The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home.

The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates;
2. the rate for the incidental expenses only deduction; and
3. the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates
The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS); and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the 2021-2022 special per diem rates are:

• $296 for travel to any high-cost locality; and
• $202 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality; and
• $64 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality; and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement. Further, the notice provides guidance under recent legislation, including: the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127), as amended by the COVID-Related Tax Relief Act of 2020 (Division N of P.L. 116-260) and the American Rescue Plan Act of 2021 ( P.L. 117-2). Employers are required to report these amounts to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2. The wage amount that the notice requires employers to report on Form W-2 will provide employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities.

Reporting Requirements
The guidance requires eligible employers to report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under (i) sections 7001 or 7003 of the Families First Act for leave provided during the period beginning January 1, 2021, through March 31, 2021, and (ii) Code Secs. 3131 and 3132 for leave provided during the period beginning April 1, 2021, through September 30, 2021. Moreover, eligible employers have separate reporting requirements for (i) leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, under the Families First Act; and (ii) leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, under Code Secs. 3131 and 3132.

Specific Reporting Instructions
Qualified leave wages paid in 2021 under the Families First Act and Code Secs. 3131 and 3132 are to be reported in Box 1 of Form W-2. To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively.

In addition to the regular reporting requirements, employers must report the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement to the employee:

• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $511 per day limit);
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $200 per day limit);
• the total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified family leave wages paid to the employee under EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021.

Model Language for Employee Instructions
As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages, and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The guidance provides model language for employee instructions.

Self-Employment Tax Reporting
If taxpayers have self-employment income in addition to wages paid by an employer, and they intend to claim any qualified sick leave or qualified family leave equivalent credits, they must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax return. The self-employed taxpayer may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.

The IRS has issued temporary and proposed regulations that authorize the assessment of any erroneous refund of the COVID-19 employment tax credits which were added by the American Rescue Plan Act of 2021 ( P.L. 117-2). These credits for certain wages paid by employers are:

The IRS has issued temporary and proposed regulations that authorize the assessment of any erroneous refund of the COVID-19 employment tax credits which were added by the American Rescue Plan Act of 2021 ( P.L. 117-2). These credits for certain wages paid by employers are:

• the Credit for Paid Sick Leave under Code Sec. 3131,
• the Credit for Paid Family Leave under Code Sec. 3132, and
• the Employee Retention Credit under Code Sec. 3134.

The text of the temporary regulations also serves as the text of the proposed regulations.

The temporary regulations apply to all credits under Code Secs. 3131 and 3132, including any increases to the credits under Code Sec. 3133, credited or refunded on or after April 1, 2021, including advanced refunds, as well as all credits under Code Sec. 3134 that are credited or refunded on or after July 1, 2021, including advanced refunds.

Erroneous Refunds
These credits are taken against the employer's share of Medicare tax imposed under Code Sec. 3111(b) and the attributable Railroad Retirement Tax Act tax imposed under Code Sec. 3221(a). If the amount of the credits exceeds these taxes for any calendar quarter, then the excess must be treated as an overpayment to be refunded or credited under Code Secs. 6402(a) and 6413(b). Any credits claimed that exceed the amount to which the employer is entitled, and that are actually credited or refunded by the IRS, are considered to be erroneous refunds of these credits.

If a small eligible employer specified in Code Sec. 3134(j)(2) receives excess advance payments of the credit, then the tax imposed under Code Sec. 3111(b) (or the attributable Code Sec. 3221(a) tax) for the calendar quarter are increased by the excess amount.

The temporary regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under Code Sec. 3111(b) (and the attributable Code Sec. 3221(a) tax). The temporary regulations authorize the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were the applicable taxes, subject to assessment and administrative collection procedures. This allows the IRS to prevent the avoidance of the purposes of the limitations under the credit provisions, and to recover the erroneous refund amounts efficiently, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation.

These assessment and administrative collection procedures do not replace the existing recapture methods, but instead represent an alternative method available to the IRS.

Any amount of the credits for qualified leave wages and certain collectively bargained contributions under Code Secs. 3131 and 3132, plus any amount of credits for qualified health plan expenses under Code Secs. 3131(d) and 3132(d), and including any increases in these credits under Code Sec. 3133, and any amount of the employee retention credit for qualified wages under Code Sec. 3134 that are erroneously refunded or credited to an employer must be treated as underpayments of the employer’s share of the applicable Medicare tax by the employer, and may be administratively assessed and collected in the same manner as the taxes. The temporary regulations provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS.

