The American Rescue Plan Act of 2021 (ARPA) signed into law on March 11, 2021 by President Biden contains numerous tax provisions which may affect your taxes in 2020 and 2021. We’ll provide a general recap of some of the major changes in this article.
The biggest news for taxpayers is a stimulus payment of $1,400 per person including dependents for taxpayers who meet income limits. The income will be measured based on the 2020 tax return if filed, and the 2019 tax return if 2020 has not yet been filed.
Individuals with adjusted gross incomes (AGI) of less than $75,000 qualify for the full amount, while individuals with AGIs between $75,000 and $80,000 will qualify for a partial rebate. Joint filers with adjusted gross incomes below $150,000 qualify for the full amount, while joint filers with AGIs between $150,000 and $160,000 qualify for a partial rebate.
The Recovery Rebate stimulus payment is a fully refundable tax credit against 2021 taxes which will start paying out the weekend of March 13, 2021. The stimulus payments are tax-free.
While unemployment income (UI) is normally taxable, the first $10,200 of 2020 UI for households making less than $150,000 is now tax-free. However, if you pay state income tax, the UI may still be taxable. It remains to be seen how many states will follow federal tax treatment of UI.
The $300 unemployment income payments that were set to expire in March are now extended through September 6, 2021 for eligible individuals. The Pandemic Unemployment Assistance for the self-employed, part-time workers and gig workers is also extended.
The Child Tax Credit (CTC) increases for 2021 only from $2,000 to $3,600 for each child under 6 and $3,000 for each child older than 6 and younger than 18 (up from age 16). Single filers earning up to $75,000 and joint filers earning up to $150,000 receive the full credit, while single filers making from $75,000 to $200,000 and joint filers making from $150,000 to $400,000 will receive a portion of the credit.
The payout for the CTC is different as well. Half of the credit will be disbursed in monthly payments from July to December 2021 while the remaining half can be claimed on the 2021 tax return.
The Child and Dependent Care Credit amounts have been increased as well. This credit helps defray the costs paid to a caretaker or child care agency for caring for a child or dependent with disabilities. For 2021 alone, the credit is increased from $3,000 to $8,000 for one child or dependent, and from $6,000 to $16,000 for more than one child or dependent.
Many people who have been laid off have also lost their health insurance. COBRA is the program that allows unemployed individuals to continue paying for insurance after they’ve lost their job or had hours reduced. The government will pay COBRA premiums from April through September 2021 for qualified taxpayers.
While ARPA did not forgive student debt outright, it provided for the tax treatment of forgiven student debt that occurs between January 1, 2020 and December 31, 2025. Any debt forgiven during these dates is non-taxable.
The American Rescue Plan Act of 2021 (ARPA) signed into law on March 11, 2021 by President Biden contains numerous tax provisions which may affect the tax situation for your business in 2020 and 2021. We’ll provide a general recap of some of the major changes impacting businesses in this article.
Employee Retention Credit
The Employee Retention Credit (ERC) has been extended through the end of 2021, which adds the third and fourth quarters to the mix. It also allows the credit to be claimed against the 1.45% Medicare or Hospital Insurance (HI) taxes.
The ERC can be a significant windfall for businesses that have had a drop in gross receipts or have been shuttered by a government order.
Paycheck Protection Program
While the current March 31, 2021 application deadline for First and Second Draw PPP loans has not been extended as of this posting, the ARPA did add more funds to the program, made COBRA eligible for forgiveness, and expanded eligibility to additional entities, including additional covered nonprofit entities, newspapers, and certain nonprofits.
The Paycheck Protection Program was designed to save jobs by providing forgivable funds to employers and self-employed individuals so they can make payroll and support their ongoing operations during the economic uncertainty of the pandemic.
Shuttered Venue Operators
Additional monies have been allocated to this program which was initiated by the Consolidated Appropriations Act signed in December 2020. Entities that are eligible for the Shuttered Venue Operators program, which has not opened as of this writing, can now apply for Paycheck Protection Program loans.
