The IRS has announced that the federal income tax filing deadline for individuals for the 2020 tax year is extended from April 15, 2021, until Monday, May 17, 2021. The IRS extended the deadline to provide relief to taxpayers facing challenges as a result of the pandemic and because it’s grappling with a rising backlog of 24 million unprocessed returns. As part of its announcement, the IRS stated it would soon be issuing additional guidance about the deadline extension.

Extended deadline details

Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.

Individual taxpayers don’t need to file any forms to qualify for this automatic federal tax filing and payment relief. If you need additional time to file beyond the May 17 deadline, you can request a filing extension until October 15 by filing Form 4868. Filing Form 4868 gives you until October 15 to file your 2020 tax return but doesn’t grant you an extension of time to pay taxes due. You should pay the federal income tax due by May 17, 2021, to avoid interest and penalties.

Estimated payment deadline not extended

This relief doesn’t apply to estimated tax payments that are due on April 15, 2021. These payments are still due on that date. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS if your income isn’t subject to income tax withholding. This includes self-employment income, interest, dividends, prize winnings, alimony and rental income. Many taxpayers automatically have taxes withheld from their paychecks and sent to the IRS by their employers.

State tax returns not included

Be aware that the federal tax filing deadline postponement to May 17, 2021, applies to only individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021. It doesn’t apply to state tax payments or deposits or payments of any other type of federal tax. Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and aren’t always the same as the federal filing deadline. Check with your tax advisor or your state tax authority for more information.

In addition, earlier this year, the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 doesn’t affect the June deadline.

File as soon as possible

Be aware that this extended deadline is optional. You’ll want to file as soon as possible — especially if you’re due a refund.

California Wildfires: https://www.irs.gov/newsroom/irs-provides-tax-relief-for-victims-of-california-wildfires-oct-15-deadline-other-dates-extended-to-dec-15
Oregon Wildfires: https://www.irs.gov/newsroom/irs-provides-tax-relief-for-victims-of-oregon-wildfires-oct-15-deadline-other-dates-extended-to-jan-15
Hurricane Sally: https://www.irs.gov/newsroom/irs-provides-tax-relief-for-victims-of-hurricane-sally-oct-15-deadline-other-dates-extended-to-jan-15

The IRS hotline to contact with any inquiries is, 866-562-5227. Also, please feel free to connect with one of our tax advisors if you have any questions.

The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.

Tax deferral background

On August 8, President Trump signed a Presidential Memorandum that permits the deferral of the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic.

The memorandum directed Treasury Secretary Steven Mnuchin to defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes (or the employee’s share of Railroad Retirement taxes) on wages or compensation paid from September 1, 2020, through December 31, 2020. It applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or the equivalent amount with respect to other pay periods. Amounts can be deferred without penalties, interest or additions to the tax.

Note: Under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

New guidance

Issued on August 28, the three-page guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.

The guidance states that “if necessary,” the employer “may make arrangements to collect the total applicable taxes” from an employee. This appears to answer one question that employers have about what happens if an employee leaves a job later this year or before the deferred taxes are due. However, no additional details are given on how an employer should make arrangements to collect unpaid tax.

Pushback from business groups

Before the guidance was issued, several business and payroll groups stated that their members would not implement the deferral. The U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral unworkable.

“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging,” the letter states. “But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”

The National Payroll Reporting Consortium, a payroll services industry association, stated there are “substantial” computer programming changes that are needed to implement the deferral.

“Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” the consortium explained. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by September 1.”

Going forward

There are still unanswered questions about the payroll tax deferral. If you need assistance or have questions about how to proceed at your business, contact us. We can help you decide whether to participate and how to go forward.

The IRS has issued new guidance updating the rules for using optional standard mileage rates when calculating “above-the-line” deductions for the costs of operating an automobile for certain purposes. IRS Revenue Procedure 2019-46 also lays out rules for establishing the amount of an employee’s transportation expenses that are reimbursed using the optional standard mileage rates.

