenditures.

Use of Prior Year Income for Determining 2021 EITC: Section 9626 of the Act allows taxpayers in 2021, for purposes of computing the EITC, to substitute their 2019 earned income for their 2021 earned income, if 2021 earned income is less than 2019 earned income.

Increase in Dependent Care Assistance Tax Benefits for 2021

Section 9631 of the Act adds Code Sec. 21(g), which provides a number of favorable changes to tax benefits relating to dependent care assistance, including the following:

  • making the child and dependent care tax credit (CDCTC) refundable;
  • increasing the amount of expenses eligible for the CDCTC;
  • increasing the maximum rate of the CDCTC;
  • increasing the applicable percentage of expenses eligible for the CDCTC; and
  • increasing the exclusion from income for employer-provided dependent care assistance.

Refundable Credit: Generally, a taxpayer is allowed a nonrefundable CDCTC for up to 35 percent of the expenses paid to someone to care for a child or dependent so that the taxpayer can work or look for work. Under Code Sec. 21(g)(1), the dependent care credit is refundable for 2021 if the taxpayer has a principal place of abode in the United States for more than one-half of the tax year.

Increased Dollar Limit on Creditable Expenses: Code Sec. 21(g)(2) increases the amount of child and dependent care expenses that are eligible for the credit to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals.

Increase in Maximum Credit Rate, Applicable Percentage, and Phase-out Thresholds: For 2020, the CDCTC is an amount equal to the applicable percentage of the employment-related expenses paid by an individual during the tax year, with the applicable percentage being 35 percent reduced (but not below 20 percent) by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the tax year exceeds $15,000. For 2021, Code Sec. 21(g)(3) increases the maximum credit rate from 35 to 50 percent and amends the phase-out thresholds so they begin at $125,000 instead of $15,000. At $125,000, the credit percentage begins to phase out, and plateaus at 20 percent. This 20-percent credit rate phases out for taxpayers whose adjusted gross income is in excess of $400,000, such that taxpayers with income in excess of $500,000 are not eligible for the credit.

Increase in Exclusion for Employer-Provided Dependent Care Assistance: Section 9632 of the Act increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

Tax Treatment of Targeted Economic Injury Disaster Loans (EIDL) Advances: Section 9672 of the Act provides that amounts received from the Administrator of the Small Business Administration in the form of a 14 targeted EIDL advance under Section 331 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act in Pub. L. 116-260 is not included in the gross income of the person that receives such amounts. Further, no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied, by reason of the exclusion of such amounts from gross income. In the case of a partnership or S corporation that receives such amounts, any amount excluded from income under this provision will be treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec. 1366. The IRS is directed to issue rules for determining a partner’s distributive share of any amounts excluded from income for purposes of Code Sec. 705.

Tax Treatment of Restaurant Revitalization Grants: Section 5003 of the Act establishes a Restaurant Revitalization Fund in order to provide restaurants and similar businesses with grants to cover expenses incurred as a direct result of, or during, the COVID-19 pandemic. Under Section 9673 of the Act, restaurant revitalization grants are not includable in gross income, and no deduction will be denied, no tax attribute reduced, and no basis increase denied, by reason of the exclusion from gross income for a restaurant revitalization grant. In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount excluded from income by will be treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec. 1366. The IRS is directed to provide rules for determining a partner’s distributive share of any amount of restaurant revitalization grant excluded from income under Section 9673 for purposes of Code Sec. 705.

Modification of Exceptions for Reporting of Third Party Network Transactions: Section 9674 amends Code Sec. 6050W, which currently provides that a payment settlement entity must provide a Form 1099-K for transactions of sellers who exceed $20,000 in gross receipts when collected in over 200 transactions. The provision would amend Code Sec. 6050W to provide that sales in excess of $600 would trigger the Form 1099-K filing requirement.

Modification of Treatment of Student Loan Forgiveness in 2021 – 2025:

Section 9675 of the Act excludes certain discharges of student loan debt occurring in years 2021 through 2025 from gross income.

Exclusion of Debt Forgiveness from Income: Under new Code Sec. 108(f)(5), gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of:

  • any loan provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if the loan was made, insured, or guaranteed by the United States or agency thereof, a state, territory, or possession of the United States, or the District of Columbia, or an eligible educational institution as defined in Code Sec. 25A;
  • any private education loan as defined in Section 140(a)(7) of the Truth in Lending Act;
  • any loan made by any educational organization described in Code Sec. 170(b)(1)(A)(ii) if it was made (i) under an agreement with any entity described in (1) above or any private education lender (as defined in Section 140(a) of the Truth in Lending Act) under which the funds from which loan was made were provided to the educational organization, or (ii) under a program designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in Code Sec. 501(c)(3) and exempt from tax under Code Sec. 501(a); or
  • any loan made by an educational organization described in Code Sec. 170(b)(1)(A)(ii) or by an organization exempt from tax under Code Sec. 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization, but only if the refinancing loan is made under a program of the refinancing organization which is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs, and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in Code Sec. 501(c)(3) and exempt from tax under Code Sec. 501(a).

Exception to Debt Forgiveness: The exclusion provided under Code Sec. 108(f)(5) does not apply to the discharge of a loan made by an educational organization or a private education lender (as defined in Section 140(a)(7) of the Truth in Lending Act) if the discharge is on account of services performed for either such organization or for such private education lender.

Expansion of Limitation on Deductibility of Certain Executive Compensation: Section 9708 of the Act adds a provision in Code Sec. 162(m) which increases the number of highly compensated employees for which a compensation deduction is limited, to be effective for tax years beginning after 2026.

If you have any questions or need help with your taxes, please call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns and provides estate and tax planning year round.

2021 Consolidated Appropriations Act

2021 Consolidated Appropriations Act Which Includes $900 Billion in Covid-19 Relief

On December 27, 2020, President Trump signed into law a $900 billion Covid-19 relief package for individuals and businesses. Highlights of the relief package, include $600 payments to individual taxpayers with adjusted gross income (AGI) of $75,000 or less (or $112,500 AGI for heads of households), payments of $1,200 to joint filers with AGI of $150,000 or less, and an additional $600 payment for each qualifying child. For businesses, additional time is provided for paying previously deferred payroll taxes, another round of Paycheck Protection Program (PPP) loans is available, and borrowers with PPP loans may take deductions for expenses paid with PPP loan proceeds. The legislation also extends numerous expiring tax provisions for both individuals and businesses. President Trump sharply criticized the package and demanded changes before ultimately signing it into law, as passed. Consolidated Appropriations Act, 2021 (12/27/2020).