In certain situations, third-party payors claim tax credits on behalf of their common law employer clients. The temporary regulations address this by providing that employers against which an erroneous refund of credits may be assessed as an underpayment include persons treated as the employer under Code Secs. 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credits applied.

Effective Date; Request for Comments
The temporary regulations are effective on the date they are published in the Federal Register.

A public hearing on the proposed regulations will be scheduled if requested in writing by any person who timely submits electronic or written comments. Written or electronic comments and requests for a public hearing must be received by the date that is 60 days after the proposed regulations are published in the Federal Register.

The IRS has announced that it intends to defer until 2023 the applicability of certain final regulations under Code Sec. 1446(a) and (f) relating to withholding of tax on foreign partners’ share of effectively connected income.

Withholding Provisions on Transfers of Interests in Publicly Traded Partnerships Deferred
The amendments will defer the applicability date to January 1, 2023, for certain provisions relating to (1) withholding under Code Sec. 1446(f) on transfers of interests in publicly traded partnerships ( "PTP interests"); (2) withholding under Code Sec. 1446(a) on distributions made with respect to PTP interests; and (3) withholding under Code Sec. 1446(f)(4) by partnerships on distributions to transferees.

Code Sec. 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Code Sec. 1446(f)(1) generally requires a transferee of an interest in a partnership to withhold 10 percent of the amount realized if any portion of the gain on the disposition would be treated under Code Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States. Code Sec. 1446(f)(4) provides that if a transferee fails to withhold on the disposition as required under Code Sec. 1446(f)(1), the partnership must withhold on distributions to the transferee.

Taxpayers May Rely on Deferral Prior to Amendments
The final foreign partner withholding regulations were published on November 30, 2020, in T.D. 9926, I.R.B. 2020-51, 1602, and the provisions whose applicability dates the amendments will defer generally would have applied to transfers and distributions that occur on or after January 1, 2022. Taxpayers may rely on the deferrals announced in the notice prior to amendments being issued.

The IRS has reminded taxpayers to file their 2020 tax returns by the upcoming October 15, 2021 due date. Taxpayers must file on or before the extension deadline to avoid the penalty for filing late if they request an extension. Tax returns can still be filed through electronic filing options, such as the IRS Free File.

The IRS has reminded taxpayers to file their 2020 tax returns by the upcoming October 15, 2021 due date. Taxpayers must file on or before the extension deadline to avoid the penalty for filing late if they request an extension. Tax returns can still be filed through electronic filing options, such as the IRS Free File.

However, the following taxpayers may have more time to file their returns:

• members of the military and others serving in a combat zone as they have 180 days after they leave the combat zone to file returns and pay any taxes due, and
• taxpayers in federally declared disaster areas who already had valid extensions.

Taxpayers are usually not penalized for failure to file if a refund is due. However, people risk losing the refund if they wait too long to file and claim a refund. Taxpayers can avoid additional penalties and interest by filing the 2020 return as soon as possible and paying any taxes owed.

Taxpayers must remember the following while paying federal taxes electronically:

• electronic payment options are the best way to make a tax payment,
• payment can be made when taxpayers file electronically using tax software online,
• IRS Direct Pay permits taxpayers to directly pay online from a checking or savings account for free and to schedule payments up to 365 days in advance,
• taxpayers can pay with a credit card, debit card or digital wallet option through a payment processor, which would charge a fee for the transfer,
• the IRS2Go app provides mobile-friendly payment options, including Direct Pay and debit or credit card payments on mobile devices, and
• payment can be made conveniently using the Electronic Federal Tax Payment System Voice Response System.

Further, taxpayers can see the following information while preparing their tax return or following up on balances or notices through their online account:

• adjusted gross income,
• economic impact payment amounts,
• estimated tax payment amounts,
• amount owed for any past years, updated for the current calendar day,
• payment history and any scheduled or pending payments,
• payment plan details,
• digital copies of select notices from the IRS, and
• approve or reject authorization requests from tax professional

Direct Deposit for Refunds
Taxpayers must file electronically and have their refund electronically deposited into their bank or other financial accounts for safe and quick refund receipt. Taxpayers can use direct deposit to deposit their refund into one or more accounts or purchase U.S. Savings Bonds. People can visit the FDIC website or the National Credit Union Association to use their Credit Union Locator Tool for information on opening an online bank or credit union account if they do not have a bank account. Further, veterans can use the Veterans Benefits Banking Program (VBBP) to access financial services at participating banks.

