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Navigating home office deductions By: National Association of Tax Professionals
October 26, 2021

COVID has changed the way society lives, operates and functions. There has been a major shift in the professional world, specifically, where people call “work.” The rise of COVID saw many businesses opting for a “work from home” initiative, creating a rise in home offices. This has major tax implications both on tax professionals and their clients. Obviously, this has raised a number of questions about the qualifications of a home office, how to record keep and has led taxpayers to seek more information on the deduction.

How to qualify

To deduct home office expenses, a taxpayer must use the space exclusively and regularly:

  • As a place of business
  • As a place to meet or deal with clients and customers in the normal course of business, or
  • In connection with the business if the space is a separate structure from the residence (for example, a detached garage)

For 2018-2025, the home office deduction for employees is suspended by the 2017 Tax Cuts and Jobs Act (TCJA). Only self-employed taxpayers are able to claim the home office deduction from 2018-2025.

Because of the TCJA many employees who work from home and are required by their employer to maintain a home office are no longer able to take an itemized deduction for home office expenses. Some employers are creating an accountable plan to reimburse employees for the cost of these expenses. With an accountable plan, the employee seeks reimbursement from the employer for allowable expenses. The reimbursement is not taxable to the employee and the employer is allowed a tax deduction for the expense.

Information to keep track of

What clients need to keep track of will depend on the method they use to figure the home office deduction. There are two methods to use, the regular or simplified method.

The regular method is more difficult and uses actual expenses. Direct expenses (expenses directly related to the home office such as painting or repairs, depreciation deduction for furniture and fixtures used in the home office, etc.) are allowed in full and indirect expenses (expenses related to the home such as mortgage interest, property taxes, insurance, utilities, general home repairs) are deductible based on the percentage of the home used for business. Under this method, the taxpayer is required to depreciate the value of their home and so the value of the home will be needed.

For the simplified method, actual expenses are not deducted. The square footage used as a home office (up to 300 square feet) is multiplied by a prescribed rate ($5 per square foot). The maximum deduction under the safe harbor is $1,500 ($300 x $5).

If using the regular method, all expenses would need to be tracked. If using both simplified and regular, they would need to know the square footage of space used for the home office.

Recordkeeping

The taxpayer should keep detailed records of all expenses related to the home office and provide a copy or a listing to the tax preparer. All the items mentioned above would be needed – mortgage interest statement, etc.

It is important to note that the simplified method is an alternative only for calculating the amount of the home office deduction. All the other requirements must be met, including the exclusive and regular use requirements, the deduction is limited to income from the business and the restrictions on employees attempting to claim the home office deduction.

What else to know about the deduction

The home office deduction is available to both homeowners and renters, though specific requirements must be met. Even then, the deductible amount be limited.

“Home” means:

  • House, apartment, condominium, mobile home, boat or similar property
  • Includes structures on property such as unattached garage, studio, barn or greenhouse
  • Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business

Expenses that relate to a separate structure not attached to the home will not qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.

If the home office is the taxpayer’s principal place of business, the costs of travel between the home office and other work locations in that business are deductible transportation expenses, not nondeductible commuting costs.

If the home is sold at a profit, the exclusion of the sale for gain on the sale of a principal residence won’t apply to the portion of the profit equal to the amount of depreciation claimed on the home office.

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Employee retention tax credit (ERC) updates for 2020 and 2021 tax returnsBy: National Association of Tax Professionals
October 12, 2021

Many changes have occurred in the past year regarding the employee retention credit (ERC). The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES) and stated eligible employers who paid qualified wages after March 12, 2020, and before Jan. 1, 2021, were eligible for a refundable credit equal to 50% of qualified wages paid (limited to $10,000 in wages per employee). The maximum credit for an eligible employer for qualified wages paid to any employee is $5,000 ($10,000 x .50) for the year. All wages paid qualify for the credit for employers that averaged 100 or fewer full-time employees in 2019.

ERC extensions were made under the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act of 2021 (ARP). For calendar quarters beginning after 2020, the credit is 70% of qualified wages (limited to $10,000 in wages per employee, per quarter), and all wages paid qualify for the credit for employers that averaged 500 or fewer full-time employees in 2019. The maximum credit amount per employee is $7,000 ($10,000 x .70) per quarter or $28,000 ($7,000 x 4) for the full year. For employers that averaged more than 500 full- time employees in 2019, only wages paid to employees who are not providing services qualify for the credit. Special rules apply to a recovery startup business and a severely financially distressed employer.