2021 Consolidated Appropriations Act Which Includes $900 Billion in Covid-19 Relief

Executive Summary

Highlights of the year-end Covid-19 related legislation include:

  • Additional unemployment assistance which provides 11 weeks of $300 per-week emergency unemployment benefits, an extension of expiring pandemic-related unemployment assistance, and protection for individuals who received pandemic-related unemployment benefit overpayments through no fault of their own and are now unable to repay the funds;
  • A second round of direct cash assistance payments of $600 for each family member, subject to certain family adjusted gross income limitations, with mixed-status families now eligible where only one spouse has a social security number;
  • The creation of a Paycheck Protection Program (PPP) Second Draw loan program with a maximum loan amount of $2 million made available for businesses that employ 300 or less employees and have used, or will use, the full amount of their first PPP loan;
  • A new rule establishing that business expenses paid with the proceeds of a forgiven PPP loan are deductible (effectively overriding prior law and IRS guidance issued earlier this year);
  • Eligibility to use 2019 income to determine the earned income tax credit and the additional child tax credit;
  • A permanent reduction in the adjusted gross income threshold for medical expense deductions from 10 percent to 7.5 percent;
  • An expansion of the carryover and grace period policies relating to employees with unused amounts in their health and dependent care flexible spending accounts;
  • A three month extension of credits reimbursing employers for paid sick and family leave paid to employees due to Covid-19;
  • An increase in the income threshold at which the Lifetime Learning Credit phases out;
  • Additional time for employees and employers to pay back deferred employee payroll tax amounts from the President’s August memorandum;
  • An extension and expansion of the employee retention tax credit;
  • Permanent and temporary extensions of expiring tax provisions (“tax extenders”); and
  • A 100-percent deduction for business meal and beverage expenses, including any carry-out or delivery meals, provided by a restaurant that are paid or incurred in 2021 and 2022.

Legislative Components

The relief package’s tax provisions and the PPP extension appear in three separate bills that were part of the 2,124-page Consolidated Appropriations Act, 2021 as follows:

  • The Covid-Related Tax Relief Act of 2020 (Covid-Related Tax Relief Act), which extends and modifies earlier Covid relief provisions from the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
  • The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), which extends and modifies the Paycheck Protection Program.
  • The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Tax Relief Act), which extends numerous expiring tax breaks and adds several new ones.

The provisions of greatest interest to tax practitioners fall in the following categories spanning the three bills: (i) Covid-related tax relief, (ii) Paycheck Protection Program extension and enhancement, (iii) tax extenders, (iv) miscellaneous tax provisions, and (v) disaster tax relief.

I. COVID-19 RELATED TAX RELIEF

Additional 2020 Recovery Rebates for Individuals and Amendments to CARES Act Recovery Rebates

Sections 272 and 273 of the Covid-Related Tax Relief Act provide a refundable tax credit in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.

The provision also provides for the Department of Treasury to issue advance payments based on the information on 2019 tax returns. Eligible taxpayers treated as providing returns through the nonfiler portal in the first round of Economic Impact Payments, provided under the CARES Act, will also receive payments. The Treasury Department may issue advance payments for Social Security Old-Age, Survivors, and Disability Insurance beneficiaries, Supplemental Security Income recipients, Railroad Retirement Board beneficiaries, and Veterans Administration beneficiaries who did not file 2019 returns based on information provided by the Social Security Administration, the Railroad Retirement Board, and the Veterans Administration.

Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.

In general, taxpayers without an eligible social security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a social security number (SSN) and one spouse does not are eligible for a payment of $600, in addition to $600 per child with an SSN. The provision aligns the eligibility criteria for the new round of Economic Impact Payments and the credit for the Economic Impact Payments provided by the CARES Act.

Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. Additionally, the provision instructs the Treasury Department to make payments to the United States territories that relate to each territory’s cost of providing the credits.

Tax Treatment of PPP Loans

Section 276 of the Covid-Related Tax Relief Act provides that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also (1) overrides current law (and IRS guidance) preventing the deduction of expenses paid with tax-exempt income by allowing businesses to deduct business expenses paid with the proceeds of a PPP loan that is forgiven, and (2) provides that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act (3/27/2020).

Employee Retention Tax Credit Modifications

Sections 206 and 207 of the Disaster Tax Relief Act extend and expand the CARES Act employee retention tax credit (ERTC) and makes technical corrections. Beginning on January 1, 2021 and through June 30, 2021, the provision:

  • Increases the credit rate from 50 percent to 70 percent of qualified wages;
  • Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50 percent to 20 percent and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
  • Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
  • Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
  • Allows certain public instrumentalities to claim the credit;
  • Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
  • Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year;
  • Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit; and
  • Retroactive to March 13, 2020, the provision: (1) clarifies the determination of gross receipts for certain tax-exempt organizations; (2) clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance; and (3) provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds.

Extension of Credits for Paid Sick and Family Leave

Section 286 of the Covid-Related Tax Relief Act extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act (Families First Act), through the end of March 2021. It also modifies the tax credits so that they apply as if the corresponding employer mandates were extended through the end of March 2021. This provision is effective as if included in Families First Act.

Election to Use Prior Year Net Earnings from Self-Employment in Determining Average Daily Self-Employment Income for Purposes of Credits for Paid Sick and Family Leave

Section 287 of the Covid-Related Tax Relief Act provides an election for an individual who elects the credit for paid sick or family leave to use prior year net earnings from self-employment income, rather than current year earnings, in calculating the income tax credit available.

Extension of Certain Deferred Payroll Taxes

On August 8, 2020, the President Trump issued a Presidential Payroll Tax Memorandum allowing employers to defer withholding employees’ share of social security taxes or the railroad retirement tax equivalent from September 1, 2020, through December 31, 2020, and requiring employers to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January 1, 2021, and April 31, 2021.