Monthly Advance Child Tax Credit Payments
The IRS is using previous year tax information, 2019 for most, for determination of the credit amount for those eligible and on extension for their 2020 tax returns. People who request an extension must file as soon as possible if they experience a significant change like the birth of a child in 2020. The IRS can calculate the credit based on the 2020 return and pay it out in total over the remaining months in 2021 once that return is processed.

Taxpayers may be eligible for two payments of half the credit in 2021 if they file and have their 2020 return processed on or before November 1, 2021. Similarly, people may be eligible for one payment if they file and have their return processed on or before November 29, 2021. The IRS has encouraged taxpayers to file electronically for quick processing of returns and to avoid delays.

Claiming Missing Stimulus Payments
To claim missing stimulus payments, eligible people must file a 2020 tax return or use the Child Tax Credit Non-filer Sign-up Tool soon, even if they usually do not file. The IRS will also automatically evaluate the taxpayer’s eligibility for the third economic impact payment when the 2020 return is processed. It will continue to issue eligible taxpayers their third economic impact payment and plus-up payments through the end of 2021.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month.

Further, the IRS advised taxpayers to:

• secure critical documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space;
• duplicate and scan key documents for backup storage on electronic media such as a flash drive, CD or in the cloud, which provide security and easy portability;
• record all property, especially expensive and high value items. The IRS disaster-loss workbooks in Publication 584 and Publication 584-B can help individuals and businesses compile lists of belongings or business equipment;
• employers who use payroll service providers should check payroll service provider’s fiduciary bonds as they could protect the employer in the event of default by the provider;
• employers should create an Electronic Federal Tax Payment System account at EFTPS.gov to monitor their payroll tax deposits and receive email alerts; and
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement. Further, taxpayers who have lost some or all their records during a disaster can visit the IRS's Reconstructing Records webpage.

In addition, taxpayers residing in a federally declared disaster can check for the available disaster tax relief on the IRS Tax Relief in Disaster Situations webpage or Around the Nation on IRS.gov. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers impacted by a disaster can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Further, taxpayers impacted by a disaster outside of a federally declared disaster area may qualify for disaster relief. This includes taxpayers who are not physically located in a disaster area but their records essential for filing or payment deadlines postponed during the relief period are located in a covered disaster area.

The IRS has emphasized the importance of correctly determining whether the individuals providing services to businesses were employees or independent contractors.

The IRS has emphasized the importance of correctly determining whether the individuals providing services to businesses were employees or independent contractors. Generally, an employee performs services that businesses control. Independent contractors offer their services to the public. Businesses have a right to control the details of the services performed.

The classification depends on the:

• company’s behavioral Control on what the worker does and how the job is performed;
• business’ direct or control the financial and business aspects of the worker; and
• relationship of the Parties ascertained by written contracts or employee type benefits.

Misclassification of Workers
Businesses could be held liable for employment taxes if an employee is misclassified without a reasonable basis.

Workers can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected taxes due on their compensation if they believe they have been improperly classified as independent contractors

Voluntary Classification Settlement Program
Taxpayers can reclassify their workers as employees for future tax periods for eligible taxpayers that agree to treat their workers as employees through the Voluntary Classification Settlement Program. Taxpayers must fulfill eligibility requirements, apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

Self-employed individuals must file an annual tax return and pay estimated tax quarterly. They pay self-employment tax (Social Security and Medicare tax) and income tax. If self-employed individuals use part of business home, they may claim the home office deduction.

Gig Economy
Taxpayers must report gig economy income on a tax return even if the income is part-time, temporary or side work; not reported on a Form 1099-K, 1099-MISC, W-2 or other income statements; or paid in any form, including cash, property, goods or virtual currency.

The IRS has allowed taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically.

The IRS has allowed taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The Service has balanced the e-signature option with critical security and protection needed against identity theft and fraud. The IRS will accept a wide range of electronic signatures. Acceptable electronic signature methods include:

• a typed name typed on a signature block;
• a scanned or digitized image of a handwritten signature that’s attached to an electronic record;
• a handwritten signature input onto an electronic signature pad;
• a handwritten signature, mark or command input on a display screen with a stylus device; and
• a signature created by a third-party software.