Understanding the allowable deductions

The Tax Cuts and Jobs Act (TCJA) temporarily suspends all miscellaneous itemized deductions that are subject to the 2% floor, until 2026. The suspension applies to most employees’ miscellaneous itemized deductions for unreimbursed business expenses — including the costs of operating an automobile for business and unreimbursed travel costs.

But self-employed individuals and qualified employees (including Armed Forces reservists, qualifying state or local government officials, educators, and performing artists) are still allowed to deduct unreimbursed expenses during the suspension. The suspension doesn’t preempt the deductions because these taxpayers can claim the expenses “above the line,” or when computing their adjusted gross income (AGI), rather than as itemized, below-the-line deductions. The guidance provides rules for how to do so.

Using the business standard rate

For owned or leased automobiles used for business, taxpayers generally can deduct an amount equal to either:

• The business standard mileage rate (for 2019, 58 cents) multiplied by the number of business miles traveled, or
• The actual fixed and variable costs paid that are attributable to traveling those business miles.

The new guidance provides that eligible taxpayers generally can use the business standard mileage rate instead of actual fixed and variable costs when computing AGI, subject to certain limitations. (For example, you can’t use the business rate for fleet operations of five or more autos.)

If you opt to use the business rate, though, you generally can’t also deduct your costs for items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, and license and registration fees.

You can, however, deduct parking fees and tolls attributable to business use above the line. Under certain circumstances, you also can deduct interest on the purchase of the automobile and related state and local property taxes. (If the auto isn’t used solely for business purposes, these expenses must be allocated accordingly.)

As for depreciation, taxpayers are required to reduce the basis of an automobile used in business by the greater of the amount of depreciation claimed or allowable. Under the guidance, in any year during which you use the business standard mileage rate, a specified per-mile amount (published annually by the IRS) is treated as both the depreciation claimed and the depreciation allowable.

The guidance also provides that taxpayers with deductible unreimbursed travel expenses can use the business standard mileage rate when calculating their AGI.

Documenting transportation expenses

The new guidance includes rules for documenting — or “substantiating” — the amount of an employee’s ordinary and necessary transportation expenses that an employer, its agent or a third party reimburses using a mileage allowance.

According to the guidance, an employee will be deemed to satisfy the substantiation requirements if he or she actually substantiates to the reimbursing party the time, place (or use) and business purpose of the expense. The amount is considered substantiated simply because the reimbursing party pays a mileage allowance instead of reimbursing the actual transportation expenses the employee incurs or may incur (subject to certain limitations).

Under the revenue procedure, self-employed individuals and qualified employees aren’t required to include in gross income the portion of a mileage allowance received from an employer, its agent or a third party that is less than or equal to the amount deemed substantiated. Assuming other requirements for accountable plans — plans that comply with IRS requirements for reimbursing workers for business expenses in which reimbursement isn’t counted as income — are met, that portion of the allowance isn’t reported as wages or other compensation and is exempt from withholding and payment of employment taxes.

The portion of an allowance that exceeds the substantiated amount, however, must be included in gross income and is treated as paid under a nonaccountable plan. As a result, such amounts are reported as wages or other compensation and subject to employment tax withholding and payment.

Be aware that taxpayers aren’t required to use the method described in the guidance to establish their reimbursed transportation expenses. If you maintain adequate records or other sufficient evidence, you can instead choose to substantiate your actual expense amounts.

The guidance provides additional rules for satisfying the requirements that employees return allowance payments that exceed substantiated amounts. If an employer provides an advance mileage allowance that anticipates more business miles than the employee substantiates, the employee must return a certain portion of the excess, depending on the type of allowance.

FAVR allowances

The revenue procedure also includes guidance on computing fixed and variable rate (FAVR) allowances to establish an employee’s automobile expenses. A FAVR is a mileage allowance that uses a flat rate or stated schedule that combines periodic fixed payments (for items such as depreciation or lease payments, insurance, registration and license fees, and personal property taxes) and variable rate payments (for items such as gasoline and all related taxes, oil, tires, and routine maintenance and repairs).

Employers must base the amount of a FAVR allowance on data that’s derived from the relevant geographic area and reflects retail prices. The data must be reasonable and statistically defensible in approximating the actual expenses an employee would incur as owner of the “standard automobile” (the automobile the payer selects to use as the basis for a specific FAVR allowance).

