Tax Newsletter March 2021

 February 26th, 2021    

Your Guide to the 2021 Tax Season

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In This Issue

Issue 1A: IRS Commissioner Has No Plans to Extend Tax Season Even Though Requested by the House

Issue 1: Another COVID-19 Bill is Making Its Way Through Congress – Here is What We Know as of March 1, 2021 – Promoting Economic Security Act

Issue 2:  Flexible Spending Arrangements Just Got More Flexible – Temporary

Issue 3: New IRS ‘Submit Forms 2848 and 8821 Online’ Offer Contact Free Signature Options for Tax Pros and Clients Sending Authorization Forms

Issue 4: New Form 7202 Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals

Issue 5: Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR – What’s New?

Issue 6: Information About Filing Form 943-X for 2020

Issue 7: Qualified Plug-In Electric Drive Motor Vehicles (IRC 30D)

Issue 8: Final 1040 Instructions Revise Virtual Currency Transaction List

Issue 9: Erroneous CP 21C Letters

Issue 10: Educators Can Now Deduct Out-of-Pocket Expenses for COVID-19 Protective Items

Issue 11: IRS Warns About Corporate Domestic Production Activities Deduction Refund Claims

Issue 12: Employers May Be Able to Claim the Employee Retention Credit and Have a PPP Loan

Issue 13: Provisions Expiring in 2021

Issue 14: CCA Looks at Relation Between Refund Look-back Period and COVID Filing Extension – Chief Counsel Advice 202053015

Issue 15:  New Law Extends COVID Tax Credit for Employers Who Keep Workers on Payroll

Issue 16: IRS Operations During COVID-19: Mission Critical Functions Continue

Issue 17: Clarification of the Definition of Qualified Sick Leave Wages and Qualified Family Leave Wages

Issue 18: Applicable Federal Rates (AFR) for March 2021 – Rev. Rul. 2021-5

NEWS

Issue 1A: IRS Commissioner Has No Plans to Extend Tax Season Even Though Requested by the House

In February 23 testimony before the House Appropriations Committee Financial Services Subcommittee, IRS Commissioner Charles Rettig said that IRS is not planning to extend the April 15 filing deadline despite requests from several House Democrats.

Rettig also noted that a final decision on the matter has not yet been reached.

On February 18, several House Ways and Means Committee Democrats, led by House Oversight Subcommittee Chair Bill Pascrell, D-N.J., sent a letter to Rettig in which they asked him to extend the filing season until July 15.

As always, we are monitoring.

Issue 1: Another COVID-19 Bill is Making Its Way Through Congress – Here is What We Know as of March 1, 2021Promoting Economic Security Act

9601 – 2021 Recovery Rebates to individuals

Provides a $1,400 refundable tax credit for each family member that shall be paid out in advance payments, similar to the Economic Impact Payments in the CARES Act and Consolidated Appropriations Act, 2021. The credit is $1,400 for a single taxpayer ($2,800 for joint filers), in addition to $1,400 per dependent.

The credit phases out between $75,000 and $100,000 of adjusted gross income ($112,500 and $150,000 for head of household filers and $150,000 and $200,000 for joint filers) proportional to the taxpayer’s income in excess of the phaseout threshold over $25,000 ($37,500 for head of household filers and $50,000 for joint filers).

Under this phaseout structure, the credit is reduced to zero for all taxpayers at the $100,000, $150,000, and $200,000 AGI levels (depending on filing status).

For purposes of this credit, a dependent includes both children and non-child dependents. A taxpayer is eligible for a credit with respect to any individual in the household for whom a Social Security number is associated with such individual on the tax return.

Advance payments are generally not subject to administrative offset for past due federal or state debts, including offset for past-due child support. Treasury is directed to issue this credit as an advance payment based on the information on 2019 or 2020 tax returns.

In addition, Treasury is given broad authority to make payments to non-filer populations based on return information available to the Secretary. Taxpayers receiving an advance payment that exceeds their maximum eligible credit based on 2021 tax return information will not be required to repay any amount of the payment to the Treasury. If a taxpayer’s 2021 tax credit exceeds the amount of the advance payment, taxpayers can claim the difference on their 2021 tax returns.

9611 – Child Tax Credit

Child Tax Credit improvements for 2021 makes the child tax credit (“CTC”) fully refundable for 2021 and increases the amount to $3,000 per child ($3,600 for a child under age 6). The provision also increases the age of qualifying children by one year for 2021, such that 17-year-olds qualify for the credit.

For 2021, the excess of the child tax credit (i.e., the additional $1,000 or $1,600 per-child in excess of the present-law $2,000 per-child credit) is reduced by $50 for every $1000 in modified adjusted gross income in excess of $150,000 for joint filers ($112,500 for head of household filers and $75,000 for other filers).

Once the excess credit amount is so reduced, the credit plateaus at $2,000, and then phases out at the present law levels established in the TCJA ($400,000 for joint filers, $200,00 for other filers).