Moreover, the IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as tiff, jpg, jpeg, pdf, Microsoft Office Suite, or Zip.

The IRS has allowed taxpayers and representatives to use electronic or digital signatures on paper forms, which they cannot file using IRS e-file, including for example:

• Form 11-C, Occupational Tax and Registration Return for Wagering;
• Form 637, Application for Registration (For Certain Excise Tax Activities);
• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return and other forms in the 706 series;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 730, Monthly Tax Return for Wagers;
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations and other forms in the 1120 series;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

The Tax Court had jurisdiction to determine the appropriate relief available to an individual who sought innocent spouse relief for two tax years at issue. Initially, the taxpayer submitted a request for innocent spouse relief for one tax year, which the IRS denied in a final determination.

The Tax Court had jurisdiction to determine the appropriate relief available to an individual who sought innocent spouse relief for two tax years at issue. Initially, the taxpayer submitted a request for innocent spouse relief for one tax year, which the IRS denied in a final determination. Subsequently, the taxpayer filed an untimely petition for Tax Court review which was dismissed for lack of jurisdiction. Later, the taxpayer submitted a request for innocent spouse relief for an additional tax year at issue (two tax years). The IRS issued a final determination denying relief as to both years on the merits. The Tax Court held it had jurisdiction to hear the case even though the IRS previously denied relief for one year and argued that the year was included in the notice by mistake.

Notice Is Evaluated on its Face
The Tax Court has jurisdiction to review a final determination denying innocent spouse relief. The Tax Court concluded that when evaluating whether a notice serves as the predicate for jurisdiction, it generally does not look beyond the face of the notice unless its text is ambiguous or inconsistent. In this case, the notice unambiguously denied relief for two years. The court also stated that nothing in the law or regulations prohibits the Commissioner from issuing more than one final determination as to a given tax year. Thus, the notice could be a final determination conferring jurisdiction, even though there had been a prior final determination.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Traditional year-end planning techniques

For many individuals, a look at traditional year-end tax planning techniques is a good starting point. Spreading the recognition of certain income between 2014 and 2015 is one technique. Individuals need to take into account any possible changes in their income tax bracket. The individual income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. Each taxable income bracket is indexed for inflation. The starting points for the 39.6 percent bracket for 2014 are $406,750 for unmarried individuals; $457,600 for married couples filing a joint return and surviving spouses; $432,200 for heads of households; and $228,800 for married couples filing separate returns. For 2014, the top tax rate for qualified capital gains and qualified dividends is 20 percent.

For the second year, individuals also need to plan for potential net investment income (NII) tax liability. The NII tax applies to taxpayers with certain types of income and who fall within the thresholds for liability. Again, spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are strategies to consider.

Tax extenders

Many individuals are surprised to learn that some very popular and widely-used tax incentives are temporary. If you claimed the higher education tuition deduction on your 2013 return, you cannot claim it in your 2014 return because the deduction expired after 2013. The same is true for the state and local sales tax deduction, the teachers’ classroom expense deduction, the Code Sec. 25C residential energy credit, transit benefits parity, and more. All of these tax breaks expired after 2013 and unless they are extended by Congress, you will not be able to claim them on your 2014 returns.

Businesses are also affected. A lengthy list of business-oriented tax breaks expired after 2013. They include the Work Opportunity Tax Credit (WOTC), research tax credit, Indian employment credit, employer wage credit for military reservists, special incentives for biodiesel and renewable fuels, tax credits for energy-efficient homes and appliances, and more.

The good news is that Congress is likely to extend these tax breaks, probably for two years, and make the extension retroactive to January 1, 2014. That means taxpayers can claim these incentives on their 2014 returns. One hurdle is when Congress will act. In past years, lawmakers waited until very late in the year, or even until the start of the new year, to vote on an extension of these incentives. Late extension puts extra pressure on the IRS to quickly reprogram its return processing systems. Most likely, the IRS will have to delay the start of the filing season. Our office will keep you posted of developments.

Retirement savings

In 2014, the Tax Court surprised many with its decision that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow, TC Memo. 2014-21). The one-year limitation is not specific to any single IRA maintained by a taxpayer, but instead applies to all IRAs maintained by the taxpayer. The IRS, in turn, announced that it would change its rules to reflect the court’s decision.

The key point to keep in mind is that the Bobrow decision affects only IRA-to-IRA rollovers. The decision does not limit trustee-to-trustee transfers.

