IRS Announces Individual Tax Deadline Extension
For the second year in a row, the federal income tax filing due date for individuals has been postponed. The postponements come as a part of the fallout of the coronavirus pandemic and the legislation that has resulted from it, which has added complexity to tax filings and systemic strain to the U.S. tax bureau.
On Wednesday, March 17, the Internal Revenue Service (IRS), in conjunction with the U.S. Treasury Department, announced an extension of the federal income tax filing due date for individuals. Individual returns for the 2020 tax year are now due on May 17, 2021, rather than the standard date of April 15, 2021.
In addition to the federal income tax deadline changing, Pennsylvania has extended the personal income tax deadline as well. Pennsylvania’s individual filing deadline will also be May 17, 2021. Click here to read more information about this decision from the Pennsylvania Department of Revenue.
The IRS stated their intention to issue formal guidance on the extension soon. As of now, here are the details that we are aware of, per the IRS news release:
- In addition to a filing extension, any federal income tax payments owed for 2020 are also automatically extended to the new due date, with no penalties or interest.
- The filing and tax payment postponements are applicable for self-employed individual filers.
- Taxpayers who do not pay any amounts owed by May 17 will begin to accrue penalties and interest at that point.
- There is no need to file for an extension or contact the IRS—this extension is automatic.
- Individuals who need more time than the May 17due date provided should file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return to apply for an extension through October 15, 2021. This would result in an extension for filing; any payment due would still need to be paid by May 17 to avoid penalties and interest.
- The postponement does not apply to the April 15 deadline for estimated tax payments.
Individual taxpayers should be sure to note that this extension only applies to federal income tax filings. While it is possible that states will follow suit with a due date extension, individual taxpayers need to refer to their state tax bureau for guidance on state income tax filings.
As your tax advisors, please be aware that we are actively monitoring the situation for updates that impact you, both federally and locally. We will continue to work hard to meet current tax deadlines and operate under the assumption that all other standard deadlines remain in effect unless an announcement is made by tax authorities. We will be sure to reach out again in the event of any further developments.
How AI Chatbots are Transforming Businesses
When a business moves its services online, it runs the risk of losing the close connection it had with customers. This affects customer loyalty and sometimes means lost revenue. Thanks to technology, some businesses have deployed artificial intelligence (AI) chatbots to keep customers engaged in a two-way conversation.
What is an AI Chatbot?
An AI chatbot is a piece of software powered by artificial intelligence that is placed on websites and other applications to interact with humans.
Chatbots are not a new technology, and it’s worth noting that there is a difference between AI chatbots and flow chatbots. Flow chatbots follow a pre-determined path defined by a developer; AI chatbots are self-trained, meaning they give feedback depending on the information supplied by the customer. They use natural language processing and machine learning technology to turn complex business interactions into simple conversations through text or voice.
This makes AI chatbots smarter because they learn over time.
According to a report by Markets and Markets, the conversational AI market is expected to grow from $4.8 billion in the year 2020 to $13.9 billion by 2025.
AI Chatbots in Business
AI is no longer reserved for large enterprises only. Small businesses can now leverage conversational chatbots on applications such as Facebook.
The demand for chatbots has been driven by customers who need round-the-clock assistance from businesses. In most cases, businesses are slow to adapt to new technologies – especially because of the related costs. But the many benefits of AI chatbots make it worth adopting. Below are some of the ways that AI chatbots are being used in businesses:
- Customer inquiries – The bots help reduce customer service workload and can serve customers outside typical working hours. This means there is no need to struggle to manually respond to inquiries as the AI chatbots can be used to automate customer feedback, including in emails. The customers also no longer have to wait a long time to connect with a customer care representative.
- Personalizing interactions – conversational AI helps personalize interactions relevant to each user. AI chatbots learn the behavior of a client to provide personalized conversations.
- Data analysis – Businesses have a greater understanding of their clientele once the conversational data is analyzed.
- Sales representatives – they offer product suggestions for customers who are not sure what they are looking for.
- Lead qualifying – instant feedback helps keep a prospect interested and eventually turn them into a paying customer.
- Candidate vetting – Interested applicants converse with the AI chatbot, which then helps to filter for new hires.
- Free HR staff time – for businesses that have many employees, the conversational chatbots help answer employee questions depending on their job function, geographical location and date. It’s also useful in reminding employees of tasks that need to be completed. This frees time for the HR staff to concentrate on other tasks that help improve job satisfaction and reduce staff turnover.
- Increased engagement – the ability to answer emails and queries instantly helps keep the customer engaged. This enhances a business brand differentiation.
- Fast information retrieval – a human can take a long time to retrieve information, especially for an e-commerce or real estate business. AI chatbots easily connect to the database and provide feedback in real-time as they serve as an internal knowledge base.
- Integration with other applications – AI chatbots are integrated with robotic process automation, enterprise resource planning, or customer relationship management systems to carry out further tasks. Such tasks include booking appointments, filling out forms, and making recommendations.
- Easy scalability – chatbots handle multiple conversations simultaneously. This means that even when a business grows, the bots still handle large volumes of chats without affecting business costs.