Directs the Secretary of the Treasury to issue advance payments of the child tax credit, based on 2019 or 2020 tax return information. The payments are intended to be delivered on a monthly basis, but if the Secretary determines that this frequency is infeasible, the Secretary is directed to issue the payments as frequently as is feasible.

The advance payments under this section do not begin until July 1, 2021 and will comprise in total half of the child tax credit for which the taxpayer is otherwise entitled to for 2021 (with the remaining half claimed on the 2021 tax return).

Thus, under the advance payment provision, if the Secretary determined that a monthly payment was feasible, a taxpayer with two children above age 5 would receive $500 per month (2 x $3,000/12) for each of the six months remaining in calendar year 2021, for a total of $3,000.

The remaining $3,000 would be claimed in 2021 on the taxpayer’s tax return. If, however, the Secretary determined that it was feasible to make a payment every two months, each advance payment would total $1,000. The taxpayer’s child tax credit claimed on the 2021 tax return is reduced by the aggregate of advance payments paid by the Secretary.

However, in the case of taxpayers who received an overpayment of the advance credit due to a child for whom the advance was paid in 2021, when in fact the child was no longer that taxpayer’s dependent, the provision provides a hold-harmless amount on the repayment obligation. Under this hold-harmless amount, a taxpayer below the income threshold ($40,000 for a single taxpayer, $50,000 for a head of household, and $60,000 for a joint filer) will be protected from repaying up to $2,000 in overpayments per child that was incorrectly taken into account. The hold-harmless threshold is decreased to $0 as the taxpayer’s income rises to double the threshold amount.

The Secretary is directed to establish an on-line portal to allow taxpayers to opt-out of receiving advanced payments and provide information regarding changes in income, marital status, and number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.

9612 – Application of Child Tax Credit in Territories

Instructs the Treasury Department to make payments to each “mirror code” territory for the cost of such territory’s CTC. This amount is determined by Treasury based on information provided by the territorial governments.

Puerto Rico, which does not have a mirror code, will receive the refundable credit by having its residents file for the CTC directly with the IRS, as they do currently for those residents of Puerto Rico with three or more children.

For American Samoa, which does not have a mirror code, Treasury is instructed to make payments in an amount estimated by Treasury as being equal to the aggregate amount of benefits that would have been provided if American Samoa had a mirror code in place.

9621 – Earned Income Tax Credit

Strengthen the Earned Income Tax Credit for individuals with no qualifying children.

Expands the eligibility and the amount of the earned income tax credit for taxpayers with no qualifying children (the “childless EITC”) for 2021.

In particular, the minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless EITC is eliminated.

This section also increases childless EITC amount by increasing the credit percentage and phaseout percentage from 7.65 to 15.3%, increasing the income at which the maximum credit amount is reached to $9,820, and increasing the income at which phaseout begins to $11,610 for non-joint filers.

Under these parameters, the maximum credit amount in 2021 increases from $543 to $1,502. The provision contains special rules regarding the application of the credit for former foster youth and homeless youth.

9622 – Taxpayer Eligible for Earned Income Tax Credit in Case of Qualifying Children Who Fail to Meet Certain Identification Requirements

Repeals the provision prohibiting an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he or she cannot claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN for qualifying children).

Accordingly, individuals who do not claim the EITC with respect to qualifying children due to failure to meet identification requirements would now be able claim the childless EITC.

9623 – Credit Allowed in Case of Certain Separated Spouses

Allows a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed.

Thus, the EITC may be claimed by the individual on a separate return. This rule only applies if the taxpayer lives with a qualifying child for more than one-half of the taxable year and either does not have the same principal place of abode as his or her spouse for the last six months of the year, or has a separation decree, instrument, or agreement and does not live with his or her spouse by the end of the taxable year.

This change aligns the EITC eligibility requirements with present-day family law practice.

9624 – Modification of Disqualified Investments Income Test

Increases the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 (2020) to $10,000. The $10,000 amount is indexed for inflation.

9625 – Application of Earned Income Tax Credit in Territories

Instructs Treasury to make payments to the territories that relate to the cost of each territory’s EITC. In the case of Puerto Rico, which has an EITC, the payment is structured as a matching payment, wherein the Treasury will provide a match of up to three times the current cost of the Puerto Rico EITC, if Puerto Rico chooses to expand its current EITC.

The other territories receive cost reimbursements of 75% of their EITC expenditures. The territories must provide Treasury with annual reports on the estimate of costs and a statement of costs with respect to the preceding year.

9626 – Temporary Special Rule for Determining Earned Income for Purposes of the Earned Income Tax Credit

Allows taxpayers in 2021, for purposes of computing the EITC, to substitute their 2019 earned income for their 2021 earned income, if 2021 earned income was less than 2019 earned income.