Under the Payroll Tax Memorandum, the deferral is only available with respect to any employee with wages or compensation, as applicable, payable during any bi-weekly pay period of less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. This equates to wages of $104,000 per year. The Payroll Tax Memorandum provides that the amounts deferred are not subject to any penalties, interest, additional amounts, or additions to the tax. The Payroll Tax Memorandum also authorizes the Treasury Secretary to issue guidance to implement these orders and directs the Treasury Secretary to explore avenues, including legislation, to eliminate the obligation to repay the deferred taxes. Under the Payroll Tax Memorandum, penalties and interest on deferred unpaid tax liability would begin to accrue on May 1, 2021.

Section 274 of the Covid-Related Tax Relief Act extends the repayment period through December 31, 2021. Additionally, penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.

Clarification of Educator Expense Deduction for PPE

Section 275 of the Covid-Related Tax Relief Act requires the IRS to issue guidance or regulations providing that personal protective equipment (PPE) and other supplies used for the prevention of the spread of Covid-19 are treated as eligible expenses for purposes of the educator expense deduction. Such regulations or guidance will be retroactive to March 12, 2020.

Emergency Financial Aid Grants

Section 277 of the Covid-Related Tax Relief Act provides that certain emergency financial aid grants under the CARES Act are excluded from the gross income of college and university students. The provision also holds students harmless for purposes of determining eligibility for the American Opportunity and Lifetime Learning tax credits. The provision is effective as of March 27, 2020, the date of enactment of the CARES Act.

Clarification of Tax Treatment of Certain Loan Forgiveness and Other Business Financial Assistance Under the Coronavirus Relief Legislation

Section 278 of the Covid-Related Tax Relief Act clarifies that gross income does not include forgiveness of certain loans, emergency EIDL grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. The provision is effective for tax years ending after March 27, 2020..

Authority to Waive Certain Information Reporting Requirements

Section 279 of the Covid-Related Tax Relief Act gives the Treasury Department authority to waive information filing requirements for any amount excluded from income by reason of the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.

Application of Special Rules to Money Purchase Pension Plans

The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans. Section 280 of the Covid-Related Tax Relief Act clarifies that money purchase pension plans are included in the retirement plans qualifying for these temporary rules. The provision applies retroactively as if included in Section 2202 of the CARES Act.

Election to Waive Application of Certain Modifications to Farming Losses

Section 281 of the Covid-Related Tax Relief Act allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. This provision also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver. These clarifications are aimed at eliminating unnecessary compliance burdens for farmers. The provision applies retroactively as if included in the CARES Act.

II. PAYCHECK PROTECTION PROGRAM EXTENSION AND ENHANCEMENT

Section 311 of the Economic Aid Act creates a second loan from the Paycheck Protection Program (PPP), called a “PPP Second Draw” loan for smaller and harder-hit businesses, with a maximum loan amount of $2 million. In order to receive a PPP Second Draw loan, eligible entities must: employ not more than 300 employees, have used or will use the full amount of their first PPP; and must demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter (although applicable timelines for businesses that were not in operation in Q1, Q2, and Q3, and Q4 of 2019 are provided). Applications submitted on or after January 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.

In addition to the creation of the PPP Second Draw, Section 304 of the Economic Aid Act expands the list of eligible expenses for which a PPP loan may be used. Additional eligible expenses include (1) covered operations expenditures; (2) covered property damage costs; (3) covered supplier costs; and (4) covered worker protection expenditures.

Eligible and Noneligible Entities

Entities eligible for the PPP Second Draw include businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Entities ineligible include entities listed in 13 C.F.R. 120.110 and subsequent regulations (except for entities from that regulation which have otherwise been made eligible by statute or guidance, and except for nonprofits and religious organizations); entities involved in political and lobbying activities including engaging in advocacy in areas such as public policy or political strategy or an entity that otherwise describes itself as a think tank in any public document, entities affiliated with entities in the People’s Republic of China; and registrants under the Foreign Agents Registration Act.

Loan Terms

In general, borrowers may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020. New entities may receive loans of up to 2.5 times the sum of average monthly payroll costs. Entities in industries assigned to NAICS Code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times average monthly payroll costs. Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location. Waiver of affiliation rules that applied during initial PPP loans apply to a second loan. An eligible entity may only receive one PPP second draw loan. Fees are waived for both borrowers and lenders to encourage participation. For loans of not more than $150,000, the entity may submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits its loan forgiveness application and non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.

Loan Forgiveness

Borrowers of a PPP Second Draw loan are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the covered period. The 60/40 cost allocation between payroll and non-payroll costs in order to receive full forgiveness will continue to apply.

Churches and Religious Organizations

Churches and religious organizations are eligible for PPP Second Draw loans.

Safe Harbor on Restoring Full-time Employees and Salaries and Wages Applies

The rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25 percent applies.

Maximum Loan Amount for Farmers and Ranchers

A specific loan calculation for the first round of PPP loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, who report income and expenses on a Schedule F, and were in business as of February 15, 2020, is established. These entities may utilize their gross income in 2019 as reported on a Schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. This provision applies to PPP loans before, on, or after the date of enactment (i.e., December 27, 2020), except for loans that have already been forgiven.

Seasonal Employer

A seasonal employer is defined as an eligible recipient which: (1) operates for no more than seven months in a year, or (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.

Eligibility of News Organizations for Loans

Eligible FCC license holders and newspapers with more than one physical location are eligible for a PPP Second Draw loan, as long as the business has no more than 500 employees per physical location or the applicable Small Business Administration size standard; and includes eligible Code Sec. 511 public colleges and universities that have a public broadcasting station if the organization certifies that the loan will support locally focused or emergency information.

Prohibition on Use of Loan Proceeds for Lobbying Activities

An eligible entity is prohibited from using proceeds of the covered loan for lobbying activities, lobbying expenditures related to state or local campaigns, and expenditures to influence the enactment of legislation, appropriations, or regulations.