An eligible employer can claim the ERC even if it received a Paycheck Protection Program (PPP) loan. By the time this guidance came, many employers may have already filed their payroll reports for the tax year 2020.

So, what does this mean for practitioners? This means practitioners may have clients who they initially thought were not eligible for the ERC (due to having received a forgivable PPP loan) are now eligible for the ERC. Similar to most tax- related items, no double dipping is allowed. Any wages that count toward eligibility for the ERC or PPP loan forgiveness can be applied to either the ERC or PPP loan forgiveness, but not both.

To recap, some of our clients may be eligible to file amended payroll reports when the eligible employer’s qualified wages were not provided by the PPP loan.

Practitioners may find other situations where clients are eligible to amend; however, the one mentioned above will probably be the most common. For additional information on when and how employers that received a PPP loan can claim the ERC for 2020, see Notice 2021-20.

Also keep in mind, if a taxpayer files a Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim the ERC, Notice 2021-49 (under timing of qualified wages deduction disallowance) states the taxpayer must file an amended federal income tax return to reduce the deduction for the wages on which the credits were claimed. If the taxpayer is a partnership subject to the Centralized Partnership Audit Regime an administrative adjustment request (AAR) would need to be filed. An AAR is filed instead of an amended return for the partnership.

What this is saying is, if you amend a taxpayer’s 941 for a prior year, you will also most likely need to amend the related business return to account for a reduction in wages. You will not be able to make the wage adjustment, for example, on the 2021 business return, if an amended 2020 payroll report was filed to claim the ERC. The wage adjustment will need to be made on an amended 2020 business return.

An important item to be aware of is that the statute of limitations on ERC claims is extended from three to five years (based on Notice 2021-49). For example, if the Form 941 for quarter four of 2021 claiming the ERC is treated as filed on April 15, 2022, the return could be audited with respect to the ERC as late as April 14, 2027.

Lastly, Notice 2021-49 delivered some disappointing news to many practitioners and their clients. In the majority of cases, wages paid to a more than 50% owner of a corporation, partnership or other entity are ineligible for the ERC. The same would apply generally to wages paid to a spouse of a more than 50% owner of a corporation, partnership or other entity.

If you are an NATP member and have additional questions concerning the ERC, are intrigued by the concept, or are looking to obtain CPE, we will have an article in our final issue of the 2021 TAXPRO Journal, delivered straight to your mailbox.

If you are not an NATP member, you can join today and experience all the benefits that come with membership, including access to this article and all others like it!

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What practitioners need to know about the 2021 extended return due date By: National Association of Tax Professionals
October 5, 2021

For most clients who needed more time to prepare their 2020 individual income tax return, a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, should have been filed by May 17, 2021. Due to the tough times many people were experiencing, the IRS postponed the 2020 individual tax year due date from April 15, 2021, to May 17, 2021. The extension allows individuals additional time to file a tax return. It does not, however, grant them an extension of time to pay taxes for the 2020 tax year. To avoid possible penalties, an estimate of taxes owed should have been paid by the extended deadline. Special rules apply for those:

  • Serving in a combat zone or a qualified hazardous duty area
  • Living outside the United States

Many clients still need to file their individual returns. Some individuals may be slow in giving their tax preparer their information for several reasons. Fear of owing tax may be one of them. Due to the unique nature of the past year, we thought it would be helpful to remind practitioners of some of the atypical items you might encounter with the 2020 extended returns.

Due to COVID, many clients may have received a coronavirus-related distribution and could be thinking they will have a big tax bill as a result. Coronavirus-related distributions, up to $100,000, from eligible retirement plans receive favorable tax treatment.

Tax professionals can share the good news with these clients by telling them that qualified distributions are taken into the taxpayer’s gross income ratably over three years, beginning with the year the distribution is received. Unless the taxpayer elects out of the three-year spread or rolls the money back into an account tax-free, the three-year averaging rule applies automatically.

Also, qualified distributions are exempt from the §72(t) premature tax. Qualified distributions may be recontributed to eligible retirement plans or IRAs, tax –free, any time during the three-year period beginning on the day after the date of the distribution.

Planning opportunities may exist for professionals with clients regarding these distributions. For some, it may make sense to report the distribution in 2020; for others it may make sense to spread over three years. Also, don’t forget about those who may have the money to recontribute as their financial situation has improved.