The guidance provides that the standard automobile cost for a calendar year can’t exceed 95% of the sum of the retail dealer invoice cost for the standard auto in the area and the state and local sales or use taxes on the purchase of the auto. (The IRS publishes the maximum standard auto cost annually.) Its guidance addresses the determination of business use percentage, allowance limitations and the payer’s recordkeeping and reporting obligations.

Effective now

The new IRS guidance is effective for deductible transportation expenses paid or incurred, and mileage allowances or reimbursements paid, on or after November 14, 2019. In addition to business driving expenses, it also addresses the deductible costs of operating a vehicle for charitable, medical or moving purposes. We’d be pleased to answer your questions regarding mileage-rated deductions.

The IRS recently issued its 2020 cost-of-living adjustments. With inflation remaining largely in check, many amounts increased slightly, and some stayed at 2019 levels. As you implement 2019 year-end tax planning strategies, be sure to take these 2020 adjustments into account in your planning.

The Tax Cuts and Jobs Act (TCJA) suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2020, the standard deduction is $24,800 (married couples filing jointly), $18,650 (heads of households), and $12,400 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help a lot of taxpayers who typically itemize deductions.

Education and child-related breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2020. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2020, depending on the break. For example:

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2020: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2020. They’re $118,000–$138,000 for joint filers and $59,000–$69,000 for other filers — up $2,000 for joint filers and $1,000 for others.

The adoption credit. The MAGI phaseout ranges for eligible taxpayers adopting a child will also increase for 2020 — by $3,360 to $214,520–$254,520 for joint, head-of-household and single filers. The maximum credit increases by $220, to $14,300 for 2020.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2020, the amount is $11.58 million (up from $11.40 million for 2019).

The annual gift tax exclusion remains at $15,000 for 2020. It’s adjusted only in $1,000 increments, so it typically increases only every few years. (It increased to $15,000 in 2018.)

Retirement plans

Not all of the retirement-plan-related limits increase for 2020. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2020:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
  • For a spouse who participates, the 2020 phaseout range limits increase by $1,000, to $104,000–$124,000.
  • For a spouse who doesn’t participate, the 2020 phaseout range limits increase by $3,000, to $196,000–$206,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2020 phaseout range limits increase by $1,000, to $65,000–$75,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2019 phaseout range limits increase by $3,000, to $196,000–$206,000.
• For single and head-of-household taxpayers, the 2019 phaseout range limits increase by $2,000, to $124,000–$139,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Crunching the numbers

With the 2020 cost-of-living adjustment amounts inching slightly higher than 2019 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2020 numbers.

Earlier this year, the IRS published a proposed safe harbor giving owners of certain rental real estate interests the opportunity to take advantage of the qualified business income (QBI) deduction. The QBI write-off was created by the Tax Cuts and Jobs Act (TCJA) for pass-through entities. The IRS has now released final guidance (Revenue Procedure 2019-38) on the safe harbor that clearly lays out the requirements that taxpayers must satisfy to benefit.

QBI in a nutshell

The TCJA added Section 199A to the Internal Revenue Code. It generally allows partnerships, limited liability companies (LLCs), S corporations and sole proprietorships to deduct as much as 20% of QBI received. QBI equals the net amount of income, gains, deductions and losses — excluding reasonable compensation, certain investment items and payments to partners for services rendered. The deduction is subject to several significant limitations.

Many taxpayers involved in rental real estate activities were uncertain whether they would qualify for the deduction, which prompted the proposed safe harbor. The final guidance leaves no doubt that individuals and entities that own rental real estate directly or through disregarded entities (entities that aren’t considered separate from their owners for income tax purposes, such as single-member LLCs) may be eligible.

Covered interests

The safe harbor applies to qualified “rental real estate enterprises.” For purposes of the safe harbor only, the term refers to a directly held interest in real property held for the production of rents. It may consist of an interest in a single property or multiple properties.

You can treat each interest in a similar property type as a separate rental real estate enterprise or treat interests in all similar properties as a single enterprise. Properties are “similar” if they’re part of the same rental real estate category (that is, residential or commercial). In other words, you can only hold commercial real estate in the same enterprise with other commercial real estate. The same applies for residential properties.