- In digital marketing – businesses are using AI chatbots to support the collection of customer data, new product launches, lead generation, and to increase brand loyalty.
AI technology is continuously progressing and no doubt chatbots will also keep changing.
As with every technology, there are some limitations, such as lack of emotional intelligence that affects the depth and scope of a conversation. This means that there are still complex communications that will require humans.
Nonetheless, having AI chatbots as an additional resource to run a business is a sure way to help boost revenue, improve customer experience, and provide a competitive advantage.
However, before jumping on the bandwagon, it is best to first identify areas in your business where you can deploy AI chatbots.
How Will Surging Oil Prices Impact the Economy in 2021?
Now that the Keystone XL pipeline is being shut down and southern parts of the United States are experiencing extremely cold weather, how will increasing oil prices impact the economy as the COVID-19 vaccine is being rolled out?
With West Texas Intermediate (WTI) crude closing at $58.22 per barrel on Feb. 11, 2021, and likely higher due to the cold snap in the United States, the price of oil is expected to impact the U.S. and global economy.
One of the major impacts of increasing oil prices is the rising price of gasoline. With higher oil prices rippling throughout the economy, understanding how it impacts consumers is one way to see how the economy in 2021 is likely to perform.
As the Federal Reserve Bank of San Francisco points out, there’s a close correlation in pricing between gasoline and crude oil pricing. They point out that WTI and what American consumers pay for gasoline to fill up their car track each other quite closely — as oil prices increase, so do consumer prices for gasoline.
Historic Price Trends in Relation to Today
When it comes to looking at how oil prices impact inflation, looking at historical prices gives helpful insight. In the 1970s, the price of oil increased tenfold, from $3 in 1973 (pre-oil crisis) to more than $30, due to Middle East tensions in 1978-1979 resulting from the Iranian Revolution, according to The Federal Reserve and the U.S. Energy Information Administration (EIA).
However, as time progressed beyond the two oil crises of the 1970s, this correlation became weaker. When the 1980s began, so did the association between oil prices and rising inflation. The U.S. Bureau of Labor Statistics (BLS) explains this rapid increase in the cost of oil drove the consumer price index (CPI), one way to measure inflation, from 41.20 at the beginning of 1972 to 86.30 as 1980 came to a close. As the BLS illustrates how the 1970s experienced high inflation, it took three times as long (24 years) for the CPI to double between 1941-1971.
With the two Oil Shocks passed, the 1980s and the 1990s ushered in a new divergence of how oil prices ultimately impacted what consumers paid for oil and oil-dependent products. This is illustrated by looking at the impact of the Producer Price Index (PPI), or wholesale cost, versus how consumers ultimately felt, or the Consumer Price Index (CPI).
CPI and PPI Data and Oil Prices
Looking at the CPI, especially in the 1990s, statistics from the EIA show that the price per barrel of crude oil went from $14 to $30 in six months. However, data from the BLS shows that CPI started at 134.6 in January 1991, eventually reaching 137.9 in December 1991.
Later, from 1999 to 2005, the EIA’s data shows the price of a barrel of oil jumped from $16.50 to $50. While the price nearly tripled, the BLS’ CPI jumped from 164.30 in January 1999 to 196.80 in December 2005, an increase of 33.5 over nearly six years.
Looking at the Producer Price Index (PPI) data, per the Federal Reserve Bank of St. Louis, from 1970 to 2017, the correlation was 0.71. For the CPI, during the same time frame, it was only 0.27. The difference between the CPI and PPI, according to the Federal Reserve Bank of St. Louis, is due to the higher proportion of services provided in the United States, which are less oil-reliant for raw materials.
With the expected relief payment of $1,400 per individual and additional money allotted for dependents, coupled with continuing vaccinations and the reopening of the U.S. and global economies, there’s much stimulus expected to provide consumers with a financial cushion. However, with the increased spending by the federal government and pressure on the U.S. dollar, only time will tell how the price of crude oil will impact consumer spending and company earnings.
While Many Suffer Financially, Some Manage to Profit off Pandemic
The Federal Reserve recently reported that the 50 richest people in the United States increased their net worth by $339 billion during the first half of 2020. There are two primary contributors to this near-unprecedented level of growth. The first is that many either owned or were heavily invested in tech companies that thrived during the pandemic. Increased technology demands for remote work, online shopping, streaming entertainment, and socially-distanced socializing created a lucrative COVID-19 economy in some sectors.
Another reason is that the U.S. Treasury and Federal Reserve proactively infused the economy with stimulus capital. That helped mitigate long-term market disruption that might have otherwise occurred.
The short explanation of how to leverage assets for greater wealth during a pandemic is to be well-capitalized and invested in the stock market. To wit, over 88 percent of the equity in corporations and mutual fund shares is owned by the wealthiest 10 percent of Americans. In other words, they’re not sitting on their cash; it is continually working for them.
Nearly every tragedy has some form of silver lining investment opportunity. For example, hurricanes, floods, tornadoes, and earthquakes are good for the construction and contracting industries. The pandemic is interesting because it has largely and almost exclusively benefited technology companies – in as much as they serve other industries.
