Important Tax Changes for Individuals and Businesses
Every year, it's a sure bet that there will be changes to current tax law and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here's a checklist of tax changes to help you plan the year ahead.
In 2021, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2020; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025.
In 2021, the standard deduction increases to $12,550 for individuals (up from $12,400 in 2020) and to $25,100 for married couples (up from $24,800 in 2020).
Alternative Minimum Tax (AMT)
In 2021, AMT exemption amounts increase to $73,600 for individuals (up from $72,900 in 2020) and $114,600 for married couples filing jointly (up from $113,400 in 2020). Also, the phaseout threshold increases to $523,600 ($1,047,200 for married filing jointly). Both the exemption and threshold amounts are indexed annually for inflation.
For taxable years beginning in 2021, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,100. The same $1,100 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax." For example, one of the requirements for the parental election is that a child's gross income for 2021 must be more than $1,100 but less than $11,000.
Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2021, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $7,000 for self-only coverage and $14,000 for family coverage.
Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2021, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,400 ($2,350 in 2020) and not more than $3,600 (up $50 from 2020), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,800 (up $50 from 2020).
Family coverage. For taxable years beginning in 2021, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,800 and not more than $7,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,750.
AGI Limit for Deductible Medical Expenses
In 2021, the deduction threshold for deductible medical expenses is 7.5 percent of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act, 2021.
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2021, the limitation is $450. Persons more than 40 but not more than 50 can deduct $850. Those more than 50 but not more than 60 can deduct $1,690 while individuals more than 60 but not more than 70 can deduct $4,520. The maximum deduction is $5,640 and applies to anyone more than 70 years of age.
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2021, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax.
Foreign Earned Income Exclusion
For 2021, the foreign earned income exclusion amount is $108,700 up from $107,600 in 2020.
Long-Term Capital Gains and Dividends
In 2021 tax rates on capital gains and dividends remain the same as 2020 rates (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum zero percent rate amounts are $40,400 for individuals and $80,800 for married filing jointly. For an individual taxpayer whose income is at or above $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $40,400 and below $445,850 for single filers).
Estate and Gift Taxes
For an estate of any decedent during calendar year 2021, the basic exclusion amount is $11.70 million, indexed for inflation (up from $11.58 million in 2020). The maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $15,000.
Individuals - Tax Credits
In 2021, a non-refundable (only those individuals with tax liability will benefit) credit of up to $14,440 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit
For tax year 2021, the maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working families rises to $6,728 up from $6,660 in 2020. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credit
For tax years 2020 through 2025, the child tax credit is $2,000 per child. The refundable portion of the credit is $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit also remained under tax reform. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2021. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.
Individuals - Education
American Opportunity Tax Credit and Lifetime Learning Credit
The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return. To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). Prior to the passage of the Consolidated Appropriations Act, 2021, taxpayers with MAGI of $139,000 (joint filers) or $69,500 (single filers) were not able to claim the Lifetime Learning Credit.
While the phaseout limits for Lifetime Learning Credit increased, taxpayers should note that the qualified tuition and expenses deduction has been repealed starting in 2021.
Interest on Educational Loans
In 2021, the maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $70,000 ($140,000 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers).
Individuals - Retirement
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains at $19,500. Contribution limits for SIMPLE plans also remain at $13,500. The maximum compensation used to determine contributions increases to $290,000 (up from $285,000 in 2020).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $66,000 and $76,000.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $105,000 to $125,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple's modified AGI is between $198,000 and $208,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $13999,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
In 2021, the AGI limit for the Saver's Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000 in 2020; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500 in 2020.
Standard Mileage Rates
In 2021, the rate for business miles driven is 56 cents per mile, down 1.5 cents from the rate for 2020.
Section 179 Expensing
In 2021, the Section 179 expense deduction increases to a maximum deduction of $1,050,000 of the first $2,620,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also, of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $26,200.
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond.
Qualified Business Income Deduction
Eligible taxpayers are able to deduct up to 20 percent of certain business income from qualified domestic businesses, as well as certain dividends. To qualify for the deduction business income must not exceed a certain dollar amount. In 2021, these threshold amounts are $164,900 for single and head of household filers and $329,800 for married taxpayers filing joint returns.
Research & Development Tax Credit
Starting in 2018, businesses with less than $50 million in gross receipts can use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well.
