Seling Your Principal Residence - Come on, man!

When you sell your home, you may incur a taxable gain: one in excess of the exclusion available ($250K, and $500K).  In the year you sell, don't wait around until the 10th of the following April during the busy tax season to call your tax preparer and inquire as to what he or she needs to figure your gain.  In many cases, it also makes sense to complete this task immediately and early on in the year of the sale if it occurs before March 31st because the tax preparer may need the sale information to discuss its impact on the need for estimated taxes that may become due as a result. 

To do this, take a few minutes or longer to compile a list of the 'improvements and betterments" made to the property during the time you owned it. These amounts are not to be confused with "simple repairs" which generally speaking aren't to be considered.  Supply this list along with the original cost to purchase it and the date it was purchased.  Make sure the preparer is aware of the length of time it was owned and the length of time it was occupied as your principal home. 

Make sure your tax preparer is provided a copy of the two-page closing document when the home was sold so that he or she can properly pick up the closing costs, credits, and the selling price that was reported to the IRS.  I personally believe in forcing this information to be included in a return because  the only sale information the IRS sees without it is the selling price. Ouch!!!   

Also remember to supply him or her with the costs you incurred to get the house ready to sell.  These costs as often separated from those costs you list in the historical summary.   

 

Meals and Entertaiment - Tax Deductions for 2022 (so far)

Here's a useful table that recaps the type of meal and/or entertainment expense covered and to what extent it is tax deductible in 2022:

Type of Expense	Deduction
Entertaining clients (concert tickets, golf games, etc.)	0% deductible
Business meals with clients	50% deductible (100% if purchased from a restaurant)
Office snacks and meals	50% deductible (100% if purchased from a restaurant)
Company-wide party	100% deductible
Meals & entertainment (included in employee compensation)	100% deductible

Getting Paid Venmo Paypal from Ken Berry and the CPA Practice Adviser

If your small business receives payments from Venmo, PayPal or other third-party network, you could be in for a rude surprise next year. Under a little-publicized provision in the American Rescue Plan Act (ARPA), providers must begin reporting to the IRS business transactions totaling $600 or more, just like most employers. This could create some unexpected hassles for entrepreneurs who use one or more of these apps to conduct business. The ARPA change takes effect on January 1, 2022.

Previously, third-party providers faced less-daunting challenges. They only had to send out 1099-K forms when an account had 200 or more business transactions during the year totaling at least $20,000. The new ARPA reporting requirement broadens the application significantly.

Of course, this rule change doesn’t change the tax consequences for recipients. If you receive payment for business services or goods that you furnish, you were already liable for federal income tax on that amount regardless of whether you’re paid in cash or by check, credit card, app or some other means. On the flip side, you’re certainly entitled to claim deductions for your qualified business expenses that can offset the tax that you may owe.

ARPA aims to clamp down on business-people, particularly those operating in the gig economy like Uber and Lyft drivers and airbnb landlords, who haven’t been reporting all of their taxable business income. But rest assured it doesn’t affect casual and personal transactions made through one of the third-party networks. For example, if you’re being reimbursed by friends for the tab at a restaurant or for tickets to a sporting event or concert, you’re in the clear. This won’t result in any taxable income.

Nevertheless, the new reporting requirement could lead to some tax complications.

Notably, the third-party network may not be sure if a transaction is personal or for business. If it issues a 1099 to you for a charge in a gray area, it’s up to you to prove tat this isn’t a taxable event if the IRS imposes tax.

What’s more, you might, and probably will, receive some duplicate 1099s for the same goods or services. This could occur, for example, if you get a 1009-MISC or 1099-NEC from a customer or client and a 1099_K from the third-party provider. Again, the onus is on you to establish the existence of just one business transaction for the event.

What can you do about it? Not a whole lot for now. Expect Venmo, PayPal and the other the third-party networks to start asking for more information to clarify the nature of your transactions. (BTW: PayPal now owns Venmo.) And they will be requesting your vitals— such as an Employer Identification Number (EIN), Individual Tax ID Number (ITIN) or Social Security Number (SSN)—that they will be sharing with the IRS.

