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The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. 

The IRS has postponed the federal tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for certain taxpayers who have been adversely affected by the Coronavirus Disease 2019 (COVID-19) pandemic. For individual taxpayers, the notice postpones to May 17, 2021, certain deadlines that would normally fall on April 15, 2021, such as the time for making IRA contributions and for filing federal income tax refund claims. The notice also extends the time for return preparers to participate in the Annual Filing Season Program for the 2021 calendar year.

The IRS has released this notice as a follow-up to a previous announcement on March 17 that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021. This notice provides details on the additional tax deadlines which have been postponed until May 17.

Federal Tax Returns and Tax Payments
For an affected taxpayer, the due date for filing federal income tax returns in the Form 1040 series having an original due date of April 15, 2021, and for making federal income tax payments in connection with one of these forms, is automatically postponed to May 17, 2021. Affected taxpayers do not have to file any form, including Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to obtain this relief.

This relief includes the filing of all schedules, returns, and other forms that are filed as attachments to the Form 1040 series, or are required to be filed by the due date of the Form 1040 series, including, for example, Schedule H, Household Employment Taxes, and Schedule SE, Self-Employment Tax, as well as:

• Form 965-A (Individual Report of Net 965 Tax Liability);
• Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts);
• Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts);
• Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations);
• Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund);
• Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs));
• Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships);
• Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments); and
• Form 8938 (Statement of Specified Foreign Financial Assets).

Additionally, elections that are made or required to be made on a timely filed Form 1040 series (or attachment to such form) will be timely made if filed on such form or attachment, as appropriate, on or before May 17, 2021.

Claims for Refund
Individuals with a period of limitations to file a claim for credit or refund of federal income tax expiring on or after April 15, 2021, and before May 17, 2021, have until May 17, 2021, to file those claims for credit or refund. This postponement is limited to claims for credit or refund properly filed on the Form 1040 series or on a Form 1040-X. As a result of this postponement, the period beginning on April 15, 2021, and ending on May 17, 2021, will be disregarded in determining whether the filing of those claims is timely.

IRA and HSA Contributions
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

For affected taxpayers that must file forms in the Form 5498 series, the due date for filing and furnishing the Form 5498 series is postponed to June 30, 2021. The period beginning on the original due date of those forms and ending on June 30, 2021, will be disregarded in the calculation of any penalty for failure to file those forms.

Estimated Tax Payments, Other Items Not Extended
The postponement also automatically postpones to May 17, 2021, the time for affected taxpayers to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs). It also automatically postpones to May 17, 2021, the time for reporting and payment of the 10-percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

The IRS has provided guidance related to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022. All other food and beverage expenses are still subject to the 50 percent deduction limitation unless some other exception applies.

The IRS has provided guidance related to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022. All other food and beverage expenses are still subject to the 50 percent deduction limitation unless some other exception applies.

Restaurants Defined
According to the IRS’s guidance, a restaurant is a business that prepares and sells food or beverages to retail customers for immediate consumption. Note that the food and beverages do not need to be consumed on the premises for the 100-percent deduction to apply.

Restaurants are not businesses that predominantly sell pre-packaged food or beverages that are intended for later consumption. Food or beverages purchased from such businesses are still subject to the 50-percent deduction limitation. Examples of businesses that are not restaurants include grocery stores, specialty food stores, liquor stores, drug stores, convenience stores, newsstands, vending machines, or kiosks.

Restaurants are also not eating facilities located at an employer’s business that provide meals that are excluded from the employees’ gross income under Code Sec. 119, or that are considered a de minimis fringe under Code Sec. 132(e)(2). This also applies to eating facilities on the employer’s premises that are operated by a third party with regards to Reg. §1.132-7(a)(3).

Effective Date
This IRS guidance is effective for food and beverages purchases made after December 31, 2020, and before January 1, 2023.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.

For calendar quarters beginning after 2020, an employer is generally eligible for the credit if it was carrying on a trade or business during the calendar quarter for which the credit is determined, and either (1) had operations that were fully or partially suspended during the calendar quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19, or (2) experienced a decline in gross receipts for the calendar quarter when compared to the same quarter in 2019.