9631 – Dependent Care Assistance

Refundability and enhancement of Child and Dependent Care Tax Credit

Makes a number of modifications to the child and dependent care tax credit (“CDCTC”) for 2021.

  • Makes the credit fully refundable and increases the maximum credit rate to 50%.
  • Amends the phaseout threshold to begin at $125,000 instead of $15,000.
  • Increases the amount of child and dependent care expenses that are eligible for the credit to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals (such that the maximum credits are $4,000 and $8,000).

At $125,000 the credit percentage begins to phase out, and plateaus at 20% This 20% credit rate phases out for taxpayers whose AGI is in excess of $400,000, such that taxpayers with income in excess of $500,000 are not eligible for the credit.

Provides for a reimbursement of mirror code territories for the costs of this refundable credit in 2021. Additionally, for non-mirror code territories (Puerto Rico and American Samoa), provides a reimbursement for the aggregate value of such a credit, provided the territory develops a plan, approved by the Secretary, to distribute these amounts to its residents.

9632 – Increase in Exclusion for Employer Provided Dependent Care Assistance

Increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

9641 – Credits for Paid Sick and Family Leave Extension of Credits

Extends the Families First Coronavirus Response Act paid sick time and paid family leave credits from March 31, 2021 through September 30, 2021.

9642 – Increase in Limitations on Credits for Paid Family Leave

Increases the amount of wages for which an employer may claim the paid family credit in a year from $10,000 to $12,000 per employee and increases the number of days for which self-employed individuals can claim the credit from 50 to 60.

9643 – Expansion of Leave to Which Paid Family Leave Credit Applies

Expands the paid family leave credit to allow employers to claim the credit for leave provided for the reasons included under the previous employer mandate for paid sick time (e.g., if the employee has contracted COVID-19 or is caring for someone with COVID-19).

9644 – Paid Leave Credits Allowed for Leave for COVID-19 Vaccination

Expands the paid sick time and paid family leave credits to include leave taken to obtain a COVID-19 vaccine or to recover from an injury, disability, illness, or condition related to a COVID-19 immunization.

9645 – Application of Non-Discrimination Rules

Prevents employers from claiming the credit if they make leave available in a manner that discriminates in favor of highly compensated employees, full time employees, or based on employment tenure with the employer.

9646 – Reset of Limitation on Paid Sick Leave

Resets the ten-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee.

The current ten-day limitation runs from the start of the credits in 2020 through March 31, 2021. The new ten-day limitation applies to sick days after March 31, 2021.

For self-employed individuals, the ten-day limitation resets on January 1, 2021.

9647 – Credit Allowed Against Hospital Insurance Tax

Beginning after March 31, 2021, the credits for paid family and medical leave will be structured as a refundable payroll tax credit against the hospital insurance tax.

9648 – Application of Credits to Certain Governmental Employers

Allows state and local governments as well as Federal governmental instrumentalities that are tax-exempt 501(c)(1) organizations to access the paid sick time and paid family leave credits.

9649 – Gross Up of Credit in Lieu of Exclusion from Tax

Increases the value of the credits by the amount equal to the OASDI and HI employer-share tax imposed on qualified paid family and medical leave wages for purposes of this credit.

9650 – Effective date

The provisions relating to the payroll tax credits included in this title become effective for amounts paid with respect to leave taken after March 31, 2021.

The provisions relating to self-employed individuals becomes effective retroactive beginning after December 31, 2021.

9651– Employee Retention Credit

Extends the employee retention tax credit, as added by the CARES Act and expanded and extended in P.L. 116-260, through December 31, 2021.

Modifies the credit such that, beginning after June 30, 2021, the credit will be structured as a refundable payroll tax credit against the hospital insurance tax.

9661 – Premium Tax Credit

Modifies the affordability percentages used for §36 (B) premium tax credits for 2021 and 2022 to increase credits for individuals eligible for assistance under current law and provides §36 (B) credits for taxpayers with income below 400% of the federal poverty line (FPL).

9662 – Temporary Modification of Limitations on Reconciliation of Tax Credits for Coverage under a Qualified Health Plan with Advance Payments of Such Credit

For tax year 2020, modifies the repayment obligations for taxpayers receiving excess premium tax credits under §36 (B) so such payments are not subject to recapture.

9663 – Application of Premium Tax Credit in Case of Individuals Receiving Unemployment Compensation During 2021

For 2021, provides advanced premium tax credits as if the taxpayer’s income was no higher than 133§ of the federal poverty line (FPL) for individuals receiving unemployment compensation as defined in §85(B) of the Internal Revenue Code.

9672 – Tax Treatment of Targeted EIDL Advances

Exempts Economic Injury Disaster Loan (EIDL) grants from tax and provides that such exclusion shall not result in a denial of deduction, reduction of tax attributes, or denial of increase in basis by reason of this exclusion from income.

