Don’t Miss Out on the Employee Retention Credit
It’s hard to imagine that a small business does not qualify for some or all of the employee retention credit (ERC).
And remember, this is a tax credit—one of the very best things that tax law has to offer. True, it’s not as valuable as some other tax credits, because you have to reduce your payroll income tax deductions for the credits, but the ERC certainly puts you ahead.
And you can be looking at big bucks. The possible ERC is $5,000 per employee for 2020 and $28,000 per employee for 2021. That’s $33,000 per employee.
For 2020, you have two ways to qualify:
- You had a gross receipts drop during a 2020 calendar quarter of more than 50 percent when compared to the same calendar quarter of 2019. The more than 50 percent test is the trigger for the ERC, and you automatically qualify for that quarter and the following 2020 quarter.
- You suffered from a federal, state, or local government order that fully or partially suspended your operations (under this rule, you qualify for the ERC on the days you suffered the full or partial suspension, even if you did not lose any money).
For 2021, you have three ways to qualify:
- You suffered a federal, state, or local government order that fully or partially suspended your operations (under this rule, you qualify for the ERC on the days you suffered the full or partial suspension, even if you did not lose any money).
- Your gross receipts for a 2021 calendar quarter are less than 80 percent of gross receipts from the same quarter in calendar year 2019.
- As an alternative to number 2 above, using the preceding quarter to your 2021 calendar quarter, your gross receipts are less than the comparable quarter in 2019.
You can see by the rules that the government wants to help your small business. Take advantage.
One final note. You may not double-dip. Wages you use for the ERC may not be used for the Paycheck Protection Program (PPP), family leave credit, or similar COVID-19 programs.
Loophole: Harvest Tax Losses on Bitcoin and Other Cryptocurrency
Here’s something to know about cryptocurrencies.
Because cryptocurrencies are classified as “property” rather than as securities, the wash-sale rule does not apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency before or after the loss sale.
You just have a garden-variety short-term or long-term capital loss, depending on your holding period. No wash-sale rule worries. This favorable federal income tax treatment is consistent with the long-standing treatment of foreign currency losses.
That’s a good thing, because folks who actively trade cryptocurrencies know that prices are volatile. And this volatility gives you two opportunities:
- profits on the upswings
- loss harvesting on the downswings
Let’s take a look at the harvesting of losses:
- On day 1, Lucky pays $50,000 for a cryptocurrency.
- On day 50, Lucky sells the cryptocurrency for $35,000. He captures and deducts the $15,000 loss ($50,000 – $35,000) on his tax return.
- On day 52, Lucky buys the same cryptocurrency for $35,000. His tax basis is $35,000.
- On day 100, Lucky sells the cryptocurrency for $15,000. He captures and deducts the $20,000 loss ($35,000 – $15,000) on his tax return.
- On day 103, Lucky buys the same cryptocurrency for $15,000.
- On day 365, the cryptocurrency is trading at $55,000. Lucky is happy.
- Assuming Lucky had $35,000 in capital gains, Lucky deducted his $35,000 in cryptocurrency capital losses. If he had no capital gains, he had a $3,000 deductible loss and carried the other $32,000 forward to next year.
- On day 365, Lucky has his cryptocurrency, which was his plan on day 1. He thought it would go up in value. It did, from its original $50,000 to $55,000.
- Lucky’s tax basis in the cryptocurrency on day 365 is $15,000.
Here’s what Lucky did:
- He kept his cryptocurrency.
- He banked $35,000 in losses.
Be alert. Losses from crypto-related securities, such as Coinbase, can fall under the wash-sale rule because the rule applies to losses from assets classified as securities for federal income tax purposes. For now, cryptocurrencies themselves are not classified as securities.
Planning point. If you want to harvest losses, make sure you hold a cryptocurrency and not a security.
Don’t Make a Big Mistake by Filing Your Tax Return Late
Three bad things happen when you file your tax return late.
You can extend your tax return and file during the period of extension; that’s not a late-filed return.
The late-filed return is filed after the last extension expired. That’s what causes the three bad things to happen.
Bad Thing 1
The IRS notices that you filed late or not at all.
Of course, the “I didn’t file at all” people receive the IRS’s “come on down and bring your tax records” letter. In general, the meeting with the IRS about non-filed tax returns does not go well.
