Now that Joe Biden is officially the president … and Democrats control both chambers of Congress with the narrowest majority in over 20 years …
Readers want to know the effect on taxes.
Here’s our take on what will happen in 2021 …
And maybe of more importance, what won’t.
Priority number one for Biden is COVID-19, both tackling the disease and shoring up the economy.
He has already set forth his stimulus plan. It calls for additional stimulus checks of $1,400, plus a one-year increase in the child tax credit and dependent care credit, and a temporary expansion of the earned income tax credit.
Look for Congress to OK more stimulus within Biden’s first 100 days.
But the president won’t get everything he wants. Republicans are opposed to some items, including the provision to raise the minimum wage to $15 per hour. Expanding tax credits for lower- and moderate-income individuals has support from some moderate GOP lawmakers, but other Republicans are accusing Biden of using stimulus as an excuse to ram through long-standing Democratic priorities.
Biden wants to first seek bipartisan support on stimulus. But if he can’t get it, he may very well turn to budget reconciliation to allow legislation to pass the Senate with a majority vote instead of the usual 60 votes to avoid the filibuster. This tool, which is subject to lots of restrictions and can only be utilized for certain items, was last used during Donald Trump’s presidency to enact the late-2017 tax law.
Other tax-related items that may have a decent shot of passing this year:
A batch of temporary tax extenders that expire at the end of 2021.
Retirement savings and tax incentives for IRA owners and 401(k) participants, and proposals to encourage more employers to offer workplace retirement plans.
Tax breaks to encourage firms to produce critical products in the U.S.
Plus addressing business-tax easings in the 2017 law that begin to phase out.
Don’t expect tax increases in 2021, either on corporations or rich individuals. Joe Biden may have campaigned on higher taxes for individuals making over $400,000 and for regular corporations, and on estate tax hikes. But though the Georgia elections put Democrats in control of the Senate, the odds of any tax hikes this year are still slim. Raising taxes before the economy fully recovers is risky. Also, it’s not certain that all Senate Democrats are on board with tax hikes, and Biden needs all of them. It wouldn’t surprise us to see the president wait a while, maybe 2022, to advocate for major tax hikes, and even then, expect any revenue-raising proposals to be used to help pay for other priorities, such as education, health care or the environment. Even on the chance that he proposes tax hikes this year, they won’t apply for 2021.
Supporters of a carbon tax are optimistic the idea can pick up steam, especially if Biden and Janet Yellen, the next Treasury Secretary, push for it.
Imposing a tax would be a hard sell to Republicans … most don’t support it.
Abide by the rules for reporting deferred gains when investing in QOFs …
Qualified Opportunity Funds. Under the Opportunity Zone program, taxpayers can defer capital gains from the sale of business or personal property by investing the proceeds in QOFs to help development of struggling communities.
Taxpayers who opt to use the break must follow the Form 8949 instructions for electing the deferral and properly reporting the deferred gain, and submit the 8949 with the federal income tax return for the year in which the gain is realized.
They must also complete and attach Form 8997. This form lets IRS know of the QOF investments and amount of gains deferred, deferred gains at the beginning and end of the year, and dispositions of QOF investments during the year.
Those who don’t properly report the deferred gains may hear from IRS.
Taxpayers get more time to invest in qualified opportunity funds. They generally have 180 days from the date of sale of a capital asset they own to defer gains by investing proceeds in a QOF. IRS now says that investments in QOFs otherwise due April 1, 2020, through March 30, 2021, are delayed to March 31.
Estate & Gift Tax
Controversial estate and gift tax regulations could be back on the table. In 2016, IRS proposed to restrict in some cases the use of valuation discounts for estate and gift tax purposes on intrafamily transfers of closely held companies. IRS withdrew the proposed rules in 2017 at the behest of the Trump administration, much to the delight of lobbying groups, Republican members of Congress and tax professionals, who argued that the rules were too broad and unworkable. The project could make a comeback, with changes, under the Biden administration.