Work Opportunity Tax Credit (WOTC)
Extended through 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.
Employee Health Insurance Expenses
For taxable years beginning in 2021, the dollar amount of average wages is $27,800 ($27,600 in 2020). This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit.
Business Meals and Entertainment Expenses
Taxpayers who incur food and beverage expenses associated with operating a trade or business are able to deduct 100 percent (50 percent for tax years 2018-2020) of these expenses for tax years 2021 and 2022 (The Consolidated Appropriations Act, 2021) as long as the meal is provided by a restaurant.
Employer-provided Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees in 2021, the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $270. The monthly limitation for qualified parking is $270.
While this checklist outlines important tax changes for 2021, additional changes in tax law are likely to arise during the year ahead. Don't hesitate to call if you have any questions or want to get a head start on tax planning for the year ahead.
Identity Protection PIN Available To All Taxpayers
Starting in January 2021, the IRS Identity Protection PIN Opt-In Program will be expanded to all taxpayers who can properly verify their identity. Previously, IP PINs were only available to identity theft victims.
What is an Identity Protection PIN?
An identity protection personal identification number (IP PIN) is a six-digit number assigned to eligible taxpayers to help prevent their Social Security number from being used to file fraudulent federal income tax returns. This number helps the IRS verify a taxpayer's identity and accept their tax return. Taxpayers with either a Social Security Number or Individual Tax Identification Number who can verify their identity are eligible for the program and the number is valid for one year. Each January, the taxpayer must get a new one.
How to get an IP PIN
The preferred method of obtaining an IP PIN - and the only one that immediately reveals the PIN to the taxpayer - is the Get an IP PIN tool located on the IRS website. The tool is available starting mid-January 2021 and uses Secure Access authentication to verify a person's identity. If someone is unable to pass the Secure Access authentication, there are two alternate ways to get an IP PIN.
Taxpayers with income of $72,000 or less should complete Form 15227,Application for an Identity Protection Personal Identification Number, and mail or fax it to the IRS. An IRS employee will call the taxpayer to verify their identity using a series of questions. Those who pass authentication will receive an IP PIN the following tax year.
Taxpayers who cannot verify their identities remotely or who are ineligible to file Form 15277 should make an appointment for in-person identity verification at an IRS Taxpayer Assistance Center and bring two forms of picture identification. After the taxpayer passes authentication, an IP PIN will be mailed to them within three weeks.
What else taxpayers need to know before applying:
- The IP PIN must be entered correctly on electronic and paper tax returns to avoid rejections and delays.
- Any primary or secondary taxpayer or dependent can get an IP PIN if they can prove their identity.
- Taxpayers who want to voluntarily opt into the IP PIN program don't need to file a Form 14039, Identity Theft Affidavit.
- The IRS plans to offer an opt-out feature to the IP PIN program in 2022.
Confirmed victims of tax-related identity theft
For confirmed victims of tax-related identity theft, there is no change in the IP PIN Program. These taxpayers should still file a Form 14039,Identity Theft Affidavit if their e-filed tax return is rejected because of a duplicate SSN filing. The IRS will investigate their case and once the fraudulent tax return is removed from their account, they will automatically receive an IP PIN by mail at the start of the next calendar year.
IP PINs will be mailed annually to confirmed victims and participants enrolled before 2019. For security reasons, confirmed identity theft victims can't opt-out of the IP PIN program. Confirmed victims also can use the IRS Get an IP PIN tool to retrieve lost IP PINs assigned to them.
As a reminder, taxpayers should never share their IP PIN with anyone but their tax provider. The IRS will never call to request the taxpayer's IP PIN, and taxpayers must be alert to potential IP PIN scams. If you have any questions about the IP PIN, don't hesitate to call.
Credit Reports: What You Should Know
Creditors keep their evaluation standards secret, making it difficult to know just how to improve your credit rating. Nonetheless, it is still important to understand the factors that determine creditworthiness. Periodically reviewing your credit report can also help you protect your credit rating from fraud - and you from identity theft.
Credit Evaluation Factors
Many factors are used in determining credit decisions. Here are some of them:
- Payment history/late payments
- Charge-offs (Forgiven debt)
- Closed accounts and inactive accounts
- Recent loans
- Cosigning an account
- Credit limits
- Credit reports
- Debt/income ratios
Obtaining Your Credit Reports
Credit reports are records of consumers' bill-paying habits but do not include FICO credit scores. Also referred to as credit records, credit files, and credit histories, they are collected, stored, and sold by three credit bureaus, Experian, Equifax, and TransUnion.
