COVID-19 Archives - The Seay Firm CPAs PLLC

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It’s never too early to begin tax planning for the current year, and there are some significant changes for 2021 that will impact a lot of taxpayers. So let’s take a look at the most significant of these changes.

Child credit for 2021

As part of the stimulus law that was enacted earlier this year, the $2,000 per child tax credit has been raised to $3,000, and to $3,600 for children under age 6. It also now applies to 17-year-olds, is fully refundable, and the IRS will be paying 50% of the credit in advance. It does phase out at higher income levels (i.e. $75,000 Adjusted Gross Income (AGI) for single taxpayers, $112,500 for heads of household, and $150,000 for joint filers), reducing $50 for each $1,000 of AGI above those threshold amounts. This phaseout applies to the amounts above the previous $2,000 credit only. So if you are not eligible for the higher amounts, you still get the $2,000 credit if your AGI is below $400,000 for joint filers and $200,000 for other filers.

The 50% payments will begin in July, with payments being sent each month. Each family’s eligibility will be determined based on 2020 or 2019 tax returns. If you have any changes in your family circumstances or AGI, you will need to notify the IRS through an online tool that is being developed. Theses payments are not taxable income.

Charitable contributions

The 2020 change to allow a write-off for cash contributions to charitable organizations for taxpayers who do not itemize will also apply in 2021. For 2021 only, the ceiling is raised to $600 for joint filers.

College tuition

The deduction for college tuition will no longer apply. It was terminated, and in its place the income phaseout limits for the lifetime learning credit was increased to match the American Opportunity Tax Credit.

Extension of tax breaks

A number of tax breaks that were set to expire after 2020 have been extended, as follows:

The 7.5% AGI threshold for deducting medical expenses on Schedule A (permanent)
The deduction for energy-efficient improvements to commercial buildings (permanent)
The exclusion of up to $5,250 from workers’ wages for college debt paid by employers (thru 2025)
The credit for employers that provide family and medical leave to workers (thru 2025)
The deduction for mortgage insurance premiums (thru 2021)
Multiple business and energy tax incentives (thru 2021)

Business meals

The 50% limitation for business meals has been suspended (100% deductible) for 2021 and 2022 as a measure to encourage restaurant dining. This includes client meals as well as meals for employees on business travel.

Mileage deductions

The standard mileage rate for business driving is lowered to $0.56/mile for 2021, while the allowance for medical travel and military moves drops to $0.16. Charitable mileage stays at $0.14 as it is fixed by law.

Qualified business income (QBI)

Self-employed individuals and owners of LLCs, S corporations and other pass-throughs can deduct 20% of their QBI, subject to limitations for individuals with taxable income greater than $329,800 for joint filers and $164,900 for single filers.

Expensing asset purchases

In 2021, $1,050,000 of asset purchases can be expensed, with this amount phasing out dollar-for-dollar once more than $2,620,000 of assets are put into service during 2021.

Health Savings Accounts (HSAs)

The annual cap on deductible contributions to HSAs increases in 2021 to $3,600 for self coverage and $7,200 for family coverage. People born before 1967 can put in $1,000 more. Qualifying insurance policies must limit out-of-pocket costs to $14,000 per family health plans and $7,000 for individual coverage. Minimum policy deductibles remain the same at $2,800 for families and $1,400 for individuals.

Long term care premiums

The limits on deductibility of long term care premiums are higher in 2021. Taxpayers 71 or older can write off as much as $5,640 per person, with those age 61 to 70 at $4,520. Those age 51 to 60 can deduct up to $1,690 each, and those 41 to 50 can deduct up to $850 each. For those 40 and younger, the limit is $450. These amounts are deductible for most taxpayers on Schedule A who itemize, while self employed taxpayers can deduct these costs on Schedule 1 of Form 1040.

These are the key changes SO FAR. However, there are a lot of rumblings within the Biden administration regarding tax increases, so we will be watching for additional changes that can impact our client’s tax situation.