Unemployment compensation

Up to $10,200 of unemployment compensation may be excludable from income for 2020. If a couple is filing a joint return, each spouse is entitled to a separate $10,200 exclusion. The taxpayer’s modified gross income (modified AGI, also MAGI) must be less than $150,000 to qualify. MAGI is determined after the application of:

  • Social Security income limitations
  • Exclusion of U.S. savings bond interest used to pay higher education tuition and fees
  • Exclusion for adoption assistance programs
  • IRA deductions
  • Student loan interest deductions
  • Tuition and fees deductions
  • Passive loss limitations

It should be noted, MAGI is also determined without regard to unemployment compensation.

This exclusion is reported separately from the total unemployment compensation received. Schedule 1 (Form 1040), Line 7, is used to report the total unemployment compensation. Schedule 1 (Form 1040), Line 8, is used to report the exclusion. The IRS has a worksheet to calculate the taxpayer’s modified AGI and exclusion amount, however most software will also have the worksheet.

Because the modified AGI limitation is per return, not individual, in some cases it may make sense for a married couple to file separately instead of jointly.

Repaying excess advance payments of the premium tax credit (excess APTC)

For 2020, any excess APTC is not required to be repaid. There is no requirement to report excess APTC on the 2020 return or file Form 8962, Premium Tax Credit. If a taxpayer is claiming a net premium tax credit (PTC) for 2020, Form 8962 is required. If the taxpayer’s PTC computed on the return is more than the APTC paid on the taxpayer’s behalf during the year, the difference is a net PTC.

Claiming a net PTC will increase the taxpayer’s refund or lower the amount of tax they owe. Net PTC is reported on Schedule 3 (Form 1040), Line 8. Taxpayers claiming a net PTC must file Form 8962 and report an amount on Line 26 of the form when filing their 2020 tax return.

Principal residence debt

Taxpayers can now exclude the discharge of indebtedness on principal residence debt from taxable income through Dec. 31, 2025. The forgiven debt is retroactive to the beginning of 2018. For discharges of indebtedness after Dec. 31, 2020, the maximum amount that may be excluded is $750,000 ($375,000 MFS). Previously up to $2 million of qualified principal residence debt could be excluded.

Amended returns may be needed for some to take advantage of this exclusion – especially those whose 2018 tax return included forgiven mortgage debt – as existing law protected discharges prior to Jan. 1, 2018. For most individuals, April 15, 2022, is the deadline to file a 2018 return, so these returns should be filed as soon as possible.

This past year has been trying for some Schedule C businesses, while other businesses have thrived. According to the U.S. Chamber of Commerce, “businesses that help people socially distance themselves from others, retailers that enable people to eat and drink at home and health care services are primary examples of businesses creatively learning to adopt to coronavirus.”

Schedule C

An issue one may see in practice is regarding the PPP loans. Taxpayers whose PPP loans are forgiven may still deduct the otherwise allowable deductible expenses paid with the PPP loan proceeds, and for federal purposes, will not be required to include in gross income the PPP loan forgiveness amount.

Schedule E

The pandemic has created issues with many rental properties. Clients may have been advertising their rentals for rent but have had no luck renting them. If a taxpayer held property for rental purposes, they may be able to deduct their ordinary and necessary expenses for managing, conserving, or maintaining the property while the property is vacant. No deduction is available for the loss of rental income.

Disaster relief

The IRS announced that victims of Hurricane Ida have until Jan. 3, 2022, to file various individual and business tax returns and make tax payments. This means taxpayers who have extensions to file their 2020 tax returns by Oct. 15, 2021, now will have until Jan. 3, 2022, to file their tax returns.

Keep in mind any payments of tax were still due May 17, 2021, so any tax due is not covered by this postponement.

There is no need for taxpayers to contact the IRS to get this relief. The IRS automatically uses a taxpayer address of record to identify affected taxpayers. If a taxpayer in a relief area gets a notice for late filing, the taxpayer should contact the IRS about penalty abatement. Also, taxpayers who live outside of the federal disaster area should call the IRS at 866-562-5227 to request relief.

The IRS and Disaster Assistance Improvement Program are great starting points for additional information.