The Fair Credit Reporting Act (FCRA) requires that each of the three credit bureaus provides you with a free copy of your credit report, at your request, every 12 months. If you have been denied credit or believe you've been denied employment or insurance because of your credit report, you can request that the credit bureau involved provide you with a free copy of your credit report - but you must request it within 60 days of receiving the notification.
You can check your credit report three times a year for free by requesting a credit report from a different agency every four months.
Fair Credit Reporting Act (FCRA)
This federal law was passed in 1970 to give consumers easier access to, and more information about, their credit files. The FCRA gives you the right to find out the information in your credit file, to dispute information you believe inaccurate or incomplete, and to find out who has seen your credit report in the past six months.
Understanding Your Credit Report
Credit reports contain symbols and codes that are abstract to the average consumer. Every credit bureau report also includes a key that explains each code. Some of these keys decipher the information, but others just cause more confusion.
Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.
If the report includes accounts that you do not believe are yours, it is extremely important to find out why they are listed on your report. It is possible they are the accounts of a relative or someone with a name similar to yours. Less likely, but more importantly, someone may have used your credit information to apply for credit in your name. This type of fraud can cause a great deal of damage to your credit report, so investigate the unknown account as thoroughly as possible.
In light of numerous credit card and other breaches, it is recommended that you conduct an annual review of your credit report. You must understand every piece of information on your credit report so that you can identify possible errors or omissions.
The Fair Credit Reporting Act (FCRA) protects consumers in the case of inaccurate or incomplete information in credit files. The FCRA requires credit bureaus to investigate and correct any errors in your file.
If you find any incorrect or incomplete information in your file, write to the credit bureau and ask them to investigate the information. Under the FCRA, they have about thirty days to contact the creditor and find out whether the information is correct. If not, it will be deleted.
Be aware that credit bureaus are not obligated to include all of your credit accounts in your report. If, for example, the credit union that holds your credit card account is not a paying subscriber of the credit bureau, the bureau is not obligated to add that reference to your file. Some may do so, however, for a small fee.
If you need help obtaining your credit reports or need assistance in understanding what your credit report means, don't hesitate to call.
The COVID-related Tax Relief Act of 2020
The Consolidated Appropriations Act, 2021, H.R. 133 included funding for the government, extensions for expiring tax extenders, tax relief under the COVID-related Tax Relief Act of 2020, and many more items. Passed by both the House and Senate, it was signed into law by President Trump on December 27, 2020.
Let's take a look at a few of the highlights related to pandemic taxpayer relief under the COVID-Related Tax Relief Act of 2020:
Economic impact payments. $600 per taxpayer ($1,200 for married taxpayers filing jointly) and an additional $600 per qualifying child (under age 17). The recovery rebate payment begins to phase out starting at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married taxpayers filing jointly. These payments are similar to the ones many taxpayers received earlier this year under the CARES Act.
Unemployment benefits. Additional unemployment insurance in the amount of $300 has been extended for an 11-week period beginning from December 26, 2020.
Educator expenses. Clarification that Personal Protective Equipment (PPE) used for the prevention and spread of COVID-19 will be treated as a deductible expense, retroactive to March 12, 2020.
Charitable contributions - Nonitemizers. The $300 above-the-line deduction for cash contributions given to a qualified charitable organization is extended through 2021 and increases to $600 for married taxpayers filing joint returns. In 2020, the maximum amount was $300.
Charitable contributions - Itemizers. The increased contribution limit to qualified charities that was specified in the CARES Act is extended through 2021 and applies to individuals and corporations. Amounts of up to 100 percent of adjusted gross income (AGI) are allowed as deductions (same as 2020). In 2019, the limit for the deduction for cash contributions was 60% of AGI.
Earned Income. For the 2020 tax year, taxpayers may use earned income amounts from the immediately preceding tax year when figuring the Earned Income Tax Credit and the Additional Child Tax Credit.
Flexible spending arrangements. Taxpayers can rollover unused amounts from 2020 to 2021 and from 2021 to 2022 and employers may allow employees to make a contribution change mid-year in 2021.