Paid Sick Leave
ARPA extended the sick and family leave benefits that began with the Families First Coronavirus Response Act (FFCRA) to September 30, 2021. It adds the employer’s share of Medicare and Social Security taxes on qualifying leave wages to the credit calculation and increases the per employee limit from $10,000 to $12,000.
The changes also include time for the employee to receive the COVID-19 vaccine and recover from it if needed. Self-employed sick days limit is expanded from 50 to 60.
Restaurant Revitalization Grant
Certain restaurants, food businesses, and shops located in an airport can apply for a restaurant revitalization grant that will be offered through the Small Business Association. The grant is for $10 million, up to $5 million per location, and can be spent on expenses necessary to keep the business open. A total of $28.6 billion has been allocated.
Businesses cannot have more than 20 locations, cannot be operated by a state or local government, and cannot apply if they received or have pending applications for Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act.
The Employee Retention Credit is one of the many IRS tax breaks for businesses that was included in the 2020 CARES Act as well as the recent Consolidated Appropriations Act, 2021. This credit is intended to provide financial relief to businesses that suffered from the effects of coronavirus but retained their employees.
The credit is available to eligible employers that paid qualified wages from March 13, 2020 through June 30, 2021. To be eligible, a business’s operations must have been fully or partially suspended as a result of national, state, or local orders or it must have experienced a significant reduction in gross receipts within a single quarter of 2020 compared to the same quarter of 2019 (this is defined as fifty percent or more in the first three quarters of 2020 and twenty percent or more in the fourth quarter of 2020 and first two quarters of 2021).
Wages and health costs paid by the employer on behalf of the employee can be counted for the credit, and there is a cap of $10,000 per employee per year in 2020 and $10,000 per employee per quarter in 2021. For 2020, the credit amounts to fifty percent of qualifying wages, and for 2021, the credit covers seventy percent of qualifying wages. Any wages used in a Paycheck Protection Program loan forgiveness process are not eligible; in other words: no double-dipping.
This tax credit is a little different as it interplays with payroll taxes and not income or business taxes. The credit can be taken on the IRS Form 941. Some employers can request an advance by completing Form 7200. Tax professionals are awaiting further guidance on details of the expanded program.
For qualifying employers, the amount received from the credit can be substantial. Since this credit affects your payroll taxes, payroll tax forms, and payroll tax filings, you will want to make sure it doesn’t fall through the cracks, especially if your payroll function and income tax preparation are handled by two different companies.
If you believe your business may be eligible, contact your tax professional to see how to get started.
Many clients are asking us about whether their taxes will go up now that there will be a change in Presidents in January. The short answer is no.
A US President does NOT have the power to raise or lower taxes. Period. That power is reserved for the legislative branch of the government. Only Congress can pass or change law to raise or lower your taxes. Once a law has passed in both the Senate and the House, the President can sign the act into law.
A change in Administration does NOT repeal all prior laws. The Tax Cuts and Jobs Act of 2017 is still in effect, and many provisions are written to last through 2025.
What a new President can do is ask Congress to pass a law to raise revenue for the government. The President can give direction but cannot make law himself when it comes to taxes.
A new Congress often does like to pass a new tax bill so that they have made their “mark.” But the timing of it will vary due to a variety of factors, including priorities, which party controls the Senate and House, and many, many other things. We won’t know the full makeup of the Senate until January 2021 when the two runoff races in Georgia are complete.
For those of you history buffs, the very first federal tax was created during Abraham Lincoln’s presidency. It was called the Revenue Act and was a tax of three percent on everyone making over $800 per year. The immediate need was to raise money for the Civil War.
Accounting Tasks at Year-End
Ever wonder why you’re so busy this time of year? As you probably already know, there are a lot of extra tasks needed to be completed for year-end. While much of it is required by the government, clean-up and adjustments are vital to keeping your books accurate.
Here are just some of the items that are performed at year-end:
- Just about every asset on your balance sheet needs to be verified in some way or other:
- Petty cash accounts need to be reconciled and reimbursed as of year-end
- Bank accounts need to be reconciled with the bank statements. This includes PayPal.
