As the nation suffers from the ravages of the highly contagious COVID-19 Delta variant, the federal government desperately wants all American workers and their families to get vaccinated.
Further, more and more employers are implementing vaccine mandates—a trend that is likely to grow after the FDA gives final approval to the COVID-19 vaccines.
COVID-19 vaccine mandates are highly controversial.
One thing that’s not controversial is giving your employees paid time off to get vaccinated and to deal with the possible side effects of vaccination (usually, short-lived flu-like symptoms). The federal government does not require that employers provide such paid time off, but it strongly encourages them to do so. And they are putting their money where their mouth is, by providing fairly generous tax credits to repay employers for the lost employee work time.
You can also collect these credits if your employees take time off to help family and household members get the vaccination and/or recover from its side effects.
How big are the credits?
- Employers who give employees paid time off to get vaccinated against COVID-19 and/or recover from the vaccination can collect a sick leave credit of up to $511 per day for 10 days, plus a family leave credit of up to $200 per day for 60 additional days.
- Employers who give employees paid time off to help household members get vaccinated and/or recover from the vaccination can get a sick leave credit for 10 days and family leave credit for 60 days, both capped at $200 per day.
What if you are self-employed and have no employees? You haven’t been left out. Similar tax credits are available to self-employed individuals who take time off from work to get vaccinated or who help family or household members do so.
But you must act soon. These sick leave and family leave credits are available only through September 30, 2021.
One more thing: these are refundable tax credits. This means you collect the full amount even if it exceeds your tax liability. Employers can reduce their third-quarter 2021 payroll tax deposits in the amount of their credits. If the credit exceeds these deposits, employers can get paid the difference in advance by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The documentation requirements for these credits are modest, and you’ll have to file a couple of new forms with your 2021 tax return.
Prorated Principal Residence Gain Exclusion Break
Here’s good news. IRS regulations allow you to claim a prorated (reduced) gain exclusion—a percentage of the $250,000 or $500,000 exclusion in select circumstances.
The prorated gain exclusion equals the full $250,000 or $500,000 figure (whichever would otherwise apply) multiplied by a fraction.The numerator of this fraction is the shorter of
- the aggregate period of time you owned and used the property as your principal residence during the five-year period ending on the sale date, or
- the period between the last sale for which you claimed an exclusion and the sale date for the home currently being sold.
The denominator for this fraction is two years, or the equivalent in months or days.
When you qualify for the prorated exclusion, it might be big enough to shelter the entire gain from the premature sale. But the prorated exclusion loophole is available only when your premature sale is due primarily to
- a change in place of employment,
- health reasons, or
- specified unforeseen circumstances.
Example. You’re a married joint-filer. You’ve owned and used a home as your principal residence for 11 months. Assuming you qualify under one of the conditions listed above, your prorated joint gain exclusion is $229,167 ($500,000 × 11/24). Hopefully that will be enough to avoid any federal income tax hit from the sale.
Premature Sale Due to Employment Change
Per IRS regulations, you’re eligible for the prorated gain exclusion privilege whenever a premature home sale is primarily due to a change in place of employment for any qualified individual.
“Qualified individual” means
- the taxpayer (that would be you),
- the taxpayer’s spouse,
- any co-owner of the home, or
- any person whose principal residence is within the taxpayer’s household.
In addition, almost any close relative of a person listed above also counts as a qualified individual. And any descendent of the taxpayer’s grandparent (such as a first cousin) also counts as a qualified individual.
A premature sale is automatically considered to be primarily due to a change in place of employment if any qualified individual passes the following distance test: the distance between the new place of employment/self-employment and the former residence (the property that is being sold) is at least 50 miles more than the distance between the former place of employment/self-employment and the former residence.
Premature Sale Due to Health Reasons
Per IRS regulations, you are also eligible for the prorated gain exclusion privilege whenever a premature sale is primarily due to health reasons. You pass this test if your move is to
- obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or
- obtain or provide medical or personal care for a qualified individual who suffers from a disease, an illness, or an injury.
A premature sale is automatically considered to be primarily for health reasons whenever a doctor recommends a change of residence for reasons of a qualified individual’s health (meaning to obtain, provide, or facilitate care, as explained above). If you fail the automatic qualification, your facts and circumstances must indicate that the premature sale was primarily for reasons of a qualified individual’s health.