Money purchase pension plans. The COVID-related Tax Relief Act of 2020 also allows money purchase pension plans to be included as a qualified retirement plan, retroactive to the CARES Act. The CARES Act allowed taxpayers to make penalty-free withdrawals of up to $100,000 from certain retirement plans for coronavirus-related expenses, with the option to pay tax on that income over a three-year period or recontribute withdrawn funds.
Paycheck Protection Program (PPP) Loans. Retroactive to the effective date of the CARES Act, PPP loans that are forgiven will be treated as tax-exempt income. Gross income does not include loan forgiveness for Economic Injury Recovery Loans (EIDLs) and certain other loans or loan repayment assistance. Under the CARES Act, taxpayers receiving an EIDL were required to reduce any PPP loan forgiveness by the amount of the EIDL.
In addition, businesses with 300 or fewer employees with a gross revenue loss of 25 percent in any quarter of 2020 compared to the same quarter in 2019 are eligible for a second round of PPP loans.
Deductible expenses. Deductions are also allowed for deductible expenses (that would otherwise be deductible) paid for with the proceeds of a forgiven PPP loan. This reverses earlier IRS guidance that stated no deduction would be allowed. This tax provision applies to the second round of PPP loans as well.
Payroll tax credits. Refundable payroll tax credits for paid sick and family (Families First Coronavirus Response Act) leave are extended through March 2021. Employers are not required to provide paid leave after December 31, 2020; however, employers may still claim the credit if the employee would have qualified for paid leave if the mandate had been extended beyond December 31, 2020, and the employer provides paid leave.
Employee retention tax credits. Implemented as a refundable credit under the CARES Act, the employee retention tax credit (ERTC) is extended through June 30, 2021. The following also applies for calendar quarters beginning after December 31, 2020:
- The credit rate is increased from 50 to 70 percent of qualified wages.
- The limit on per-employee creditable wages is increased from $10,000 for the year to $10,000 for each quarter.
- The required reduction in a year-over-year decline in gross receipts on a quarterly basis is reduced from 50 to 20 percent.
- When determining the relevant wage base, the definition of a "large employer" that can only claim the credit for employees that are not working because of the COVID pandemic increases from more than 100 to more than 500 employees.
- Certain government employers are now allowed to claim the ERTC.
- Safe harbor allowing employers to use prior-quarter gross receipts to figure eligibility.
- New employers in 2020 (i.e., those not in existence in 2019) can claim the credit.
Furthermore and retroactive to the date of the CARES Act, the ERTC is expanded to allow employers who receive PPP loans to qualify for the credit with respect to wages that are not paid with forgiven PPP proceeds. It also clarifies that group health plan expenses can be considered qualified wages even if no other wages are paid to an employee.
Employee portion of payroll tax deferral. The repayment period for deferral of payroll tax is extended through December 31, 2021.
Standard Mileage Rates for 2021
Starting January 1, 2021, the standard mileage rates for the use of a car, van, pickup, or panel truck are as follows:
- 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020
- 16 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, down 1 cent from the rate for 2020, and
- 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.
Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
Before tax reform, these optional standard mileage rates were used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. However, it is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.
Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses.
Leased vehicles. Typically, if the standard mileage rate is chosen, then leased vehicles must use the standard mileage rate method for the entire lease period (including renewals). Due to the COVID-19 pandemic, however, the IRS is allowing employers to switch from the vehicle lease valuation method to the cents-per-mile method (56 cents for 2021 and 57.5 cents for 2020) when determining the value of an employee's personal use of a vehicle during the pandemic, and is effective as of March 13, 2020.
If you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins, do not hesitate to contact the office.
Understanding the Excise Tax
An excise tax is a tax that is generally imposed on the sale of specific goods or services, or on certain uses. Examples of things a federal excise tax is usually imposed on include the sale of fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, and tobacco, as well as other goods and services. Excise taxes are imposed on a wide variety of goods, services and activities and may be imposed at the time of:
- Sale by the manufacturer
- Sale by the retailer
- Use by the manufacturer or consumer
Many excise taxes go into trust funds for projects related to the taxed product or service, such as highway and airport improvements. Excise taxes are independent of income taxes. Often, the retailer, manufacturer or importer must pay the excise tax to the IRS and file the Form 720. They may pass the cost of the excise tax on to the buyer.
Some excise taxes are collected by a third party. The third party then sends the tax to the IRS and files the Form 720. For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline.