The guidance explains changes made to the employee retention credit for the first two calendar quarters of 2021, including:

• the increase in the maximum credit amount,
• the expansion of the types of employers that may be eligible to claim the credit,
• modifications to the gross receipts test,
• revisions to the definition of qualified wages, and
• new restrictions on the ability of eligible employers to request an advance payment of the credit.

The guidance does not address the employee retention credit provided by Code Sec. 3134, enacted by the American Rescue Plan Act of 2021 ( P.L. 117-2), for wages paid after June 30, 2021, and before January 1, 2022. The IRS will address Code Sec. 3134 in future guidance.

Highlights of some of the items addressed in the guidance are summarized below.

Eligible Employers
While the employee retention credit is not available to most governmental employers, it is available to tax-exempt organizations described in Code Sec. 501(c)(1), and to any governmental entity that is a college or university or whose principal purpose is providing medical or hospital care. For this purpose, a college or university means an educational organization as defined in Code Sec. 170(b)(1)(A)(ii) and Reg. §1.170A-9(c)(1). An entity that has the principal purpose or function of providing medical or hospital care means an entity that has the principal purpose or function of providing medical or hospital care within the meaning of Code Sec. 170(b)(1)(A)(iii) and Reg. §1.170A-9(d)(1).

Decline in Gross Receipts
One way an employer can be eligible for the credit is if it experienced a decline in gross receipts. Whether an employer is an eligible employer based on a decline in gross receipts is determined separately for each calendar quarter, and is based on an 80 percent threshold compared to the same calendar quarter in 2019.

If an employer did not exist as of the beginning of the first calendar quarter of 2019, the employer generally determines whether the decline in gross receipts test is met in the first calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the first calendar quarter of 2020. If an employer did not exist as of the beginning of the second calendar quarter of 2019, the employer generally determines whether the test is met in the second calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the second calendar quarter of 2020. An employer may also elect to use an alternative quarter to calculate gross receipts.

Eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter an eligible employer elects to use in measuring the decline.

Qualified Wages
Whether wage payments by an eligible employer will be considered qualified wages depend, in part, on the average number of full-time employees an eligible employer employed during 2019. For the first and second calendar quarters of 2021, large eligible employers are those whose average number of full-time employees during 2019 was greater than 500. For these employers, qualified wages are wages paid to an employee for time that the employee is not working for the reasons the credit is allowed.

Small eligible employers are those whose average number of full-time employees during 2019 was 500 or less. For these employers, qualified wages are the wages paid an employee whether the employee is working or not working for the reasons the credit is allowed.

An employer may not claim a credit under Code Secs. 41, 45A, 45P, 45S, 51, or 1396 with qualified wages for which it claims the employee retention credit, but it may be able to take a credit under these provisions for wages for which it did not claim an employee retention credit if the particular credit’s requirements are met.

Claiming the Credit
Eligible employers may continue to access the employee retention credit for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits in anticipation of the credit. However, advance payment of the employee retention credit is available only to small eligible employers, who can may elect to receive an advance payment of not more than 70 percent of the average quarterly wages paid in calendar year 2019.

For this purpose, average quarterly wages generally means the average of wages or compensation determined without regard to the social security wage base, paid in each calendar quarter in 2019. The guidance provides details for calculating average quarterly wages. Small eligible employers that come into existence in 2021 are ineligible to receive advance payment.

Effect on Other Documents
Notice 2021-20, I.R.B. 2021-11, 922, is amplified.

The IRS has issued guidance clarifying that amounts paid for personal protective equipment—such as masks, hand sanitizer and sanitizing wipes—for the primary purpose of preventing the spread of the Coronavirus Disease 2019 (COVID-19 PPE) are treated as amounts paid for medical care under Code Sec. 213(d).

The IRS has issued guidance clarifying that amounts paid for personal protective equipment—such as masks, hand sanitizer and sanitizing wipes—for the primary purpose of preventing the spread of the Coronavirus Disease 2019 (COVID-19 PPE) are treated as amounts paid for medical care under Code Sec. 213(d).

Therefore, amounts paid by an individual taxpayer for COVID-19 PPE for use by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s) that are not compensated for, by insurance or otherwise, are deductible under Code Sec. 213(a) if the taxpayer’s total medical expenses exceed 7.5 percent of adjusted gross income.

