The Internal Revenue Service has released a midyear report to Congress that details a significant backlog of tax returns dating back to the end of tax filing season, and many of those returns have yet to be processed. While backlogs are not unusual, this year’s is far greater than in previous years. That’s bad news for those taxpayers who are eagerly waiting for tax refunds. For tax year 2020, roughly 70 percent of the individual returns that have already been processed have resulted in refunds being paid. Those refunds have averaged $2,827.00, but there were still more than 35 million returns for last year that had not yet been addressed by mid-May. An independent advocacy group within the IRS says that at the same point in time the previous year, there were a third the number of backlogged returns as now. In writing the report, national taxpayer advocate Erin M. Collins said, “For taxpayers who can afford to wait, the best advice is to be patient and give the I.R.S. time to work through its processing backlog. But particularly for low-income taxpayers and small businesses operating on the margin, refund delays can impose significant financial hardships.” The agency issued a statement indicating that by June 18th, two months after the official filing deadline, almost seven million individual tax returns had been processed. Their work is ongoing continuously, addressing both current returns, those from previous years, and amended returns. More than twice that many are currently being processed. Backlogs have been a problem in the past, but an evacuation order issued as a result of the pandemic kept IRS employees out of processing facilities, and that and the need to incorporate new tax legislation passed for the 2021 filing season has made things far worse. The agency was also responsible for sending out the third stimulus payment, bringing the total value of payments to $807 billion and the number processed over a 15-month period to 475 million. While 2019 saw a backlog of 7.4 million returns at the close of tax filing season and 2020’s backlog reached 10.7 million, 2021’s 35 million return backlog has led to several recommendations and objectives being issued to improve things in the future. A large number of tax returns were processed before the tax filing deadline, and of those 136 million returns, 96 million required that refunds totaling about $270 billion be paid. Both individual returns and business returns are included in the 35.3 million that still need to be processed, and those in the backlog all require additional intervention from an IRS employee in order to be processed.
Monthly Archives: July 2021
The Many Benefits of 401(k) Profit-Sharing Plans
If you are an employer looking for an attractive employee benefit that lets you plan contributions around your revenues, consider a 401(K) profit-sharing plan. These plans allow you to make pre-tax deposits to your employees’ eligible retirement accounts after the end of each calendar year, providing the flexibility to determine exactly how much you want to contribute based on your finances and goals. The Top Five Advantages of 401(K) Profit-Sharing Plans
You can pay out tax-advantaged bonuses If your company pays employees year-end bonuses, 401(k) profit-sharing contributions can be an excellent part of that plan. They tax-deductible to your company and don’t increase employees’ taxable income, and are not subject to federal withholding, all while adding to their retirement savings. These value-added benefits make the 401K profit sharing contribution a great way to enhance your annual bonus program.
It adds to your ability to reward Highly Compensated Employees (HCEs) One of the few drawbacks to 401K plans is the annual deferral limit that the Internal Revenue Service places on contributions. These limits ($19,500 in 2021) prevent Highly Compensated Employees from maximizing the amount that can be contributed to their accounts based on compliance limits for nondiscrimination testing. Profit-sharing plans circumvent these restrictions, allowing a combination of up to $58,000 (with an additional $6,500 catch-up if an employee is over age 50) to be contributed as a bonus.
It provides additional flexibility for budgeting As nice as it would be to promise high bonuses for year-end, unpredictable revenues make doing so a recipe for disaster. By paying out bonuses in the form of 401(K) profit-sharing contributions, you can assess exactly what you can afford and make the contribution any time before the tax filing deadline – including any extensions you choose to take. Doing so maintains the ability to deduct the contribution on the previous year’s tax return too.
Plans allow contribution vesting Bonuses and 401(k) plans are valuable recruitment tools, and they can be powerful retention tools when they are structured to vest with the employee’s tenure. Employees considering leaving in a short time frame will lose any portion that has not yet vested.