One possible solution is to use separate accounts:earmarked for business and personal transactions. That will give you more credibility if the IRS ever comes calling. Bottom line: many Venmo and PayPal users won’t be flying under the radar any longer.

Contact your adviser.

Build Back Better Acct Proposed tax Law Changes

From CCH....

Congress and the Biden Administration are locked in ongoing negotiations over the budget reconciliation bill, the Build Back Better Act (BBBA), which, if enacted in its present form, would significantly impact planning for estates and high-net worth individuals. The final form and effective dates of these proposals are subject to change as the proposal makes its way through Congress and provisions and effective dates are altered to gain legislative approval or to achieve revenue goals.Proposed Corporate Rate Changes

Among the highlights of the proposal is change in the income tax rate applicable to corporations, with a shift back towards graduated rates. Currently, a 21 percent flat rate applies to corporations, regardless of income amounts. Under the proposal, the rate would increase to 26.5 percent on corporate income in excess of $5,000,000. Income between $400,000 and $5,000,000 would retain a 21 percent tax rate, while income below $400,000 would be taxed at 18 percent. A three percent surcharge would apply to incomes in excess of $10,000,000, up to surcharge tax of $287,000.

Proposed Individual Rate Changes

As long promised by Democratic lawmakers, as well as President Biden during his campaign, individuals would also see tax increases under the proposal.  But only those making in excess of $400,000 a year would see a change.  Under the proposal, the current 37 percent rate bracket would be increased to 39.6 percent (the top rate in effect prior to the Tax Cuts and Jobs Act), and would be expanded to begin at $400,000 (in the case of unmarried taxpayers). Currently, unmarried taxpayers are at least partially taxes at 35 percent for income over $400,000. The low point of the bracket is slightly increased for joint filers and heads of households. 

Income tax Surcharge

The BBBA would apply a three-percent tax on modified adjusted gross income of individuals, estates and trusts in excess of certain amounts.  Theis would eeffctively dribve the top rate to 42.6 prercent.

Capital Gains Rate Changes

The capital gain rates, which currently are set at the top rate of 20 percent for taxpayers in the highest ordinary income tax brackets, would be changed to align with the new proposed ordinary income tax brackets. Additionally, the 20 percent rate is proposed to increase to 25 percent.

Net Investment Income

The proposed legislation expands the scope of the net investmnet income (NII) tax of 3.8% to include "all business income", which would iinclude income derived from active participation in S corporations and LLCs and partnerships.  This rate of 3.8% would efftively drive the overall highest tax rate to a whopping 46.4%.    

Additional Changes

The proposal includes several other changes applicable to businesses, including the limitation of business interest expense and taxation of foreign income, as well as some changes to IRS funding and IRAs. Notable, no changes to the deduction of state and local taxes are included.

Payment Status #2 – Not Available Problem with Stimulus Checks

Taxpayers who have recently checked the status of their 2nd stimulus check with the IRS Get My Payment tool and o have received the message “Payment Status #2 – Not Available” will not receive a second stimulus check automatically, the IRS has stated. 

The agency has started automatically depositing and mailing out millions of the the second economic impact payments, worth up to $600 for individuals and each of their child dependents.

And while many Americans have received their second stimulus payments as was intended, the IRS now says that people receiving the "Payment Status #2" message on the Get My Payment tool may have to wait until they file their 2020 taxes to get the payment, even if they've received the first stimulus check with no issues. 

“The IRS advises people that if they don’t receive their 2nd Economic Impact Payment, they should file their 2020 tax return electronically and work thorugh the return to claim the Recovery Rebate Credit (line 30 of the current form draft) to get their entitled crdit (in lieu of a direct payment) and any resulting refund as quickly as possible,” notes the agency.

A spokesperson for the agency did not clarify why this is the case or why the issue seemed to affect those who had filed their 2019 taxes through H&R Block and TurboTax in particular.

TAXATION OF CORONAVIRUS RELIEF (CARES ACT) FUND GRANTS TO INDIVIDUALS AND BUSINESSES

The general welfare exclusion or GWE, a little known administrative exception, exempts from a recipient’s taxable income most payments from government agencies under legislatively-provided social programs that promote general welfare, like the recently issued Economic Impact Payments of 2020 that were issued under the Coronavirus Aid, Relief and Economic Security (CARES) Act^1..