The obvious pandemic winners are streaming services such as Amazon and Netflix, but also consider the proliferation of video conference technologies, online financial services, and telemedicine. All of these innovations existed before COVID-19, but it took a global pandemic for them to become mainstream services. Moreover, it is unlikely that their popularity will wane once the virus is contained. After all, we love convenience, and few things are more convenient than being able to conduct daily activities – such as work and doctor’s appointments – from the comfort of your own home.
But just as the coronavirus boosted fortunes in many market sectors, it depressed others, such as cruise lines, movie theaters, and airline stocks, as well as oil prices. Unless you have a crystal ball, it’s always a good idea to diversify your portfolio across a variety of asset classes and market sectors. That way losses in some investments are likely to be offset by gains in others.
In recent years, the wealthy also have benefited from generous tax breaks provided by the Tax Cut and Jobs Act. To diversify gains achieved during the pandemic, they may take advantage of provisions from this legislation, such as the conservation easement charitable deduction. This can be claimed when purchasing land with strong development potential and then donating it to a land trust or government agency. This might create a higher tax deduction based on the appraised value. A similar approach can be used with the Opportunity Zone tax break. This eliminates taxes on capital gains earned from long-term investments in businesses or developments in specific low-income areas of the country.
Rest assured, while vaccines will lead the way to recovery from the pandemic, other crises will follow – as will opportunities to make money on them. Some of them are even easy to predict. After all, the exacerbation of climate change is evident in the increase and severity of extreme weather events. This offers two avenues for an investment opportunity. The first is reactive, such as rebuilding what has been damaged or destroyed. The second is preventive, which means investing in renewable energy resources that reduce carbon emissions, such as solar, wind, hydro, tidal, geothermal, and biomass energy solutions.
It is important to recognize, however, that we can’t always predict what type of crisis will happen next. Therefore, it is inadvisable to try to time the market for investments, particularly when saving for a long-term goal such as retirement. Instead, consider aligning your assets with investments that help build a stronger society, such as sustainable energy, technology advances, and healthcare innovation.
The biggest takeaway here is that the key to crisis opportunism is to be well-capitalized with liquid assets that can be repositioned quickly. It is no accident that economic declines are often most advantageous to the extremely wealthy. If you were able to save more money during the pandemic due to less opportunity to travel or spend on other indulgences, consider using this windfall to position your investment portfolio for crisis opportunism in the future.
Buckle Up for 2021: 4 Compliance Trends to Watch
In a matter of months, COVID-19 upended the business world and forced organizations to make seismic shifts in their daily operations. While most executives hope the next year will bring better fortune, businesses can’t lose sight of emerging compliance trends with the potential to shift the operating environment in 2021.
How will the legal and compliance landscape evolve, and what can businesses do to anticipate those changes? Two legal experts at ADP — Stacy Williams, Senior Counsel, Global Compliance and Ellen Feeney, Vice President, Counsel — identified four trends to watch in 2021.
1. Change in the workplace accelerates
“COVID accelerated some of the changes we were starting to see pre-COVID, including working from home and the growth and evolution of the gig economy,” says Williams. She points to the passing of California’s Proposition 22, which created a hybrid worker status between employee and independent contractor, as an example of how the landscape changed in 2020.
While Williams acknowledges that there is promising news regarding a vaccine for COVID-19, she predicts that it might take up to six months for it to become widely available. Even then, employers will face some challenging questions.
“Employers are going to have to grapple with employees who balk at getting the vaccine. Can an employer require it?” asks Williams. She notes that employers will also need to accommodate religious beliefs and health conditions that may affect employees’ ability to get the vaccine.
With respect to working from home, Feeney recommends that employers pay close attention to the guidance from local, state and federal officials. “Look to that guidance to figure out the appropriate return-to-office strategy and how to keep employees safe and productive,” she says.
2. Employee leave programs may accelerate
While making it safe for employees to enter the workplace is an important goal for many employers, providing employees with time off to recover from such a trying year is also an important consideration. Also, as COVID-19 lingers, some employees will continue to need to take time off to take care of themselves and their family members.
“Being proactive in this environment means being nimble and recognizing you’re dealing with a very fluid situation. Business leaders have to recognize that good compliance is good for business. You’re not just trying to check the box.”
– Ellen Feeney, Vice President, Counsel, ADP
In 2020, Congress passed the Families First Coronavirus Response Act (FFCRA) that required employers with fewer than 500 employees to provide specified paid sick and family leave to employees affected by COVID-19 and provided affected employers with a corresponding employment tax credit. The mandatory leave portion of the FFCRA sunset on December 31, 2020. The Consolidated Appropriations Act, 2021 extended the 100 percent tax credit for voluntary payments through March 31, 2021 for employers with 500 or fewer employees that choose to provide paid sick or paid family leave payments, subject to the limits established by the FFCRA. Before the pandemic and throughout its duration, some local and state governments have established paid leave provisions, and, we will likely see even more paid leave programs that allow employees to step away from their work commitments. In response to COVID-19, some jurisdictions have enacted entirely new paid sick leave laws, some existing laws have been amended, and there also has been some general guidance issued regarding how existing paid sick leave law applies in light of COVID-19.