When to File
Businesses must file the form for each quarter of the calendar year. Here are the due dates:
Quarter 1 – January, February, March: deadline, April 30
Quarter 2 – April, May, June: deadline, July 31
Quarter 3 – July, August, September: deadline, Oct. 31
Quarter 4 – October, November, December: deadline, Jan. 31
If the due date for filing a return falls on a Saturday, Sunday or legal holiday, the due date is the next business day.
How to File
Businesses that are subject to excise tax generally must file a Form 720, Quarterly Federal Excise Tax Return to report this tax to the IRS. The IRS does accept paper excise tax returns; however, electronic filing is strongly encouraged, when possible.
To make this process easier for taxpayers, the contact information for all approved e-file transmitters of excise forms is listed on IRS.gov. Businesses can submit forms online 24 hours a day. When businesses e-file, they get confirmation that the IRS received their form. Also, e-filing reduces processing time and errors. To electronically file, business taxpayers will have to pay the provider's fee for online submission.
Excise tax forms available for electronic filing are:
- Form 720, Quarterly Federal Excise Tax.
- Form 2290, Heavy Highway Vehicle Use Tax.
- Form 8849, Claim for Refund of Excise Taxes, Schedules 1, 2, 3, 5, 6 and 8.
Please call the office if you have any questions or would like more information about federal or state excise taxes.
Protecting Business Taxpayers From Identity Theft
Starting December 13, 2020, the IRS began masking sensitive data on business tax transcripts. Previously, only sensitive data on individual tax transcripts was masked.
Here's what you need to know about this new initiative to protect business taxpayers from identity theft:
What is a tax transcript?
A tax transcript is a summary of a tax return and is often used by tax professionals to prepare prior year tax returns or when representing a client before the IRS. Lenders and others use tax transcripts for income verification purposes.
What is visible on the new tax transcript?
- Last four digits of any Employer Identification Number listed on the transcript: XX-XXX1234
- Last four digits of any Social Security number or Individual Tax Identification Number listed on the transcript: XXX-XX-1234
- Last four digits of any account or telephone number
- First four characters of the first, and last name for any individual (first three characters if the name has only four letters)
- First four characters of any name on the business name line
- First six characters of the street address, including spaces
- All money amounts, including wage and income, balance due, interest and penalties
Customer File Number
For both the individual and business tax transcript, there is space for a Customer File Number. The Customer File Number is an optional 10-digit number that can be created usually by third parties that allow them to match a transcript to a taxpayer. The Customer File Number field will appear on the transcript when that number is entered on Line 5 of Form 4506-T, Request for Transcript of Tax Return, and Form 4506T-EZ.
What happens when a taxpayer seeks to verify income for a lender?
- The lender will assign a 10-digit number, for example, a loan number, to Form 4506-T. The Form 4506-T may be signed and submitted by the taxpayer or signed by the taxpayer and submitted by the lender.
- The Customer File Number assigned by the requestor on Form 4506-T will populate on the transcript. The requestor may assign any number except the taxpayer's Social Security number or Employer Identification Number.
- Once received by the requester, the transcript's Customer File Number serves as the tracking number to match it to the taxpayer.
If you have any questions or need more information about this topic, please contact the office.
Employee Business Expense Deductions: Who Qualifies?
Prior to tax reform, an employee was able to deduct unreimbursed job expenses, along with certain other miscellaneous expenses, that was more than two percent of adjusted gross income (AGI) as long as they itemized instead of taking the standard deduction. Starting in 2018, however, most taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator.
No other type of employee is eligible to claim a deduction for unreimbursed employee expenses. In other words, employee business expenses can be deducted as an adjustment to income only for eligible educators and specific employment categories such as:
- Armed Forces reservists
- Qualified performing artists
- Fee-basis state or local government officials
- Employees with impairment-related work expenses
A qualified expense is one that is:
- Paid or billed during the tax year
- Used for carrying on a trade or business of being an employee, and
- Ordinary and necessary
Taxpayers should also know there are nondeductible expenses as well. Examples of nondeductible expenses include club dues, commuting expenses, fees and licenses, such as car licenses, lunches with co-workers, meals while working late, expenses to improve professional reputation, and capital expenses. A full list of nondeductible expenses can be found in Publication 529, Miscellaneous Deductions.
Please call if you have any questions.
