Tech Trends for Small Business to Watch in 2021

This article discusses and outlines seven different technology trends to watch within the small business industry. Specifically, these trends are designed to improve software, automation, and machinery functionality. Artificial intelligence-powered chatbots and CRM, streamlining HR work, 5G, and voice-activated payments are all expected to have a significant impact. Be sure to check out this link for the full list and more information!

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Credit and Debt Collection Strategies Your Business Can Implement

This article discusses and emphasizes the importance of having and implementing the most efficient debt collection process possible. Providing services to your client before payment is often a risky but necessary part of doing business. Implementing strategies such as invoice date, contact information, and obvious total invoice values can help ensure that your business gets paid. Be sure to check out this link for more information and details on some of the best practices for your small business!

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Great News, Child Care Tax Credit Expanded for 2021

Great news if you are paying childcare expenses that enable you to work. As part of President Biden’s American Rescue Plan Act (ARPA) signed into law on March 11, 2021, the child and dependent care tax credit has been substantially increased. Here are the details:

The credit increases and other provisions of the ARPA that apply to this credit only apply to 2021. The increase in the credit is part of the government’s effort to ease families’ financial burdens during the pandemic.

A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the childcare credit is nonrefundable. However, for 2021, it is fully refundable if the taxpayer’s primary residence (or at least one spouse on a joint return) is in the U.S. for more than half the year.

The credit is based upon a percentage of the taxpayer’s care expenses for a child under the age of 13 (the expenses count up to the date the child actually turns 13) that allow a taxpayer to work. In the case of a married couple, the credit only applies if they are both employed. There are special provisions for a spouse who is disabled or a student that are not covered in this article.

There is a maximum to the expenses that can be used to figure the credit for 2021:

  • $8,000 for one child, up from the normal $3,000 in any other year.
  • $16,000 for two or more children, up from the normal $6,000 in any other year.

In addition, the percentage used to calculate the credit for most taxpayers has been increased to 50%. In any other year, that percentage would vary depending upon the taxpayer’s adjusted gross income (AGI), with lower-income taxpayers benefiting from the highest percentage rate (35%) and the lowest percentage rate (20%) for higher-income taxpayers.

A combination of the higher maximum expenses and the 50% rate results in a significant increase in the maximum credit:

  • $4,000 for one child (50% of expenses up to $8,000)
  • $8,000 for the care of 2 or more children (50% of expenses up to $16,000)

This increase in the credit is targeted at lower-income taxpayers, so it includes a phaseout provision for higher-income taxpayers. The 50% credit rate begins to phase out when the taxpayer’s AGI reaches $125,000 (1 percentage point for each $2,000 above the $125,000 threshold), but the rate isn’t reduced below 20% until the AGI reaches $400,000, at which point the credit phaseout picks up again.

In addition, since the purpose of the credit is to help lower-income workers’ childcare expenses, the expenses used to calculate the credit are limited to the taxpayer’s income from working. In the case of a married couple, the expenses are limited to the working income of the lowest-earning spouse.

This all may seem a bit complicated, so here is a typical example:

Example: A married couple has 2 children under the age of age 13 and both work. One spouse makes $25,000 and the other makes $18,000. They have no other income, so their AGI is $43,000 ($25,000 + $18,000)—under the AGI phaseout threshold of $125,000. During the year, they incurred $14,000 in childcare expenses for their 2 children. The maximum expenses allowed are $18,000, but in this example, we are limited to the $18,000 of expenses or the working income of the lowest-earning spouse, which is $14,000. Thus, we must use $14,000 as the expense amount. Child care for this couple costs $7,000 ($14,000 x 50%).

For those who enjoy employer-provided dependent care assistance, the ARPA also changes (for 2021 only) the exclusion for employer-provided assistance for dependent care, increasing the maximum amount of excludable earnings from $5,000 to $10,500 for a married couple filing jointly ($5,250 for married filing separate).

If you have questions about how this one-year change might affect your tax situation, please give our office a call.

Uncle Sam May Pick Up the Cost of Your COBRA Medical Coverage

The recently passed American Rescue Plan Act (ARPA) includes a provision for the federal government to pick up the cost of COBRA health coverage for employees’ involuntary termination of their employment or reduction of hours subject to certain qualifications.

COBRA is the acronym for Consolidated Omnibus Budget Reconciliation Act, which was passed years ago, and gives workers and their families who lose their health benefits the right to choose to continue obtaining group health benefits provided by their group health plan for limited time periods, under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Qualified individuals may be required to pay the entire premium, for coverage, up to 102% of the cost to the plan.

COBRA generally requires that group health plans sponsored by employers with 20 or more employees in the prior year offer employees and their families a temporary extension of health coverage (called continuation coverage) in certain instances in which coverage under the plan would otherwise end.