Directs the Secretary to prescribe rules for determining a partner’s distributive share of amounts received through an EIDL grant.

9673 – Tax treatment of Restaurant Revitalization Grants

Exempts Restaurant Revitalization Grants from tax and provides that such exclusion shall not result in a denial of deduction, reduction of tax attributes, or denial of increase in basis by reason of this exclusion from income.

Directs the Secretary to prescribe rules for determining a partner’s distributive share of amounts received through a Restaurant Revitalization Grant.

Issue 2: Flexible Spending Arrangements Just Got More Flexible – Temporary

Notice 2021-15 provides guidance on the application of recently enacted § 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act), which provides temporary special rules for health flexible spending arrangements (FSAs) and dependent care assistance programs under § 125 cafeteria plans.

Specifically, § 214 of the Act:

  • provides flexibility with respect to carryovers of unused amounts from the 2020 and 2021 plan years.
  • extends the permissible grace period for plan years ending in 2020 and 2021.
  • provides a special rule regarding post-termination reimbursements from health FSAs; provides a special carryover rule for dependent care assistance programs when a dependent “ages out” during the public health emergency posed by COVID-19.
  • allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

In addition, the notice provides that a § 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to, with respect to employer-sponsored health coverage:

  • make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage.
  • revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis
  • revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.

The notice also provides relief with respect to the effective date of amendments to § 125 cafeteria plans to implement the expansion under the CARES Act of allowed expenses for health FSAs and health reimbursement arrangements to include over-the-counter drugs without prescriptions and menstrual care products.

Issue 3: New IRS ‘Submit Forms 2848 and 8821 Online’ Offer Contact Free Signature Options for Tax Pros and Clients Sending Authorization Forms

 IRS has rolled out the new online option that will help tax professionals remotely obtain signatures from individual and business clients and submit authorization forms electronically.

Tax professionals can find the new “Submit Forms 2848 and 8821 Online” on the IRS.gov/taxpro page. Tax professionals must have a Secure Access account, including a current username and password, or create an account in advance of submitting an online authorization form.

The client and the tax professional must sign Form 2848. If the tax professional uses the new online option, the signatures on the forms can be handwritten or electronic. Form 8821 needs only the taxpayer’s signature. If using the new online option, the taxpayer’s signature can be handwritten or electronic.

If the tax professional uses the electronic signature option for a new client, the tax professional must first authenticate the client’s identity.

Tax professionals may also use the “Submit Forms 2848 and 8821 Online” to withdraw previous authorizations. But the new online option cannot be used to ask questions or address other issues.

The process to mail or fax authorization forms to the IRS is still available. Signatures on mailed or faxed forms must be handwritten. Electronic signatures are not allowed.

This summer, the IRS plans to launch the Tax Pro Account. Its initial functionality will allow tax professionals to initiate a third-party authorization on IRS.gov and send it to a client’s IRS online account.

Individual clients will access their online account and digitally sign the authorization, sending it to be recorded on the CAF.

Issue 4: New Form 7202 Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals – Does This Apply to Your Client? 

A new IRS form is available for eligible self-employed individuals to claim sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA). Eligible self-employed individuals will determine their qualified sick and family leave equivalent tax credits with the new IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. Individuals will claim the tax credits on their 2020 Form 1040 for leave taken between April 1, 2020, and Dec. 31, 2020, and on their 2021 Form 1040 for leave taken between Jan. 1, 2021, and March 31, 2021.

The FFCRA, passed in March 2020, allows eligible self-employed individuals who, due to COVID-19 are unable to work or telework for reasons relating to their own health or to care for a family member to claim refundable tax credits to offset their federal income tax. The credits are equal to either their qualified sick leave or family leave equivalent amount, depending on circumstances.

Who May File Form 7202
Eligible self-employed individuals must:

Taxpayers must maintain appropriate documentation establishing their eligibility for the credits as an eligible self-employed individual.

Issue 5: Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR – What’s New?

Excess deductions on termination.

Under Final Regulations – TD9918, each excess deduction on termination of an estate or trust retains its separate character as an amount allowed in arriving at adjusted gross income, a non-miscellaneous itemized deduction, or a miscellaneous itemized deduction. Box 11, code A, was revised to read Excess deductions—§67(e) expenses and a new Box 11, code B, Excess deductions—Non-miscellaneous itemized deductions was added.

See Box 11, Code A—Excess Deductions on Termination – §67(e) Expenses and Box 11, Code B—Excess Deductions on Termination- Non-Miscellaneous Itemized Deductions, later, for more information.

Business interest expense limitation.

The business interest expense limitation of §163(j) increased from 30% to 50% of adjusted taxable income for tax year 2020, and retroactively for 2019.

Every taxpayer who deducts business interest is required to file Form 8990, Limitation on Business Interest Expense Under Section 163(j), unless an exception for filing is met.

