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Tax Updates

FORM 1099 REPORTING REQUIREMENTS FOR BUSINESSES

Cash payments made by businesses to entities not taxed as corporations are required to be reported to the IRS if the payments exceed $600 during the 2021 calendar year. Payments to attorneys exceeding $600 are required to be reported to the IRS regardless of the tax status of the payee. Cash payments include payments made by check.

Payments related to services rendered are required to be reported on form 1099-NEC. Forms 1099-NEC are required to be filed with the IRS by January 31, 2022. Examples of services rendered are payments of legal and accounting fees, the portion of vehicle repairs related to labor charges, and snow plowing.

Interest payments are required to be reported to the IRS on form 1099-INT and must be filed with the IRS by February 28, 2022 (March 31, 2022 if the forms are filed electronically).

Payments for dividends paid are required to be reported to the IRS on form 1099-DIV and must be filed with the IRS by February 28, 2022 (March 31, 2022 if the forms are filed electronically).

Payments related to rents, prizes, and awards are reported on form 1099-MISC and must be filed with the IRS by February 28, 2022 (March 31, 2022 if the forms are filed electronically).

Copies of forms 1099-NEC, 1099-INT, 1099-DIV, and 1099-MISC must be provided to the recipients of the payments by January 31, 2022. Mailing the recipient copy by January 31, 2022 satisfies this requirement.

Payments made by your business with a debit or credit card should not be reported on the above referenced forms. These payments are reported to the IRS on form 1099-K by the credit card processing company.

Failure to file forms 1099 with the IRS can result in penalties of up to $280 for each 1099 not timely filed.

IRS Letters – Stimulus Checks and Advanced Child Credit Checks

The IRS will issue informational letters to advance child tax credit recipients and to recipients of the third round of the economic impact payments (stimulus checks).  If you have received either of these types of payments, you should receive a letter from the IRS in January 2022. The information contained in these letters is required to accurately prepare your 2021 tax returns.

Advance child tax credit payment information is contained in IRS Letter 6419. This letter will include the total dollar amount of advance child tax credit payments received in 2021 and the number of qualifying children used to calculate the advance payments. Economic Impact Payment recipients will receive Letter 6475 and will reflect the dollar amount of economic impact payments received.

TAX DEDUCTIONS – CHARITABLE CONTRIBUTION

Charitable donations by individuals to qualified charitable organizations are deductible as an itemized deduction subject to the limitations discussed below. Charitable contributions exceeding the limitations can be carried forward to the next five tax years. Taxpayers who do not itemize deductions can deduct up to $300 ($600 on a jointly filed income tax return) of charitable contributions made during 2021.

QUALIFIED ORGANIZATIONS

Donations must be made to section 501(c)(3) organizations to be tax deductible. The IRS website lists qualified charitable organizations at https://apps.irs.gov/app/eos/. Examples of section 501(c)(3) organizations include religious organizations, federal, state, and local governments, and colleges and universities.

Civic and business organizations such as Rotary clubs, chambers of commerce, and trade groups (while tax exempt) are not 501(c)(3) organizations and donations to such entities are not tax deductible. Political contributions are not tax deductible.

DOCUMENTATION OF CHARITABLE CONTRIBUTION

A charitable deduction for a contribution of cash or property must be substantiated by a written acknowledgment of the donation if the donation is $250 or more. A canceled check, by itself, is not sufficient.

A charitable contribution deduction must be reduced by the value of gifts or services received in exchange for the charitable contribution. Example: every person who donates $1,000 or more to qualified charity XYZ receives a $100 gift certificate to a local restaurant. The charitable deduction is $900 ($1,000 less the $100 value of the gift certificates received).

DONATIONS OF PROPERTY

The deduction amount for donations of property is the fair market value of the property on the date of the donation. In addition to the general documentation rules referenced in the section above, noncash donations more than $500 require the completion of IRS Form 8283. With limited exceptions such as the donation of publicly traded stock, donations of property exceeding $5,000 require a written appraisal of the donated property.

PERFORMANCE OF SERVICES AND RELATED EXPENSES

A charitable deduction may not be taken for the value of services rendered to a charity. Unreimbursed travel and out-of-pocket expenses incurred while performing services for a qualified charity away from home are deductible only if there is no person element related to the activity. If there is a recreation or vacation element related to the travel a deduction is not allowed.

