News & Tech Tips

Commercial Activity Tax (CAT) Update

Kathleen Hargrove on January 22, 2021

Due to Ohio statutes for Commercial Activity Tax (CAT) reporting purposes, in addition to regular revenue typically reported for CAT filing, businesses this year must also include:

 

  • The gross proceeds received from the 3 special BWC rebates issued in 2020 – issued around April, October and December

 

  • Grants received from Ohio, county or local jurisdictions

 

  • EIDL grants for the CARES Act

 

 

Please note that the Ohio Department of Taxation has specifically excluded forgiveness of PPP loans and employee retention credits, so these proceeds do not have to be included for CAT reporting.  

 

 

If you have any questions about this update or would like to discuss your situation specifically, please contact your Whalen advisor for assistance.

IRS Delays Start of Tax Filing Season to Feb. 12

Kathleen Hargrove on January 18, 2021

The IRS announced that the nation’s tax season will start on Friday, February 12, 2021, when they will begin accepting and processing 2020 tax year returns.

 

They typically begin accepting returns at the end of January, but the February 12 start date this year allows the IRS time to do additional programming and testing of IRS systems following the December 27 tax law changes that provided a second round of Economic Impact Payments and other benefits. This programming work is critical to ensuring IRS systems run smoothly.

 

To speed refunds during the pandemic, the IRS urges taxpayers to file electronically with direct deposit as soon as they have the information they need.

 

Individuals can still begin filing their tax returns now, and the returns will be transmitted to the IRS starting February 12.

 

Under the PATH Act, the IRS cannot issue a refund involving the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) before mid-February. The law provides this additional time to help the IRS stop fraudulent refunds and claims from being issued, including to identity thieves.

 

The IRS anticipates a first week of March refund for many EITC and ACTC taxpayers if they file electronically with direct deposit and there are no issues with their tax returns. This would be the same experience for taxpayers if the filing season opened in late January. Taxpayers can utilize the Where’s My Refund Tool for their personalized refund date.

 

Overall, the IRS anticipates that the majority of taxpayers will receive their refund within 21 days of when they file electronically with direct deposit if there are no issues with their tax return. Filing via paper could cause additional delays.

 

Check out these helpful tips from the IRS for taxpayers to make filing easier.

Educate yourself about the revised tax benefits for higher education

Kathleen Hargrove on January 12, 2021

Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.

The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.

Deductions vs. credits

Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit and the American Opportunity Tax Credit.

Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.

First, let’s look at the deduction

For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:

  • For 2020, a taxpayer with a MAGI of up to $65,000 ($130,000 for married filing jointly) could deduct qualified expenses up to $4,000.
  • For 2020, a taxpayer with a MAGI between $65,001 and $80,000 ($130,001 and $160,000 for married filing jointly) could deduct up to $2,000.
  • For 2020, the allowable 2020 deduction was phased out and was zero if your MAGI was more than $80,000 ($160,000 for married filing jointly).

As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.

Two credits aligned

Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.

Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).

Best for you

Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account.

Can you qualify for a medical expense tax deduction?

Kathleen Hargrove on December 16, 2020

You may be able to deduct some of your medical expenses, including prescription drugs, on your federal tax return. However, the rules make it hard for many people to qualify. But with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.

Itemizers must meet a threshold

For 2020, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income (AGI). This threshold amount is scheduled to increase to 10% of AGI for 2021. You also must itemize deductions on your return in order to claim a deduction.

If your total itemized deductions for 2020 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2020 may allow you to exceed the 7.5% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.

In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:

  • Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.
  • Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 17¢ a mile for miles driven in 2020, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.
  • Eyeglasses, hearing aids, dental work, prescription drugs and more. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as medical marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.
  • Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.

Costs for dependents

You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. Contact us if you have questions about medical expense deductions.

PPP Loan…What Expenses Are Deductible?

Kathleen Hargrove on November 23, 2020

As previously communicated in Notice 2020-32, the IRS stated its position that business expenses paid with Paycheck Protection Program (PPP) funds that are forgiven cannot be deducted for federal tax purposes. However, it was unclear how the deduction limitation would be applied if a PPP loan was not forgiven until a subsequent tax year.

 

On Wednesday, the Treasury Department and IRS released guidance clarifying the tax treatment of expenses where a PPP loan has not been forgiven by the end of the year the loan was received.

 

In summary, IRS Revenue Ruling 2020-27 concludes:

 

A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

 

The ruling proves two scenarios as examples:

 

Scenario 1

 

A borrower pays expenses that qualify under the CARES Act as valid PPP expenditures. In that scenario, the borrower applies for forgiveness in November 2020 and satisfies all the requirements under the CARES Act to have the loan forgiven, but it doesn’t yet have an answer as to whether it will be forgiven.

 

Scenario 2

 

The borrower pays the same type of valid expenses with its PPP loan and satisfies the CARES Act requirements for the loan, but it has not submitted a forgiveness application before the end of 2020.

 

According to the ruling, the businesses in both scenarios can’t deduct expenses funded with PPP loans because they have a reasonable expectation of forgiveness.

 

In addition, Revenue Procedure 2020-51 was issued which provides a safe harbor for PPP borrowers whose loan forgiveness has been partially or fully denied and who wish to claim deductions for otherwise eligible payments on a return, amended return, or administrative adjustment request.

 

For more information on this, visit Treasury’s website that has links to the full ruling and procedure.

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