Executors who request estate tax closing letters will pay a $67 user fee, IRS says in proposed regulations. The letters verify that either an estate’s Form 706 has been accepted by IRS as filed or audit changes have been agreed to. Executors of taxable estates rely on the closing letters before making final distributions of bequests to heirs because the heirs could be held liable for unpaid estate taxes as transferees. Currently, executors must fax their requests for closing letters. But the Service says it wants to eventually move the process online, possibly through www.pay.gov.
A court loss for IRS on the three-year statute-of-limitations period. A self-employed stone mason paid subcontractors and filed 1099 forms that lacked the payees’ taxpayer identification numbers for 2005-08. In 2014, IRS assessed tax against him for noncompliance with the backup withholding rules. He claimed the assessment was barred by the three-year limitations period. IRS argued that only the filing of Form 945, the form to report backup withholding, starts the three-year period. Not so, says an appeals court. His 1040 and 1099s show that he was liable for backup withholding and the extent of such taxes, and those forms constitute the relevant return for statute-of-limitations purposes. The limitations period had expired before IRS assessed the tax (Quezada, 5th Cir.).
The basic fee to get a private letter ruling from IRS is going up to $38,000 for requests received by the agency after Feb. 3. The current levy is $30,000.
The cost is much lower for taxpayers with gross incomes under $1 million: $3,000 for those with incomes under $250,000 and $8,500 for filers with incomes between $250,000 and $1 million. Rev. Proc. 2021-1 has details on seeking a ruling.
The fee to get a PLR approving some late rollovers to IRAs is also rising. After Feb. 3, IRS will charge $12,600 for these requests … up from $10,900. Remember, many folks needn’t seek an IRS ruling for botched IRA rollovers if they meet the conditions to self-certify that they qualify for a waiver of the 60-day rule. For example, the late rollover must be for one of 11 reasons, and it must be completed within 30 days after the reason for failing to timely do it in the first place ceases.
IRS has released a flurry of final regulations over the past month or two.
Most address changes to business taxes in the 2017 tax law. Among the regs: Qualified business income deduction rules for cooperatives and their patrons. Definition of real property that qualifies for like-kind exchanges. Tax treatment of advance payments received by taxpayers using the accrual method of accounting. Rules for small businesses on the cash method of accounting and exceptions to inventory accounting and capitalization requirements. Limitations on deductions for federal penalties and settlement payments. Excise tax on compensation in excess of $1 million paid to covered employees of tax-exempt organizations. Application of the unrelated business income tax to separate trades and businesses of tax-exempt organizations. Also, the cap on business interest deductions.
None of the regs described above are caught up in Biden’s regulatory freeze.
Small firms have an easier time accounting for inventory under final regs. The 2017 tax law exempts businesses with gross receipts of $26 million or less from the general inventory requirements. These businesses may treat inventories as nonincidental materials and supplies, which are eligible to be deducted in the year in which they are first used or consumed in the taxpayer’s operations. Alternatively, firms can use a method that conforms to their applicable financial statements, or, if they do not have any AFS, their books and records prepared in accordance with their accounting procedures. See www.kiplinger.com/letterlinks/inv for the regs.
Research funded by a client prevents a firm from claiming the R&D credit. An engineering company contracted with a client to develop custom applications for turbine power generation. The contract guaranteed payment to the business regardless of whether its research and product were successful. Additionally, based on the Tax Court’s analysis of the terms of the contract, the business did not retain any substantial rights in the research it performed for its client. As a result, the company is not entitled to the R&D credit (Tangel, TC Memo. 2021-1).
Do you want your new company taxed as an S corporation for 2021?
Remember to elect S status by filing Form 2553 with IRS by March 15. Note that many experts in the tax community would like to streamline the process for making S elections. One of these individuals is IRS’s National Taxpayer Advocate. She is recommending that Congress enact legislation to allow S elections to be made on the first Form 1120S tax return that the business files as an S corporation, instead of requiring new firms to separately file Form 2553 within 2½ months.
