Marcum 2021 Year-End Tax Guide

DEFERRAL OF EMPLOYER SHARE OF FICA 2020 The IRS issued a memo examining the consequence of failing to pay the employer’s share of employer social security taxes for 2020, which were allowed to be deferred under the CARES Act, by the applicable installment due dates (50% on 12/31/21, and 50% on 12/31/22). The Service concluded that a failure to pay invalidates the deferral of the entire amount and not merely the delinquent portion. Failure to deposit tax penalty applies to the entire deferred amount – even the portion paid on time under the CARES rule. The statute provides that the deferral of payroll taxes is valid if “all such deposits are made not later than the applicable date.” The IRS says this means that if ANY deposit deferred is not timely made, then the deferral is not permitted as to the entire amount originally deferred. A failure to deposit penalty and interest will apply to 100% of the deferred employer social security taxes and not only to the delinquent amount. If the IRS issues a notice demanding payment and the full amount demanded is not paid within 10 days, the penalty rate increases from 10% to 15%. Ex 1: E defers employer social security taxes of $50,000 in 2020 and pays only $5,000 on 12/31/2021. The failure to deposit penalty applies to the entire $50,000, not just the $20,000 of the first installment not paid. Ex 2: Same as above, except that E pays $25,000 by 12/31/2021 and the rest of the balance on 2/28/23. The 10% deposit penalty applies to the entire $50,000 (even though the original $25,000 deferred was timely paid). If you have taken the benefit of the deferral of employer social security taxes, remember that it is important to make the first installment payment by December 31, 2021. IRS ENFORCEMENT Increasing IRS enforcement became an important discussion point this past year as Congress looks for additional revenue to funds its spending goals. The IRS has decided to increase the reporting responsibilities of taxpayers in recent years. This includes partnerships providing capital account information to the IRS and partners on a tax basis for 2020 and later years. This requirement was unilaterally imposed by the Service through a change in its instructions. It has also created draft versions of new Form 1065 Schedules K-2 and K-3 to provide additional information, particularly with respect to foreign transactions. The Service sees partnerships as entities through which high earners can hide income.

The Supreme Court majority determined that since the individual mandate had been repealed, the individuals pressing the claim could suffer no injury under the law. Consequently, they lacked standing to present the case since the requested relief must be tied to the potential injury. Justice Thomas wrote a concurring opinion but suggested that standing could exist for the states involved in the suit, which were themselves employers covered under the ACA and which incurred significant administrative costs and potential penalties. This was echoed by Judge Alito in his dissent. However, the states had not argued the issue of standing on these grounds and the court could not unilaterally decide the case on this basis. At this point, there is no pending case on this matter. Remote Worker State Taxation: The Court determined not to hear the case involving New Hampshire and Massachusetts on the taxation of workers who worked remotely in other states. Massachusetts issued emergency regulations on nonresident-sourced income due to COVID 19-related office closures. Under these regulations, the income of a nonresident (including employment income) derived from a trade or business carried on in Massachusetts was to be sourced in Massachusetts. This would cause compensation received for services done by a nonresident who, prior to the COVID-19 state of emergency was an employee performing such services in Massachusetts, and who is now performing those services outside of the state due to pandemic-related circumstances, to continue to be treated as Massachusetts-sourced income from March 10, 2020, through ninety days after the date on which the Governor lifts the state of emergency. MEDICAL COSTS AND CERTAIN TAX ADVANTAGED PLANS IN THE COVID-19 ERA The IRS addressed whether certain costs constitute medical expenses. The IRS also issued an Information Letter (2020- 0027) in February 2021, that addressed whether unused amounts in a dependent care FSA under a section 125 cafeteria plan could be refunded. It concluded that a refund is not available. Announcement 2021-7, issued March 26, 2021, broadened the definition of medical care amounts to include amounts paid for PPE – i.e., masks, hand sanitizers, and sanitizing wipes, if acquired for the primary purpose of preventing the spread of COVID-19 (referred to as COVID-19 PPE). However, employers may need to amend their plans so that COVID-19 PPE is reimbursable.

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