III. TAX EXTENDERS

The Disaster Tax Relief Act permanently extends the following tax provisions:

  • Reduction in medical expense deduction floor from 10 percent of adjusted gross income (AGI) to 7.5 percent of AGI;
  • Energy efficient commercial buildings deduction;
  • Exclusion from income of certain tax benefits for volunteer firefighters and emergency medical responders;
  • Repeal of deduction for qualified tuition and related expenses, replaced with increased income limitation on lifetime learning credit;
  • Railroad track maintenance credit;
  • Modification of the uniform capitalization rules and reduction of excise tax rate for beer, wine, and distilled spirits;
  • Refunds in lieu of reduced rates for certain craft beverages produced outside the United States;
  • Disallowance of reduced excise tax rates for smuggled or illegally produced beer, wine, and spirits;
  • Minimum processing requirements for reduced distilled spirits rates; and
  • Modification of single taxpayer rules with respect to beer, wine, and distilled spirits.

The Disaster Tax Relief Act extends the following tax provisions through December 31, 2025:

  • Look-thru rule for related controlled foreign corporations;
  • New markets tax credit;
  • Work opportunity credit;
  • Exclusion from gross income of discharge of qualified principal residence indebtedness;
  • Seven-year recovery period for motorsports entertainment complexes;
  • Expensing rules for certain qualified film and television and live theatrical productions;
  • Oil Spill Liability Trust Fund financing rate;
  • Empowerment zone tax incentives;
  • Employer credit for paid family and medical leave;
  • Exclusion from income for certain employer payments of student loans; and
  • Carbon oxide sequestration credit.

The Disaster Tax Relief Act extends the following tax provisions through December 31, 2023:

  • Residential energy-efficient property credit; and
  • Energy credit under Code Sec 48.

The Disaster Tax Relief Act extends the following tax provisions through December 31, 2021:

  • Credit for electricity produced from certain renewable resources;
  • Treatment of mortgage insurance premiums as qualified residence interest;
  • Credit for health insurance costs of eligible individuals;
  • Indian employment credit;
  • Mine rescue team training credit;
  • Classification of certain race horses as three-year property;
  • Accelerated depreciation for business property on Indian reservations;
  • American Samoa economic development credit;
  • Second generation biofuel producer credit;
  • Nonbusiness energy property credit;
  • Qualified fuel cell motor vehicles credit;
  • Alternative fuel refueling property credit;
  • Two-wheeled plug-in electric vehicle credit;
  • Production credit for Indian coal facilities;
  • Energy efficient homes credit;
  • Extension of excise tax credits relating to alternative fuels; and
  • Black Lung Disability Trust Fund excise tax.

IV. MISCELLANEOUS TAX PROVISIONS

Temporary Rule Preventing Partial Plan Termination

Section 209 of the Disaster Tax Relief Act provides that a qualified retirement plan will not be treated as having a partial termination under Code Sec. 411(d)(3) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

Temporary Allowance of Full Deduction for Business Meals

Effective for amounts paid or incurred after December 31, 2020, Section 210 of the Disaster Tax Relief Act amends Code Sec. 274(n)(2) to provide that the 50 percent limitation on the deduction for food or beverage expenses does not apply to expenses for food or beverages provided by a restaurant and paid or incurred before January 1, 2023.

Temporary Special Rule for Determination of Earned Income

Section 211 of the Disaster Tax Relief Act provides that, if the earned income of a taxpayer for the taxpayer’s first tax year beginning in 2020 is less than the taxpayer’s earned income for the preceding tax year, the credits allowed under Code Sec. 24(d) (i.e., child tax credit) and Code Sec. 32 (i.e., earned income tax credit) may, at the taxpayer’s election, be determined by substituting the taxpayer’s earned income for the preceding tax year for the earned income for the taxpayer’s first tax year beginning in 2020. For these purposes, in the case of a joint return, the earned income of the taxpayer for the preceding year means the sum of the earned income of each spouse for the preceding tax year.

Certain Charitable Contributions Deductible by Non-Itemizers

Section 212 of the Disaster Tax Relief Act provides that, in the case of any tax year beginning in 2021, if an individual does not elect to itemize deductions, the deduction under Code Sec. 170 for a charitable contribution equals the deduction, not in excess of $300 ($600 in the case of a joint return), which would be determined under Code Sec. 170 if the only charitable contributions taken into account in determining the deduction were contributions made in cash during the tax year to an organization described in Code Sec. 170(b)(1)(A) and not (1) to a Code Sec. 509(a)(3) supporting organization, or (2) for the establishment of a new, or maintenance of an existing, donor advised fund (as defined in Code Sec. 4966(d)(2)). In addition, the penalty under Code Sec. 6662(a) for an underpayment attributable to an overstatement of the deduction for charitable contributions by non-itemizers is increased from 20 percent to 50 percent of the underpayment.

Modification of Limitations on Charitable Contributions

The increase of the limitation for the deduction for donations of food inventory in a tax year from 15 percent to 25 percent under Section 2205 of the CARES Act is extended by Section 213 of the Disaster Tax Relief Act through 2021. Under the CARES Act, the increased deduction limitation for food inventory donations is available only to taxpayers other than C corporations.

Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements

Section 214 of the Disaster Tax Relief Act provides that, for plan years ending in 2020 or 2021, a plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement will not fail to be treated as a cafeteria plan under the Code merely because the plan or arrangement permits participants to carry over any unused benefits or contributions remaining in any such flexible spending arrangement from the 2020 or 2021 plan year to the next plan year.

In addition, a plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement will not fail to be treated as a cafeteria plan under the Code merely because the plan or arrangement extends the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of such plan year, with respect to unused benefits or contributions remaining in a health flexible spending arrangement or a dependent care flexible spending arrangement.

A plan that includes a health flexible spending arrangement will not fail to be treated as a cafeteria plan under the Code merely because the plan or arrangement allows an employee who ceases participation in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which such participation ceased (including any grace period).

V. DISASTER TAX RELIEF

Disaster Tax Relief in General

Section 301 of the Disaster Tax Relief Act provides relief for individuals and businesses in Presidentially declared disaster areas for major disasters declared on or after January 1, 2020, through February 25, 2021. The relief generally applies to incident periods beginning on or after December 28, 2019. It does not apply to areas for which a major disaster has been so declared only by reason of Covid-19.

Special Disaster Related Rules for Use of Retirement Funds

Section 302 of the Disaster Tax Relief Act provides an exception to the 10 percent early retirement plan withdrawal penalty for qualified disaster relief distributions (not to exceed $100,000 in qualified disaster distributions cumulatively). Amounts withdrawn are included in income ratably over 3 years or may be recontributed to a retirement plan to avoid taxable income and restore savings. It also allows for the re-contribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters, and provides flexibility for loans from retirement plans for qualified disaster relief.

