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The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.

The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.

This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.

The IRS has informed taxpayers that they do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until October 15 by filing Form 4868 through their tax professional or tax software, or by using the Free File link on the IRS website. Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return, but does not grant an extension of time to pay taxes due.

Not for Estimated Taxes, Other Items

This relief does not apply to estimated tax payments that are due on April 15, 2021. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. Also, the federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. The IRS urges taxpayers to check with their state tax agencies for details on state filing and payment deadlines.

Winter Storm Relief

The IRS had previously announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June deadline.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

• 2021 Recovery Rebate Credits of $1,400 for eligible individuals ($2,800 for joint filers) plus $1,400 for each eligible dependent. Credit begins to phase out at adjusted gross income of $150,000 for joint filers, $112,500 for a head of household, $75,000 for other individuals. The IRS has already begun making advance refund payments of the credit to taxpayers.
• Exclusion of up to $10,200 of unemployment compensation from income for tax year 2020 for households with adjusted gross income under $150,000.
• Enhancements of many personal tax credits meant to benefit individuals with lower incomes and children.
• Exclusion of student loan debt from income, for loans discharged between December 31, 2020, and January 1, 2026.
• For tax years after December 31, 2026, the $1,000,000 deduction limit on compensation of a publicly-held corporation’s covered employees will expand to include the five highest paid employees after the CEO and CFO. The rule in current law applies to the CEO, the CFO, and the next three highest paid officers.
• For the payroll credits for paid sick and family leave: The credit amounts are increased by an employer’s collectively bargained pension plan and apprenticeship program contributions that are allocable to paid leave wages. Also, paid leave wages do not include wages taken into account as payroll costs under certain Small Business Administration programs.

The president is conducting a nationwide tour to explain and promote the over 600-page, $1.9 trillion legislation.

Stimulus Payments

Many of the 158.5 million American households eligible for the payments from the stimulus package can expect to receive them soon, White House Press Secretary Jen Psaki said the same afternoon Biden signed the legislation into law. Payments are coming by direct deposit, checks, or a debit card to those eligible.

FTC: Beware of Scams

Scammers are right now crawling out from under their rocks to fleece businesses and consumers receiving the aid, the Federal Trade Commission warned on March 12.

It is important for business owners and consumers to know that the federal government will never ask them to pay anything up front to get this money, said the FTC: "That’s a scam. Every time." The regulatory agency also cautioned that the government will not call, text, email or direct mail aid recipients to ask for a Social Security, bank account, or credit card number.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

"I hope Treasury will say something very soon: FAQs, press release, something. IRS undoubtedly will have to write new regs," commented Urban-Brookings Tax Policy Center Senior Fellow Howard Gleckman. He stressed IRS certainly will have to figure out how to make the retroactive tax exemption for some 2020 unemployment benefits work. Gleckman also said he suspects the Child Tax Credit will require new guidance.

Gleckman claimed a new form this late in the tax season is unlikely. "Amended returns seems easiest," said the veteran IRS observer.

To help implement the tax-related changes in the American Rescue Plan, a colleague at the Tax Policy Center, Janet Holtzblatt, said that she, as well, is looking for guidance from the IRS on what taxpayers would do if they received unemployment benefits in 2020. Holtzblatt noted the law would exclude $10,200 of those benefits from adjusted gross income if the taxpayers’ adjusted gross income is less than $150,000.

What people will want to know, Holtzblatt stated, is:

• What to do if they already filed their tax return and paid income taxes on those benefits? Do they have to file an amended tax return just to get the tax refund for that reason, or will the IRS establish a simpler method to do so?
• And going forward, what about people who have not yet filed their tax return? If a new form is not released, what should they report on the existing return—the full amount or the partial amount? And how will the IRS know when the tax return is processed whether the taxpayer reported the full amount or the partial amount? (Eventually, the IRS could—when, after the filing season is over and tax returns are matched to 1099s from UI offices—but that could be months before taxpayers would be made whole.)