For the late filers, the big problem is exposure to an IRS audit. Say you’re in the group that the IRS audits about 3 percent of the time, but you file your tax return late. Your chances of an IRS audit increase significantly, perhaps to 50 percent or higher.
Simply stated, bad thing 1 is this: file late and increase your odds of saying “Hello, IRS examiner.”
Bad Thing 2
When you file late, you trigger the big 5 percent a month, not to exceed 25 percent of the tax-due penalty.
Here, the bad news is 5 percent a month. The good news (if you want to call it that) is this penalty maxes out at 25 percent.
Bad Thing 3
Of course, if you owe the “failure to file” penalty, you likely also owe the penalty for “failure to pay.” The failure-to-pay penalty equals 0.5 percent a month, not to exceed 25 percent of the tax due.
The penalty for failure to pay offsets the penalty for failure to file such that the 5 percent is the maximum penalty during the first five months when both penalties apply.
But once those five months are over, the penalty for failure to pay continues to apply. Thus, you can owe 47.5 percent of the tax due by not filing and not paying (25 percent plus 0.5 percent for the additional 45 months it takes to get to the maximum failure-to-pay penalty of 25 percent).
The Principal Residence Gain Exclusion Break
The $250,000 ($500,000, if married) home sale gain exclusion break is one of the great tax-saving opportunities.
Unmarried homeowners can potentially exclude gains up to $250,000, and married homeowners can potentially exclude up to $500,000. You as the seller need not complete any special tax form to take advantage.
To take full advantage of the principal residence gain exclusion break, you must pass two tests: the ownership test and the use test.
- To pass the ownership test, you must have owned the home for at least two years out of the five-year period ending on the sale date.
- To pass the use test, you must have used the home as your principal residence for at least two years out of the five-year period ending on the sale date.
Key point. These two tests are completely independent. In other words, periods of ownership and use need not overlap.
If you’re married and you and your spouse file your tax returns separately, you can potentially qualify for two separate $250,000 exclusions.
If you’re married and file jointly, you qualify for the $500,000 joint-filer exclusion if
- either you pass or your spouse passes the ownership test for the property and
- both you and your spouse pass the use test.
When you file jointly, it’s also possible for both you and your spouse to individually pass the ownership and use tests for two separate residences. In that case, you and your spouse would qualify for two separate $250,000 exclusions.
Each spouse’s eligibility for the $250,000 exclusion is determined separately, as if you were unmarried. For this purpose, a spouse is considered to individually own a property for any period the property is actually owned by either spouse.
The other big qualification rule for the home sale gain exclusion privilege goes like this: the exclusion is generally available only when you have not excluded an earlier gain within the two-year period ending on the date of the later sale. In other words, you generally cannot recycle the gain exclusion privilege until two years have passed since you last used it.
You can claim the larger $500,000 joint-filer exclusion only if neither you nor your spouse took advantage of it for an earlier sale within the two-year period. If one spouse claimed the exclusion within the two-year window but the other spouse did not, the exclusion is limited to $250,000.
President Biden’s Proposed Tax Legislation
- INDIVIDUAL TAXES – President Biden’s proposed tax changes will have devasting effects on millions of Americans. He wants to increase taxes on the wealthy. Most Americans will agree with this as we have had a progressive tax structure since 1913 when the individual tax system started. The more you make the higher your income is taxed by percentage. Let’s look at what he wants:
- Individual income tax increase raises will see the top individual income tax rate go to 39.6%
- Capital Gains Tax increase, tax capital gain over $1 million go to 39.6% plus 3.8% Medicare Surtax when AGI exceeds $200,000 single or $250,000 joint return, that’s as high as 43.4% not including state income tax.
- BUSINESS TAXES The American Jobs Plan (Biden infrastructure plan) would raise taxes on corporations in several ways according to The Tax Foundation: He wants to raise the percentage from 21% to 28% on corporate income and tighten inversion regulations, plus raise taxes on foreign earnings of US corporations (this will drive more business abroad). He wants to raise the tax on Global intangible Low Tax Income (GILTI) to 21 percent. Impose a 15 percent minimum tax on corporate book income which would be levied on a firms financial profits instead of taxable income for firms with revenue over 100 million. Repeal the Foreign – Derived Intangible Income (FDII) deduction, which incentivizes firms to move intellectual property (IP) into the US. Provide a tax credit for certain onshoring activity and deny expense deductions on jobs that were offshored. Increase corporate tax enforcement. Eliminate certain deductions and credits for the fossil fuel industry. The effects of the above action would make the US the least competitive of all nations placing us as the highest corporate rate in the world. Remember higher corporate taxes are passed on to consumers and corporate employees and companies may choose not to stay here. (like California companies, they have the right to leave).