Since amounts paid for COVID-19 PPE are medical care expenses under Code Sec. 213(d), they are also eligible to be paid or reimbursed under:

• health flexible spending arrangements (health FSAs),
• Archer medical savings accounts (Archer MSAs),
• health reimbursement arrangements (HRAs), or
• health savings accounts (HSAs).

Note, however, that amounts paid or reimbursed under one of these arrangements or accounts are not deductible under Code Sec. 213.

Group Health Plans
If COVID-19 PPE expenses may not be reimbursed under the terms of a group health plan (including a health FSA and an HRA), the plan can be amended under this IRS guidance to provide for reimbursements of expenses for COVID-19 PPE incurred for any period beginning on or after January 1, 2020. Such an amendment will not be treated as causing a failure of any reimbursement to be excludable from income under Code Sec. 105(b), or as causing a cafeteria plan to fail to meet the requirements of Code Sec. 125.

Group health plans can be amended under this IRS guidance if:

• the amendment is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective,
• no amendment with retroactive effect is adopted after December 31, 2022, and
• the plan is operated consistent with the terms of the amendment, including during the period beginning on the effective date of the amendment through the date the amendment is adopted.

The U.S. Department of Labor has published a new webpage with guidance implementing the Continuation of Health Coverage premium assistance provisions of the American Rescue Plan (ARP), to provide full COBRA premium assistance to certain individuals who experienced a reduction in hours or involuntary termination of employment.

The U.S. Department of Labor has published a new webpage with guidance implementing the Continuation of Health Coverage premium assistance provisions of the American Rescue Plan (ARP), to provide full COBRA premium assistance to certain individuals who experienced a reduction in hours or involuntary termination of employment. This guidance, from the Labor Department’s Employee Benefits Security Administration, includes documents to implement these provisions, such as FAQs about COBRA premium assistance, FAQs on COBRA continuation health coverage for workers, and model notices.

COBRA Premium Subsidy
COBRA allows employees and their families who would otherwise lose their group health coverage due to certain life events to continue their group health coverage, known as COBRA continuation coverage. The ARP provides a 100 percent premium subsidy between April 1, 2021 and Sept. 30, 2021, for individuals whose reduction in hours or involuntary termination of employment makes them eligible for COBRA continuation coverage during this period. The ARP also requires group health plans to provide notices to individuals losing health coverage to inform them about premium assistance that may be available to them.

The IRS has announced that, under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the Premium Tax Credit (excess APTC) is suspended for tax year (TY) 2020.

The IRS has announced that, under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), the requirement that taxpayers increase their tax liability by all or a portion of their excess advance payments of the Premium Tax Credit (excess APTC) is suspended for tax year (TY) 2020. A taxpayer’s excess APTC is the amount by which the taxpayer’s advance payments of the Premium Tax Credit (APTC) exceed his or her Premium Tax Credit (PTC). Eligible taxpayers with excess APTC for 2020 are not required to file Form 8962, Premium Tax Credit, or report an excess advance Premium Tax Credit repayment on their 2020 Form 1040 or Form 1040-SR when they file. Taxpayers claiming a net PTC must file Form 8962 when they file their TY 2020 return.

Taxpayers who have already filed their TY 2020 return and who have excess APTC do not need to file an amended tax return or contact the IRS. Taxpayers who enrolled, or enrolled a family member, in health insurance coverage for TY 2020 through the marketplace should have received Form 1095-A, Health Insurance Marketplace Statement, from the marketplace. Taxpayers can check with their tax professional or use tax software to figure the amount of allowable PTC and reconcile it with their APTC received using the information from Form 1095-A.

The Premium Tax Credit helps pay for health insurance coverage bought from the health insurance marketplace. 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.

The IRS has extended the penalty relief provided in Notice 2020-22, I.R.B. 2020-17, 664, for failure to deposit employment taxes, to eligible employers that reduce their required deposits in anticipation of the following credits.