It can be built into your existing 401(k) plan with no additional work Signing your company up for a 401(k) plan takes time and effort, but once it is in place you can easily add a profit-sharing plan, and many retirement plan providers will add the program without charging an additional fee.
The disadvantages of profit-sharing plans As much as our country favors 401(k) plans, including those that incorporate profit-sharing plans, there are a few things that need to be kept in mind.
There are limits to how much can be contributed for each employee. The total of employee deferrals and employer deposits cannot be greater than 100% of the employee’s compensation.
You are limited on how much you can contribute for any employee a year. In 2021 that limit is $58,000, or $64,500 for employees over the age of 50.
Employer contributions may be limited by an employee’s annual compensation. For 2021, no contributions were allowed for employees earning more than $290,000.
Only contributions of up to 25% of total employee compensation can be deducted by employers.
Acknowledging the contributions that your employees make is an integral part of keeping your workforce morale upbeat, and profit sharing is a powerful tool in support of that goal. If you have questions about how to approach 401(k) profit sharing for your business, contact our office.
IRS Extends COVID-19 Relief Leave Donations
Article Highlights:
IRS extends COVID-19 Relief Leave Donations
Donating unused vacation time, sick leave, and personal time
Employer’s Function
Great Donation Opportunity
As part of the emergency disaster declaration made by President Trump on March 13, 2020, it became possible for employees to donate their unused paid vacation time, sick leave, and personal time off to qualified charities that provided COVID-19 relief in 2020. The IRS recently extended leave donations through 2021. Check with your employer to see if they are participating and for more details. It is an opportunity for you to make donations without costing you out-of-pocket cash. Here is how it works: if your employer is participating, you can relinquish any unused and paid vacation time, sick leave, and personal leave for cash payments which your employer will donate to COVID-19 relief charitable organizations. The cash payment will not be treated as wages to you and your employer can deduct the amount donated as a business expense. However, since the income isn’t taxable to you, you will not be allowed to claim the donation as a charitable deduction on your tax return. Even so, excluding income is often worth more as tax savings than a potential tax deduction, especially if you generally claim the standard deduction or are subject to AGI-based limitations. This special relief applies to all donations made before January 1, 2022, giving individuals plenty of time to forgo their unused paid vacation, sick and leave time and have the cash value donated to a worthy cause. This is a great opportunity to provide sorely needed help in the ongoing COVID-19 emergency without costing you anything but time. Contact your employer to see about participating. If your employer is unaware of his program, refer them to IRS Notice 2020-46 and 2021-42 for further details. If you have questions related to donating leave time for COVID-19 relief efforts or other charitable contributions, please contact this office.
August 2021 Individual Due Dates
August 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
August 2021 Business Due Dates
August 2 – Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2020.August 2 – All Employers
If you maintain an employee benefit plan, such as a pension, profit sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2020. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.August 2 – Certain Small EmployersDeposit any undeposited tax if your tax liability is $2,500 or more for 2021 but less than $2,500 for the second quarter. August 2 – Federal Unemployment TaxDeposit the tax owed through June if more than $500.
August 10 – Social Security, Medicare and Withheld Income TaxFile Form 941 for the second quarter of 2021. This due date applies only if you deposited the tax for the quarter in full and on time.August 16 – Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in July.August 16 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in July.
Video tip: Extension of COVID-19 Relief Leave Donations
The ability to donate your unused paid vacation time to COVID-19 charity organizations has been extended by the IRS through the end of 2021. Watch the video for more information.
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Contemplating Refinancing Your Home Mortgage? Things You Should Consider
Article Highlights:
Is It Appropriate to Refinance Your Home Loan?
