Tax

Tax Law Updates! (American Rescue Plan)

On March 11, 2021, the president signed into law the American Rescue Plan Act of 2021.  This is another massive COVID relief legislation that has significant tax changes to both 2020 (retroactively) and 2021.

Below are the highlights that are most likely to affect many of our clients.  This is not comprehensive coverage of the bill, or even the tax aspects of the bill, but the most important items (from my point of view) to bring your attention to at this time.

 

2020 Retroactive Tax Law Changes

There are two significant changes that are retroactive to 2020:

  • Up to $10,200 in unemployment compensation per person is non-taxable on tax returns with Adjusted Gross Income less than $150,000. (This $150,000 limit applies whether your return is Single or Married Filing Joint – there is no increase/doubling for Joint returns.)
  • There is no repayment of medical insurance subsidy if you purchased your medical insurance on the state exchange (Affordable Care Act plan on Healthplanfinder.org) and received more subsidy than your income allowed for.

If either of these apply to you, you fall into one of three categories:

If we already filed your return – The IRS says “do not file an amended return YET.”  We have you on our list of returns that will need to be fixed as soon as the IRS gives us guidance as to how they want us to fix it (and we receive the appropriate software updates from our tax preparation software vendor).

If we completed your return but have not yet filed it – We will hold off on finalizing / filing your return until the IRS has given us guidance on how to report these items (and we receive the corresponding software updates).  We will let you know if this applies to you, so you know your return is done, except for this issue.

If we have your return in process but not yet completed – We are screening every return for these two items until the IRS and our software vendor have issued updates.  If they do not apply to you, we will finalize & file your return as normal.  If they do apply to you, we will notify you that your return is done but on hold for these updates.

 

2021 New Tax Law Highlights

These changes affect the 2021 tax year ONLY – these are not permanent changes and do not affect future years.

3rd Relief/Stimulus Payment – This is similar to the two prior payments (currently being reported on your 2020 tax return) but with a few critical differences:

  • You should receive $1,400 per person listed (claimed) on your tax return (taxpayer, spouse, and all dependents including adult dependents).
  • If your Adjusted Gross Income (AGI) is $75,000 – $80,000 (single filers) or $150,000 – $160,000 (married joint filers), you will receive a partial payment. If your AGI is over these ranges, you will receive no payment.
  • The IRS will reference your last filed return for your income & eligibility (2019 or 2020).
  • If the IRS overpays you, you will not have to pay it back. If the IRS underpays you, you will get the rest when you file your 2021 tax return.
  • If you owe the IRS taxes on prior years, you should still receive this payment.
  • Please keep documentation of the amount you received – we will ask for it for preparing your tax return next year!

Child Tax Credit:

  • Tax credit amount increased from $2,000 per child to $3,600 per child under age 6 or $3,000 per child ages 6-17.
  • This credit starts getting reduced when your AGI is over $75,000 (single filers) or $150,000 (married joint filers).
  • The IRS has been instructed to pre-pay 50% of this tax credit in monthly payments July-December 2021 based on your last filing (2019 or 2020). Further, the IRS has been instructed to set up an online portal where taxpayers can opt-out of these monthly payments (or report other changes such as new children, marriage, divorce, etc). The IRS has said that this is (nearly) impossible to do with their outdated technology, so expect delays and glitches.
  • Then your 2021 tax return will report a reconciliation of the tax credit based on your actual income in 2021. If you received too much in pre-payments, you will not have to pay back the extra, but you will have to pay tax on it as additional taxable income.  If you received too little, you will get the extra credited on your 2021 tax return.
  • Beware! The tax withholding calculation for your paycheck may already take into consideration the old child tax credit amount ($2,000). Add to that the pre-payments (for example $250 per month Jul-Dec to give you $1,500 or half of the $3,000 credit), and you could easily receive an over-payment of the tax credit and have surprise taxable income on your 2021 tax return.

Childcare Tax Credit

  • The amount of childcare expenses that qualify is increased from $3,000 to $8,000 per child.
  • The tax credit has increased from 35% to 50% (subject to reductions at higher incomes)
  • Employers have the option to offer dependent care benefits up to $10,500 per family (increased from $5,000).

Medical Insurance Subsidy (& Unemployment Income) – These changes affect both 2021 and 2022:

  • The income qualification for receiving the subsidy on medical insurance purchased on the state exchange has changed. Previously, you qualified for subsidy if your income was less than 400% of the poverty level. Now your premium cost is limited to 8.5% of your income (with no comparison to the federal poverty level), anything more is covered by subsidy.
  • If you have any unemployment income at all, you will receive the maximum subsidy, regardless of your overall income. (Please note, this is how the tax law is currently written.  This seems to be an area where the details may have been overlooked and corrective legislation could be passed later in the year.)