Issue 6: Information About Filing Form 943-X for 2020

The newest version of Form 943-X (to allow for corrections to the new lines added to the 2020 Form 943) is expected in mid-March 2021.

In the meantime, for 2020:

  1. If adjusting 2019 or earlier, you may use the existing Form 943-X.
  2. If adjusting 2020 and not making any increase or decrease to the employer or employee share of social security tax or to any of the new COVID-related lines that were added to the 2020 Form 943, the IRS strongly recommends not using the existing Form 943-X, but rather waiting for the new Form 943-X revision to be released.
  3. If adjusting 2020 and making any increase or decrease to the employer or employee share of social security tax or to any of the new COVID-related lines, do not use the existing Form 943-X; instead, wait for the new Form 943-X revision.
  4. Please do not send a Form 943 with “Amended” (or similar notation) written on the form. If you have already done either (3) or (4) above, wait for correspondence to find out if the IRS was able to process the tax return or had to reject it.

Given the backlog of paper forms and correspondence due to COVID-19, the IRS is unable to estimate when correspondence will go out.

Issue 7: Qualified Plug-In Electric Drive Motor Vehicles (IRC 30D)

§30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks. For vehicles acquired after 12/31/2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours.

The total amount of the credit allowed for a vehicle is limited to $7,500. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009).

Manufacturers of the vehicles listed below have provided appropriate information and have received from the Service acknowledgement of the vehicle’s eligibility for the credit and the amount of the qualifying credit. The list of qualified vehicles provided below applies only to vehicles acquired after December 31, 2009.

New plug- in electric drive motor vehicles added to credit list.

The IRS has added the following models to the list of vehicles eligible for the plug- in electric drive motor vehicle credit under §30D.

  • Ford: 2021 Escape Plug-in Hybrid. The credit amount for this model is $6,843.
  • Porsche: 2021 Taycan 4S EV, Taycan Turbo EV and Taycan Turbo S EV. The credit amount for these models is $7,500.
  • Audi: 2021 Audi e-tron Sportback, A7 55 TFSI e Quattro, A8 L 60 TFSI e Quattro, and Q5 55 TFSI e Quattro qualify. The credit amount for the e-tron Sportback is $7,500, while the other models have a credit of $6,712.
  • Ford: All 2021 Mustang Mach-Es. The credit amount is $7,500.
  • Lincoln: 2021 Lincoln Corsair Reserve Grand Touring (PHEV). The credit amount is $6,843.
  • Mitsubishi: 2021 Outlander PHEV. The credit amount is $6,587.
  • Kia: 2021 Kia NIRO EV (the credit amount for this model is $7,500)
  • 2021 Kia Niro Plug-in Hybrid (the credit amount for this model is $4,543).

Issue 8: Final 1040 Instructions Revise Virtual Currency Transaction List

The final version of the instructions to Forms 1040 and 1040-SR has revised the non-exhaustive list of transactions involving virtual currency by removing the purchase of virtual currency and the acquisition of a financial interest in virtual currency from the list. The list is used by taxpayers to determine how they answer the question on Form 1040 and 1040-SR on whether they have received, sold, sent, exchanged, or otherwise acquired any financial interest in virtual currency during the year.

Background

For the 2020 tax year, a client will need to answer the question on page 1 of Form 1040, U.S. Individual Income Tax Return, or 1040-SR, U.S. Tax Return for Seniors, which asks, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” (Instructions to Form 1040 and Form 1040-SR, “1040 instructions”)

A draft version of the 1040 instructions released in December 2020 included a list of transactions involving virtual currency.

The draft 1040 instructions read:

“A transaction involving virtual currency includes, but is not limited to:

  • The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork.
  • An exchange of virtual currency for goods or services.
  • A purchase or sale of virtual currency.
  • An exchange of virtual currency for other property, including for another virtual currency; and
  • An acquisition or disposition of a financial interest in virtual currency.”

List virtual currency transactions revised. The final version of the 1040 instructions has revised the list of virtual currency transactions. The final 1040 instructions read:

“A transaction involving virtual currency includes, but is not limited to:

  • The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork.
  • An exchange of virtual currency for goods or services.
  • A sale of virtual currency.
  • An exchange of virtual currency for other property, including for another virtual currency; and
  • A disposition of a financial interest in virtual currency.”

Thus, “a purchase of virtual currency” and “an acquisition of a financial interest in virtual currency” have been removed from the list.

Note: The fact that these two things were removed from the list does not necessarily mean that they are therefore not virtual currency transactions. First, the list is not exhaustive since it “includes, but is not limited to” what is listed.

Second, the question on the Form 1040 asks explicitly whether a taxpayer has received or acquired a financial interest in virtual currency. It would seem that, regardless of what is on the list in the instructions, if a taxpayer purchased virtual currency, or acquired a financial interest in virtual currency, then the taxpayer would be required to answer yes to the virtual currency question on the Forms.