Employee Retention Credit for Employers Affected by Qualified Disasters

Section 303 of the Disaster Tax Relief Act provides a tax credit for 40 percent of wages (up to $6,000 per employee) paid by a disaster-affected employer to a qualified employee. The credit applies to wages paid without regard to whether services associated with those wages were performed. Certain tax-exempt entities are provided the option to claim the credit against payroll taxes.

Other Disaster Related Tax Relief Provisions

Section 304 of the Disaster Tax Relief Act temporarily suspends limitations on the deduction for charitable contributions associated with qualified disaster relief. With respect to uncompensated losses arising in the disaster area, the provision eliminates the current law requirements that personal casualty losses must exceed 10 percent of adjusted gross income to qualify for deduction. The provision also eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief.

Low-Income Housing Tax Credit

Section 305 of the Disaster Tax Relief Act increases the 2021 and 2022 state ceilings for 9-percent low-income housing tax credit allocations for allocations to qualified disaster zones. The maximum increase across 2021 and 2022 is equal to $3.50 multiplied by the number of state residents in disaster zones and is capped at 65 percent of the state’s 2020 low-income housing tax credit ceiling. The provision also allows an additional year for properties provided disaster allocations to place buildings in service.

Please call Gregory J. Spadea at 610-521-0604, if you have any questions.  The Law Offices of Spadea & Associates, LLC prepares tax returns year round.    

How To Deduct An Ordinary Loss of Up to $100,000 on Qualified Small Business Corporate Stock Under Section 1244 of the Internal Revenue Code

Unfortunately, not all startup companies succeed, however when they fail, all is not lost.  In what may otherwise be considered a complete loss, there are some potential tax benefits available to certain original individual shareholders of corporations in this position.   

After selecting the type of entity to form, if a corporation is the most favorable, I recommend making an S election and issuing Section 1244 stock for this newly incorporated entity.  As long as certain requirements are met, the original investors can claim an ordinary loss of up to $100,000 if the venture is unsuccessful and the stock is ultimately sold for a loss.  

Under normal circumstances, when you invest in corporate stock, any resulting loss on its sale is treated as a capital loss where the loss can offset capital gains and then up to $3,000 of ordinary income per year with the excess capital losses carried forward.  

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Under Section 1244 of the Internal Revenue Code, an ordinary loss deduction for a loss on stock from a “qualified small business corporation” can offset ordinary income and any capital gains. You can deduct up to $100,000 of losses from Section 1244 stock in any one year if  married and file a joint return, or $50,000 if you file as single.  

To qualify under Section 1244, these five requirements must be adhered to:  

1. The stock must be acquired in exchange for cash or property contributed to the corporation. Investors cannot receive shares as compensation for their services. However, cancellation of indebtedness may be sufficiently valid consideration.  

2. The corporation must issue the stock directly to the investors. They cannot acquire the stock from another shareholder, so gifts or inheritance of the shares will not qualify.  

3. The corporation must be an actual, operating company. During the past five years, it must have received less than 50% of its gross receipts from rents, royalties, dividends and other investment income. If the corporation is less than five years old, this test applies to the years it existed.  

4. The stock must be issued by a “small business corporation” defined as a corporation with invested capital of $1,000,000 or less. It can be an S corporation or a C corporation.  

5. The entity must be a domestic corporation.  

Under the current 2020 tax tables, a long-term capital gain that results from the sale of this Section 1244 stock will be taxed at the regular preferential rate of 15% for most individuals or 20% for high-income individuals with taxable income over $441,450. The 3.8% Net Investment Income Tax (NIIT) may also be due.  

Section 1244 of the Internal Revenue Code is the small business stock provision enacted to allow shareholders of domestic small business corporations to deduct a loss on the disposal of such stock as an ordinary loss rather than as a capital loss, which is limited to only $3,000 annually.   A loss on Section 1244 stock is reported on Form 4797 of your personal income tax return, not Schedule D.  

I recommend that when the corporation is set up, corporate records should document that the stock issued qualified as Section 1244 stock. The corporation and the individual shareholders should retain information about the qualifying stock purchased such as the number of shares received, date the stock was issued and price paid for the stock.  

If a partnership purchases Section 1244 stock of another corporate entity and later disposes of the stock at a loss, the partnership entity may pass the ordinary loss through to its partners. Note that for a partner to claim the loss as an ordinary loss instead of a capital loss, the partner must have been a partner when the stock was originally issued and remained so until the time of the loss. 

Alas, if an S corporation owns Section 1244 stock and passes a loss on the stock to its shareholders, they may not deduct the loss as an ordinary loss. Instead, they must deduct the loss as a capital loss.   Shareholders in S corporations who plan to invest in Section 1244 stock issued by other corporations should be certain to 1) acquire the stock directly from the issuing corporation themselves or 2) purchase the stock through a partnership in which they are partners. Assuming all other requirements are met, the stock will qualify as Section 1244 stock, and the taxpayers may deduct as ordinary losses any future losses realized on the stock up to $100,000 per year for joint filers.  

An additional tax planning strategy would be to have the S corporation issue Section 1244 stock to its shareholders. This way, the shareholders will be certain to realize the best of both worlds. They receive the benefit of having items of income and deduction passed through to them from the S corporation. In addition, should they subsequently sell the S corporation stock at a loss, the loss would be deductible as an ordinary loss up to $100,000 per year for joint filers, rather than as a capital loss. 

If you have any questions about Section 1244 stock, call Gregory J. Spadea at 610-521-0604. 

2020 Year End Tax Planning for Businesses

Tax legislation enacted at the end of 2019, as well as new tax laws enacted in 2020 in response to the coronavirus pandemic (COVID-19), will most assuredly affect your business’s 2020 income tax return. The plethora of legislation contains many new provisions which are likely to minimize your business’s 2020 tax liability. As a result, there are actions we may need to take before year end to ensure we take full advantage of all the opportunities introduced by these pieces of legislation.  In December of 2019, the Further Consolidated Appropriations Act, 2020, was signed into law. Included in that new law was the SECURE Act of 2019, which not only extended certain expiring tax credits, such as the employer credit for paid family and medical leave, it also made favorable changes to certain provisions relating to employer-provided retirement plans.

