Marcum 2021 Year-End Tax Guide

GENERAL TAX DEVELOPMENTS Employee Retention Tax Credits (ERTC)

transactions or as working capital of a business. This provision had an effective date as of the enactment date of the law. • Rules related to grantor trusts: Two new provisions were part of the prior House bill. A new IRC section would be added (Section 2901) that would include into the grantor’s estate the portion of the trust that the grantor is the deemed owner of for income tax purposes. While existing grantor trusts were to be grandfathered and would fall outside of these new provisions, new contributions to such trusts would cause a portion of the trust to be subject to these rules. For existing life insurance trusts, which are generally treated as grantor trusts, this raised concerns about the method of continued funding of life insurance premiums. A separate provision would treat sales to grantor trusts as if made to third parties, making these transactions taxable. A change to IRS Code Section 267 would cause losses created on such transaction to be deferred. Valuation Reduction for Certain Real Property Increase in limit of estate tax valuation reduction for certain real property used in farming and other trades or businesses: In a taxpayer-friendly move, the prior House bill made an amendment to increase the special valuation reduction from $750,000 to $11,700,000. This rule applies to decedent estates that own real property used in a farm or business and allows for the valuation of the asset to be based on its actual use as opposed to a value based on highest and best use. However, the reduction in value from its highest and best use has been set at $750,000 for a long time. Two-Year period for an S corporation to have a nontaxable reorganization to partnership: This was an extremely limited provision found in the prior House bill. It allowed certain “eligible S corporations” a two-year period (beginning on 12/31/2021) to reorganize as partnerships without triggering a tax. The eligible S corporation would have to completely liquidate and transfer substantially all of its assets and liabilities to a domestic partnership. The House summary indicated that this would apply to any corporation that was an S corporation on May 13, 1996. Limitations on like-kind exchanges: The American Families Plan contained a provision that would have limited the ability to use like-kind exchanges after 2021 for gains greater than $500,000. This proposal created many questions and was not part of the prior House bill and is not in the current bill.

2021 saw many changes with respect to the Employee Retention Tax Credit. The Consolidated Appropriations Act of 2021 extended the credit (which was scheduled to end on 12/31/2020) to June 30, 2021, with more liberal terms than applied in 2020. ARP extended the credit through the end of 2021 but the credit has been terminated under the Infrastructure bill by not allowing the credit applicable to wages paid after October 1, 2021. • It included certain governmental entities (excluded originally): » Public colleges or universities. » Organizations whose principal purpose is provision of medical or hospital care. » Certain federal instrumentalities (e.g., federal credit unions, Fannie Mae, FDIC, Federal home loan banks). • Employers that received Paycheck Protection Payment (PPP) loans were made retroactively eligible for the ERTC, but the same salaries cannot be used for both the credit and for loan forgiveness. This change caused many employers that ignored the ERTC in 2020 to reconsider whether the ERTC applied to them and whether amended Forms 941 should be filed and refunds claimed. • Significant changes were made to how eligibility is established under the significant reduction of gross receipts test for 2021. There only needs to be a 20% reduction of gross receipts for one quarter in 2021 compared to the comparable quarter in 2019. Alternately, an employer can base eligibility on the current quarter for 2021 by calculating the gross receipts reduction for the prior quarter in comparison to the comparable quarter in 2019. The IRS said that the employer does not need to consistently make this election for all quarters in 2021. • If the employer was not in business in 2019, it could compare to a 2020 comparable quarter. • The value of the credit was substantially increased for 2021 versus 2020. The 2021 credit is 70% of covered wages (including qualified health plan costs) of up to $10,000 per quarter (versus a 2020 credit of 50% of $10,000 per employee cumulatively for the year). The 2021 credit is potentially $7,000 for a covered employee per quarter.

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