The ARPA provides premium assistance, a 100% federal subsidy (i.e., makes the health insurance coverage no cost to the former employee), for COBRA premiums for eligible individuals who have a COBRA option through their employment beginning April 1 and continuing through September 30, 2021. On top of that, this subsidy is also tax-free.

An individual qualified for this subsidy is one who is eligible for COBRA coverage as an employee, former employee, covered spouse, or covered dependent, and elects to have COBRA coverage due to involuntary termination of their employment or reduction of hours and is not eligible for other group coverage or Medicare.

Individuals who do not have a COBRA election in effect on April 1, 2021, but who would be otherwise qualified for the subsidy also qualify. Also qualified are those who elected to have COBRA coverage but discontinued it before April 1, 2021, are still within their maximum coverage period and make the COBRA election during the period starting April 1, 2021 and ending 60 days after they are provided with a required notification of the extended election period by their former employer.

The duration of this subsidized coverage will begin April 1, 2021, and end on September 30, 2021, unless, under the terms of the COBRA coverage, the covered period is less, or the COBRA beneficiary becomes eligible for coverage under another group health plan or Medicare. A penalty of $250, or more for intentional failures, applies to beneficiaries who fail to notify the government that they become ineligible for the subsidy.

Where the COBRA group health plan sponsors permit it, the premium assistance will apply to any compliant coverage in which the employee enrolls, provided the premium does not exceed the premium for the coverage in which the individual was enrolled and does not provide only excepted benefits or is not a qualified small employer health reimbursement arrangement or health flexible spending arrangement.

The employer, or insurer for fully insured plans, will pay for the subsidized COBRA coverage, and in turn, will be reimbursed for the cost of the coverage by the federal government through a credit claimed against its Medicare payroll tax. If the credit exceeds the tax, the difference is refundable and can be claimed in advance. ARPA requires employers provide notices to assistance eligible individuals of: the subsidy’s availability, the extended election period for COBRA coverage, and the subsidy’s expiration.

Contact your prior employer related to your benefits under COBRA coverage. For more information, related to this new law change please give our office a call.

Big Increase in Child Tax Credit For 2021

An increased child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package, which was passed by Congress on March 10, 2021, and is known as the American Rescue Plan Act, will provide lower-income parents with substantial financial assistance and support various other efforts to stimulate the economy. Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, for 2021, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December.

Here are the details.

  • Additional Credit Amounts – Normally, the credit is $2,000 per eligible child. For 2021, it has increased to $3,000 for each child under age 18 (normally under age 17) and $3,600 for children under age 6 at the end of the year.
  • Refundability – A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.
  • High-Income Phaseout – The credit is designed to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.
2021 MAGI PHASEOUT – CHILD TAX CREDIT
Filing Status Threshold
Married Filing Jointly 150,000
Heads of Household 112,500
Others 75,000

Example 1: Jack and Jill have two children—Ella, age 4, and Joe, age 8. Their child tax credit for 2021 before the phaseout will be $6,600 ($3,600 + 3,000). They file a joint return and their AGI is below $150,000, so they are entitled to the full $6,600. However, if their AGI for 2021 is $170,000, they would have to reduce (phase out) the credit by $1,000 ($50 x [($170,000-$150,000)/1,000]). Thus, their child tax credit would be $5,600.

Note: This phaseout only applies to the increase in the credit. Families that aren’t eligible for the higher child credit would still be able to claim the regular credit of $2,000 per child subject to the normal phaseout thresholds of $400,000 for married couples filing jointly and $200,000 for others.

Example 2: Using Jack and Jill from example #1, they qualified for a credit of $6,600 before phaseout. If their AGI had been $220,000, they would be completely phased out of the additional 2021 credit but would still qualify for the normal $2,000 per child credit. Since their AGI is below the regular $400,000 phaseout threshold, their credit for 2021 would be $4,000 (2 x $2,000).

Advance Payments – Under a special provision included in the new tax law, to get the credit benefit into the hands of taxpayers as quickly as possible, the Secretary of the Treasury has been charged with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would be entitled to by using the information on the 2020 return. If the 2020 return has not been filed, the 2019 information is to be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered (either reduced or increased) when the 2020 return is filed. The initial advance payment won’t arrive before July 1, 2021, and monthly payments would end in December 2021. Any balance of the credit due to a taxpayer would be claimed on their 2021 tax return.