For the CARES Act, Holtzblatt said the IRS generally provided guidance through FAQs on their website which was insufficient for some tax professionals and later voided. "Some of their interpretations raised questions—and in the case of the treatment of prisoners, was challenged in the courts and led to a reversal of the interpretation in the FAQ," she explained.

National Association of Tax Professionals Director of Marketing, Communications & Business Development Nancy Kasten said new rules are musts and the agency will have to issue new FAQs, potentially on all of the key provisions in the legislation. The NATP executive asserted that old forms are going to need to be revised for Tax Year 2021. "Regarding 2020 retroactive items, we are waiting on IRS guidance," said Kasten.

National Conference of CPA Practitioners National Tax Policy Committee Co-Chair Steve Mankowski said the primary rules that will need to be written ASAP relate to the changes in the 2020 unemployment, especially since it appears to be income based as well as the increased child tax credit with advanced payments being sent monthly unless a taxpayer opts out. He added there will most likely need to be a worksheet added to the 2020 tax returns to show the unemployment received and adjusting UE income down to the taxable amount.

Mankowski, immediate past president of NCCCPAP said the primary items for new FAQs include the unemployment and the income limit on the non-taxability, changes in the child tax credit; and changes in the Employee Retention Credit.

In response to an email seeking what the agency plans to do to help implement the pandemic relief measure, an IRS spokesman forwarded the following statement released on March 10:

"The IRS is reviewing implementation plans for the American Rescue Plan Act of 2021 that was recently passed by Congress. Additional information about a new round of Economic Impact Payments and other details will be made available on IRS.gov, once the legislation has been signed by the President."

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Creating new incentives and making temporary ones permanent are particularly critical for helping American competitiveness in semiconductors, batteries and other high-tech products, Senate Banking Chair Ron Wyden (D-Ore) and Ranking Minority Party Member Mike Crapo (R-Idaho) stressed at the session.

Wyden said it is urgent business for elected officials to create conditions for the American semiconductor industry to thrive for years as part of a Congressional job creation toolkit. "I have seen too many short-term tax policies and mistakes," the Senate Finance Chair said. His sentiment was echoed by Crapo, the committee’s top Republican: "This is an area of bipartisan interest, and I welcome the opportunity to work with Chairman Wyden on this."

Crapo: Don’t Raise Corporate Rate

At the same time, Crapo cautioned Congress should not offset losses in federal revenue from increasing the stability of investment importance of protecting tax credit credits by raising the overall corporate tax rate. He said he is "very concerned" by reports he has heard that the White House is preparing to propose just that. Currently at 21 percent, the corporate tax rate was 35 percent before the 2017 Tax Cut and Jobs Act took effect.

Massachusetts Institute of Technology Sloan School Of Management Accounting Professor Michelle Hanlon told the hearing raising corporate tax rates would put American industry at a competitive disadvantage globally. She said the 2017 tax cuts should be built upon to expand manufacturing.

While saying expanding tax breaks for tech including clean energy is critical, Senator Tom Carper (D-Del) warned the federal government is looking at an avalanche of debt. To lessen that surge, he said it is important to go after the tax gap: money that taxpayers owe but they are not paying.

Senator Todd Young (R-Ind) warned that left unchanged, starting in 2022 companies will no longer be able to expense research and development expenses in the year incurred. "This would come at the expense of manufacturing jobs," he said. Young has introduced legislation to let businesses write up R&D as they are currently allowed.

If businesses are not allowed to continue to amortize their research and development expenses in the year they are incurred, it would significantly increase the cost to perform R&D in the U.S., Intel Chief Financial Officer George Davis warned the panel.

Ford Embraces Biden Proposal

Ford Motor Company Vice President, Global Commodity Purchasing And Supplier Technical Assistance Jonathan Jennings told the Senate that the auto maker embraces President Joe Biden’s proposal to provide a 10 percent advanceable tax credit for companies creating U.S. manufacturing jobs.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

"There were trailers in June filled (with unopened paper returns). There are none today," Rettig said in an appearance before the House Appropriations Committee Financial Services Subcommittee.

When there was a delay in getting to a return, Rettig said that a taxpayer was credited on the date the mail was received, not the day the payment was processed.