- Accounts receivable balances and all other receivables need to be tied to each customer and any amounts determined to be uncollectible need to be written off.
- A physical inventory count needs to be taken and the inventory account should be adjusted accordingly.
- Fixed assets need to be reconciled to their fixed assets ledger and depreciation should be properly recorded.
- Goodwill accounts need to be checked and amortization adjusted.
- Prepaids, deposits, and all other asset accounts need to be adjusted if necessary.
- Liabilities and equity need to be adjusted too:
- Accounts payable balances and all other payables need to be tied to each vendor.
- Credit card accounts need to be tied to the statements and reconciled.
- Liabilities that haven’t been recorded need to be added to the books.
- Loans need to tie to lender statements, and interest paid on loans needs to be properly expensed.
- The Equity accounts need to be checked and tied out to prior year balances.
- Corrections and adjustments need to be made:
- Any misclassifications and corrections need to be made on the books with adjusting journal entries or other classification tools.
- If the client is a cash-basis taxpayer, a reversing journal entry needs to be made to get the correct tax numbers.
- A clean set of reports can now be run and used.
- If you have payroll, employees need to be sent their W-2s before the end of January, and the federal and state government need a copy of the W-2s with a W-3 transmittal.
- For employees, you may also be required to have an up-to-date W-4 signed by them.
- For employers, your federal unemployment 940 return is due.
- If you have contractors, they need to be sent their 1099s before the end of January, and the IRS needs the 1099s and the 1096 transmittal.
- For contractors, you must also have an up-to-date W-9 form from them. You may also need to request an insurance certificate, or you may get a surprise at your workers compensation audit.
- For vendors who claim exemption from sales tax, you’ll need to be sure you have an exemption certificate in your files from them.
- If you pay sales tax annually, your return and payment are due.
- Your personal federal, state, and local income tax and returns are due in the spring, or they can be extended until later in the year.
- Depending on the type of entity your business is organized as, you may have franchise, federal and state tax returns to file. This deadline comes up sooner than the individual tax return due date.
- This is a good time to file and store your receipts in case you are ever asked for them. For long-term storage, thermal receipts should be copied or scanned in before the ink fades.
- This may be the perfect time to start thinking about paperless document storage!
We are often so busy this time of year because of all the extra work we must do over and above the normal monthly load. If you have questions about any of this, please reach out anytime.
Five Tips to Make Tax Time Painless
Tax time is probably not your favorite time of year, especially if you have to pay the government your hard-earned dollars. Here are five tips on how we can make it just a bit less painful.
1. Have patience.
Practicing patience will go a long way when you’re dealing with taxes. Keep in mind that for tax professionals, the months of January through April are as crowded and hectic as a shopping mall in December.
Be patient with yourself as well. You have the skills to manage your business and do well in your career, but maybe not for organizing paperwork or dealing with numbers. That’s where we can help.
2. The tax stack.
Set aside a permanent place on your desk to be the tax stack. When you receive something in the mail that is tax-related, place it in the tax stack. You’ll save valuable time later not having to look for documents you need.
Similarly, create a folder on your computer for tax items. Under Documents, create a folder called Taxes. Within that folder, create a folder for the tax year, such as 2017 for the year just ended. Move all of your tax-related computer documents into that file.
At your leisure, scan in or take a cell phone picture of the paper documents in the tax stack and place the digital file in the Tax folder. Now you’ll have everything in one place and you’ll be so organized that your tax accountant will be surprised!
3. Catch up.
If your books or records are behind for 2017, get them caught up now to beat the rush. If you wait until the first week of April, you’ll probably need to file an extension. Keep in mind that an extension only grants a paperwork extension; it doesn’t delay any tax payments that are due. If you wait too late, you’ll have the stress of waiting until the last minute, the stress of paying estimated taxes, and the stress of waiting until your return is finally filed.
4. Early bird.
Connect with us or your tax professional early to agree on what services will be offered and to get your documents turned in as soon as you receive them. Getting your things in early will mean less waiting time for preparation and filing. Wouldn’t it be great to be able to say that you’re done with your taxes in February? Your stress will be less, and your energy can be redirected to new projects.