  • Reconciliation on the 2021 Tax Return – The advance payments will reduce the child tax credit claimed on the tax return, but not below zero. If the aggregate amount of the advance payments to the taxpayer exceeds the amount of the allowable credit, the excess must be repaid unless the taxpayer meets the safe harbor test.
  • No Repayment Safe Harbor – The amount of the excess advance repayment is eliminated or reduced based on a safe harbor that applies to lower-income taxpayers. Thus, families with a 2021 MAGI below the applicable income threshold (see table below) will not have to repay any advance credit overpayments that they receive.
SAFE HARBOR APPLICABLE MAGI
Filing Status Threshold
Married Filing Joint 60,000
Heads of Household 50,000
Others 40,000

Child’s Death – A child isn’t taken into account in determining the annual advance amount if the death of the child is known to the IRS as of the beginning of the calendar year for which the estimate is made.

Online Portal – The Secretary of the Treasury will establish an online portal for taxpayers to elect to not receive advance payments or provide information that would affect the amount of the advance payment, including the birth of a qualifying dependent, change in marital status or significant changes in income.

It will take the Treasury some time to initiate the advance payments, but if you have questions about the child tax credit, please give our office a call.

Are Your Unemployment Benefits Taxable?

With the passage of the CARES Act stimulus package early in 2020, the federal government began supplementing the normal state weekly unemployment benefits by adding $600 per week through the end of July 2020. When this provision ran out, and with Congress at a stalemate, President Trump issued an executive order in early August that extended the supplement, but at $400 per week, with the federal government providing $300 and the state the other $100. Then, the COVID Tax Relief Act that was enacted in late December of 2020 extended the federal unemployment supplement through March 14, 2021, but at $300 per week. Now, President Biden’s American Rescue Plan that Congress enacted in March of 2021 has extended the $300 benefit through September 9, 2021, and increased the number of weeks an individual can qualify for the benefits from 50 to 74.

The American Rescue Plan Act originally slated the weekly amount to be $400. That was before a provision to treat the first $10,200 of unemployment income as tax exempt was included, at which point the weekly supplemental amount was reduced to $300. However, the tax exemption of the first $10,200 of unemployment compensation will only apply to taxpayers with AGIs less than $150,000. Prior to this change, unemployment benefits were fully taxable income for federal purposes.

This change is retroactive to 2020, and if you have already filed your 2020 tax return, on which you included unemployment compensation, and you qualify for the income exclusion, the return can be amended to take advantage of the up to $10,200 tax-exempt portion of the unemployment income. There is a remote chance the IRS might make the adjustment automatically.

Those who received unemployment benefits will be sent a Form 1099-G (Certain Government Payments) from the state that paid the benefits. This tax form shows the amount of unemployment benefits paid to the individual during 2020 and the amount of income tax withheld, if any.

There have been reports of people receiving Form 1099-G when they never applied for and didn’t collect any unemployment benefits for 2020. In these cases, the individual’s personal information was apparently used fraudulently by someone else to claim the unemployment benefits. If this happens to you, you should contact the government office that issued the erroneous form to request a correction.

Also, be aware that children under age 19, or full-time students over age 18 and under age 24 with unearned income in excess of $2,200, are subject to what is referred to as the kiddie tax. The kiddie tax taxes the child’s unearned income at the parent’s rate. Normally, we think of unearned income as being interest, dividends and capital gains, but certain other types of income, including unemployment benefits, are considered to be unearned income. This can lead to some unpleasant tax surprises, as those who have already filed their 2020 tax returns may have discovered. But the $10,200 retroactive exclusion should eliminate the unemployment tax for most kiddie tax returns. An amended return may be needed in this situation.

There are several states where unemployment benefits are not taxable. Of those, seven states do not have a state income tax, so obviously, unemployment benefits are not taxable in those states, which are the following:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Several states have state income tax but do not tax unemployment benefits:

  • California
  • Montana
  • New Hampshire
  • New Jersey
  • Oregon
  • Pennsylvania
  • Tennessee
  • Virginia

Two states exempt 50% of amounts above $12,000 (single taxpayer) or $18,000 (married taxpayers):

  • Indiana
  • Wisconsin

The remaining states fully tax unemployment benefits.

A word of caution: Some states may pass laws to conform to the federal treatment, or even automatically conform. Unfortunately, that information was not available when this article was prepared.

If you’ve collected unemployment compensation, the benefits’ impact on your tax bill will depend on a number of factors, including the amount of unemployment income you received, whether your benefits are covered by the $10,200 exclusion, what other income you have, whether you are single or married (and, if married, whether you and your spouse are both receiving unemployment benefits), and whether you had or have income tax withheld from benefit payments.

If you have questions about the taxation of unemployment compensation, please give our office a call.

It’s Official! Another Round of Stimulus Payments Approved by Congress

The American Rescue Plan Act has passed and includes a third much-anticipated economic impact payment (EIP). This is one of several government measures intended to help financially stressed citizens. This will be the third round of EIPs since the pandemic began disrupting the economy at the beginning of 2020, leaving many Americans without jobs or any way to support their families.