New to QuickBooks? Try These Five Activities
Tackling any new piece of software can be daunting. Add a complex process like accounting to the mix, as QuickBooks does, and you may feel apprehensive about your ability to learn how to use it.
But QuickBooks was designed for small business people, not for accountants or technical wizards. It uses familiar language and forms, and it works like other Windows programs. That doesn't mean, though, that you'll be able to just jump in and start completing your accounting tasks.
Once you've created your company file, here are five steps to familiarize yourself with QuickBooks to get the software up and running in no time. Of course, if you need help creating a company file, don't hesitate to call.
1. Open a sample file.
While you're exploring QuickBooks, it's a good idea to work with a sample file. That way, you can look around and practice without risking compromising your company file. You'll be able to see how completed records and transactions should look and try your hand at entering sample data of your own.
Before you open a sample file, you'll need to close your current company. Click on File in the upper left to open that menu and then select Close Company. A window will open that should have your company file in its list. Below that, you'll see three boxes containing different options. Click on the down arrow next to Open a sample file, as pictured above (this may look slightly different in your version). Choose the one you want to open and click on it. QuickBooks will load again with that file open. When you're done looking at the sample file, go to File | Close Company again. The No Company Open window should appear again. Click on your company file name and then on Open to return to your file.
2. Learn where your lists are.
You'll be storing a great deal of information in lists. QuickBooks maintains these automatically sometimes when you enter information in a record or transaction. For example, when you create a record for a product or service you sell, it goes into a master list that you can access by opening the Lists menu at the top of the screen and clicking on Item List. You'll also open the Lists menu when you want to add options to an existing type of list, like Class List (QuickBooks allows you to assign Classes to transactions so you can group related information, like New Construction or Remodel if you're a contractor).
3. Try a Transaction.
There are two transactions you'll probably be using the most: invoices and sales receipts. QuickBooks comes with templates that resemble these sales forms' paper counterparts. You simply fill in the blanks by entering data and selecting options from drop-down lists. Open the Customers menu and select Create Invoices. Click the back arrow above Find in the upper left corner to see sample invoices. Then click the right arrow to get back to a blank form and create an invoice by clicking the down arrows in blank fields to see your sample lists.
4. Explore Snapshots.
Once you start entering records and transactions, you'll want to be able to access that information in ways that provide insight into how your company is doing. You'll eventually start running reports in QuickBooks, but the software also accomplishes this through its Snapshots. There are three of them, and they all provide these overviews by using data tables and charts. Open the Company menu and click on Company Snapshot, then click the tabs to move between Company, Payments, and Customer. You'll learn how QuickBooks provides real-time information about your finances.
5. Look at the Income Tracker.
It's easy to see the status of your invoices (and estimates) in QuickBooks. Open the Customers menu and select Income Tracker. Colored bars at the top of the screen show you what's outstanding and what's been paid. A list of the related transactions appears below these bars.
QuickBooks can be overwhelming when you first start to use it, but a QuickBooks professional can help you ease the transition through training. If you need assistance transferring your existing accounting information to the software or have any questions about QuickBooks software, don't hesitate to call.
Stay healthy and best wishes for a more prosperous 2021.
Tax Due Dates for January 2021
All employers - Give your employees their copies of Form W-2 for 2020 by February 1, 2021. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting.
Employees - who work for tips. If you received $20 or more in tips during December 2020, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2020.
Individuals - Make a payment of your estimated tax for 2020 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2020 estimated tax. However, you do not have to make this payment if you file your 2020 return (Form 1040 or Form 1040-SR) and pay any tax due by February 1, 2021.
Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2020.
Farmers and Fisherman - 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 do not 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.
Employers - Give your employees their copies of Form W-2 for 2020. If an employee agreed to receive Form W-2 electronically, have it posted on a website and notify the employee of the posting. File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2020.
Employers - Federal unemployment tax. File Form 940 for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return.
Farm Employers - File Form 943 to report social security and Medicare taxes and withheld income tax for 2020. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2020. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2020 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2020. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2020 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.
Payers of nonemployee compensation - File Form 1099-NEC for nonemployee compensation paid in 2020.
Businesses - Give annual information statements to recipients of certain payments made during 2020. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date only applies to certain types of payments.
Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040 or Form 1040-SR) for 2020 by February 1. Filing your return and paying any tax due by February 1, 2021, prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by February 1, file and pay your tax by April 15.