- Impose Net Investment Income Tax (NIIT) on active pass-through income above $400,000, effecting millions of small businesses (Partnerships, S-Corporations and Trust) and make the passive loss limitation permanent. These are the largest employers in America, therefore, higher tax equals less employment.
- ESTATE TAXES Current estate tax exclusion prevent the estate under $11.7 million from estate tax per person. In addition, when someone die, his or her assets get a step-up in basis equal to the fair market value as of the date of death, therefore, there is no capital gain tax immediately after death and if you had depreciation on assets like rental properties you get to start over with the stepped-up value and all prior depreciation is forgiven. President Biden wants to lower the estate tax exemption to $3.5 million. In addition, when someone dies, he wants to impose a capital gains tax on the unrealized appreciation in your assets (home, stocks, bonds, business, farm, ranch, rentals, raw land, etc.) no step-up in value. That means everyone who dies will leave their heirs an income tax liability. Your primary home will still be allowed IRC Sec 121 exclusion $250,000 of gain on primary residence will be excluded, however, everything else gets hammered and remember that rate could be as high as 43.4%.
- This new tax bill will end up costing most Americans more in tax, cost of living expense and less wage benefits. Estimates are on average $6,000 per year.
- In 2015 the top 1% of income earners paid as much as the bottom 95%.
- In 2017 the following were the statistics: (IRS.gov statistics)
Top 1% income earners AGI over $515,000 paid 38.47% of taxes
Top 5% income earners AGI over $208,053 paid 59.14% of taxes
Top 10% income earners AGI over $145,135 paid 70.08% of taxes
Top 25% income earners AGI over $83,682 paid 86.1% of taxes
Top 50% income earners AGI over $41,740 paid 96.89% of taxes
Bottom 50% income earners AGI under $41,740 paid 3.11% and much if not all of that was paid with credits (childcare credit earned income credit, etc.)
- The question always in our progressive system of taxation is how much should someone making more than me be paying for the benefits that we all have? What is fair? The percentage is relative, if the country needs more money to operate, then collect it from someone other than me, is how most feel.
- Tax Policy Center (TPC) “released estimateson the portion of households with no federal income tax liability, finding that in 2020, about 60.6 percent of households did not pay income tax, up from 43.6 percent of households in 2019. Much of the 2020 increase was due to pandemic-related factors, but the growing share of households paying no income tax should be kept in mind when evaluating the progressivity of the federal income tax system and proposed tax hikes on higher earners. While 2020 was an unusual year due to expanded government support through the tax code to combat the pandemic’s economic effects and due to lower household incomes, it continues an ongoing trend of fewer households paying income tax due to long-running expansions in the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). TPC finds that in 2020, out of 176.2 individuals and married couples who could file a tax return, about 144.5 million of them actually filed a tax return. Of the 144.5 million, 75.1 million filers paid no taxes after deductions and credits. Another 32 million households did not file a tax return. In total, about 107 million Americans (or 60.6 percent of households) paid no federal income taxes.”
Special Per Diem Rates Each year the IRS update the special per diem rate for taxpayers to use in substantiating the amount or ordinary and necessary business expenses incurred while traveling away from home. Foe 2021 M&IE (meals and entertainment expense), continental U.S. (CONUS) is $69 up from $66 in 2020 and M&IE outside continental US (OCONUS) it is $74 up from $71 in 2020.
Advanced Child Tax Credit Families will need Letter 6419 to quickly and accurately fill out their 2021 federal income tax return next year. For most families that receive the monthly advance credit are only receiving about half the amount that they are due, therefore, look for the letter 6419 so you can get the balance owed to you.
I realize that individual and business taxation is not everyone’s favorite subject and some of what is in this letter may be confusing, but that is why I am available to answer your questions. Remember there is no charge for consultation. I wish you the best of health and wealth.
Al Whalen, EA, ATA, CFP®
For almost 40 years Al has been enrolled to practice before the Internal Revenue Service and a Certified Financial Planner™ for 34 years. Al hosted one of the longest running financial shows in America on radio “Let’s Talk Money” from 1980 to 2008.