The IRS leader stated that virtual currency, which is designed to be anonymous, has probably significantly increased the amount of money taxpayers owed but have not paid since the last formal figure of $381 billion was estimated in 2013.

To close the gap between money owed and money paid, Rettig said there has to be an increase in guidance as well as enforcement. "The two go together," said Rettig, who pointed out that the IRS must support the people who are working to get their tax payments right as well as working against those who are trying to thwart the agency’s efforts.

Rettig cited high-income/high-wealth taxpayers, including high-income non-filers, as high enforcement priorities. "We have not pulled back enforcement efforts for higher income individuals during the pandemic. We can be impactful," said Rettig. He added that the IRS is using artificial intelligence and other information technology (IT) advances to catch wealthy tax law and tax rule breakers. "Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago," said the IRS leader.

Rettig contended that the agency’s IT improvement efforts are being hampered by a shortage of funding. According to Rettig, three years into a six-year business modernization plan, the IRS has received half of the money it requested from Congress for the initiative.

One of the impacts of the pandemic on the IRS and the taxpayers and tax professionals it serves, said Rettig, is the average length of phone calls has risen to 17 minutes from 12 minutes because the issues have been more complex.

On another issue related to COVID-19, Rettig said the IRS has been diligently working to alert taxpayers and tax professionals to scams related to COVID-19, especially calls and email phishing attempts tied to the Economic Impact Payments (EIPs). He said people can reduce the chances of missing their EIP payments through lost, stolen or thrown-away debit cards by filing their tax returns electronically.

The Commissioner told the panel that the delay in starting the tax filing season this year will not add to any additional delays to refunds on returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC).

Rettig also noted that taxpayers who interact with an IRS representative now have access to over-the-phone interpreter services in more than 350 languages.

The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.

The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.

Background

During the tax years at issue, each taxpayer had an American Express credit card that was part of a rewards program that paid reward dollars for eligible purchases made on their cards. Card users could redeem reward dollars as credits on their card balances (statement credits). To generate as many reward dollars as possible, the taxpayers used their American Express credit cards to buy as many Visa gift cards as they could from local grocery stores and pharmacies. They used the gift cards to purchase money orders, and deposited the money orders into their bank accounts. The husband occasionally purchased money orders with one of the American Express cards.

The taxpayers also occasionally paid their American Express bills through a money transfer company. Using this method, they paid the American Express bill with a reloadable debit card, and the money transfer company would transmit the payment to American Express electronically. The taxpayers used their American Express cards to purchase reloadable debit cards that they used to pay their American Express bills, and the purchase of debit cards and reloads also generated reward dollars.

All of the taxpayers' charges of more than $400 in single transactions with the American Express cards were for gift cards, reloadable debit cards, or money orders. On their joint tax returns, the taxpayers did not report any income from the rewards program.

The IRS determined that the reward dollars generated ordinary income to the taxpayers. When a payment is made by a seller to a customer as an inducement to purchase property, the payment generally does not constitute income but instead is treated as a purchase price adjustment to the basis of the property ( Pittsburgh Milk Co., 26 TC 707, Dec. 21,816; Rev. Rul. 76-96, 1976-1 CB 23). The IRS argued that the taxpayers did not purchase goods or property, but instead purchased cash equivalents—gift cards, reloads for debit cards, and money orders—to which no basis adjustment could apply. As a result, the reward dollars paid as statement credits for the charges relating to cash equivalents were an accession to wealth.

Rebate Policy; Cash Equivalency Doctrine

The Tax Court observed that the taxpayers' aggressive efforts to generate reward dollars created a dilemma for the IRS which was largely the result of the vagueness of IRS credit card reward policy. Under the rebate rule, a purchase incentive such as credit card rewards or points is not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points ( Rev. Rul. 76-96; IRS Pub. 17). The court observed that the gift cards were quickly converted to assets that could be deposited into the taxpayers’ bank accounts to pay their American Express bills. According to the court, to avoid offending its long-standing policy that card rewards are not taxable, the IRS sought to apply the cash equivalence concept, but that concept was not a good fit in this case.

