Employee Retention Credit Updated by the American Rescue Plan

Employee Retention Credit Updated by the American Rescue Plan

Employee Retention Credit Updated by the American Rescue Plan

The sweeping American Rescue Plan Act of 2021 may have greenlit the third round of economic impact payments, but it also includes changes to several tax credits—many of which were designed to provide relief to struggling Americans whose finances took a hit during the pandemic. One of those affected tax credits helps both employees and businesses: the employee retention credit, or ERC.  

As the name suggests, the ERC provides a tax credit to businesses that keep their employees on payroll during coronavirus-related lockdowns and closures. It was created by the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act increased the amount of the credit and extended it until June 30, 2021. The American Rescue Plan makes additional changes, like extending it to the end of the year and adding a new type of qualifying business.

What are some of the changes to the employee retention credit?

The ERC can now be claimed by eligible employers for wages paid after March 12, 2020 and before January 31, 2022, providing a refundable credit of up to $7,000 (70 percent of qualifying wages up to $10,000) against employment tax for wages paid to each employee in a given calendar quarter.

Paragraph (2)(A) of the new section added to the Internal Revenue Code—3134 Employee Retention Credit for Employers Subject to Closure due to COVID-19—generally defines eligible employers as those:

  • which was carrying on a trade or business during the calendar quarter for which the credit is determined under subsection (a), and
  • with respect to any calendar quarter, for which—
    1. the operation of the trade or business … is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19),
    2. the gross receipts (within the meaning of section 448(c)) of such employer for such calendar quarter are less than 80 percent of the gross receipts of such employer for the same calendar quarter in calendar year 2019, or
  • the employer is a recovery startup business

New businesses that were started in the early days of the pandemic can also claim the ERC on their tax year 2021 return. Drake Software Education Tax Team Lead Amanda Watson says these “recovery startup businesses” only need to meet two criteria:

  • First opened for business after February 15, 2020
  • Gross receipts do not exceed $1,000,000

Since RSBs don’t have a three-year period prior to the calendar quarter in which they want to claim the ERC, they instead use the entire amount of time the company has existed to determine whether their gross receipts exceed the threshold. The other difference is an additional cap on the amount that an RSB can claim.

“Like other businesses claiming the ERC, it’s equal to 70 percent of qualified wages limited to $10,000 per employee per quarter ($7,000 credit per employee) for RSBs,” Amanda explains. “What’s different is that—after applying those normal limits—the max credit for each RSB employer is $50,000 per quarter, no matter how many qualifying employees the RSB may have.”

Important: The IRS has not yet released official guidance for the employee retention credit changes found in the American Rescue Plan Act of 2021. The Employee Retention Credit page on IRS.gov even notes that it doesn’t contain current information, instructing visitors to “check back later for updates to [the] page.” So, be sure to frequently check the IRS News page for future guidance on this credit and others.

SourceH.R. 1319

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IRS Now Sending EIP Checks, Debit Cards

IRS Now Sending EIP Checks, Debit Cards

IRS Now Sending EIP Checks, Debit Cards

As the old phrase goes, things are looking up.

The Internal Revenue Service says more Economic Impact Payments (EIP3) are coming this week—a second round that will include paper checks and prepaid debit cards.

Taxpayers getting direct deposits will see a deposit date of Wednesday, March 24, with some recipients getting their deposits even sooner. Some of those may be shown as provisional or pending deposits.

The IRS says “a large number of this latest batch of payments will also be mailed, so taxpayers who do not receive a direct deposit by March 24 should watch the mail carefully in the coming weeks for a paper check or a prepaid debit card, known as an Economic Impact Payment Card, or EIP Card.”

The good news: No action is needed by most people who are eligible for EIP3. But if they want to see the status of their payment, the Get My Payment tool on IRS.gov has that information.

While the IRS is now distributing EIP3 to some taxpayers through the mail, the agency reminds that “the vast majority of taxpayers receiving EIPs will receive [their payment] by direct deposit.” One reason EIP3 will be quickly distributed by direct deposit is a partnership between the IRS and the Bureau of the Fiscal Service.

“The IRS and the Bureau of the Fiscal Service leveraged data in their systems to convert many payments to direct deposits that otherwise would have been sent as paper checks or debit cards,” the IRS says. “This accelerated the disbursement of these payments by weeks.”

Keep an eye on the US Mail

Since the IRS is sending some of payments by mail, the agency is reminding taxpayers who normally receive physical refund checks to keep an eye on their mailbox.

“More people are receiving direct deposits, while those receiving them in the mail may get either a paper check or an EIP Card—which may be different than how they received their previous stimulus payments,” the IRS notes. “IRS and the Treasury Department urge eligible people who have not received a direct deposit to watch their mail carefully during this period.”