Extended items from 2020 legislation – There were several provisions from prior relief laws that have been extended or had additional funding:

  • The Sick Pay and Family Medical Leave Pay from the very first Families First Coronavirus Response Act in March 2020 has been extended to 9/30/21. In addition, there is a second 10 days of Sick Pay allowed for 4/1/21 – 9/30/21 if 10 days were already used in the prior 12 months. (For a refresher on this – see our original blog post about the FFCRA Act here: http://cpabellingham.com/blog/tax-extensions-new-employer-rules/ )
  • PPP / EIDL – There are no new EIDL Grant applications allowed and there is no new (3rd) PPP loan program. However, both the PPP program and EIDL programs have received additional funding.
  • Employee Retention Credit has been extended for the full 2021 year. It is still a 70% credit, up to $10,000 in wages per quarter for businesses with a 20% decrease in cash receipts (compared to the same quarter in 2019).
  • Unemployment compensation supplements of $300 per week have been extended through 9/6/21. There is no provision for this to be nontaxable in 2021 (so far).

What are estimated tax payments?

 

CPA Siobhan Murphy, of Thrive Business Group, explains estimated tax payments.

 

What are estimated tax payments 2

 

Cryptocurrency FAQ

 

Cryptocurrency / virtual currency tax reporting – FAQ

We are seeing a lot more of our clients with virtual currency transactions recently, so we’ve put together this FAQ to assist with tax reporting of these transactions.

 

All I did was buy cryptos, do I need to report anything?

Yes. Your tax return includes reporting that you own any virtual currency (there’s a Yes/No box to check on the front page of the tax return).

Purchasing a virtual currency is not a taxable transaction, but if you purchased one currency and then transferred it to a different currency, the IRS treats this as selling the first to purchase the second.  And any sale is a taxable event.

 

What transactions do I need to report?

  • Sale of virtual currency
  • Purchase of products or services with virtual currency
  • Trade virtual currency for other products
  • Receive virtual currency as payment for services
  • Transfer of virtual currency from one type of currency to another
  • Receipt of new cryptocurrency after your existing cryptocurrency went through a hard fork followed by an airdrop
  • Virtual currency received as a result of mining

 

What transactions are not reported?

  • Purchase of virtual currency with cash
  • Transfer of a virtual currency from one wallet to another (without changing the currency type)
  • When a soft fork occurs with existing virtual currency
  • When a hard fork occurs but you do not receive new currency afterward

 

How do I report my virtual currency transactions?

Virtual currency can be reported as self-employment income, ordinary income, or investment income (capital gains/loss).

Virtual currency received as a result of mining or in exchange for services provided is treated as self-employment income (generally reported on a Schedule C).  It is reported at the market value on the date it is received.  This also become your acquisition cost for future capital gains reporting.

Virtual currency received through a hard fork or airdrop is treated as ordinary income (generally reported as “other income” on the Form 1040).  It is reported at the market value on the date it is received.  This also become your acquisition cost for future capital gains reporting.

Most other virtual currency transactions are considered sale of property and reported on Schedule D, taxed as capital gains income.  These transactions are reported like buying & selling stocks or other financial assets and any increase is value is taxed as a capital gain and losses are deductible (with limits).

 

If you are preparing my tax return, what information do you need from me to report my virtual currency transactions?

To report your virtual currency transactions, we need a listing of each transaction showing the following:

  • The date of acquisition
  • Cost/value at the date of acquisition
  • The date of sale/transfer
  • Cost/value at the date of sale/transfer
  • Capital gain or loss amount

 

For example, imagine the following set of (fictitious) facts:

1/1/18 purchased $1,000 worth of Bitcoin (valued $13,500 per coin = 0.074 Bitcoin received)

6/1/18 traded half of that bitcoin for Ethereum  (Bitcoin valued at $7,500 so 0.074 Bitcoin valued at $555, half of which is traded ($277).  Ethereum valued at $577 per coin = 0.480 Ethereum)

10/30/18 sold the other half of the Bitcoin for $229 (valued $6,200 per coin and 0.037 Bitcoin sold)

10/30/19 sold the Ethereum for $92 (valued $192 per coin and 0.480 Ethereum sold)

 

Most virtual currency wallets will provide a list of transactions with the transaction market value, but they do not report your purchase date or acquisition cost.  The transactions in the example above would show in a virtual currency transaction list as follows:

1/1/8 buy 0.074 Bitcoin $1,000

6/1/18 trade 0.037 Bitcoin for 0.480 Ethereum

10/30/18 sell .0.037 Bitcoin $229

10/30/19 sell 0.480 Ethereum $92

 

These same transactions would show on a tax return Schedule D as follows:

6/1/18 sale date Bitcoin – sales price $277, purchase date 1/1/18 – cost $500 – capital loss $223

10/30/18 sale date Bitcoin – sales price $229, purchase date 1/1/18 – cost $500 – capital loss $271

10/30/19 sale date Ethereum – sales price $92, purchase date 6/1/18 – cost $277 – capital loss $185

 

As you can see, the wallet transaction list is incomplete for tax reporting.  Also note that this is a very simple example – imagine 25 different purchases of Bitcoin, 12 exchanges between different 4 different virtual currencies, and 8 currency sales.  The tracking for tax purposes gets complex quickly!