The IRS has extended the penalty relief provided in Notice 2020-22, I.R.B. 2020-17, 664, for failure to deposit employment taxes, to eligible employers that reduce their required deposits in anticipation of the following credits:

• the paid sick and family leave credits under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), as amended by the COVID-related Tax Relief Act of 2020 (Tax Relief Act) (Division N of P.L. 116-260), for qualified leave wages paid with respect to the period beginning January 1, 2021, and ending March 31, 2021;
• the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, added by the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), for qualified leave wages paid with respect to the period beginning April 1, 2021, and ending September 30, 2021;
• the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for qualified wages paid with respect to the period beginning January 1, 2021, and ending June 30, 2021;
• the employee retention credit under Code Sec. 3134, added by ARP, for qualified wages paid with respect to the period beginning July 1, 2021, and ending December 31, 2021; and
• the COBRA Continuation Coverage Premium Assistance credit under Code Sec. 6432, added by ARP, for continuation coverage premiums not paid by assistance eligible individuals under section 9501(a)(1) of the ARP, during the period beginning April 1, 2021, and ending September 30, 2021.

Background
Eligible employers claim the paid sick and family leave credits under the Families First Act, and the employee retention credit under the CARES Act, against the employer’s share of the Old Age, Survivors, and Disability Insurance (Social Security) portion of FICA tax under Code Sec. 3111(a). Employers that are eligible for the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, the employee retention credit under Code Sec. 3134, or the COBRA Continuation Coverage credit under Code Sec. 6432, can claim the credit(s) against the employer’s share of the Hospital Insurance (Medicare) portion of FICA tax under Code Sec. 3111(b). The credits are also available to eligible railroad employers for the attributable Railroad Retirement Tax Act (RRTA) taxes under Code Sec. 3221(a).

These refundable tax credits are reported on the employer’s employment tax return for reporting its FICA tax liability, which for most employers is the quarterly Form 941. Certain employers may claim an advance payment of the refundable credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Code Sec. 6656 imposes a penalty for failure to timely deposit required tax amounts, unless the failure is due to reasonable cause and not willful neglect. Failure to deposit employment taxes required under Code Sec. 6302 generally subjects an employer to the penalty. The various legislative acts and provisions implementing the refundable employment tax credits described above either instruct the IRS to waive the penalty or authorize guidance that provides penalty relief.

Paid Leave Credit Penalty Relief
An employer can reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the applicable paid sick or family leave credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer paid qualified leave wages, qualified health plan expenses, or qualified collectively bargained contributions, for the period beginning on April 1, 2021, and ending on September 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
• the amount of employment taxes that the employer does not timely deposit is less than or equal to its anticipated applicable paid leave credits claimed for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of the deposit reduction cannot be more than the total amount of the employer’s anticipated paid leave credits as of the time of the required deposit, minus any amount of those anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Employee Retention Credit Penalty Relief
After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of its applicable employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer paid qualified retention wages for the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
• the amount of employment taxes that the employer does not timely deposit— reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits claimed— is less than or equal to the amount of the employer’s anticipated applicable employee retention credits for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated employee retention credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

COBRA Credit Penalty Relief
After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits and the anticipated employee retention credit, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the employer’s COBRA continuation coverage credit anticipated for the calendar quarter prior to the required deposit, as long as:

• the employer is a “person to whom premiums are payable,”
• the amount of employment taxes that the employer does not timely deposit— reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits and the employee retention credits claimed—is less than or equal to the amount of the employer’s anticipated credits under Code Sec. 6432 for the calendar quarter as of the time of the required deposit, and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated COBRA continuation coverage credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Effect on Other Documents
Notice 2020-22, I.R.B. 2020-17, 664, is amplified.

Continuing an ongoing effort to help those experiencing homelessness during the pandemic, the IRS has reminded people who do not have a permanent address or a bank account that may still qualify for Economic Impact Payments (EIP) and other tax benefits.

Continuing an ongoing effort to help those experiencing homelessness during the pandemic, the IRS has reminded people who do not have a permanent address or a bank account that may still qualify for Economic Impact Payments (EIP) and other tax benefits.

While EIPs are made automatically to most people, payments cannot be issued to eligible Americans when there is no information available in the tax agency’s systems. For this reason, the IRS urges employers and others to share information about EIPs and encourage the rural poor and other historically under-served groups to file returns so they can receive the benefits they are entitled to.