You cannot claim a prorated gain exclusion for a premature sale that is merely beneficial to the general health or well-being of a qualified individual.
Premature Sale Due to Other Unforeseen Circumstances
Per IRS regulations, a premature sale is generally considered to be due to unforeseen circumstances if the primary reason for the sale is the occurrence of an event that you could not have reasonably anticipated before purchasing and occupying the residence.
But a premature sale that is primarily due to a preference for a different residence or an improvement in financial circumstances will not be considered due to unforeseen circumstances, unless the safe-harbor rule applies.
Under the safe-harbor rule, a premature sale is deemed to be due to unforeseen circumstances if any of the following events occur during your ownership and use of the property as your principal residence:
- Involuntary conversion of the residence
- A natural or man-made disaster or acts of war or terrorism resulting in a casualty to the residence
- Death of a qualified individual
- A qualified individual’s cessation of employment, making him or her eligible for unemployment compensation
- A qualified individual’s change in employment or self-employment status that results in the taxpayer’s inability to pay housing costs and reasonable basic living expenses for the taxpayer’s household
- A qualified individual’s divorce or legal separation under a decree of divorce or separate maintenance
- Multiple births resulting from a single pregnancy of a qualified individual
Beware
Look at what has happened to self-employment taxes since they first came into being in 1935, assuming you earn at the base amount:
- $60 in 1935
- $60 in 1949
- $3,175 in 1980
- $7,849 in 1990
- $14,413 in 2006
- $21,848 in 2021
To put the rates in perspective, say you are single and earn $150,000. On the last dollar you earned—dollar number 150,000—how much federal tax did you pay? The answer in round numbers—39 cents (14 cents in self-employment and 24 cents in federal income taxes).
Wow! That’s a lot. Then, if you live in a state with an income tax, add the state income tax on top of that.
Tax Planning
Two things to know about tax planning:
- Your new deductions give you benefits starting at your highest tax rates.
- In most cases, the return on your planning is not a one-time event. Once your plan is in place, you reap the benefits year after year. Thus, good tax planning is like an annuity.
Checklist
Here is a short checklist of some tax-planning ideas. Review these ideas so you can identify new business deductions for your tax return. You want business deductions because business deductions reduce both your income and your self-employment taxes.
- Eliminate the word “friend” from your vocabulary. From now on, these people are sources of business, so start talking business and asking for referrals over meals and beverages.
- Hire your children. This creates tax deductions for you, and it creates non-taxable or very low taxed income for the children. Also, wages paid by parents to children are exempt from payroll taxes.
- Learn how to combine business and personal trips so that the personal side of your trip becomes part of your business deduction under the travel rules (for example, traveling by cruise ship to a convention on St. Thomas).
- Properly classify business expansion expenses as immediate tax deductions rather than depreciable, amortizable, or (ouch!) non-deductible capital costs.
- Properly identify deductible start-up expenses ($5,000 up front and the balance amortized) rather than letting them fall by the wayside (a common oversight).
- Correctly classify business meals that qualify for the 100 percent deduction rather than the 50 percent deduction.
- Know the entertainment facility rules so your vacation home can become a tax deduction.
- Identify the vehicle deduction method that gives you the best deductions (choosing between the IRS mileage method and the actual expense method).
- Correctly identify your maximum business miles, so you deduct the largest possible percentage of your vehicles.
- Qualify your office in your home as an administrative office.
- Use allocation methods that make your home-office deductions larger.
- If you are married with no employees, hire your spouse and install a Section 105 medical plan to move your medical deductions to Schedule C for maximum benefits.
- Operate as a one-person S corporation to save self-employment taxes.
- If you are single with no employees, operate as a C corporation and install a Section 105 medical plan so you can deduct all your medical expenses.
IRS Focuses on Cryptocurrency
Have you missed partying and having business meals with your prospects, customers, and employees?
Cryptocurrencies have gone mainstream.
For example, you can use bitcoin to buy far more than you would think. To see, try googling “What can I buy with bitcoin?” You will get more than 350,000 hits. But using cryptocurrencies has federal income tax implications that may surprise you.