This round of EIPs will be:

  • $1,400 ($2,800 for joint filers), plus
  • $1,400 per dependent—unlike the prior payments, the payment will apply to all of a taxpayer’s dependents regardless of age.

Since the payments are meant for lower-income taxpayers, they will phase out for higher-income taxpayers. Thus, the payment amounts will phase out for taxpayers with adjusted gross incomes (AGI) between:

  • $150,000 and $160,000 for married taxpayers filing jointly;
  • $112,500 and $120,000 for head-of-household filers; and
  • $75,000 and $80,000 for all other filers.

The Treasury will make these payments automatically based on a taxpayer’s filing status, AGI, and claimed dependents on their 2019 return—or the 2020 return if it has been filed and processed by the IRS by the time the IRS generates the payments.

Example: Don and Shirley file jointly, have one dependent, and their 2019 AGI is $152,500 (they had not filed their 2020 return by the time the third round of EIPs were determined). Because their AGI is a quarter of the way through the phaseout range for joint filers, their EIP3 will be reduced by 25%.

Here is the computation for their EIP3:

EIP for Don & Shirley:  2,800
EIP for their dependent 1,400
Total before phaseout  4,200
Phaseout (25%) -1,050
Economic impact payment 3,150

Had Don and Shirley had an AGI of less than $150,000, their EIP would have been $4,200.
Had Don and Shirley had an AGI of $160,000 or more, their EIP would have been $0.

It is anticipated that the Treasury will begin issuing the EIP3s within a week after President Biden signs the American Rescue Plan Act into law.

Reconciliation – When taxpayers file their 2021 tax returns, they will need to reconcile the payments they received with the amounts they were entitled to based upon the 2021 tax return filing status, AGI and claimed dependents. If payments were less than what they were entitled to, the difference becomes a refundable tax credit on the 2021 tax return. Taxpayers who received more than they were entitled to are not required to repay any difference.

Example (continued) – Don and Shirley’s actual 2021 AGI ends up being $148,000, so none of the recovery rebate credit (RRC) has to be phased out because the AGI is less than $150,000. Therefore, they’ll be allowed $1,050 (the difference between $4,200 and the EIP3 they received of $3,150) as a refundable credit on their 2021 tax return.

Dependents – Dependents who file their own returns are not eligible for an EIP or the RRC.

Decedents – Individuals who died prior to January 1, 2021 will not be eligible for the EIP3 or RRC.

Social Security Number – A Social Security number is required for eligibility for filers and their dependents. An exception to the SSN requirement is if a dependent is adopted or placed for adoption and has an ATIN (adoption taxpayer identification number). The SSN has to have been issued by the Social Security Administration on or before the due date for filing the 2021 return.

Regulations – The Act specifies that the Treasury Secretary is to issue regulations or other guidance to ensure, to the maximum extent administratively practicable, that in determining the amount of the RRC, an individual is not taken into account more than once. This includes claims by different taxpayers and by reason of a change in joint return status or dependent status between the taxable year for which an advance refund amount is determined and the taxable year for which the RRC is determined.

Non-filers – An individual does not have to file a tax return to be eligible for the EIP. The Treasury has developed methods for directing payments to non-filers, such as Social Security recipients who don’t have other income. If you are a non-filer who received the two prior EIPs, you should automatically receive this third one. Although it may take a bit of time for the IRS to update their website to incorporate the recent changes, they provide a Non-Filer Tool on their website.

Following Up – You will be able to check on the status of your rebate using the “Get My Payment” feature on the IRS webpage.

Also, realize there may have been births, deaths, changes in dependents, marriages, separations, divorces, and income changes that can cause the rebate amounts to be different from expected or, in some cases, incorrect.

The IRS provides an extensive Q&A related to rebate issues and situations that may answer any questions related to your rebate once the information is updated for this third round of payments.

If you have any other questions, please give our office a call.

Estate Planning Techniques During COVID

This article discusses how the COVID-19 pandemic has resulted in low interest rates and depressed asset values, creating a very unique opportunity for estate planners. Specifically, this article outlines five different strategies to consider utilizing during this time. For example, annual gift tax exclusion, gifting interest, annuity trusts, and intra-family loans are all topics that should be considered. Be sure to check out this link for more information and details!

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Keeping Your Company Grounded During a Crisis

This article discusses and emphasizes the need for all businesses to be able to adapt and pivot in the right direction, especially during a crisis like the Coronavirus pandemic. Some tips that are outlined are the ability to strategize quickly, supporting company morale, staying grounded, and preparing for a future crisis through risk management. No matter your industry, these tips can be very beneficial if implemented in the proper format. Be sure to check out this thing for more information as well as the full list of tips!

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