Refinance Costs
Interest Rates
Credit Score
Borrowing Additional Cash
Loan Term
Itemizing Deductions
With home mortgage rates at historic lows, it may be appropriate for you to consider refinancing your current mortgage. However, refinancing may not always be the greatest idea, even though mortgage rates are low, and even when your friends, relatives, and coworkers are bragging about the low interest rates they got with their refinance. This is because a number of issues must be considered when refinancing. Cost to Refinance – Refinancing can be costly, considering you might have to pay for title insurance, points, and other closing costs that easily can lessen the benefits of a lower interest rate and generally aren’t tax-deductible. However, many lenders are offering no-cost refinancing, so you need to compare lenders carefully. Some may be offering no-cost loans, but the interest rate may be higher, or vice versa. Interest Rates – One of the primary reasons to refinance is to secure a lower interest rate for your home loan. Whether refinancing is a good idea depends on how much you can reduce your interest rate and resulting mortgage payments. Some recommend reducing your interest rate by at least two percentage points, while others contend that as little as a one-point savings is enough of an incentive to refinance. However, you must also consider the costs of refinancing and the tax implications discussed later. Credit Score – Some homeowners are concerned that refinancing will affect their credit rating adversely. Of course, all lenders will check your credit score, and adding new debt naturally will cause your credit score to dip. But because refinancing replaces an existing loan with another of roughly the same amount, its impact on your credit score is minimal. However, increasing the amount of the loan will have a negative impact on your credit score. Additionally, taking out cash and increasing the loan amount will have negative tax effects, as discussed later. Borrowing Additional Cash – Some lenders are even hyping taking out additional cash when refinancing. They suggest vacations, retail purchases, and other discretionary uses. Many borrowers have already forgotten the hard lessons of 2004 through 2008, when home prices took a severe drop in value and those who treated their home equity like a piggy bank found themselves owing more on their home than it was worth. Sound financial planning dictates paying off one’s home as quickly as possible and resisting borrowing against its equity. If you are tempted to take out additional cash, you should also be aware that interest on equity debt is not tax-deductible. This means if the replacement loan is greater than the amortized balance of your original loan, then the interest attributable to the equity debt (the cash out) will not be deductible.
Example: Your original debt to purchase your home (the acquisition debt) some years ago was $300,000. You’ve paid off $100,000 of the original debt, leaving a loan balance of $200,000. You refinance it for $300,000, taking $100,000 in cash out. So, the new loan is 2/3 acquisition debt and 1/3 equity debt. Thus, any interest paid on the refinanced loan will be only 66.67% deductible since the loan is 1/3 equity debt.
However, if the $100,000 in the example was used to make substantial home improvements, then the additional $100,000 of debt would be treated as acquisition debt, and the interest on the entire loan would be deductible, subject to the loan-term limits discussed next. Loan Term – Mortgages are available for various terms, and the most common for first-time homeowners is 30 years. However, many of the current loans offering the best interest rates are 15-year loans. So, depending upon your circumstances, the shorter-term loan may not reduce your mortgage payments but will instead pay off your mortgage sooner. The Tax Cuts & Jobs Act (TCJA), which became effective in 2018, included a restriction to extending the term of the original acquisition debt. This is best described by example:
Example: A taxpayer’s original loan to purchase a home was a 20-year loan taken out on January 1, 2010. Thus, it would normally be paid off on January 1, 2030. If the taxpayer were to refinance the amortized balance of the loan with a 15-year loan on July 1, 2021, that loan normally would be paid off on July 1, 2036, thus extending the refinanced loan term by 6.5 years. However, under current law, the interest on the refinanced loan will only be deductible for the term of the original acquisition debt, and the interest on the refinanced loan would cease to be deductible after January 1, 2030, meaning that the interest on the loan would not be deductible for the remaining 6.5 years of the loan.
Itemizing Deductions – Qualified home mortgage interest is deductible only if you itemize your deductions rather than claim the standard deduction. For a married couple filing a joint return, their 2021 standard deduction will be $25,100. The standard deduction for those filing single or head of household is $12,550 or $18,800, respectively. These amounts are slightly more for those who are age 65 or older and/or blind. For most people, their itemized deductions will consist of medical expenses exceeding 7.5% of income, charitable contributions, state and local income and property taxes (maximum $10,000), and home mortgage interest. If your itemized deductions have been just over your standard deduction amount, after refinancing at a lower interest rate, it’s possible that your total itemized deductions could be less than your standard deduction amount because you will be paying less interest. This means you would not get any tax benefit on your federal return from the mortgage interest you pay. In this case, you would want to be aware of the strategy of bunching deductions, which then could allow you to itemize one year and use the standard deduction the next year. As you can see, there is a lot to consider when contemplating a refinance. If you need assistance in making your decision, please call for an appointment.