With the price of bitcoin having gone through the roof (before its recent decline), and with increasing acceptance of bitcoin and other cryptocurrencies as forms of payment, the tax implications of using cryptocurrencies are a hot-button issue for the IRS.
The 2020 version of IRS Form 1040 (the form you recently filed or will file soon) asks whether you received, sold, sent, exchanged, or otherwise acquired—at any time during the year—any financial interest in any virtual currency. If you did, you are supposed to check the “Yes” box.
The fact that this question appears on page 1 of Form 1040, right below the lines for supplying taxpayer information such as your name and address, indicates that the IRS is getting serious about enforcing compliance with the applicable tax rules. Fair warning!
The 2020 Form 1040 instructions clarify that virtual currency transactions for which you should check the “Yes” box include but are not limited to:
- the receipt or transfer of virtual currency for free (i.e., without having to pay),
- the exchange of virtual currency for goods or services,
- the sale of virtual currency,
- the exchange of virtual currency for other property, and
- the disposition of a financial interest in virtual currency.
To arrive at the federal income tax results of a cryptocurrency transaction, the first step is to calculate the fair market value (FMV), measured in U.S. dollars, of the cryptocurrency on the date you receive it and on the date you use it to pay for something.
When you exchange cryptocurrency for other property, including U.S. dollars, a different cryptocurrency, services, etc., you must recognize taxable gain or loss just as you do when you make a stock sale in your taxable brokerage account.
- the receipt or transfer of virtual currency for free (i.e., without having to pay),
- You’ll have a taxable gain if the FMV of what you receive exceeds your basis in the cryptocurrency that you exchanged.
- You’ll have a taxable loss if the FMV of what you receive is less than your basis in the cryptocurrency.
It is hard to imagine that a cryptocurrency holding will be classified for federal income tax purposes as anything other than a capital asset—even if you use it to conduct business or personal transactions, as opposed to holding it for investment. Therefore, the taxable gain or loss from exchanging a cryptocurrency will be a short-term capital gain or loss or a long-term capital gain or loss, depending on how long you held the cryptocurrency before using it in a transaction.
Example. You use one bitcoin to buy tax-deductible supplies for your booming sole proprietorship business. On the date of the purchase, bitcoins are worth $55,000 each. So, you have a business deduction of $55,000.
But there’s another piece to this transaction: the tax gain or loss from holding the bitcoin and then spending it.
Say you bought the bitcoin in January of this year for only $31,000. You have a $24,000 taxable gain from appreciation in the value of the bitcoin ($55,000 – $31,000). The $24,000 gain is a short-term capital gain because you did not hold the bitcoin for more than one year.
Detailed records are essential for compliance. Your records should include
- the date when you received the cryptocurrency,
- its FMV on the date of receipt,
- the FMV on the date you exchanged it (for U.S. dollars or whatever), the cryptocurrency trading exchange that you used to determine FMV, and
- your purpose for holding the currency (business, investment, or personal use).
Congress Closes the PayPal 1099-K Reporting Loophole
The PayPal loophole is going away in a little over six months from now.
Cryptocurrencies have gone mainstream.
You used to be able to avoid giving 1099s to contractors and vendors when you use PayPal or a similar service as your payment platform. This pushed the reporting requirements to PayPal. Current federal law requires that PayPal file Form 1099-K with the IRS and send it to you when
- your gross earnings are more than $20,000, and
- you have more than 200 transactions.
Example. You work as a consultant. Your clients pay you $30,000 via PayPal. PayPal does not give you a 1099-K because this fails the more than 200 transactions in a calendar year test.
According to lawmakers, this created a situation where those people who use PayPal have an easy ability to cheat (i.e., not report the income on their tax returns).
Starting January 1, 2022, the American Rescue Plan Act kills the two-step “more than $20,000 and more than 200 transactions” threshold for third-party settlement organization (TPSO) filing of 1099-K and replaces it with the single “$600 or more” reporting threshold.
The Joint Committee on Taxation estimates that this change in the 1099 rules will gain more than $8 billion in new taxes over the next 10 years.
Several states have already closed this reporting loophole on the state level:
- Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year.
- Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions).
- Arkansas has a $2,500 threshold.
- Missouri has a $1,200 threshold.
