Changes to Tax Laws- New Legislation for 2021
There were multiple changes that you may not be aware of for tax year 2021. The deadline to file your personal or S-Corp returns is April 15, 2022 and for your partnership returns it is March 15, 2022. The following is a summary of the main changes made by the IRS for tax year 2021.
For business entities we have Notice 2020-75 IRC -164. Partnerships- This pertains to the SALT, (state and local tax). The TCJA of 217 limited the individual deductions to $10,000 for married filing jointly. Certain jurisdictions described in section 164(b)(2) have enacted or are contemplating the enactment of tax laws that impose either a mandatory or elective entity-level income tax on partnerships and S corporations that do business in the jurisdiction or have income derived from or connected with sources within the jurisdiction. In certain instances, the jurisdiction’s tax law provides a corresponding or offsetting, owner-level tax benefit, such as a full or partial credit, deduction, or exclusion. Notice 2020-75 announces that the Department of the Treasury and the IRS intend to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non–separately stated taxable income or loss for the tax year of the payment. Thus, the specified income tax payments made by a partnership or an S corporation are not included when applying the SALT deduction limitation to an individual who is a partner in the partnership or a shareholder of the S corporation.
TD 9914—IRC 1371, 1377 – for S Corporations.
Final regulations provide guidance on the definition of an eligible terminated S corporation and rules relating to distributions of money by such a corporation after the post-termination transition period. The final regulations also amend current regulations to extend the treatment of distributions of money during the post-termination transition period to all shareholders of the corporation and clarify the allocation of current earnings and profits to distributions of money and other property. The final regulations affect C corporations that were formerly S corporations and the shareholders of those corporations.
Credits: Sick Leave and Family Leave Credits
The Families First Coronavirus Response Act (Families First Act), Pub. L. No. 116-127 (March 18, 2020), required certain employers to provide paid leave to workers who are unable to work because of COVID-related situations. The CAA extended the credits through March 31, 2021.
ARPA § 9641 I.R.C. §§ 3131, 3132
There is a refundable employer credit against the employer’s share of Medicare tax for each calendar quarter in an amount equal to 100% of the qualified sick leave wages and qualified family leave wages paid by the employer for that quarter. The credit applies to wages paid for the period beginning on April 1, 2021, and ending on September 30, 2021.
Eligible Employers
An eligible employer is any business with fewer than 500 employees. The government of the United States or any agency or instrumentality thereof cannot claim the credit. However, an organization that is described in section 501(c) (1) and exempt from tax under section 501(a) can claim the credit. Self-employed individuals are eligible for similar tax credits under ARPA §§ 9642 and 9643.
Qualified Leave
Eligible employers can claim the tax credits for wages paid for leave taken by employees who are not able to work or telework due to reasons related to COVID-19, including leave taken for COVID-19 testing and leave to receive COVID- 19 vaccinations or to recover from any injury, disability, illness, or condition related to the vaccinations.
Amount of the Credit
The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons for up to 2 weeks (80 hours), limited to $511 per day and $5,110 in the aggregate, at 100% of the employee’s regular rate of pay (or two-thirds, if leave is to care for someone else). The tax credit for paid family leave wages is equal to the family leave wages paid for up to 12 weeks, limited to $200 per day and $12,000 in the aggregate, at two-thirds of the employee’s regular rate of pay. The amount of these tax credits is increased by allocable health plan expenses and contributions for certain collectively bargained benefits, and the employer’s share of social security and Medicare taxes paid on the wages (up to the respective daily and total caps).
These are just a few of the new changes the IRS has instituted due to the coronavirus and how it has affected many taxpayers’ businesses and therefore their livelihood. Please stay informed and as always, please reach out to us here at Croft and Frost if you have any tax questions!
By: Angelo Sanchez, Jr., Tax Resolution Specialist at CROFT & FROST
Sources: IRS.gov