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NATP's 2021 coronavirus relief acts survey resultsBy: National Association of Tax Professionals
August 9, 2021

Tax preparers faced unprecedented challenges in the 2021 tax season, including last-minute tax law changes that needed to be incorporated into returns that may have already been filed and accepted by the IRS. The National Association of Tax Professionals (NATP) sent a survey to more than 20,000 tax preparers, both before and after tax season, comparing their expectations of the upcoming season with how it actually went.

Tax pros weigh in on 2021 tax season, COVID-19 relief acts and future business practices

According to the survey findings, the most critical issues tax pros faced this past tax season were related to tax law changes. But, overall, tax professionals reported they felt confident in their knowledge level when it came to completing accurate returns this season – specifically related to new or revised deductions and credits, and tax law changes or updates.

Additionally, the coronavirus relief acts did not have as negative of an impact on their clients as expected. One complicated issue preparers faced with the coronavirus relief acts was their clients’ recordkeeping and accurate reporting to reconcile the third stimulus payment. The change in business operations due to pandemic safety protocols was also a burden to some firms, according to the survey.

“This data, while not surprising, is important to collect because it helps us develop the resources our members need to provide outstanding service to their clients during tax season and beyond,” said NATP Executive Director Scott Artman. “This tax season was another one for the books, and we’re not expecting the changes to stop as the year progresses. I’m proud that NATP was able to keep tax pros informed and equipped to handle these changes as they were announced.”

Even though tax preparers saw an increase in the number of returns they prepared this season compared to last, the Tax Day extension to May 17 had little impact on the number of returns prepared – both for business and individual clients. The overall impact on tax professional’s business was greater than expected, and reflecting on the past season, more tax professionals indicated they would have increased staffing levels compared to what they expected prior to the tax season. They also think the increased impact will carry into next year’s filing season.

Tax pros reported the biggest ways coronavirus relief acts impacted their business in the 2021 tax season were in stress levels and workload, as well as the complexity of returns, which was expected among industry professionals. At the center of it all, though, was the need for further clarification and guidance from the IRS on issues related to coronavirus relief acts. Many preparers reported getting in contact with the IRS to be a burden on their workload this season.

Other key findings include:
• The majority of firm owners (67%) made no changes to their staffing levels in response to the coronavirus relief acts, but in hindsight, many tax professionals would have hired more staff if they had known the complexities associated with this tax season
• Tax professionals, in general, filed about the same number of extensions as last year
o About a quarter of the extensions filed were due to effects from the coronavirus relief acts
• Tax professionals mostly conducted client interviews virtually or over the phone
• 25% of firm owners plan to increase their staff for next year, up from 9% when asked prior to tax season

To view the full report, or to speak with someone on its findings, please contact Nancy Kasten, NATP marketing director, at nkasten@natptax.com.

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Tax Season Updates events begin in person on Oct. 25By: National Association of Tax Professionals
July 29, 2021

We don’t have to tell you that the latest tax season was, shall we say, tumultuous. Between last-minute tax law change and COVID-19 safety practices, it’s been a lot. We know you’re short on time and patience, which is why we created an event to get you the updates you need to do your job and apply updated federal tax code to your clients’ unique situations.

There are Tax Season Updates in 100+ cities throughout the U.S., which means you’ll easily be able to find an event close to you. If you’d prefer, we’re also offering this event virtually, if that’s your preferred learning style. (Premium members can attend the virtual event for free!)

These events, formerly known as our 1040 Updates, are designed to help you understand the complexities of tax law to help you serve your clients with the excellence they deserve. Taught by a team of instructors using hands-on learning tools, this two-day workshop provides detailed, in-depth information on the most recent legislation and IRS updates. You’ll earn 16 CPE by the end.

Each event will include information and analyze provisions of the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act, and how these provisions affect your clients. We’ll also teach you to determine the tax treatment of different sources of income, apply inflation-adjusted amounts to 2021 individual returns, and analyze the change in tax rules for certain credits and deductions, including the expanded child tax credit and the third economic impact payment, including plus-up payments.

Plus, you’ll get an on-demand webinar in January covering any last-minute tax law changes, a quick reference desk card, a multi-page tax law quick reference guide with flowcharts, an e-book with handouts from each session and a certificate of completion to proudly display to set yourself apart from your competition.

The first live in-person events begin Oct. 25, 2021, in Lakewood, Colorado; Bay City, Michigan; Memphis, Tennessee; Perrysburg, Ohio; Liverpool, New York; and Bismark, North Dakota; so be sure to register soon!

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