Issue 9: Erroneous CP 21C Letters

More than 109,000 taxpayers recently received a letter (designated by the IRS as a “Notice CP21C”) informing them the IRS was offsetting their Economic Impact Payment. The IRS issues letters such as a CP21C when informing taxpayers of account adjustments.

The critical news: The letters were wrong. The letter was supposed to have said that the IRS could not issue the first EIP to the taxpayer because the IRS had not processed the taxpayer’s 2019 return and there was no 2018 return on which to base that EIP.

The bad news: The IRS could not issue EIP1 to taxpayers who didn’t submit a timely claim or return or for whom the IRS had not issued a payment by December 31, 2020. These are the taxpayers who received the CP21C Letter.

The good news: Taxpayers can disregard the notice and eligible individuals can claim the Recovery Rebate Credit on their 2020 tax return.

But more bad news: Taxpayers will have to wait to receive the RRC until their 2020 return processes, and the RRC is subject to regular offset rules for unpaid federal tax liabilities and certain other debts (such as child support or state income tax obligations).

Issue 10: Educators Can Now Deduct Out-of-Pocket Expenses for COVID-19 Protective Items

Eligible educators can deduct unreimbursed expenses for COVID-19 protective items to stop the spread of COVID-19 in the classroom. COVID-19 protective items include, but are not limited to:

  • Face masks
  • Disinfectant for use against COVID-19
  • Hand soap
  • Hand sanitizer
  • Disposable gloves
  • Tape, paint, or chalk to guide social distancing.
  • Physical barriers (for example, clear plexiglass)
  • Air purifiers
  • Other items recommended the Centers for Disease Control and Prevention recommends that individuals use for the prevention of the spread of COVID-19

Rev. Proc. 2021-15 provides guidance for educators and their expenses under the COVID-related Tax Relief Act of 2020. For more information about the educator expense deduction, the COVID-related Tax Relief Act of 2020 and other tax changes, visit IRS.gov.

Issue 11: IRS Warns About Corporate Domestic Production Activities Deduction Refund Claims

IRS officials issued an alert concerning amended returns and claims for the Domestic Production Activities Deduction. This provision of tax law was repealed as part of the Tax Cuts and Jobs Act for taxable years after Dec. 31, 2017.

In the wake of the repeal, the IRS has received a wave of questionable amended returns and claims for tax benefits in the billions of dollars. A very high percentage of the claims for the now repealed Domestic Production Activities Deduction are not properly supported by those claiming the deduction.

A large majority of the filings involve taxpayers who are claiming DPAD for the first time based on studies conducted after the fact, which contain unreasonable assumptions of facts and law.

The IRS will continue to audit this issue even though the section was repealed. In many examination cases, once challenged, taxpayers have conceded 100% of the claim.

IRS examiners have been advised to consider §6676, Erroneous Claim for Refund or Credit, penalties, other applicable penalties, and referrals to the Office of Professional Responsibility (OPR), when appropriate. Taxpayers and their advisors should ensure they have documentation to support their position and should expect that the IRS may impose appropriate penalties unless taxpayers establish that they have reasonable cause. A study does not necessarily provide reasonable cause. Taxpayers who have already filed can withdraw prior to IRS audit contact to avoid penalties.

Issue 12: Employers May Be Able to Claim the Employee Retention Credit and Have a PPP Loan

Under §206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP).

The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both. Please disregard the “Caution” paragraph under the line instructions for “Nonrefundable Portion of Employee Retention Credit From Worksheet 1” in the instructions for the employment tax return as the information in that paragraph is no longer accurate after passage of the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Issue 13: Provisions Expiring in 2021

Provision Code Section Expiration Date
Credit for certain nonbusiness energy property §25C(g) 12/31/21
Credit  for qualified fuel cell motor vehicles §30B(k)(1) 12/31/21
Credit for alternative fuel vehicle refueling property §30C(g) 12/31/21
Credit for two-wheeled plug-in electric vehicles  §30D(g)(3)(E)(ii) 12/31/21
Credit for health insurance costs of eligible individuals §35(b)(1)(B) 12/31/21
Second generation biofuel producer credit §40(b)(6)(J) 12/31/21
Increase in State low-income housing tax credit ceiling  

§42(h)(3)(I)

 

12/31/21
Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit.

December 31, 2025, in the case of investment credits for offshore wind facilities.

 

§45(d) and 48(a)(5)) 12/31/21
Credit for production of Indian coal

 

§45(e)(10)(A) 12/31/21
Indian employment credit §45A(f) 12/31/21
Credit for construction of new energy efficient homes §45L(g) 12/31/21
Mine rescue team training credit §45L(g)) 12/31/21
Treatment of premiums for certain qualified mortgage insurance as qualified residence interest §163(h)(3)(E)(iv)) 12/31/21
Computation of adjusted taxable income without regard to any deduction allowable for depreciation, amortization, or depletion for purposes of the limitation on business

 

§163(j)(8)(A)(v)) 12/31/21
Three-year recovery period for racehorses two years old or younger

 

§168(e)(3)(A)) 12/31/21
Accelerated depreciation for business property on an Indian reservation.