To qualify under this exception, an exempt payment must (1) be made from a government fund, (2) be made for the promotion of general welfare (ie. generally based upon individual or family needs), and (3) not represent compensation for any services rendered.

Regarding similar payments made to businesses, like grants or the payments provided under the Cares Act’s (SBA) Paycheck Protection Program, it has been stated that these payments  generally do not qualify for the general welfare exclusion, because they are not based upon individual or family needs. Payments issued under the SBA's PPP program, for example, have been earmarked as loans, giving the recipient the ability to request loan forgiveness under SBA and IRS strict procedures.

In April, 2020, the IRS issued Notice 2020-32 and ruled that forgiven PPP loans may be excluded from gross income by an eligible recipient by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  However, it stated that any expenses associated with this tax-free income (eg. the forgiven loans) would not be deductible. In May, to assist in clarifying its position, the IRS issued Notice 2020-32, providing 2 examples stating that a taxpayer that receives a loan through the PPP is not permitted to deduct expenses that are normally deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act. This expense treatment is consistent with historic guidance regarding non-taxable income and any related expenses. In essence, it has the net effect of essentially reversing the tax-free benefit of the exclusion on any loan forgiveness.

And based upon the SBA's loan forgiveness application process, it could be well into 2021 until a borrower knows how much of their loan is forgiven. The question then becomes whether the forgiveness of the loan increases taxable income in 2020 when the proceeds are received and expenses are incurred or in 2021, when the borrower receives confirmation their loan is forgiven. There’s was also the question of whether the ultimate tax treatment of these income and expense items will match a business's financial statements prepared under generally accepted accounting principles (GAAP).  All of the answers to these questions appear to have been clarified in Notice 2020-32. 

It is not clear whether or not the SBA loans will be taxable for state tax purposes.  And to further complicate matters, "state-sponsored" program grants issued during the pandemic that are generally taxable for federal income tax purposes may or may not be taxable for state tax purposes. You will need to check with your state revenue agencies to get an answer to that question.

Note 1 - Because the individual is getting what amounts to a refundable tax credit in advance in the form of a stimulus payment, rather than waiting to get the money from the credit provided in 2021 (for 2020) when he or she actually files a 2020 tax return, he or she, in effect, is getting an advanced refundable tax credit.  If, for some reason, that individual doesn’t get any stimulus payment this year, but he or she is owed one, he or she can request it when filing a 2020 tax return. If they don't get the full amount that they were entitled to this year — say, they weren't able to get the $500 payment for an eligible child under 17 — they  should be able to request it once they file a 2020 tax return in early 2021. What if it turns out that the stimulus payment was more than that allowed? For example, suppose the IRS based a stimulus payment on a 2018 or 2019 tax return, when the income reported was lower, but the actual income is much higher for 2020? “If someone has income in 2020 that is higher than the tax return to calculate the advance rebate, they will not have to pay the credit back,” says Garrett Watson, senior tax policy analyst for the Tax Foundation, an independent, nonprofit tax policy organization. “In other words, any adjustments to a taxpayer's rebate on 2020 tax returns will be in the taxpayer's favor."

Tennessee—Multiple Taxes: Relief Announced for Taxpayers Affected by April Tornadoes and Severe Storms

Following the IRS decision to extend federal deadlines for individuals and businesses located in Bradley County or Hamilton County, Tennessee has extended the franchise and excise tax and Hall income tax filing and payment deadlines to October 15, 2020, for taxpayers located in those counties.

The relief postpones the franchise and excise tax and income tax filing and payment deadlines that fall between April 12, 2020, and October 15, 2020. Affected businesses and individuals will have until October 15, 2020, to file returns and make any payments. This includes estimated tax payments for the first two quarters of 2020 that were due on July 15, and the third quarter estimated tax payment normally due on September 15. The extension will be automatically applied to franchise, excise, and income tax accounts of taxpayers having a primary address in Bradley County or Hamilton County. (Extracted from Paychex State Tracker News)