3. US legal and compliance shifts
With the change of presidential administration beginning in 2021, employers should expect some very substantial policy changes. The next administration will be very active, and employers will see a shift in some of the policies championed by the outgoing administration. Every change in administration generally brings policy changes and different areas of focus. One of the main areas of focus for the Biden administration is COVID-19 and economic recovery so expect new stimulus measures and new CDC and OSHA guidance concerning workplace safety.
As a specific example, the DOL recently issued a final rule on the test for determining who is an independent contractor and who is an employee under the FLSA that is set to take effect on March 8, 2021. With the new administration, this rule may be delayed, modified or abandoned.
There will be more regulatory activity related to the workplace, such as increased efforts to improve pay equity. The changes to the EEO-1 report to include pay data for the 2017 and 2018 reporting years are expected to be revisited and possibly reinstated by the Biden administration.
“We expect to see a pivot to be more in line with Obama administration priorities and policies but not necessarily a replica of the Obama era,” says Feeney. She notes that the extent of the changes under the new administration and what is possible legislatively depends on the Georgia Senate run-off race, as control of the Senate has enormous implications for the legal and compliance environment businesses will face. However, businesses cannot overlook changes in the compliance and legal landscape from beyond Washington.
“Even if we continue to see legislative gridlock on the federal level, state and local governments will continue to be active. We would definitely expect to see that continue or even accelerate,” says Feeney.
4. Work from home complicates compliance overseas
With millions of employees working from home, achieving compliance with laws and regulations overseas — particularly those that limit working hours — will require careful consideration.
For example, in France and Spain, there is the “right of disconnection,” which enables employees to disconnect from their employers’ technology after normal work hours. With employees working from home, adhering to this policy requires walking a fine line between achieving compliance and not alienating employees for leaving the virtual office when they deem appropriate.
“Since employees are working remotely, they may move their physical location, and that may create problems related to taxes and compliance with local laws,” says Williams. To that end, employers might want to create policies requiring employees to receive permission before they relocate across borders, or at least notify their employer of their intent to do so.
Compliance will always matter
While much remains unknown about the 2021 operating environment, businesses cannot wait for a clearer picture of compliance demands to present itself. Instead, they must continue to evolve their policies and give their employees as much advance notice as possible about changes that could affect how and where they work.
Compliance starts at the local level and requires subject matter experts with knowledge of the compliance landscape and how it might evolve.
“Being proactive in this environment means being nimble, and recognizing you’re dealing with a very fluid situation,” says Feeney. “Business leaders have to recognize that good compliance is good for business. You’re not just trying to check the box.”
While it’s difficult to predict the future, organizations that account for current and emerging compliance trends can better position themselves to meet tomorrow’s challenges head on.
This story originally published on SPARK, a blog designed for you and your people by ADP®. Learn more about how ADP’s small business expertise and easy-to-use tools can simplify payroll & HR at adp.com.
Obscure and Overlooked Tax Deductions, Credits, and Benefits
As tax time approaches, here are some tax issues that taxpayers frequently overlook, ranging from obscure deductions to overlooked tax credits and benefits. Of course, not everything can be included since the tax law has grown significantly in complexity, and it would take a thick book to list everything. But besides what you are probably accustomed to, here are over 20 issues you may not be aware of and that can save you tax dollars.
State Income Tax Refund – For those who took the standard deduction on their 2019 federal return, your state income tax refund received in 2020 is not taxable income. If you itemized your deductions, then the state tax was a federal tax deduction, and to the extent you received a tax benefit from the deduction, the state tax refund you received in 2020 is federally taxable. However, in many cases, the entire refund will be tax-free if you were subject to the alternative minimum tax (AMT) for 2019, the deductible amount was reduced by the $10,000 limit on tax deductions, or part of the deduction pushed your deductions over the standard deduction threshold. Although the Form 1099-G shows the entire amount of the refund, not all of it may be taxable, so you do not want to report more than necessary.
If you owed state income tax on your 2019 return and paid that tax during 2020, then that tax payment can be added to your state tax deduction for 2020, subject to the $10,000 limit for state and local taxes.
Social Security Taxes Deduction – If you are self-employed, you can deduct half of the self-employment tax (Social Security and Medicare tax) that you are liable for on your 2020 net profits. You don’t have to itemize on a Schedule A to take the deduction because it is an adjustment to income.
NOL Carryback – The year 2020 has been challenging for many businesses, especially those that were subjected to COVID-19 closure orders and ended up with a tax loss for the year. However, the CARES Act does allow a 5-year carryback period in which to use the loss (known as a net operating loss) for business owners who cannot utilize the full loss in 2020. This is done by amending prior returns to recover the taxes paid in the earlier year(s). First, the 2015 return is amended, and if not all of the loss is used on that return, then the 2016 return is amended, and so on.
Charitable Contribution Deduction for Non-Itemizers – For the first time ever, taxpayers can claim a cash charitable contribution without itemizing their deductions on Schedule A. Non-itemizers can deduct up to $300 in cash contributions per tax return. Unfortunately, the $300 limit – and not $600 – also applies to married taxpayers filing jointly. So, hold onto those receipts to substantiate the contributions.