Tax Rules for Home Flippers
Article Highlights:
Definition of Flipping
Government Will Share in the Profits
Tax Treatment Depends on Being a Dealer, Investor or Homeowner
Distinguishing a Dealer from an Investor
With mortgage interest rates low, flipping real estate appears to be on the rise. This activity is even the theme of several popular reality TV shows. House flipping is, essentially, purchasing a house or property, improving it and then selling it (presumably for a profit) in a short period of time. The key is to find a suitable fixer-upper that is priced under market for its location, fix it up and resell it for more than it cost to buy, hold, fix up and resell. Are you contemplating trying your hand at flipping? If so, keep in mind that you will have a silent partner, Uncle Sam, who will be waiting to take his share of any profits in taxes. (And most likely, Sam’s cousin in your state capitol will expect a share, too.) Taxes play a significant role in the overall transaction, and tax treatment can be quite different depending upon whether you are a dealer, an investor or a homeowner. The following is the current tax treatment for each.
Dealer in Real Estate – Gains received by a non-corporate taxpayer from business operations as a real estate dealer are taxed as ordinary income (10% to 37%), and in addition, individual sole proprietors are subject to the self-employment tax of 15.3% of their net profit (the equivalent of the FICA taxes for a self-employed person). Higher-income sole proprietors are also subject to an additional 0.9% Medicare surtax on their earnings. Thus, a dealer will generally pay significantly more tax on the profit than an investor. On the other hand, if the flip results in a loss, the dealer would be able to deduct the entire loss in the year of sale, which would generally reduce his or her tax at the same rates.
Investor – Gains as an investor are subject to capital gains rates (maximum of 20%) if the property is held for more than a year (long term). If held short term (less than a year, as will likely be the case for most flippers), ordinary income rates (10% to 37%) will apply. An investor is not subject to the self-employment tax, but could be subject to the 3.8% surtax on net investment income for higher-income taxpayers. A downside for the investor who has a loss from the transaction is that, after combining all long- and short-term capital gains and losses for the year, his or her deductible loss is limited to $3,000, with any excess capital loss being carried over to the next year. The rules get a bit more complicated if the investor rents out the property while trying to sell it, but such rules are beyond the scope of this article.
Homeowner – If the individual occupies the property as the primary residence while it is being fixed up, he or she would be treated as an investor, with three major differences: (1) if the individual has owned and occupied the property for two years and has not used a homeowner gain exclusion in the two years prior to closing the sale, he or she can exclude gain of up to $250,000 ($500,000 for a married couple); (2) if the transaction results in a loss, the homeowner will not be able to deduct the loss or even use it to offset gains from other sales; and (3) some fix-up costs may be deemed to be repairs rather than improvements, and repairs on one’s primary residence are neither deductible nor includible as part of the cost basis of the home.
Being a homeowner is easily identifiable, but the distinction between a dealer and an investor is not clearly defined in the tax code. A real estate dealer is a person who buys and sells real estate property with a view to the trading profits to be derived and whose operations are so extensive as to constitute a separate business. A person acquiring property strictly for investment, though disposing of investment assets at intermittent intervals, generally does not deal in real estate on a regular basis. This issue has been debated in the tax courts frequently, and both the IRS and the courts have taken the following into consideration:
whether the individual is already a dealer in real estate, such as a real estate sales person or broker;
the number and frequency of sales (flips);
whether the individual is more committed to another profession as opposed to fixing up and selling real estate; and
how much personal time is spent making improvements to the “flips” as opposed to another profession or employment.