Bear in mind that, if you opt to treat interests in similar properties as a single enterprise, you must continue to treat interests in all properties of that category — including newly acquired properties — as a single enterprise as long as you use the safe harbor. If, however, you choose to treat your interests in each property as a separate enterprise, you can later decide to treat your interests in all similar commercial or all similar residential properties as a single enterprise.

Notably, the guidance provides that an interest in mixed-use property may be treated as a single rental real estate enterprise or bifurcated into separate residential and commercial interests.

Safe harbor requirements

The final guidance clarifies the requirements you must fulfill during the tax year in which you wish to claim the safe harbor. Requirements include:

Keeping separate books and records. You must maintain separate books and records reflecting income and expenses for each rental real estate enterprise. If the enterprise includes multiple properties, you can meet this requirement by keeping separate income and expense information statements for each property and consolidating them.

Performing rental services. For enterprises in existence less than four years, at least 250 hours of rental services must be performed each year. For those in existence at least four years, the safe harbor requires at least 250 hours of rental services per year in any three of the five consecutive tax years that end with the tax year of the safe harbor.

The rental services may be performed by owners or by employees, agents or contractors of the owners. Rental services include:

• Advertising to rent or lease the property,
• Negotiating and executing leases,
• Verifying tenant application information,
• Collecting rent,
• Performing daily operation, maintenance and repair of the property, including the purchase of materials and supplies,
• Managing the property, and
• Supervising employees and independent contractors.

Financial or investment management activities, studying or reviewing financial statements or reports, improving property, and traveling to and from the property don’t qualify as rental services.

Maintaining contemporaneous records. For all rental services performed, you must keep contemporaneous records that describe the service, associated hours, dates and the individuals who performed the service. If services are performed by employees or contractors, you can provide a description of them, the amount of time employees or contractors generally spent performing those services, and time, wage or payment records for the individuals.

This requirement doesn’t apply to tax years beginning before January 1, 2020. The IRS cautions, though, that taxpayers still must establish their right to any claimed deductions in all tax years, so be prepared to document your QBI deduction.

Providing a tax return statement. You must attach a statement to your original tax return (or, for the 2018 tax year only, on an amended return) for each year you rely on the safe harbor. If you have multiple rental real estate enterprises, you can submit a single statement listing the requisite information separately for each.

Excluded real estate arrangements

The safe harbor isn’t available for all rental real estate arrangements. The guidance excludes:

• Real estate used as a residence by the taxpayer (including an owner or beneficiary of a pass-through entity),
• Real estate rented or leased under a triple net lease that requires the tenant or lessee to pay taxes, fees, insurance and maintenance expenses, in addition to rent and utilities,]
• Real estate rented to a commonly controlled business, or
• The entire rental real estate interest if any part of it is treated as a specified service trade or business (SSTB) for purposes of the QBI deduction. (SSTBs with taxable income above a threshold amount don’t qualify for the deduction.)

The guidance states that taxpayers that don’t qualify for the safe harbor may still be able to establish that an interest in rental real estate is a business for purposes of the deduction.

Next steps

The final safe harbor rules apply to tax years ending after December 31, 2017, and you have the option of instead relying on the earlier proposed safe harbor for the 2018 tax year. Plus, you must determine annually whether to use the safe harbor. We can help you determine whether you’re eligible for this and other valuable tax breaks.

In December of 2017, the “Tax Cuts and Jobs Act” was passed, resulting in significant changes to the tax code. Some of these changes include elimination or reduction of some itemized deductions, updated tax brackets, and the removal of personal exemptions. Pre-2018 withholding was calculated based on the personal exemptions that taxpayers anticipated claiming with their tax filings. Under the new tax law, there are no personal exemptions.

Please take a moment and consider filing an updated W-4 with your employer to be proactive in avoiding potential unnecessary penalties. If you have any additional questions or concerns please do not hesitate to contact Edelstein & Company, LLP and we will gladly assist you with all of your tax matters.

*NPR – More Tax Payers Will Owe