The Seay Firm CPAs provides tax planning services throughout the year, so if you are impacted by these changes, or if you have other significant life changes occurring in 2021, give us a call at (479) 876-9980 or email me at Brent@seaycpas.com to set up an appointment to review your situation in detail.

Net operating losses

Congress passed the Tax Cuts and Jobs Act (TCJA) in 2017, and one of the key changes in that legislation was the dis-allowance of carrying back net operating losses to prior years as well as a limitation in the amount of loss carryforwards that can be taken in future years, where the losses can be used to offset no more than 80% of taxable income. However, the Corona Virus Aid, Relief, and Economic Security (CARES) Act postponed the 80% carryforward limitation, and it will now only apply for years beginning on or after January 1, 2021. In addition, taxpayers can also carry back any NOLs that arise in tax years beginning after December 31, 2017, and before January 1, 2021, over a 5-year period.

Corporate Alternative Minimum Tax (AMT) Credit

The TCJA of 2017 eliminated the 20% corporation AMT that principally impacts C corporations, and provided that only 50% of the AMT credits carried forward could be refundable in tax years after December 31, 2017 and before January 1, 2021. After December 31,2020, 100% of any excess AMT credits could then be refunded. However, the CARES Act permits corporations to claim a refund for 2018 equal to the full amount of their excess AMT credit carryforwards. For corporations that do not elect to take this refund, the CARES Act eliminates the 50% limitation on AMT credits for taxable years beginning in 2019.

Business Interest Expense Deduction

The TCJA limited the amount of business interest expense that a taxpayer can deduct. Under IRC Section 163(j), taxpayers may deduct business interest expense only up to 30% of their adjusted taxable income. However, the CARES Act increases the limitation to 50% for taxable years beginning in 2019 and 2020, and it also allows taxpayers to elect to use their 2019 adjusted taxable income for their 2020 taxable year, benefitting taxpayers that have had their income impacted by COVID-19.

For partnerships, the IRC Section 163(j) limitation still applies at the partnership level. the 30% limitation will continue to apply to partnership interest expense in 2019. However, 50% of any excess business interest allocated to a partner and carried over from 2019 will be treated as business interest paid by the partner in 2020 and will not be limited to the partner’s business interest income for 2020. The remaining 50% will continue to be subject to such limitations.

Bonus Depreciation for Qualified Improvement Property

Probably the most important change impacting the taxation of real estate involves bonus depreciation involving qualified improvement property. The TCJA permitted taxpayers to deduct the full cost of certain depreciable property placed in service by the taxpayer in a taxable year before January 1,2027. This is commonly referred to as bonus depreciation. Property eligible for bonus depreciation included property with a depreciable life of 20 years or less. While these rules permit immediate expensing for various types of personal property (i.e. equipment, furniture & fixtures, etc.), it was also intended to apply to structural improvements made to commercial properties, including (but not limited to) hotels, restaurants, and retail establishments. However, the general 39-year recovery period for these improvements prevented them from being eligible for immediate expensing.

The CARES Act corrects this “error” by assigning a 15-year depreciable life to “qualified improvement property,” thereby permitting such improvements to be eligible for bonus depreciation. The provision is effective retroactively to property placed in service in 2018 and beyond. This provision may allow taxpayers to file amended returns and claim refunds for 2018 and 2019 tax years if they placed qualified improvement property into service during those years, and it may also encourage taxpayers to make needed improvements in the coming years as the economy recovers from the pandemic.

The CARES Act also revises the definition of “qualified improvement property” to limit that concept to “improvements made by the taxpayer,” thereby eliminating the possibility of the taxpayer getting bonus depreciation for “used” property that was purchased by the taxpayer.

If you invest in real estate, please keep these CARES Act changes in mind as you review your tax planning for the coming years. If you need assistance in better understanding how these changes apply to your investments or real estate business, feel free to contact me at Brent@seaycpas.com or (479) 329-5862.

Tag: COVID-19

Tax Changes for 2021