Tax Planning 2020

In 2020, the first piece of COVID-19 legislation signed into law was the Families First Coronavirus Response Act (Families First Act), which responded to the coronavirus outbreak by providing, among other things, payroll tax credits for leave required to be paid under the newly enacted Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (EFMLEA). The Families First Act was followed by the biggest piece of legislation for the year – the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Included in the CARES Act was the Paycheck Protection Program (PPP), a program authorized by the Small Business Administration (SBA) to guarantee $349 billion in new loans to eligible businesses and nonprofits affected by coronavirus/COVID-19. Such loans may also qualify for tax-free loan forgiveness. We need to evaluate the changes made by the CARES Act, as well as subsequent coronavirus-related legislation, to determine their impact on your business’s tax liability. The following are some of the considerations we need to review when deciding what year-end actions may be appropriate to reap the most benefit to you and your business’s bottom line.

Depreciation Deductions

Among the many changes made by the CARES Act, the one which may have the most impact is the correction of a technical error made in the Tax Cuts and Jobs Act of 2017 (TCJA). That error resulted in the 15-year recovery period that applied to qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property being eliminated for such property placed in service after 2017. After the TCJA, the depreciation period for such property, now referred to as “qualified improvement property,” was 39 years and, as a result, did not meet the requirements for additional first-year depreciation (i.e., bonus depreciation). Under the CARES Act, qualified improvement property is now depreciated over a 15-year life and meets the criteria for taking bonus depreciation. The change is effective as if it were included in the TCJA. Thus, if your business is affected by this change, we can file amended returns to claim refunds for the deductions that should have been available to you had the technical error not happened.

Relaxed Rules for Deducting Net Operating Losses

The CARES Act also temporarily removed the 80 percent limitation on taxable income for deducting net operating losses (NOLs) for 2020. In addition, the CARES Act amended the rules for NOLs to provide for a five-year carryback of any NOL arising in 2018, 2019, and 2020. As a result, if applicable, your business can take such NOLs into account in the earliest tax year in the carryback period and carry forward unused amounts to each succeeding tax year. Alternatively, you can waive this carryback period and instead carry forward any NOLs to offset income in future years. Depending on expected tax rates and cash flow in future years, this waiver option may make more sense than carrying back any NOLs.

Reduction in Business Interest Limitation

The CARES Act reduced the limitation on the deductibility of business interest. For tax years beginning in 2019 or 2020, 50 percent of a business’s adjusted taxable income, rather than 30 percent, is used to determine the business interest limitation. A special rule is provided for partnerships. Under this special rule, the increase in the limitation to 50 percent of adjusted taxable income in determining the business interest limitation does not apply to a partnership for 2019, subject to certain rules relating to allocations to the partners. There is also an election under which a business can substitute its adjusted taxable income for its last tax year beginning in 2019 for its adjusted taxable income for 2020 in calculating the business interest limitation for 2020. Keep in mind that the business interest deduction limitation only applies if the gross receipts of your business exceed $26 million in 2019 and 2020; Additionally, certain types of businesses are exempt from the limitation.

Modification of Excess Business Loss Limitation Rules

The CARES Act eliminated certain limitations on excess farm losses of a business other than a corporation. This change applies to any tax year beginning after December 31, 2017, and before January 1, 2026. Thus, if you had such losses that were limited in 2018 and/or 2019, we may be able to obtain tax refunds with respect to those years. Further, excess business losses, previously disallowed for tax years beginning after December 31, 2017, and before January 1, 2026, are now allowed for tax years beginning after 2017 and before January 1, 2021. This also presents an opportunity for amended tax returns if it applies to your business.

Minimum Tax Credit Refund

The CARES Act modified the rules for the minimum tax credit for alternative minimum tax (AMT) incurred by a corporation in a prior tax year. Under this provision, the limitation on the credit for prior year minimum tax liability does not apply to a corporation’s 2020 and 2021 tax years and the AMT refundable credit amount is 100 percent, rather than 50 percent, for tax years beginning in 2019. In addition, a corporation can elect to take the entire refundable credit amount in 2018. A corporation can apply for a tentative refund of any amount for which a refund is due by reason of this new election and, within 90 days, the IRS is required to review the application, determine the amount of the overpayment, and apply, credit, or refund the overpayment.

Retirement Plans and Other Employee Benefits

You can reap substantial tax benefits, as well as non-tax benefits, by offering a retirement plan and/or other fringe benefits to employees. Businesses that offer such benefits have a better chance of attracting and retaining talented workers. This, in turn, reduces the costs of searching for and training new employees. Contributions made to retirement plans on behalf of employees are deductible and you may be eligible for a tax credit for setting up a qualified plan. In addition, business owners can take advantage of the retirement plan themselves, as can their spouse. Where a spouse is not currently on the payroll of a business, consideration should be given to adding the spouse as an employee and paying a salary up to the maximum amount that can be deferred into a retirement plan. So, for example, if your spouse is 50 years old or over and receives a salary of $25,000, all of it could go into a 401(k), leaving him or her with a retirement account but no taxable income.

To help employees with medical expenses, your business might consider setting up a high deductible health plan paired with a health savings account (HSA). The benefits to a business include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages and thus neither the employer nor the employee is subject to FICA taxes on the payroll contributions. As for employees, they can reap a tax deduction for funds contributed to the HSA, which they can invest the funds for future medical costs because there is no use-it-or-lose-it limit like there is for most flexible spending accounts; thus the funds can grow tax free and be used in retirement.

Your business might also consider establishing a flexible spending arrangement (FSA) which allows employees to be reimbursed for medical expenses and is usually funded through voluntary salary reduction agreements with the employer. The employer has the option of making or not making contributions to the FSA. Some of the benefits of an FSA include the fact that contributions made by the business can be excluded from the employee’s gross income, no employment or federal income taxes are deducted from the contributions, reimbursements to the employee are tax free if used for qualified medical expenses, and the FSA can be used to pay qualified medical expenses even if the employer or employee haven’t yet placed the funds in the account.