The court stated that a debt obligation is a cash equivalent where it is a promise to pay of a solvent obligor and the obligation is unconditional and assignable, not subject to set-offs, and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for the use of money ( F. Cowden, CA-5, 61-1 ustc ¶9382, 289 F2d 202). The court found that the three types of transactions in this case failed to fit this definition.

The court ruled that the reward dollars associated with the gift card purchases were not properly included in income. The reward dollars taxpayers received were not notes, but instead were commitments by American Express to allow taxpayers credits against their card balances. The court found that American Express offered the rewards program as an inducement for card holders to use their American Express cards.

However, the court upheld the inclusion in income of the related reward dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards. The court observed that the money orders purchased with the American Express cards, and the infusion of cash into the reloadable debit cards, were difficult to reconcile with the IRS credit card reward policy. Unlike the gift cards, which had product characteristics, the court stated that no product or service was obtained in these uses of the American Express cards other than cash transfers.

As the court noted, the money orders were not properly treated as a product subject to a price adjustment because they were eligible for deposit into taxpayers' bank account from acquisition. The court similarly found that the cash infusions to the reloadable debit cards also were not product purchases. The reloadable debit cards were used for transfers by the money transfer company, which the court stated were arguably a service, but the reward dollars were issued for the cash infusions, not the transfer fees.

Finally, the court stated that its holdings were not based on the application of the cash equivalence doctrine, but instead on the incompatibility of the direct money order purchases and the debit card reloads with the IRS policy excluding credit card rewards for product and service purchases from income.

The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.

The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.

Settlement Day

Settlement Day events are coordinated efforts to resolve cases in the U.S. Tax Court by providing taxpayers who are not represented by counsel with the opportunity to receive free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys, and other pro bono organizations. Taxpayers can also discuss their Tax Court cases and related tax issues with members of the Office of Chief Counsel, the IRS Independent Office of Appeals and IRS Collection representatives. These communications can aid in reaching a settlement by providing taxpayers with a better understanding of what is needed to support their case.

The Taxpayer Advocate Service (TAS) employees also participate in VSDs to assist taxpayers with tax issues attributable to non-docketed years. Local Taxpayer Advocates and their staff can work with and inform taxpayers about how TAS may be able to assist with other unresolved tax matters, or to provide further assistance after the Tax Court matter is concluded. IRS Collection personnel will be available to discuss potential payment alternatives if a settlement is reached. For those who choose to take their cases to court, the VSD process can also give a better understanding of what information taxpayers need to present to the court to be successful.

Following its first announcement of virtual settlement days in May last year, the Chief Counsel and LITCs have successfully used VSD events to help more than 259 taxpayer resolve Tax Court cases without having to go to trial.

Registration and Information

The IRS proactively identifies and reaches out to taxpayers with Tax Court cases which appear most suitable for this settlement day approach, and invites them attend VSD events. The IRS also generally encourages taxpayers with active Tax Court cases to contact the assigned Chief Counsel attorney or paralegal about participating in the March VSD events.

This year, the IRS has included the following locations where these events have never been offered: Albuquerque, Billings, Buffalo, Cheyenne, Cleveland, Denver, Des Moines, Indianapolis, Little Rock, Milwaukee, Nashville, Peoria, Omaha, Reno, Sacramento, San Diego and San Jose.

LITCs can contact their local Chief Counsel offices about the event in their area. If additional information is needed, individuals can reach out to Chief Counsel’s Settlement Day Cadre, or contact Sarah Sexton Martinez at (312) 368-8604. Pro bono volunteers are encouraged to contact Meg Newman (Megan.Newman@americanbar.org) with the American Bar Association Tax Section.

An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.

An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.

However, the taxpayer, a high school graduate, testified that she had “a little bit of banking education,” indicating that she had some familiarity with bookkeeping. Her ex-spouse added during trial that the taxpayer had worked at a bank for a few years. Regarding her role in the LLC, the taxpayer maintained the business' books and records, prepared and signed sales tax returns and unemployment tax contribution forms on its behalf, and worked with an accountant to prepare its tax returns. Nothing in the record indicated that her ex-spouse tried to deceive or hide anything from her.