But what will the envelopes containing EIP3 checks and debit cards look like? Here’s what the IRS says:

  • Paper checks will arrive by mail in a white envelope from the U.S. Department of the Treasury. For those taxpayers who received their tax refund by mail, this paper check will look similar, but will be labeled as an “Economic Impact Payment” in the memo field.
  • The EIP Card will also come in a white envelope prominently displaying the seal of the U.S. Department of the Treasury. The card has the Visa name on the front and the issuing bank, MetaBank, N.A. on the back. Information included with the card will explain that this is an Economic Impact Payment. Each mailing will include instructions on how to securely activate and use the card.

Unlike some commercially available prepaid debit cards, EIP cards cannot be reloaded: Once the IRS-loaded funds are spent, that’s it. Those who previously received an EIP card will get a new card for EIP3. However, EIP cards do function like most debit cards in other ways.

“EIP Card recipients can make purchases online or in stores anywhere Visa Debit Cards are accepted,” the IRS explains. “They can get cash from domestic in-network ATMs, transfer funds to a personal bank account, and obtain a replacement EIP Card if needed without incurring any fees. They can also check their card balance online, through a mobile app, or by phone without incurring fees.”

To learn more about EIP cards, visit EIPcard.com.

What are the basics for EIP3?

The IRS outlines three major points about EIP3:

  • In general, most eligible people will get $1,400 for themselves (those filing joint returns will get $2,800) and $1,400 for each of their qualifying dependents claimed on their tax return.
  • Eligible families will get a payment based on all of their qualifying dependents claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents.
  • Unlike the first two payments, the third stimulus payment is not restricted to children under 17.

In this third round, the amount of an eligible individual’s payment will generally be based on their latest processed tax return from the previous two years. According to the IRS, “this includes anyone who registered online at IRS.gov using the agency’s Non-Filers tool last year or submitted a special simplified tax return to the IRS.” Taxpayers who have already filed this year will have their tax-year 2020 return information used instead.

As with EIP1 and EIP2, most recipients of federal benefits will automatically receive EIP3, like those provided by the following:

  • Social Security Administration
  • Railroad Retirement Board
  • Veterans Administration

However, the IRS says that some non-filers may still need to file a return to claim the dependent portion of EIP3. “People in this group should file a 2020 tax return to be considered for an additional payment for their dependent as quickly as possible,” the agency urges.

Another aspect setting this third round of Economic Impact Payments apart from the other two is it’s adjusted gross income (AGI) phase-out range:

  • $75,000 – $80,000 for single filers
  • $112,500 – $120,000 for heads of household
  • $150,000 – $160,000 for married couples filing jointly and qualifying widows and widowers

EIP3 is completely zeroed out for those whose AGI exceeds the top end of the range, which, as the IRS points out, “means that some people won’t be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit.”

The IRS closes the release by noting that Fact Sheet 2021-05, Updated details about the third round of Economic Impact Payments, contains more information about EIP3.

Sources: More Economic Impact Payments set for disbursement in coming days; taxpayers should watch mail for paper checks, debit cardsStart using your EIP Card

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IRS Announces March is National Settlement Month

IRS Announces March is National Settlement Month

IRS Announces March is National Settlement Month

The Internal Revenue Service says it’s pulling out all the stops to come to agreement with taxpayers who owe back taxes. Through its Office of Chief Counsel, the agency announced the significant expansion of its Settlement Days program and proclaimed March 2021 is now “National Settlement Month.”

All hands on deck

These annual Settlement Days are coordinated efforts that aim to resolve cases in U.S. Tax Court. The IRS seeks to give taxpayers who don’t have counsel of their own the chance to get “free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys, and other pro bono organizations.”

To help meet this goal, the IRS has been working with Chief Counsels in every state and the District of Columbia to make sure unrepresented taxpayers across the country have a chance to participate in Settlement Days. Because of the pandemic, the program will once again feature “Virtual Settlement Days” rather than face-to-face meetings.

The IRS notes that taxpayers “can also discuss their Tax Court cases and related tax issues with members of the Office of Chief Counsel, the IRS Independent Office of Appeals, and IRS Collection representatives.” These wider communication channels can help both sides to reach a settlement by giving taxpayers a better idea of what’s needed to support their case.

If a settlement is reached, IRS Collection representatives can discuss potential payment alternatives.

The Virtual Settlement Days structure can also help those taxpayers who decide to go to court, providing them with a better idea of what information they need to be successful.

Settlement Days will address other issues, too

The Taxpayer Advocate Service is also pitching in to expand the types of services offered on Settlement Days.