Letting a charity deconstruct your house doesn’t qualify for a write-off. A couple who bought a residence wanted to demolish the existing house and build another one, so they ended up conveying the structure to a nonprofit that hires disadvantaged people to deconstruct buildings and salvage the materials. Neither the couple nor the charity recorded the transaction in the state’s land record. The couple took a charitable write-off for the house’s full value. A district court nixed the write-off, saying the couple didn’t transfer their entire real property interest, which precludes claiming any tax deduction for the donation. The couple appealed, and to their dismay the appeals court agreed with the lower court (Mann, 4th Cir.).
A nonprofit group that provides officials for hockey games is ruled offside.
IRS denies its request for tax exemption. The organization was formed to train officials and supply their services for a fee to a state’s athletic leagues. It coordinates schedules and assigns hockey games to the officials. The leagues that use the officials pay the nonprofit, which keeps a portion and sends the balance to the officials. The organization doesn’t qualify as a tax-exempt 501(c)(3) charity because it is more like a commercial enterprise and doesn’t serve the public interest.
Digital signatures on some mailed-in tax forms are allowed by IRS through June 30. The relief applies to about 20 tax forms filed on paper. Taxpayers can use any technology to provide their electronic or digital signatures.
Among the forms for which e-signatures are authorized: Form 706, Estate Tax Return; Form 709, Gift Tax Return; Form 3115, Application for Change in Accounting Method; and Form 8832, Entity Classification Election.
Tax Court petitions can now be filed electronically using DAWSON, the Court’s newly installed filing and digital case management system. Electronic filing could alleviate issues that arise with the mailing of paper petitions.
IRS will start accepting returns on Feb. 12, a few weeks later than normal. The agency has revised its forms and instructions to account for changes in the multiple stimulus laws, including the most recent one, enacted in late Dec. But it still needs more time to update its computer systems to reflect the changes.
You can actually file returns before that date with tax software companies …
But the returns won’t be submitted to the Revenue Service until Feb. 12.
The filing due date for individual returns is April 15. Some tax professionals want IRS to extend the 2021 filing season, as it did last year because of COVID-19. Others disagree. It’s too early to tell whether there will be an automatic extension.
Calendar-year regular corporations (C corps) also must file by April 15.
The deadline for calendar-year S corporations and partnerships is March 15.
E-file your return early to help protect yourself from tax-related identity theft. Thieves who use stolen taxpayer identification numbers on fraudulent returns to seek improper refunds typically file the phony returns early in the filing season so that the Service receives them before legitimate taxpayers file their returns. But if you file early, your return will likely arrive at IRS before a fake return does.
The fastest way to get a refund? E-file and have the money direct-deposited.
You may want to apply for an identity-protection PIN as extra protection from tax identity theft. The IP PIN is a six-digit number assigned by the Service to help verify a taxpayer’s identity on returns filed either on paper or electronically. To apply for an IP PIN, use the “Get an Identity Protection PIN” tool on IRS’s website.
Do you file a paper return because you don’t want to pay for tax software?
Try this alternative, which the editor of this Letter has used for years:
IRS’s Free File Fillable Forms. It’s for individuals who are comfortable preparing their own returns with little to no assistance from preparers or tax software.
And if your adjusted gross income is $72,000 or less, consider IRS’s Free File, which allows people to use commercial tax software to prepare and e-file returns for free. Both Free File Fillable Forms and Free File can be accessed at www.irs.gov/freefile.
Expect a bumpy filing season this year. IRS’s offices and phone lines are still not fully staffed because of coronavirus restrictions, so getting live assistance will be hard. Also, millions of 2019 returns are still being processed by the agency. And if Congress enacts more stimulus early in the Biden administration, IRS’s duties will multiply even more, right in the midst of the tax filing season.