 

§168(j)(9)) 12/31/21
Charitable contributions deductible by nonitemizers §170(p)) 12/31/21
Black Lung Disability Trust Fund: increase in amount of excise tax on coal.

 

§4121(e)(2))

 

12/31/21
Incentives for alternative fuel and alternative fuel mixtures:

a.      Excise tax credits and outlay payments for alternative fuel.

b.      Excise tax credits for alternative fuel

mixtures

 §6426(d)(5)

and §6427(e)(6)(C)

 

§ 6426(e)(3))

12/31/21
Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands §7652(f)) 12/31/21
American Samoa economic development credit §119 of Pub. L. No. 109-432, as amended

 

12/31/21
Modification of limitation on charitable contributions §2205 of Pub. L. No. 116-136, as amended 12/31/21
Employee retention and rehiring tax credit

 

§2301 of Pub. L. No.16-136, as amended)

 

12/31/21
Prevention of partial plan termination

 

§209 of Division EE of Pub. L. No. 116-260)

 

3/31/21

 

Special rule for health and dependent care flexible spending arrangements §214 of Division EE of Pub. L. No. 116-260 12/31/21

Issue 14: CCA Looks at Relation Between Refund Look-back Period and COVID Filing Extension Chief Counsel Advice 202053015

In an emailed Chief Counsel Advice, the IRS has said that, with respect to a taxpayer who files a refund claim for 2016 after April 15, 2020, the period between April 15, 2020 and the date a taxpayer actually files for the refund is included as an extension for purposes of determining the amount of a refund the taxpayer can receive.

Background. In April, due to the COVID-19 pandemic, the IRS extended the deadline to file refund claims for any tax from the 2016 tax year until July 15, 2020. This extension was made in accordance with §7508A (authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions). (Notice 2020-23, 2020-18)

The amount of a refund cannot exceed the tax paid within the period, immediately preceding the filing of the claim, equal to three years plus the period of any extension of time for filing the return. (§6511(b)(2)(A)) The period is often referred to as the 6511 look-back period.

Reg § 301.7508A-1, Ex. 5, describes the relation between the 6511 look-back period and extensions of time to file due to a federally declared disaster.

  • W, resident of County D, intend to file an amended return to request a refund of 2008 taxes. W filed her 2008 income tax return on April 15, 2009. Under 6511(a), W’s amended 2008 tax return had to be filed on or before April 15, 2012. (Reg § 301.7508A-1, Ex. 5(i))
  • On April 2, 2012, an earthquake hit County D. The IRS determined that County D was a federally declared disaster area and said that the time period for affected taxpayers to file a claim for a refund falling on or after April 2, 2012, and on or before October 2, 2012, had been postponed to October 2, 2012. (Reg § 301.7508A-1, Ex. 5(ii))
  • The postponement period for the disaster began on April 2, 2012 and ended on October 2, 2012. Accordingly, W’s claim for refund for 2008 taxes would be timely if filed on or before October 2, 2012. Moreover, in applying the 6511 look-back period, which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is “disregarded.” Thus, if the claim was filed on or before October 2, 2012, amounts deemed paid on April 15, 2009, would have been paid within the 6511 look-back period. (Reg § 301.7508A-1, Ex. 5(iii))

Facts. Taxpayer had withholding from 2016 deemed paid on April 15, 2017, as per §6513(c)(2).

Taxpayer late filed the 2016 return in June 2020 and claimed a refund of the withholding.

The taxpayer’s 2016 refund claim normally would have been due by April 15, 2020 in order to claim the withholding. However, Notice 2020-23 extended the due date to file the 2016 refund claim to July 15, 2020. Thus, when the taxpayer filed in June 2020, the refund claim was timely.

Issue. Does the Notice 2020-23 extension to file a 2016 refund claim operate to disregard the period between April 15, 2020 and the date the taxpayer actually filed in June 2020 for purposes of the 6511 look-back period?

Advice. Yes. The Notice 2020-23 extension operated to disregard the period from April 15, 2020 to the date of filing in June 2020 for purposes of the section 6511 look-back period.

The CCA based its advice on the similar situation described in Reg § 301.7508A-1, Ex. 5.

Issue15: New Law Extends COVID Tax Credit for Employers Who Keep Workers on Payroll

IRS urges employers to take advantage of the newly extended employee retention credit, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted Dec. 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.

As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after Dec. 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.

Effective Jan. 1, 2021, employers are eligible if they operate a trade or business during Jan. 1, 2021, through June 30, 2021, and experience either:

  1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
  2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).

Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

In addition, effective Jan. 1, 2021, the definition of qualified wages was changed to provide:

  • For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
  • For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.