PPP Loan Expenses – Don’t forget that the COVID-Related Tax Relief Act passed late in December 2020 confirmed that business expenses paid for with proceeds from a forgiven PPP loan continue to be deductible on the business schedule. However, this may not be true for state taxes.
Military Reservist Travel Expenses – Armed forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct their travel expenses as an adjustment to gross income (they don’t have to itemize deductions). Unreimbursed expenses for the reservist’s transportation, meals (subject to the 50% limit for 2020), and lodging qualify for the above-the-line deduction, but the deduction is limited to the amount that the federal government pays its employees for travel expenses – i.e., the general federal government per diem rate for lodging, meals, and incidental expenses applicable to the locale as well as the standard mileage rate (57.5 cents per mile for 2020) for car expenses plus parking, ferry fees, and tolls.
Child’s Private School Expenses – If your child is attending a private school, the Tax Cuts and Jobs Act allows up to $10,000 per year of Sec. 529 college savings plan funds to be used to pay tuition for kindergarten through grade 12. However, tapping your college savings plan for these expenses may be detrimental to your overall long-term savings plan to pay for college tuition.
Student-Loan Interest – If parents pay back a non-dependent child’s student loans, the IRS treats the transactions as if the money were a gift to the child and the child made the payment. Thus, the child is deemed as having paid any interest included in the payment and can deduct it as student-loan interest, which is deductible without having to itemize deductions, up to the annual limit of $2,500.
Extended Tax Benefits – A number of tax benefits that had expired at the end of 2019 were extended, without much fanfare, and are still available in 2020. In case you missed any of them, they include the following:
- A tax credit of up to $500 for installing energy-efficient improvements in your home, including exterior windows and skylights, exterior doors, metal roofs with appropriately pigmented coatings, asphalt roofing with appropriate cooling granules, energy-efficient heating and air-conditioning systems, insulation materials, or systems designed to reduce heat loss or gain. The $500 limit is a lifetime limit, so if you’ve taken this credit in the past, you need to take into account the amount of credit you claimed previously.
- A tax credit of up to $2,500 for purchasing a qualifying electric motorcycle.
- A deduction for mortgage insurance premiums on a loan used to purchase the home (acquisition debt).
- Forgiveness of qualified cancellation of debt income on a principal residence.
- Tax credits for fuel-cell vehicles and alternative-fuel-refueling property.
Gambling Losses – Gambling losses up to the extent of one’s gambling winnings are allowed as a deduction and can help to offset gambling winnings, provided the taxpayer itemizes deductions.
Live in a State Without a State Income Tax? – If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, these states do not have an income tax. Because you can choose to deduct either state income tax or sales tax, if you itemize your deductions, your only choice will be sales tax.
The sales tax that can be deducted is the actual amount paid during the year, which can be determined by the larger of the following:
(1) Actual receipts for purchases OR
(2) The amount from the IRS’s income-based table PLUS sales tax paid when purchasing motor vehicles, boats, and other items specified by the IRS.
Spousal IRA – If one spouse works and the other does not, the tax law allows the non-working spouse to base his or her contribution to an IRA on the working spouse’s income. This tax benefit is frequently overlooked when spouses have been working for years and basing their individual contributions on their own income, and then one of the spouses retires. Even if the working spouse has a pension plan at work and his or her income precludes making a deductible IRA contribution, the non-working retired spouse may still make a contribution based on the working spouse’s income. Spousal contributions can also be made to Roth IRAs if the spouses’ joint income does not exceed IRS limits. As of 2020, the law was changed so that there is no longer an age limitation for making contributions to IRAs.
Economic Impact Payment – If you qualified for an economic recovery payment, in either the first or the second round, and did not receive the amount you were entitled to, you can claim the underpayment on your 2020 tax return as a tax credit.
Economic Impact Payment Document – If you received an economic impact payment, you should have received a Notice 1444, which documents the payment you actually received. The IRS has requested that taxpayers keep this form with all other important tax records, including W-2s from employers, 1099s from banks and other payers, and other income documents and records, to support their tax deductions.
Reinvested Dividends – If you are invested in a mutual fund, you are probably reinvesting the annual dividends. Reinvested dividends add to the basis of your investment, and when you sell the mutual fund, having a higher basis will reduce the gain. Mutual funds are required to track your basis for mutual fund shares purchased after 2012. Some even track the basis and reinvested dividends going further back. However, some do not, and it would be your responsibility to track the reinvested dividends so that you get the benefit of all reinvested dividends when you sell.
Worthless Stock – If you are like most investors, you occasionally will pick a loser that declines in value. Sometimes, a security can even become totally worthless when the issuing company goes out of business. Whatever you do, don’t wait until it’s too late to claim your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, then the current year’s loss will be denied.
Lifetime Learning Credit – The American Opportunity Credit (AOTC) is the education credit most familiar to taxpayers because it is available for the first four years of post-secondary education and provides a higher credit. It also requires the student to attend the college or university on at least a half-time basis and to pursue a program leading to a degree or other recognized educational credential. On the other hand, the Lifetime Learning Credit (LLC) is available for all years of post-secondary education and for courses to acquire or improve job skills. The student doesn’t need to be pursuing a program leading to a degree or other recognized education credential, and it is available for one or more courses. Many individuals who do not qualify for the AOTC overlook the LLC.