 

You have three options of how to organize your virtual currency transactions, to bridge the gap between the wallet transaction list and the full tax reporting details:

  • Use a third-party services that will connect to your wallet data to create tax reports. A few examples of these are cointracking.info, cointracker.io, bitcoin.tax and essentials.lukka.tech
  • Create a spreadsheet and calculate your tax info yourself.
  • Hire a bookkeeper or accountant who understands the taxation of virtual currency to create a spreadsheet to calculate your tax info for you.

 

How important is this really?  I’m not buying/trading/selling that much.

The IRS is taking the stance that not reporting your virtual currency transactions is tax fraud.  In other words, they are not treating it as an honest error that is fixable and possibly subject to penalties.  Instead, they are treating it as criminal activity and intentional tax evasion.

They will not accept the excuse of not knowing the tax rules.  They are taking it very seriously and putting a lot of resources into cracking down on non-reporters.  The consequences of not reporting can be very severe, including $250,000 fine and up to 3 years in prison.

 

The Lowdown on Auto Expenses—Can I Deduct My Car? (Part 2 of 2)

In Part 1 we looked at the difference between business use and personal use for a vehicle, and discussed how to track and deduct actual auto expenses versus tracking business-related miles. (Read Part 1 here.) In Part 2 we will explore the advantages of using the standard mileage rate over actual expenses for business, and describe standard mileage rates for allowable, non-business use.The beauty of the standard mileage rate is fourfold.

  1. You don’t need to track every receipt for every expense.
  2. You likely are already tracking your business versus personal miles (to find your business-use percent).
  3. You can always switch to actual expenses for a year in which you anticipate higher actual expenses. For example, use actual expenses in years you incur a lot of repair costs (you have this freedom only if you used the standard mileage rate for the first year the particular vehicle was placed in service).
  4. You can avoid the pesky depreciation recapture in the event you later sell the vehicle.Other Car Deductions

In case you’re curious, 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. So, you get to factor in all your actual expenses without the hassle of tracking each one. As a reminder, the standard mileage rate for 2015 is $0.575 (up from 56 cents in 2014).

There are other types of mileage (non-business) that are deductible on your tax return. Without getting bogged down in the details, the rates are:

  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014.
  • 14 cents per mile driven in service of charitable organizations.

The rate for medical and moving purposes is based on the above-calculated variable costs, such as gas and oil. The charitable rate is set by law.

Of course, all of the above is a general characterization of vehicle-related deductions, which should give you a good idea of which method is better suited to your circumstances. But we all know how nuanced the IRS can be! So, connect with us so we can give you nuanced insight on your particular circumstances in order to help you make the best, most informed business decisions. Remember that at Thrive Business Group it’s

Your Life. Your Business. In That Order.

 

The Lowdown on Auto Expenses—Can I Deduct My Car? (Part 1 of 2)

Running a business can be expensive. Fortunately, the IRS allows certain expenses to offset your business income. A key source of such deductions is your vehicle business expenses. In what follows, I will sketch an outline of how vehicle deductions work and help you determine the deduction method that is right for you.

First, what counts as business use of a vehicle? Vehicle expenses are those ordinary and necessary expenses paid or incurred during the taxable year in carrying on your business and that are related to your vehicle. Simple, right? Here are a couple examples to clarify:

Business Car Deductions

Business Car Deductions

Commuting to or from your regular place of business are miles that are never deductible. Driving to and from a client’s office for business purposes, however, is business related, as is picking up office supplies or driving to a business conference. These, therefore, are deductible.

As you likely are aware, the vehicle need not be reserved solely for business use to claim its deductions, but you definitely cannot deduct the personal-use portion of the expenses. The easiest way to track personal versus business use is to track your mileage. For example:

You drove the car a total of 100 miles in January, 40 of which were business related. In this case, you could deduct 40% (40 miles / 100 miles) of vehicle expenses for January.

There are two main ways to deduct your vehicle expenses. You can either deduct your actual expenses (gas, oil, repairs, etc.) or you can use the standard mileage rate. Here are some facts to know about each.

Deducting actual expenses is exactly as it sounds—you track all expenses related to your vehicle for the year and deduct the business-use percent on your tax return.

Setting aside depreciation for the moment, if you had $3,000 in gas, $250 in oil changes, and $500 in repairs then, assuming 40% business use, your total vehicle deductions for the year equal $1,500 (40% x ($3,000 + $250 + $500)).

Depreciation complicates matters a bit, but the long and short of it is simply that each year you deduct a certain percent of the vehicle’s original cost to you (reduced by the personal-use portion). The downside is that if you sell the vehicle, any amount the IRS so graciously let you depreciate is now treated as ordinary taxable income to you (so called “depreciation recapture”).

Standard mileage is easy. Again, it’s a matter of tracking total business miles for the year. A mileage logbook (which correlates with your work calendar) is useful here. The standard mileage rate for business purposes is 57.5 cents per mile for 2015 (up from 56 cents in 2014).

If you log 1000 business miles, you deduct $575 in 2015 (1000 miles x $0.575 per mile). (No personal-use reduction here since this is based purely on business miles.)

Make sure to catch Part 2 to learn the advantages of using the standard mileage rate!