5. Avoid a large tax payment.
The worst thing about tax time might just be writing a big check, possibly with penalties, to the government in April. Instead, plan ahead and spread out your payments for next year by adjusting your payroll withholding or making quarterly estimated tax payments. Spreading your tax payment throughout the year will have you writing a smaller check, if any, in April.
Try these five tips for tax time, and you’ll have more energy for other, more important things in your business and your life.
Get Ahead on Year-End Tasks
Year-end is just around the corner, and that means a couple of administrative tasks are necessary to take care of bookkeeping and tax chores. Here are a couple of tips to make year-end go smoother.
Things will go a lot smoother if you reach out to your vendors and employees and get their help to update your records.
- Send a notice to all employees, asking them to verify their address so they will get their W-2s without delay.
- Make sure you have the right information for vendors that you need to produce a 1099 for. Before you pay your vendors more than $600 in one year, ask them for a W-9 so that you have a current address and taxpayer ID number on file.
- Check to make sure you have any sales tax exemption certificates from vendors that you are not charging sales tax to.
It’s also time to clean up any account balances that need to be reclassified or corrected.
- Any clearing accounts, such as undeposited funds, should be zero.
- Bank reconciliations should be caught up and book balances should match the bank or be explained.
- Inventory should be adjusted to reflect accurate quantities.
- Loan balances should be adjusted to correctly reflect interest and principal allocations.
- Depreciation entries should be made.
Here are a just a few ways to maximize deductions:
- Any bad debts that aren’t expected to be collected can be written off.
- Any inventory that is not saleable or worth less than you paid for it can be adjusted on your books.
- For cash basis taxpayers, pay any large bills before year-end if you have excess profits.
- Pay employee bonuses prior to year-end.
Create a place in your home or office or a special file on your computer to store tax-related documents, such as W-2s, brokerage statements, and tax returns. Convert them to PDF format if they are not already, and upload them to your accountant’s secure client portal as you get them.
With all this great preparation, you’ll find tax season easier than ever and a chore that you can mark off your to-do list early.
Tax Time, Ready or Not
How to Avoid Sales Tax Surprises
Sales tax laws are constantly changing, and sales tax audits have increased since states and local agencies have become creative about finding new ways to generate revenues. If you haven’t made any changes in your sales tax procedures in a while, you are probably at risk.
From state to state, the taxability of items varies. For example, data processing services including web hosting and graphics are taxable in Texas but not California. Because of these intricacies, it makes sense to consult an expert in this area. Some states have been taxing certain services for many years now.
The new buzzword in sales tax is “nexus,” which simply means presence. If your business has a presence in a state, then certain items you sell could be taxable. “Presence” is a little gray, but here are a few examples of some characteristics that the courts have decided prove nexus.
- If you have employees or contractors working in a state, you are liable to collect and remit sales tax. This can play havoc if you hire virtual or remote workers. Even if they are part-time, you have nexus in that state.
- If you outsource inventory fulfillment in any way (think Amazon sales), you have nexus in states where there is a physical warehouse that houses your products.
- If you own business property in a state, you must file sales tax.
- If you participate in trade shows or are a public speaker, you have nexus in states where the conferences are held.
If you fail to collect taxes where you should, the risk is easy to calculate. Take the potential taxable sales times the sales tax rate, and add any penalties. The numbers get scary if you’ve been in business for several years.
Let’s say your annual revenues are $5 million. You didn’t realize that your Texas sales were taxable, and this amounts to 10% or $500K. Your tax liability is $41,250 per year. If you have been doing it wrong for five years, well, you can add it up. Add penalties on top, and it’s not a small amount. It can wipe out your entire year’s profit.
Sales tax liability becomes more important if you plan to sell your business. A traditional valuation will always include a sales tax risk analysis. Even if you don’t plan to sell, the odds of you getting audited or a disgruntled employee blowing the whistle can be too much to risk.
If you want help calculating your risk or assessing nexus or taxability for your business, reach out and we can help.