“Local Taxpayer Advocates and their staff can work with and inform taxpayers about how TAS may be able to assist with other unresolved tax matters, or to provide further assistance after the Tax Court matter is concluded,” the IRS explains. “If a taxpayer experiences difficulties concerning collection, TAS can also assist with collection alternatives.”

How do taxpayers participate in Settlement Days?

There are a few different ways that taxpayers can participate in a VSD event.

“One way is to be notified and invited to attend by the IRS as part of its work with LITCs and pro bono attorneys,” the IRS says. “The IRS proactively identifies and reaches out to taxpayers with Tax Court cases which appear most suitable for this settlement day approach. The IRS also generally encourages taxpayers with active Tax Court cases to contact the assigned Chief Counsel attorney or paralegal about participating in the March VSD events.”

Commissioner Rettig says a taxpayer has nothing to lose by taking part in the Virtual Settlement Day process.

“I strongly encourage all taxpayers who have the ability to participate in a settlement day event to do so because they will understand their own case better while not giving up their day in court if they so choose,” Rettig said.

This year’s program will be offered at several new locations, like the following:

  • Albuquerque
  • Billings
  • Buffalo
  • Cheyenne
  • Cleveland
  • Denver
  • Des Moines
  • Indianapolis
  • Little Rock
  • Milwaukee
  • Nashville
  • Peoria
  • Omaha
  • Reno
  • Sacramento
  • San Diego
  • San Jose

Last year’s foray into virtual meetings not only provided the blueprint for this year’s Settlement Days event, but it has been used to help provide resolution services to taxpayers all year long.

“Chief Counsel and LITCs have successfully used VSD events to help more than 259 taxpayers resolve Tax Court cases without having to go to trial,” the IRS says. “This saves taxpayers and the government time and money.”

The IRS stresses, however, that this help isn’t exclusive to Settlement Days: Chief Counsel attorneys and paralegals who are assigned to cases are always available to settle cases outside of the VSD program.

SourceIRS Office of Chief Counsel unveils National Virtual Settlement Days effort this year to reach more taxpayers in more parts of the nation

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Tax Day Pushed Back to May 17

Tax Day Pushed Back to May 17

Tax Day Pushed Back to May 17

Much like last year, the 2021 filing season has been characterized by challenges. The season started later than usual, tax professionals and taxpayers continue to manage pandemic safety precautions, and guidance is pending for the retroactive tax law changes included in the American Rescue Plan Act of 2021 that President Biden signed into law last week. So, it comes as no surprise that the Internal Revenue Service today announced the federal filing and payment deadline is delayed by a month.    

Americans now have until May 17, 2021 to file their tax year 2020 federal income tax return and pay any tax owed. The change to the payment deadline is notable, since “individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.” While taxpayers can still request an October 15 filing extension, the IRS notes that it won’t affect the new payment deadline.

Estimated tax payment deadlines, winter storm disaster relief deadlines, and state filing deadlines are not affected

The new deadline may grant additional time to file and pay federal income tax for tax year 2020, but the IRS says it does not affect the following:

  • April 15, 2021 quarterly estimated tax payment deadline
  • June 15, 2021 federal filing and payment deadline granted to victims of winter storms in Louisiana, Oklahoma, and Texas
  • State and D.C. income tax deadlines

Since “most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer,” the quarterly estimated tax payment deadline predominantly affects these types of income:

  • Self-employment income
  • Interest
  • Dividends
  • Alimony
  • Rental income

Last year when the federal filing deadline was delayed, many—but not all—states that collect income tax changed their filing deadlines to match the federal date. So, “the IRS urges taxpayers to check with their state tax agencies for those details.” 

Be sure to regularly visit the News section of the IRS website for further guidance and updates.

Source: IR-2021-59

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Don’t Overlook Recent Changes to Retirement Plans

Don’t Overlook Recent Changes to Retirement Plans

Don’t Overlook Recent Changes to Retirement Plans

There are a lot of things vying for our attention these days: the coronavirus, vaccine opportunities, new Economic Impact Payments, the new tax deadline—all worthy topics. But when it comes to taxes, recent changes to retirement plan rules also shouldn’t go unnoticed.

How did the SECURE Act affect Required Minimum Distributions (RMDs)?

The established rules for RMDs were changed by the Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act. The Internal Revenue Service says RMDs from certain retirement accounts now start at age 72. This includes the following account types:

  • Traditional IRA
  • Roth IRA (after the death of the plan owner)
  • Simplified Employee Pension Plan (SEP)
  • Savings Incentive Match Plan for Employees (SIMPLE)
  • 401(k) Plans
  • 403(b) Plans
  • 457(b) Plans
  • Profit sharing and other defined contribution plans

“Someone born on or before June 30, 1949, was required to start getting RMDs for the year they reached the age of 70½,” says the IRS. “However, under the SECURE Act, if a person’s 70th birthday is July 1, 2019, or later, they do not have to take their first RMD until the year they reach age 72.”