The distinction between a dealer and an investor is truly based on the facts and circumstances of each case. Clearly, an individual who is not already in the real estate profession and flips one house is not a dealer. But one who flips five or more houses and/or properties and has substantial profits would probably be considered a dealer. Everything in between becomes various shades of grey, and the facts and circumstances of each case must be considered. If you have additional questions about flipping real estate or need assistance with your specific situation, please give this office a call.
8 Keys to Creating an Effective Employee Handbook
Most companies have policies or procedures governing their employment practices, but they’re sometimes maintained informally. This can lead to inconsistent application and confusion about employer and employee rights and responsibilities. An employee handbook formalizes those policies so that employees have a written resource to read and reference. Here are some key steps to consider as you create an employee handbook or update an existing one. #1: Know your history. Your company’s history, practices, and culture will help set the tone of your handbook and determine what policies to include (see below). Also staying on top of new and changing compliance requirements may necessitate new or updated policies. Think about the information you most need to convey to employees, areas of misunderstanding or confusion, and frequent questions you receive from employees. #2: Identify required policies. Although there’s no law that requires a written employee handbook, there are laws that require employers to maintain certain policies in writing. For example, a growing number of jurisdictions require employers to maintain written policies on harassment, discrimination, leave of absence and other time off, and/or workplace safety and health rules. In addition, some state and local laws require employers that maintain an employee handbook to include certain information. For instance, Colorado requires employers with an employee handbook to include a copy of the Colorado Overtime and Minimum Pay Standards (COMPS) Order (or poster). Review all required policies that are applicable to your business and include them in your handbook. #3: Include other must-have policies. Even when there isn’t a specific requirement, certain policies are essential for conveying important information. Some examples include:
A prominent at-will statement in the beginning of your employee handbook (except in Montana, where at-will employment is not recognized). This statement reiterates that, absent certain exceptions, either you or the employee can terminate the employment relationship at any time and for any reason.
Employment classifications, meal and rest periods, timekeeping and pay, employee conduct, attendance, and punctuality.
Anti-harassment, nondiscrimination, leave of absence, and workplace safety and health.
#4: Know what policies to avoid. Just as important as understanding what policies to include is knowing what policies to avoid. These include blanket policies on criminal convictions, withholding final pay until company property is returned, refusing to pay unauthorized overtime/early punch-ins, requiring a doctor’s note for every sick day, prohibiting lawful off-duty conduct, prohibiting employees from discussing their pay with coworkers, probationary/introductory periods, and English-only policies. #5: Draft policies that reflect company values. Many employers set a higher standard than what’s required by law. This can be reflected in the language used and the policies selected. For example, to help maintain a harassment-free workplace, many employers will adopt a broader definition of sexual harassment than what’s outlined in federal, state, or local law. #6: Set the tone. Employers often include a welcome statement or section in their handbook to help set the tone. This part of the handbook often provides a brief history of the company, defines the company’s mission, explains what makes the company unique (e.g., its core values and work culture), and describes the purpose and importance of the employee handbook. #7: Create an acknowledgment form. Each employee should be required to sign and date an acknowledgment stating that they’re responsible for reading, understanding, and complying with the employee handbook. Also, consider including a statement reinforcing the at-will employment relationship. Explain that the employee handbook is not an employment contract, management retains the right to interpret policies, and the company reserves the right to revise the handbook at any time. #8: Gather feedback. Ask a few people within your company to provide feedback on your draft handbook and acknowledgment form and then consider having legal counsel review your handbook to help ensure compliance with all applicable laws. Conclusion: As you’re building your employee handbook, develop plans for training supervisors on how to interpret and apply the policies, introducing and distributing the handbook to employees, and reviewing and updating the handbook as laws or company practices change. This story originally published on HR Tip of the Week – a blog providing practical information on hiring, benefits, pay, and more – by ADP®. Learn more about how ADP’s small business expertise and easy-to-use tools can simplify payroll & HR at adp.com.
Video tip: How Long Should You Keep Old Tax Records?
This is a common question: How long must taxpayers keep copies of their income tax returns and supporting documents? Watch this video for an overview.
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