In addition, the SECURE Act made substantial changes to retirement plan-related provisions from which your business may benefit. For one, it increased the credit available for small employer pension plan startup costs. The credit is available for qualified startup costs of an eligible small employer that adopts a new qualified retirement plan, SIMPLE IRA plan, or SEP, provided that the plan covers at least one non-highly compensated employee. Qualified startup costs are expenses connected with the establishment or administration of the plan or retirement-related education for employees with respect to the plan. The credit, which applies for up to three years, was increased to the lesser of (1) a flat dollar amount of $500 per year, or (2) 50 percent of the qualified startup costs.

The SECURE Act also extended through 2020 an employer credit for paid family and medical leave. The credit allows eligible employers to claim a general business credit equal to an applicable percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave, provided that the rate of payment under the program is at least 50 percent of the wages normally paid to an employee.

The SECURE Act also extended the work opportunity credit through 2020. Under this provision, an employer can take a 40 percent credit for qualified first-year wages paid or incurred with respect to employees who are members of a targeted group of employees.

Qualified Business Income Deduction

If you participate in a business as sole proprietor, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, you may be eligible for the qualified business income (QBI) deduction. The QBI deduction is generally 20 percent of qualifying business income from a qualified trade or business. A W-2 wage limitation amount may apply to limit the amount of the deduction. The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily-defined amount (i.e., the threshold amount). For any tax year beginning in 2020, the threshold amount is $326,600 for married filing joint returns, $163,300 for married filing separate returns, and $163,300 for all other returns.

The QBI deduction reduces taxable income, and is not used in computing adjusted gross income. Thus, it does not affect limitations based on adjusted gross income. The QBI deduction does not apply to a “specified service trade or business,” which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business. 

Some of the categories and fields listed as a specified service trade or business are fairly clear in their meaning. Others – such as “consulting” and “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees” – are more vague. If your business could be considered a specified service trade or business, we will need to document why it should not be considered such a business and is thus eligible for the QBI deduction.

Employee Payroll Tax Deferrals

In a Payroll Tax Memorandum issued in August, President Trump directed Treasury Secretary Mnuchin to use his authority to defer the withholding, deposit, and payment of employee social security taxes, as well as taxes imposed under the Railroad Retirement Tax Act (RRTA) on railroad employees, for the period of September 1, 2020, through December 31, 2020. Because these taxes are not forgiven, and must be repaid at the end of the year, such a deferral could result in numerous practical challenges, such as what happens if an employee leaves before he or she repays the payroll taxes. Due to these practical challenges I recommended that my clients not defer any payroll taxes.  However, if you have deferred an employee’s payroll taxes under this Presidential directive, we need to discuss your options.

Extension of Time to Pay Employment Taxes

Under the CARES Act, a business can delay payment of applicable employment taxes for the period beginning on March 27, 2020, and ending before January 1, 2021 (i.e., the payroll tax deferral period). Generally, under this provision, the business is treated as having timely made all deposits of applicable employment taxes that would otherwise be required during the payroll tax deferral period if all such deposits are made not later than the “applicable date,” which is (1) December 31, 2021, with respect to 50 percent of the amounts due, and (2) December 31, 2022, with respect to the remaining amounts. For self-employed taxpayers, the payment for 50 percent of the self-employment taxes for the payroll tax deferral period is not due before the applicable date. For purposes of applying the penalty for underpayment of estimated income taxes to any tax year which includes any part of the payroll tax deferral period, 50 percent of the self-employment taxes for the payroll tax deferral period are not treated as taxes to which that penalty applies.

Rental Real Estate

Whether a rental real estate enterprise is considered a passive activity with respect to a taxpayer is important in determining whether losses from the activity are deductible. Generally, passive activity losses are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against nonpassive income to the extent an individual actively participates in the rental real estate activities. However, the deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately).

Rental real estate enterprises operated by individuals and owners of passthrough entities may also qualify for the QBI deduction if certain criteria are met. For example, a taxpayer’s rental activity must be considerable, regular, and continuous in scope. In determining whether a rental real estate activity meets this criteria, relevant factors include, but are not limited to, the following:

  • the type of rented property (commercial real property versus residential property);
  • the number of properties rented;
  • the taxpayer’s day-to-day involvement;
  • the types and significance of any ancillary services provided under the lease; and
  • the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).

A rental real estate activity will be treated as a business eligible for the QBI deduction if certain safe harbor requirements are satisfied, such as:

  • separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;
  • for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);
  • contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services.                                                                           

Thus, to qualify for the QBI deduction, it’s important to determine if the safe harbor conditions are met and, if not, whether such conditions can be met by year end. Alternatively, even if the safe harbor requirements are not met, certain actions may be taken to ensure that your real estate business falls within the “trade or business” guidelines for taking the deduction.

Vehicle-Related Deductions and Substantiation Requirements

Deductions relating to vehicles are generally part of any business tax return. Since the IRS tends to focus on vehicle expenses in an audit and disallow them if they are not properly substantiated, it’s important to remind business clients that the following should be part of their business’s tax records with respect to each vehicle used in the business:

(1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);

(2) the amount of mileage for each business or investment use and the total miles for the tax period;

(3) the date of the expenditure; and

(4) the business purpose for the expenditure.

The following are considered adequate for substantiating such expenses:

(1) records such as a notebook, diary, log, statement of expense, or trip sheets; and

(2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.

Records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.

Feel free to contact Gregory J. Spadea at 610-521-0604, if you have any questions.  The Law Offices of Spadea & Associates, LLC prepares individual and business tax returns year round.  

Investment and Income Tax Strategies for Individuals

2020 Year-end Tax Planning Strategies for Individuals

Now is an ideal time to consider year-end strategies that may benefit you, and plan for 2021.

Results of the election on November 3, 2020 may require a need to revisit this checklist. For example, if you anticipate your marginal income tax rates to increase next year, whether due to increased income or changes to tax legislation, you may want to look to ways to accelerate income and defer deductions.

Offset capital gains

Harvest your losses by selling taxableinvestments.

Harvest your gains by selling taxable investment if you have capital loss carryovers or year-to-date losses for the current year. Short-term losses are most effective at offsetting capital gains. Note: wait at least 31 days before buying back a holding sold for a loss to avoid the IRS wash sale rule.