Issue 16: IRS Operations During COVID-19: Mission Critical Functions Continue

The IRS is now opening mail within normal timeframes. The IRS has also made significant progress in processing prior year returns.

As of January 29, 2021, they had 6.7 million individual tax returns in the processing pipeline. For refunds that could not be issued in 2020 because the tax return is being corrected, reviewed, or awaiting correspondence from a taxpayer, the refund will be issued as a paper check in 2021 per normal processes.

How long you may have to wait:  It depends on where the tax return was sent and where it is being processed. IRS is processing returns received over the summer due to the extended July 15 tax filing due date and, in some cases, are processing tax returns dated as early as July 15, 2020.

However, IRS is rerouting tax returns and taxpayer correspondence from locations that are behind to locations where more staff is available, and they are taking other actions to minimize any delays. Tax returns are opened in the order received. As the return is processed, it may be delayed because it has a mistake, is missing information, or there is suspected identity theft or fraud. If IRS can fix it without contacting the taxpayer, they will. If IRS needs more information or need the client to verify that it was actually the client who sent the tax return, they will write and send a letter.

The resolution of these issues depends on how quickly and accurately clients respond, and the IRS staff trained and working under social distancing requirements to complete the processing of the return.

What should the client do: Other than responding to any requests for information promptly, there is no action to take. IRS asked that the client please not file a second tax return or contact the IRS about the status of the return.

E-filing the 2020 tax return: To e-file the client will need to enter their AGI from the tax year 2019 tax return.  If the 2019 return has not yet been processed, they may enter $ 0 (zero) as the prior year Adjusted Gross Income.

Issue 17: Clarification of the Definition of Qualified Sick Leave Wages and Qualified Family Leave Wages

Qualified sick leave wages and qualified family leave wages are wages (as defined in §3121(a)) that an employer is required to pay under the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act, or voluntarily pays under the COVID-related Tax Relief ACT of 2020.

  • 288 of the COVID-related Tax Relief Act of 2020 clarified that whether a payment is a qualified sick leave wage or qualified family leave wage is determined without regard to the exclusions from the definition of employment under §3121(b).

However, for purposes of reporting qualified sick leave wages or qualified family leave wages on the employment tax return, the exclusions under §3121(b) still apply.

Accordingly, qualified sick leave wages and qualified family leave wages that meet an exclusion under §3121(b) are not subject to social security and Medicare Tax. Therefore, when calculating the credit for qualified sick and family leave wages on Worksheet 1, add the amount of those qualified sick or family leave wages that are eligible for the credit but not included in Step 2, line 2a, and/or Step 2, line 2e, because the qualified sick or family leave wages meet an exclusion under §3121(b) before figuring the total credit in Step 2, line 2d (credit for qualified sick leave wages) or Step 2, line 2h (credit for qualified family leave wages).

Issue 18: Applicable Federal Rates (AFR) for March 2021 – Rev. Rul. 2021-5

Rev. Rul. 2021-5 TABLE 1

Applicable Federal Rates (AFR) for March 2021

Period for Compounding

Annual          Semiannual Quarterly     Monthly

Short-term

AFR    0.11%           0.11%           0.11%           0.11%

110% AFR   0.12%           0.12%           0.12%           0.12%

120% AFR   0.13%           0.13%           0.13%           0.13%

130% AFR   0.14%           0.14%           0.14%           0.14%

Mid-term

AFR    0.62%           0.62%           0.62%           0.62%

110% AFR   0.68%           0.68%           0.68%           0.68%

120% AFR   0.74%           0.74%           0.74%           0.74%

130% AFR   0.81%           0.81%           0.81%           0.81%

150% AFR   0.93%           0.93%           0.93%           0.93%

175% AFR   1.09%           1.09%           1.09%           1.09%

Long-term

AFR    1.62%           1.61%           1.61%           1.60%

110% AFR   1.78%           1.77%           1.77%           1.76%

120% AFR   1.94%           1.93%           1.93%           1.92%

130% AFR   2.10%           2.09%           2.08%           2.08%

Rev. Rul. 2021-5 TABLE 2

Adjusted AFR for March 2021

Period for Compounding

Annual          Semiannual Quarterly     Monthly

Short-term

adjusted AFR          0.08%           0.08%           0.08%           0.08%

Mid-term

adjusted AFR          0.47%           0.47%           0.47%           0.47%

Long-term

adjusted AFR          1.22%           1.22%           1.22%           1.22%

Rev. Rul. 2021-5 TABLE 3

Rates Under Section 382 for March 2021

Adjusted federal long-term rate for the current month 1.22%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 1.22%

Rev. Rul. 2021-5 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for March 2021

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit        7.26%

Appropriate percentage for the 30% present value low-income housing credit        3.11%

Rev. Rul. 2021-5 TABLE 5

Rate Under Section 7520 for March 2021

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest .8%

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