How did the CARES Act affect Required Minimum Distributions?

The Coronavirus, Aid, Relief and Economic Security (CARES) Act made two major changes to RMDs for 2020:

  • Waiving RMDs for the year, those
    • who turned who turned age 70½ in 2019 and took their first RMD in 2020
    • who reached age 70½ before 2020 and were still employed, but terminated employment in 2020
  • Allowing RMDs to be treated as coronavirus-based distributions

The IRS says the RMD waiver was implemented “so seniors and retirees, including beneficiaries with inherited accounts, were not required to take money out of IRAs and workplace retirement plans.” And RMDs are allowed to be treated as coronavirus-based distributions in the following situations:

  • An owner or beneficiary of an IRA who received an RMD in 2020 had the option of returning it to their account or qualified plan to avoid paying taxes on the distribution.
  • RMDs in 2020 not rolled over or repaid could be eligible to be treated as coronavirus-related distributions if the individual is qualified.
  • A 2020 RMD that otherwise qualifies as a coronavirus-related distribution may be repaid over a 3-year period or have the taxes on the distribution spread out over three years.
  • A withdrawal from an inherited IRA can also be considered a coronavirus-related distribution. The income from the withdrawal can be spread over three years for income inclusion, but the withdrawal cannot be repaid to an inherited IRA.

The IRS also notes that “special plan loans made to qualified individuals … [allowed plans to] suspend loan repayments for up to one year, although, typically, repayments resumed in January 2021.” Any plan allowing the one-year repayment suspension “effectively gives up to six years (instead of five) to repay a typical plan loan.”

What are coronavirus-based distributions?

The IRS says that the coronavirus-based distributions created by the CARES Act “provided account holders favorable tax treatment for certain withdrawals from retirement plans and IRAs, including expanded loan options.” Generally, this meant being able to choose whether distributions taken in 2020 would be treated as income or a tax-free loan—even granting flexibility on how the tax owed or loan was repaid.

Here’s what the IRS has to say about distributions treated as income: 

  • These distributions are not subject to the 10 percent additional tax on early distributions (including the 25 percent additional tax on certain SIMPLE IRA distributions).
  • Taxes on coronavirus-related distributions are includible in taxable income:
    • Over a three-year period, one-third each year, or
    • If elected, in the year you take the distribution.
  • Coronavirus-related distributions may be repaid to an IRA or workplace retirement plan within three years.

As for retirement plan distribution loans, they will remain tax-free if paid back to an eligible retirement plan within three years.

How do coronavirus-related distributions affect loan offsets?

The IRS says that retirement plan holders who “had an outstanding loan balance … when [they] left employment” have two options for dealing with loan offsets:

  • For loan offsets in 2020, recipients have until the due date of your tax return (plus extensions) to repay that amount to another retirement plan or IRA.
  • A qualified individual can treat the loan offset as a coronavirus-related distribution and have three years to repay to an IRA or include in income tax ratably over three years.

What are the deadlines for RMDs in 2021 and 2022?

The IRS lists the following RMD deadlines for 2021 and 2022:

  • Individuals who reached 70½ in 2019 or earlier … will have an RMD due by Dec. 31, 2021
  • Individuals who did not reach age 70½ in 2019 [but] will reach age 72 in 2021 will have their first RMD due by April 1, 2022 and their second RMD due by Dec. 31, 2022

There are two exceptions for the April 1, 2022 deadline: Workplace retirement plan holders generally don’t have to withdraw an RMD until April 1 of the year they retire (does not apply to traditional IRA accounts), and retirement account holders facing two required distributions in 2022 can elect to instead take the distribution in 2021. 

The IRS also listed some reminders for IRA trustees, who the agency says are required to do one of two things for account owners:

  • Report the amount of the RMD to the IRA owner, or
  • Offer to calculate [the RMD] for the owner.

If opting to calculate the RMD, trustees need to be careful:

  • Calculating the amount of the RMD depends on the type of IRA or if they are from multiple accounts.
  • Not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.

The IRS recommends that employees of public schools and certain tax-exempt organizations “check with their employer, plan administrator, or provider to see how to treat these accruals.”

For more information on RMDs and coronavirus-related distributions, see Publication 590-B, Distribution from Individual Retirement Arrangements; and Coronavirus Relief for Retirement Plans and IRAs.

Source: “Tax Time Guide: IRS reminds taxpayers of recent changes to retirement plans,” IRS.gov 

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