Evaluate if you should delay purchasing mutual fund shares until 2021 to avoid capital gains on brand new investments.

Defer or reduce income (if you anticipate being in a lower taxable income bracket in 2021 or later)

If possible, defer income and the sale of capital gain property until 2021 or later to postpone taxable income to the following year.

Consider using an RBC Credit Access Line to cover any short-term income distribution gaps.

Bunch your itemized medical expenses in the same year in order to meet the threshold percentage of your adjusted gross income to claim such deductions.

In December, make your January mortgage payment (i.e., the payment due no later than January 15) so you can deduct the interest on your 2020 tax return.

Increase your W-2 federal withholding amount in preparation for a significant tax bill or to avoid the under- withholding tax penalty.

If you have concerns that you may be subject to the Alternative Minimum Tax (AMT), speak with your tax advisor before deferring income or accelerating deductions, as your AMT status could limit your ability to benefit from these actions.

If you feel you will be in a lower income tax bracket in the future and can accept the risk of receiving payments over time, use installment sale agreements to spread out any potential capital gains among future taxable periods.

For 2020 only, consider not taking your RMD if you are in a higher income tax bracket in 2020 than you expect to be in 2021 or future years.

Retirement planning

Maximize your IRA contributions. You may be able to deduct annual contributions of up to $6,000 to your traditional IRA and $6,000 to your spouse’s IRA. If you are 50 or older, take advantage of catching up on IRA contributions and certain qualified retirement plans. You may be able to contribute and deduct an additional $1,000.

Take your Required Minimum Distribution (RMD) if you are age 72 or older.

Consider increasing or maximizing your 401(k) and retirement account contributions.

Consider contributions to a Roth 401(k) plan (if your employer allows and you are in a lower income tax bracket now than you expect to be in the future).

Avoid mandatory tax withholding by making a direct rollover distribution to an eligible retirement plan, including an IRA.

Avoid taking IRA distributions prior to age 59½ or a 10% early withdrawal penalty may apply.

Consider setting up a Roth IRA for each of your childrenwho have earned income.

Consider converting from a traditional IRA to a Roth IRA if in a low marginal income tax bracket. Partial Roth IRA conversions are permissible.

Investment and income tax strategies

Explore taking employer stock from tax-deferred accounts (net unrealized appreciation strategy) to take advantage of capital gains tax rules.

Determine the optimal time to begin taking Social Security benefits, which you can apply for between ages 62 and 70.

If you have been impacted by the COVID-19 pandemic as defined by the IRS, you may be eligible to take a COVID-19- related distribution from an eligible retirement plan. The deadline for taking such a distribution is December 30, 2020, and you may withdraw up to an aggregate limit of $100,000 from all eligible plans and IRAs. You have to pay income tax on the COVID-19-related distribution, but the 10% penalty for withdrawals before age 59 ½ does not apply and the taxes can be paid over three income tax years.

If you have business losses that flow through to your individual tax return in 2020, consider a Roth conversion or harvest capital gains to create income that is offset by the business loss.

Make a Roth IRA contribution if under the applicable earnings limitation  for tax  year  2020. If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $139, 000. If your married filing jointly your MAGI must be under $206,000.

Gifting strategies

Give to loved ones

Consider making gifts of up to $15,000 per person allowed under federal annual gift tax exclusion. Use assets likely to appreciate significantly for optimum income tax savings.

Make sure that your estate plan is up to date, and that you have a will, revocable trust, health care directive and power of attorney in place.

Give to those in need—charity

Make a charitable donation (cash or even old clothes) before the end of the year. Remember to  keep  all  of your receipts from the recipient charity. If the charitable contribution is made very close to year end, consider using a credit card to record that they can be deducted in the current year.

Use appreciated stock rather than cash when contributing to charities. This may help you avoid income tax on the built-in gain in the stock, while at the same time maximizing your charitable deduction.

If you are over 70½ in 2020 and would like to make a donation to charity from your IRA, you can donate up to $100,000 each year directly to qualified charities using a Qualified Charitable Distribution. You avoid taxes through a direct transfer of funds from your IRA custodian to qualified charities. It is a particularly effective way to direct your required minimum distribution.

Set up a donor-advised fund for an immediate income tax deduction and provide immediate and future benefits to charity over time.

Consider “bunching” several years of charitable contributions into one year with a gift to a donor-advised fund to make your contributions more tax-efficient.

Itemize personal residence and mortgage interest*

Up to $250,000 ($500,000 for married couples filing jointly) of the gain from the sale of your principal residence can be excluded from federal income tax, if you lived in the house for 2 of the last 5 years and other requirements are met.

Interest on up to $750,000 of mortgage indebtedness incurred after December 14, 2017, is allowed as an itemized deduction if used to purchase or improve a home.

For mortgages incurred December 14, 2017, or earlier, interest will be deductible on up to $1,000,000 of debt (the old cap), even if refinanced after December 14, 2017.

Set yourself up for success when doing your 2020 taxes

Send capital gains and investment income information to your accountant for a more accurate year-end projection.

Check your Health Savings Account contributions for 2020.If you qualify, you can contribute up to $3,550 (individually) or $7,100 (family), and an additional $1,000 catch-up if you are age 55 or older. Confirm you’ve spent the entire balance in your Flexible Spending Accounts for the year.

Revisit contribution amounts to your 529 plan college savings accounts.

Review Medicare Part D plan to potentially make a change during open enrollment, which begins in October.

Planning for 2021

Discuss major life events with your tax attorney to ensure you have clarity in your current situation and direction for tomorrow. Thisincludes family, job or employment changes and significant elective expenses (real estate purchases, college tuition payments, etc.).

Ensure your account preferences and risk tolerance and investment objectives are up to date with your financialadvisor.

Double check your beneficiary designations (employer- sponsored retirement plans, 401(k)s, IRAs, Roth IRAs, annuities, life insurance policies, deferred compensation plans, etc.), transfer on death (TOD) designations and payable on death (POD) designations. They should be updated as necessary and align with your estate plan.

Review to ensure you have designated a trusted contact person on each of your accounts to help protect your assets against fraud and financial exploitation.

* Interest on mortgage or home equity debt not used to purchase or improve a personal residence is no longer allowable as an itemized deduction.

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