Charity Volunteer Tax Breaks – If you volunteered your time for a charity or governmental entity during the COVID-19 pandemic, then you probably qualify for some tax breaks. These rules actually apply to all charity volunteers, not just COVID-19 volunteers. Although no tax deduction is allowed for the value of services performed for a qualified charity or a federal, state, or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services, such as away-from-home travel, lodging, and meals; automobile travel; and uniforms.
Self-Employed Travel Expenses – If you are self-employed and travel for business, don’t overlook highway tolls, porter fees, airline baggage fees, tips, taxi fares, Uber fees, car rentals, laundry, cleaning, or other incidentals while away, in addition to the normal meal, lodging, and transportation expenses.
Self-Employed Health Insurance Deduction – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can generally deduct, as an above-the-line expense, 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse, and their dependents limited to the self-employed taxpayer’s net income from self-employment.
However, no deduction is allowed for any month when the self-employed individual is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. The term “subsidized” means that the employer pays at least 50% of the coverage’s cost.
The health insurance premiums claimed as an above-the-line self-employed health insurance expense cannot also be claimed as a Schedule A medical expense.
Summer Camp – If you are single and working, or married and both you and your spouse work, you may not realize that the costs of day camp during the summer generally count as expenses toward the child and dependent care credit allowing you to work. A day camp or similar program may qualify even if the camp specializes in a particular activity, such as soccer or computers. The credit ranges from 20% to 35% of the day camp’s cost, not exceeding $3,000 for one child or $6,000 for two or more. Overnight camps do not count.
Medical Dependent – You may not realize that if you itemize your deductions, you can deduct medical expenses paid for certain individuals who are not your dependents. One such situation involves divorced parents, in which the non-custodial parent can deduct medical expenses they pay for their child, even when the other parent claims the child as a dependent. Another situation, which we refer to as a medical dependent, involves paying the expenses for someone who would qualify as your dependent except that their gross income is too much, which disqualifies them. For 2020, the gross income limitation is $4,300.
Example – The taxpayers’ adult son was seriously injured in a motorcycle accident and did not have medical insurance. His parents paid all of his medical expenses for the year. Their son meets all of the dependent qualifications, except that his gross income of $20,000 is too much, which disqualifies him. However, under the exception, they can still include his medical expenses on their 1040 Schedule A.
Income in Respect of a Decedent (IRD) – One of the most overlooked tax deductions is what is referred to as the IRD deduction. IRD is the acronym for income in respect of a decedent. IRD income is income that is taxable to the decedent’s estate and also taxable to the estate’s beneficiaries. Thus, it is double taxed; as a result, the beneficiaries generally receive a deduction equal to the difference between the decedent’s estate tax figured with and without the taxed income. Beneficiaries will only have this deduction if the decedent’s estate was large enough to be subject to the estate tax.
If you have questions about how these or other tax issues apply to your particular tax circumstances, please give our office a call.
American Rescue Plan Act
The American Rescue Plan Act (ARPA) was passed by the Senate on Saturday, March 6 and in the House on Wednesday, March 10. The $1.9 trillion relief bill was signed into law on Thursday, March 11 by President Biden. Read on for details on the provisions included in the ARPA.
Individual Stimulus Checks
Estimated portion of the stimulus package: $422 billion
The ARPA includes another round of economic impact payments for people who meet certain income eligibility requirements. Single taxpayers who earn less than $75,000 will receive $1,400 and married taxpayers filing jointly who earn less than $150,000 will receive $2,800. The payments phase out at an adjusted gross income of $80,000 for single filers and $160,000 for joint filers. The bill also includes a $1,400 payment per dependent. Payment amounts will be determined using 2020 tax returns if already processed by the IRS or 2019 returns.
Federal Unemployment Assistance
Estimated portion of the stimulus package: $242 billion
The bill renews federal unemployment benefits at a lower level—$300 per month—through September 6, 2021. Additionally, it makes the first $10,200 of unemployment insurance benefits for households with incomes at or below $150,000 non-taxable.
Aid to Businesses
Estimated portion of the stimulus package: $47.25 billion
The ARPA includes funding for various industries hard hit by the pandemic, as well as a financial boost for the Paycheck Protection Program. The funds are broken down as follows:
- $15 billion for airlines and eligible contractors (must refrain from furloughing workers or cutting pay through September 2021)
- $25 billion for restaurants and bars (includes grants of up to $10 million per entity to be used for covering payroll, rent, utilities, and other operating expenses)
- $7.25 billion for the PPP
Child Tax Credit
The ARPA makes a number of changes to the existing child tax credit, including:
- Making the credit fully refundable for 2021
- Including 17-year-olds in the definition of qualifying children
- Increasing the amount of the credit for children over seven to $3,000
- Increasing the amount of the credit for children 0-6 to $3,600
- Directing the IRS to estimate each taxpayers’ child tax credit and pay it in advance monthly from July through December 2021
The increased credit amounts faze out at certain income levels ($75,000 for singles, $150,000 for married couples filing jointly, and $112,500 for heads of household).