Affordable Care Act

Individuals who obtain health insurance through the Affordable Care Act Marketplace (and the federal government estimates they number seven million) have special tax planning considerations, especially if they are eligible for the Code Sec. 36B premium assistance tax credit. The credit is payable in advance to insurers and it appears that most taxpayers have elected this option. These individuals must reconcile the amount paid in advance with the amount of the actual credit computed when they file their tax returns. Changes in circumstances, such as an increase or decrease in income, marriage, birth or adoption of a child, and so on, may affect the amount of the actual credit.

Remember that the Affordable Care Act requires individuals to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Many individuals will qualify for an exemption if they are covered under employer-sponsored coverage. Individuals covered by Medicare also are exempt.

If you have any questions about year-end planning, please contact our office.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

Employer mandate

Under Code Sec. 4980H, an applicable large employer must make a shared responsibility payment if either:

• The employer does not offer or offers coverage to less than 95 percent (70 percent in 2015) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage and one or more full-time employee is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(a) liability”); or
• The employer offers to all or at least 95 percent of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and one or more full-time employees is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(b) liability”).

For purposes of the employer mandate shared responsibility provisions, an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Under final regulations issued by the IRS earlier this year, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.

The IRS has provided two methods for determining whether a worker is a full-time employee: the monthly measurement method and the look-back measurement method. The monthly measurement method allows an employer to determine each employee’s status by counting the employee’s hours of service for each month. The look-back measurement method allows employers to determine the status of an employee as a full-time employee during a future period, based upon the hours of service of the employee in a prior period.

In September 2014, the IRS clarified the look-back method in certain circumstances. The IRS described application of the look-back method where an employee moves from one measurement period to another (for example, an employee moves from an hourly position to which a 12-month measurement period applies to a salaried position to which a 6-month measurement period applies). The IRS also described situations where an employer changes the measurement method applicable to employees within a permissible category (for example, an employer changes the measurement period for all hourly employees for the next calendar year from a 6-month to a 12-month measurement period).

Transition relief for mid-size employers

Mid-size employers are exempt from the Code Sec. 4980H employer mandate for 2015 under special transition relief. Employers qualify as mid-size if they employ on average at least 50 full-time employees, including full-time equivalents, but fewer than 100 full-time employees, including full-time equivalents.

The IRS has placed some restrictions on this transition relief for mid-size employers. During the period beginning on February 9, 2014, and ending on December 31, 2014, the employer that reduces the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition is ineligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons will not be considered to have been made in order to satisfy the workforce size condition, the IRS explained.

Information reporting

Code Sec. 6056 requires certain employers to report to the IRS information about the health insurance, if any, they offer to employees. The IRS has posted draft forms and instructions about Code Sec. 6056 reporting on its website: Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Information reporting encompasses (among other things):

• The employer’s name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer’s plan; and
• The employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Code Sec. 6056 reporting for 2015 is mandatory. Although mid-size employers may be exempt from the employer mandate, they are not exempt from Code Sec. 6056 reporting for 2015. The IRS is requiring all Code Sec. 6056 information returns to be filed no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates.

Please contact our office if you have any questions about preparing for the employer mandate and Code Sec. 6056 reporting.

The IRS is moving quickly to alert employers about a new tax credit for health insurance premiums. The recently enacted health care reform package (the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010) created the small employer health insurance tax credit. The temporary credit is targeted to small employers that offer or will offer health insurance coverage to their employees. The credit, like so many federal tax incentives, has certain qualifications. Please contact our office and we can arrange to review in detail how the credit may cut the cost of your business's health insurance premiums. The dollar benefits of the credit are substantial and they apply immediately to 2010 premium costs.

Outreach

The IRS is sending postcards to more than four million small businesses in coming weeks. The postcards briefly describe the new tax credit and are just one part of the IRS's outreach campaign to educate employers about the credit. The IRS has also created a special page on its web site on the credit along with a fact sheet and frequently asked questions and answers.

Maximum credit

The new health care credit is effective immediately so employers need to plan now to take advantage of it. The credit, which is available over the next five years, also rises over time but the enhanced credit comes with some additional requirements.

For tax years beginning in 2010 through 2013, the maximum credit reaches 35 percent of qualified premium costs paid by for-profit employers. The maximum credit is 25 percent of qualified premium costs paid by tax-exempt employers.