A charitable deduction equal to 14 cents per mile driven is allowed if your vehicle is used to perform services for a qualified charity. Tolls and parking fees may be deducted in addition to the mileage rate. Alternatively, the taxpayer may deduct his actual, unreimbursed expenses for gas and oil. General repairs and maintenance, insurance expenses, and vehicle registrations are not deductible.

LIMITATIONS

Contributions are limited based on a percentage of adjusted gross income. The maximum contribution deduction ranging from 20 percent to 60 percent of adjusted gross income is dependent on the date of the contribution and the type (cash or property) of the charitable donation. Cash contributions made in 2021 can be deducted up to 100 percent of adjusted gross income.

Qualified Business Income Deduction

Congress enacted the 20 percent business deduction beginning in 2018 to coincide with the tax rate reduction provided to corporations. The 20 percent business income deduction effectively reduces the maximum tax rate on an individual’s business income to 29.6 percent (80 percent of the maximum income tax rate of 37 percent). The business income deduction is not allowed when calculating self-employment income. The business income deduction is limited to 20 percent of taxable income.

WHAT IS BUSINESS INCOME?

The Internal Revenue Code allows individuals to deduct 20 percent of business income in computing taxable income. For sole proprietors, business income is calculated as the amount reflected on schedule C adjusted for items discussed below. Business income includes income from rental real estate properties if the taxpayer spends at least 250 hours per year managing and maintaining the rental properties.

For sole proprietors, business income is calculated as the amount reflected on schedule C less the self-employed health insurance deduction, the deductible portion of the self-employment tax, and pension plan contributions related to the taxpayer’s business. Business income does not include income from the sale of business assets treated as long-term capital gains.

CALCULATION OF BUSINESS INCOME DEDUCTION

An example of the calculation of the business income deduction is as follows:

John and Mary file a 2021 joint return and have taxable income of $300,000 before calculating the business income deduction. Mary’s business income is $280,000. The business income deduction allowed on their joint tax return is calculated as the lesser of 1) 300,000 x 0.2 = $60,000 or 2) $280,000 x 0.2 = $56,000. The business income deduction allowed on John and Mary’s joint tax return is $56,000.

In the above example the business income deduction is not limited by taxable income. If a taxpayer’s only source of income is derived from a sole proprietorship, the business income deduction will be limited to 20 percent of taxable income because the taxpayer is entitled to a standard deduction available to all taxpayers.

HIGHER INCOME TAXPAYERS

For higher income taxpayers the business income deduction is either phased out or limited. For service businesses, the business income deduction is phased out or eliminated and for non-service businesses, the maximum business deduction is based on wages paid by the business and the cost of property used in the business.

Service businesses include businesses providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, and athletics. Businesses providing financial and brokerage services, investing services, and trading and dealing in securities are also considered service businesses under the business income deduction rules.

For taxpayers operating a service business, the business income deduction is reduced if taxable income is between $164,900 and $214,900 for single filers and between $329,800 and $429,800 for joint filers. For taxpayers operating a service business the deduction is eliminated for single individuals with taxable income exceeding $214,900 and for married individuals filing a joint return with taxable income exceeding $429,800. The phase-out ranges are applicable to the 2021 tax year and are adjusted annually for inflation.

For taxpayers operating non-service businesses, the business income deduction is not eliminated but the maximum deduction is limited. For single individuals with taxable income exceeding $214,900 and for married taxpayers filing a joint return with taxable income more than $429,800 the 20 percent business deduction is limited based on the rules discussed above and is further limited to the greater of 50 percent of wages paid or 25 percent of wages paid plus 2.5 percent of the cost of property used in the taxpayer’s business.

Itemized Deductions, Standard Deduction, and Exemptions

Under the Tax Cuts and Jobs Act (P.L. 115‐97), the value of the dependency exemption was reduced to zero and replaced with a larger standard deduction. While the Act eliminated the tax savings related to the dependency exemption deduction, the rules related to the parent eligible to claim the deduction remain in place.

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Summary of Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (The Act) made the most significant changes to the tax laws in over 30 years. The Act significantly reduces both individual and corporate tax rates beginning in 2018.

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