In order to distribute the monthly estimated child tax credit payments, the IRS will create an online portal where taxpayers can both opt out of advance payments and provide information that modifies the amount of their payments.
Additional Tax Credits
The ARPA includes a number of additional tax credits:
- COBRA continuation coverage – On top of the extended unemployment benefits, the ARPA includes a 100% subsidy of COBRA health insurance premiums. This means that laid-off workers can maintain health insurance through their former employer’s plan at no cost. The subsidy covers the period from April 1, 2021, through September 30, 2021.
- Earned income tax credit – For 2021, the ARPA expands the EITC by making it available to taxpayers without children.
- Child and dependent care credit – The bill makes this credit refundable for 2021 and increases the exclusion for employer-provided dependent care assistance for 2021 to $10,500.
- Employee retention credit – The bill extends this credit, which was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, through the end of 2021. Additionally, it allows the credit to be claimed by eligible employers for paying qualified wages to employees.
- Family and sick leave credits – The ARPA extends these credits, which were established by the Families First Coronavirus Response Act (FFCRA), through September 30, 2021. Additionally, it increases the limit on the credit for paid family leave, increases the number of leave days a self-employed individual can take, makes leave taken due to a COVID-19 vaccination qualify, creates a reset date for counting paid sick leave (March 31, 2021), and allows 501(c)(1) governmental organizations to participate.
- Premium tax credit – The ARPA expands the premium tax credit for both 2021 and 2022 and adjusts the definition of an applicable taxpayer to include those who received, or have been approved to receive, unemployment compensation anytime in 2021.
Aid to States and Cities
Estimated portion of the stimulus package: $350 billion
The bill allots $350 billion to assist state, local, tribal, and territory governments in responding to the coronavirus pandemic, broken down as follows:
- $195.3 billion to states
- $130.2 billion to cities and counties
- $20 billion to tribal governments
- $4.5 billion to U.S. territories
Estimated portion of the stimulus package: $45 billion
The ARPA provides aid in the form of emergency rental assistance ($30 billion), funding for preventing COVID-19 outbreaks among the homeless ($5 billion), and mortgage assistance ($10 billion).
Aid to Schools
Estimated portion of the stimulus package: $170 billion
K-12 schools will receive $130 billion. The money is to be used to reduce class sizes, modify classrooms to enhance social distancing, install ventilation systems, purchase personal protective equipment, hire nurses and counselors, and provide summer school.
Of the $170 billion, the remaining $40 billion is earmarked for colleges and universities. The institutions are instructed to use the money to defray pandemic-related expenses and to provide emergency aid to students to cover expenses (e.g., food, housing, and computer equipment).
Funding for Testing and Vaccinations
Estimated portion of the stimulus package: $60 billion
Of the $60 billion allocated in this area, $14 billion is designated for expansion of COVID-19 testing (including enhanced contact tracing, laboratory expansions, and the creation of mobile testing units), and $46 billion is set aside for vaccination distribution and administration.
Ross Buehler Falk & Company, LLP Managing Partner Named Chair of Local Non-Profit
Ross Buehler Falk & Company, LLP is pleased to announce that Jeff Bleacher, CPA, CGMA has been named chair of the board of directors of EDC Finance Corporation.
“I am quite honored to have been chosen to chair the EDC Finance board,” said Bleacher. “This organization provides an invaluable service to businesses in Lancaster County. I hope that the time I spend as chair will be one of further growth and development for EDC Finance.”
Since 1987, the goal of EDC Finance Corporation has been to provide “project structuring expertise and access to multiple leading economic development financing resources and tools.” Based in Lancaster County, the organization seeks to help local businesses access funding via both state and local economic development incentive resources. To learn more about EDC Finance Corporation, visit them online at edcfinancecorp.com.
Bleacher has been with Ross Buehler Falk since 1985 and has served as the firm’s managing partner since 2009. He specializes in performing accounting and audit services for construction and manufacturing clients. He also offers management counseling. In 1983, Bleacher graduated from Elizabethtown College with a Bachelor of Science in Accounting. He is currently affiliated with the American Institute of Certified Public Accountants (AICPA) and the Pennsylvania Institute of Certified Public Accountants (PICPA), In addition to his service with the EDC Finance Corporation, Bleacher serves on the boards of the Lancaster Health Center and the East Hempfield Water Authority. He is also a member of the Lancaster Rotary Club. Bleacher and his wife, Cindy, have three children.
W-2 or 1099-NEC: Which Form Should Your SMB Use for Which Workers?
Filing annual wage reports is just one of the many end-of-year responsibilities expected of every business. But the task is not as straightforward as some would think. The reports get sent to the people who have received wages, and at the same time they get filed with the Social Security Administration (SSA) or the Internal Revenue Service (IRS). In some cases, they get filed with both. The question of which is appropriate rests entirely on who is being paid and how the relationship between them and the business is categorized.