The maximum credit climbs to 50 percent of qualified premium costs paid by for-profit employers (35 percent for tax-exempt employers) for tax years beginning in 2014 through 2015. However, Congress imposed some additional requirements. An employer may claim the credit only if it offers one or more qualified health plans through a state insurance exchange. The health care reform package requires states to create insurance exchanges by January 1, 2014.

Example. ABC Co. employs nine individuals with average annual wages of $23,000 for each employee in 2010. ABC pays $72,000 in health care premiums for its employees. This amount does not exceed the average premium for the small group market in the state in which ABC offers coverage and ABC otherwise meets the requirements for the credit. ABC's credit for 2010 is $25,200 (35 percent x $72,000).

Tax-exempt employers have additional limitations. If the amount of their credit exceeds the amount of payroll taxes of the tax-exempt employer during the calendar year in which the tax year begins, the credit is limited to the amount of payroll taxes.

FTEs

The maximum credit is available to qualified employers with no more than 10 full-time equivalent (FTE) employees paying average annual wages of $25,000 or less. The credit completely phases out if an employer has 25 or more FTEs or pays $50,000 or more in average annual wages. Effectively, a small employer can have exactly 25 FTEs or pay average annual compensation of exactly $50,000 and not receive a credit under the phase-out rules. The monetary amounts are adjusted for inflation after 2013.

The health care reform package explains how to calculate the number of FTEs. The number of an employer's FTEs is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. The result, if not a whole number, is rounded to the next lowest whole number. Lawmakers selected 2,080 hours because 2,080 hours comprise the number of hours in a 52-week assuming a 40-hour work week. Any hours beyond 2,080, such as overtime hours, are not taken into account when calculating FTEs.

Example. ABC Co has nine employees. ABC pays Aidan, Bonnie, Catherine, David, and Eddie wages for 2,080 hours each for 2010. ABC pays Francine, Gary and Harry wages for 1,040 hours each for 2010. ABC pays Kieran wages for 2,300 hours for 2010. The total hours not exceeding 2,080 per employee is the sum of: --10,400 hours for the five employees paid for 2,080 hours each (5 x 2,080) plus --3,120 hours for the three employees paid for 1,040 hours each (3 x 1,040) plus --2,080 hours for the one employee paid for 2,300 hours (lesser of 2,300 and 2,080), which add up to 15,600 hours.

To calculate the number of FTEs, 15,600 is divided by 2,080, which results in 7.5, rounded to the next lowest whole number.

Average annual wages

A formula is also used to calculate average annual wages. The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer's tax year by the number of the employer's FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).

Example. ABC Co. pays $224,000 in wages and has 10 FTEs. ABC's average annual wages are $224,000 divided by 10 which equals $22,400, and is rounded down to the nearest $1,000 for a final number of $22,000

Owners and family members

Some individuals are excluded from the calculation of FTEs and average annual wages. These include a sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses. Certain family members of these individuals are also excluded from the calculation of FTEs and average annual wages. These include a child, a parent, a sibling, and others. This list is not exhaustive. Please contact our office for more details about who is excluded from these calculations.

Premium deduction

Employers generally may deduct the cost of health insurance premiums paid on behalf of employees. The health care reform package does not change this general rule. However, the amount of premiums that an employer may deduct is reduced by the amount of the small employer health care tax credit.

Qualifying arrangement

Only premiums paid by the employer under a qualifying arrangement are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. The IRS is developing transition relief for 2010.

Additionally, the amount of an employer's premium payments is capped in relation to the average premium for the small group market. The U.S. Department of Health and Human Services will determine the average premium for the small group market in a state.

Congress is currently reviewing the costs of premiums. The health care reform package includes a requirement, effective in 2011, that insurance companies spend at least 80 percent of premium revenue on actual health care. Additionally, the health care reform package establishes a process for the annual review of premium increases prior to their use along with public disclosure of how premium rates are determined.

Claiming the credit

Qualified for-profit employers will claim the credit on their annual income tax return. The IRS is expected to advise how tax-exempt employers will claim the credit. Our office will keep you posted of developments.

According to the U.S. Department of Health and Human Services, a qualified small business can choose to start offering health insurance coverage to employees in 2010 and be eligible for the credit. If you are considering providing insurance coverage to your employees, please contact our office. If you have already been paying premiums, don't leave maximizing the new credit to chance; we can help you navigate the many federal rules that come into play.

As always, please contact our office if you have any questions about the new small employer health insurance tax credit.