Individuals who do not normally file tax returns should nevertheless file a basic 2020 tax return with the IRS. Returns can be filed for free using the Free File tool available on IRS.gov. Once the return is processed, the IRS can send stimulus payments to an address that is selected by the eligible individual. Importantly, people do not need a permanent address, bank account, or a job. Payments are issued to eligible individuals even if the person has not filed returns in years.

Individuals in this category can still qualify for the first two EIPs when they file their 2020 return by claiming recovery rebate credit. For the current round of payments, individuals who are experiencing homelessness may qualify to receive $1,400 for themselves. If they are married or have dependents, they can get an additional $1,400 for each of their family members.

In addition, some eligible workers experiencing homelessness may qualify for Earned Income Tax Credit (EITC). To be eligible, the worker must have lived in the U.S. for more than half of the year and meet other requirements. For 2020, the income limit is $15,820 for individuals with no children, and $21,710 for couples with no children.

If individuals want to receive their payments through direct deposit, many financial institutions are helping them open a low-cost or no-cost bank account. Those that open accounts will then have an account and routing number available when they claim a direct deposit of their EIP. Those with a prepaid debit card may be able to have their refund applied to the card.

Death benefits that an S corporation provided to its sole shareholder under a split-dollar life insurance arrangement were employee compensation rather than a corporate distribution. In reaching this decision, the Tax Court firmly rejected the contrary conclusion reached by the Sixth Circuit Court of Appeals in J.J. Machacek, CA-6, 2018-2 U.S.T.C. 50,447.

Death benefits that an S corporation provided to its sole shareholder under a split-dollar life insurance arrangement were employee compensation rather than a corporate distribution. In reaching this decision, the Tax Court firmly rejected the contrary conclusion reached by the Sixth Circuit Court of Appeals in J.J. Machacek, CA-6, 2018-2 U.S.T.C. 50,447.

Background
The taxpayers were a medical doctor and his wife. The doctor was the sole owner of his practice, which was organized as an S corporation that employed him and his wife. The taxpayers received wages from the S corporation, as well as fringe benefits from an employee welfare benefit plan.

The fringe benefits included death benefits that the Tax Court had previously concluded were provided under a compensatory split-dollar life insurance program ( R. De Los Santos, Dec. 61.270). However. the taxpayers responded by seeking summary judgment that the economic benefits provided by the program actually constituted a corporate distribution.

Tax Court Rejects Machacek
In Machacek, the Sixth Circuit had relied on Reg. §1.301-1(q), which states that economic benefits that a corporation provides to a shareholder under a split-dollar life insurance policy are treated as distributions of property. The Sixth Circuit emphasized that the regulation’s cross reference to Reg. §1.61-22(b) meant that it applied to both compensatory and noncompensatory split-dollar arrangements.

The Tax Court rejected this analysis. Instead, it determined that Code Sec. 301 clearly requires distributions to be made to a shareholder in the shareholder’s capacity as a shareholder. Because the compensatory split-dollar life insurance arrangement afforded benefits to the doctor in his capacity as an employee of the S corporation, the Tax Court concluded that the economic benefits he received under the arrangement could not be characterized as “distributions” under Code Sec. 301.

S Corporation Fringe Benefits
The benefits also were fringe benefits paid by an S corporation under Code Sec. 1372. As such, they were treated as guaranteed partnership payments that were ordinary income, and not a corporate distribution.

The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.

The termination date for an empowerment zone designation under Code Sec. 1391 is generally deemed to extend until December 31, 2025. However, the state or local government that nominated the zone may decline the deemed extension.

Empowerment Zone Designation Termination Dates
Empowerment zone designations generally continue until the termination date selected by the government that nominated the zone (the designated termination date), or the termination date established by legislation (the statutory termination date).

The statutory termination date has been extended multiple times, with each extension deemed to extend the designated termination date as well. Most recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) extended the statutory termination date to December 31, 2025. Thus, the designated termination dates for all empowerment zones are also deemed to be extended to December 31 2025.

A state or local government may decline the extension via a written notification to the IRS by May 25, 2021. The notification must be faxed to Bruce Chang, CC:ITA:B07, at (855) 576-2341.

Rev. Proc. 2020-16, I.R.B. 2020-27, 10, is obsoleted for tax years beginning after 2020.

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.