Wage reports are prepared for employees as well as for independent contractors, but each type of wage earner receives a different form for filing their income tax returns. The information that a business provides to the appropriate government agency needs to match the information submitted by the wage earner, both to ensure accuracy and that they are paying the taxes that they owe. Businesses are expected to use the correct form, and in order to do that they need to be certain as to whether or not the person that they are paying is considered an employee. Getting this right is important, as incorrectly labeling an individual as a non-employee can result in significant penalties.
The Difference Between an Employee and an Independent Contractor
Though at first glance it may seem obvious whether a wage earner is a nonemployee or an employee, there are a lot of instances where business owners are not certain how an individual’s role is best defined. To clear up confusion, the IRS has identified three specific distinguishing criteria: the relationship between the worker and the employer; whether the business has financial control over the individual’s payment terms; and whether the business has behavioral control over the individual. Let’s take a closer look at each.
The Relationship Between the Worker and the Employer
Business owners who are not sure whether an individual is an employee should determine the answers to specific questions about their role within the organization – or whether they have one at all. Examples of appropriate questions would be whether the duties that the person is responsible for are integral to the operations of the business and whether the individual receives paid vacation or benefits from the organization. Though some point to the existence of a written contract as evidence supporting an individual being either an independent contractor or an employee, a contract by itself is not enough to support an argument one way or another.
Another straightforward indication of whether a wage earner is an employee or a contractor is based upon how the individual is paid, and why. A person that charges based on their own fee structure in exchange for a service performed is not an employee. A business owner has the choice of paying or not paying the amount demanded or seeking somebody else to provide the service. That is not the case with an employee, whose pay is determined by the employer from the start. Employers are able to control the work that an employee is assigned to do and the employee is required to perform based upon instructions. The same is not true for an independent contractor.
Finally, an employee’s work is directed by their employer, both in terms of what they do and how, where and when they will do it. The same is not true for an independent nonemployee. These individuals are self directed and create their own terms and conditions for their schedule, their work environment, and more. Though a business may provide specifications for the work product or job, the professional that is being paid is not controlled by the business’ code of conduct, work hours, or any other specifics that an employee is obligated to follow.
Using the Correct Forms to Suit the Individual
Employees get W-2 Forms – Employees’ wage information gets reported on W-2 forms. These contain the following information:
- The amount of taxable income that the employee was paid and the amount of federal income tax that the employer withheld from the employee’s paychecks
- The amount of Medicare and Social Security income that the individual earned and the amount FICA taxes withheld on that income
- The amount of state income and related taxes withheld from the amount paid to the employee
- Employee tip income
- The value of any taxable and non-taxable employee benefits
Non-employees get 1099-NEC Forms – Wage information for non-employees gets reported on Form 1099-NEC for any non-employees that have been paid $600 or more during the tax year. Appropriate recipients of this form include:
- Nonemployees such as freelancers and independent contractors
- Attorneys under specific circumstances
- An individual or entity in the business of catching fish from whom you have purchased fish or “other aquatic life”
This form reflects all of the payments made to the individual over the course of the tax year but no withholding, Social Security, or Medicare income, as they are not withheld for independent contractors. Take note that this form is new for 2020, replacing the previously used Form 1099-MISC for independent contractors. There are others that had previously received 1099-MISC for payments, and that form will continue to be used for them.
Individuals that Are Both Employee and Contractor Get Both Forms
There are some situations where an individual can be both an employee and an independent contractor. An example would be an administrative assistant who also consults as an interior decorator. In this case the individual would be a paid employee who receives a W-2 for their role within your organization and would also receive a 1099-NEC for the interior design work done for your offices.
When Should the Forms Be Prepared and What Should Be Done with Them?
Both employees and the Social Security Administration must receive completed W-2 forms no later than January 31st following the tax year for which they have been prepared. The same date applies for 1099-NEC forms, though they are submitted to the IRS rather than to Social Security. Both W-2 forms and 1099-NEC forms can be submitted online.
If you have any questions about which forms need to be submitted from your business, please contact our office.
Important Tax Due Dates – January 2021
January 2021 Individual Due Dates
January 4 – Time to Call For Your Tax Appointment –
January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you to do so before the calendar becomes too crowded.
January 11 – Report Tips to Employer –
If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 11.
January 15 – Individual Estimated Tax Payment Due –
It’s time to make your fourth quarter estimated tax installment payment for the 2020 tax year.
January 2021 Business Due Dates
January 15 – Employer’s Monthly Deposit Due –
If you are an employer and the monthly deposit rules apply, January 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2020. This is also the due date for the nonpayroll withholding deposit for December 2020 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.
NOTE: Delayed Payment of Employer Payroll Taxes from 2020
The CARES Act allows employers to delay paying 2020 payroll taxes, with 50% of the employer’s share of the 2020 Social Security tax due by December 31, 2021, and the remainder due by December 31, 2022. Any payments or deposits the employer makes before December 31, 2021, are first applied against the payment due on December 31, 2021, and then applied against the payment due on December 31, 2022.
January 15 – Farmers and Fishermen –
Pay your estimated tax for 2020 using Form 1040-ES. You have until April 15 to file your 2020 income tax return (Form 1040 or Form 1040-SR). If you don’t pay your estimated tax by January 15, you must file your 2020 return and pay any tax due by March 1, 2021, to avoid an estimated tax penalty.