Further, the taxpayer’s joint ownership of the LLC, her involvement in maintaining its books and records, her role in preparing and signing tax-related documents on behalf of the business, and her cooperation with an accountant to prepare the LLC’s tax returns, showed that she had actual knowledge of the factual circumstances that made the deductions unallowable. Thus, she also was not entitled to relief under Code Sec. 6015(c).

The taxpayer was not eligible for streamlined determination under Rev. Proc. 2013-34, 2013-43 I.R.B. 397, because no evidence corroborated her testimony that her former spouse had abused her in any sense to which the tax law or common experience would accord any recognition. The history of acrimony between the taxpayer and her ex-spouse called into question the weight to be given to her claims of spousal abuse. Finally, the taxpayer was unable to persuade the court that she was entitled to equitable relief under Code Sec. 6015(f). She was intimately involved with the LLC, knew or had reason to know of the items giving rise to the understatement, and failed to make a good-faith effort to comply with her income tax return filing obligations.

A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.

A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.

Thereafter, the RA obtained written approval from her immediate supervisor for the civil fraud penalty, and sent the taxpayers a notice of deficiency determining the same. The taxpayers contended that the civil fraud penalty was not timely approved by the RA’s supervisor because the revenue agent report (RAR) presented at the conference meeting embodied the first formal communication of the RA’s initial determination to assert the fraud penalty.

Due to the use of a summons letter requiring the taxpayers' attendance, the closing conference at the end of the taxpayers’ examination process carried a degree of formality not present in most IRS meetings. The closing conference was, like an IRS letter, a formal means of communicating the IRS’s initial determination that taxpayers should be subject to the fraud penalty. Therefore, the RA communicated her initial determination to assert the fraud penalty when she provided the taxpayers with a completed and signed RAR at the closing conference. The RA had also informed the taxpayers during the closing conference that they did not have appeal rights at that time, which was incomplete and potentially misleading.

The completed RAR given to the taxpayers during the closing conference, coupled with the context surrounding its presentation, represented a "consequential moment" in which the RA formally communicated her initial determination that the taxpayers should be subject to the fraud penalty.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

2021 Wage Cap
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent Social Security tax, also known as Old Age, Survivors, And Disability Insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2021, the wage base is $142,800. Thus, OASDI tax applies only to the taxpayer’s first $142,800 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $142,800.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2021
For workers who earn $142,800 or more in 2021:

• an employee will pay a total of $8,853.60 in social security tax ($142,800 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $17,707.20 in social security tax ($142,800 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefits Increase for 2021
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2019 by 1.3 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:

The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:

• the definition of qualified used property;
• the election to claim bonus depreciation on components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017;
• application of the mid-quarter convention;
• clarifications to the definition of qualified improvement property, predecessor, and class of property; and
• clarifications to the rules for consolidated groups
  The rules for consolidated groups have also been moved from Proposed Reg. §1.168(k)-2(b)(3)(v) to new Reg. §1.1502-68.

Used Property
The 2019 final regulations provide that in determining whether the taxpayer or a predecessor had a depreciation interest in property prior to its acquisition, only the five calendar years immediately prior to the current placed-in-service year are considered. The latest IRS regulations clarify that the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placed-in-service date of the property without taking into account the applicable convention, are taken into account. In addition, the five-year look-back period applies separately to the taxpayer and a predecessor.

Furthermore, if the taxpayer or a predecessor, or both, have not been in existence during the entire look-back period, then only the portion of the look-back period during which the taxpayer or a predecessor, or both, have been in existence is taken into account.

Expanded Component Election
The prior regulations allow taxpayers to election to claim 100 percent bonus depreciation on components of certain larger constructed property that qualifies for bonus depreciation if the construction of the larger property began before September 28, 2017. The components must be acquired or constructed after September 27, 2017, and the larger property must be placed in service before 2020 (2021 in the case of property with a longer construction period). The final regulations remove the 2020/2021 cutoff date. In addition, the final regulations provide that eligible larger self-constructed property also includes property that is constructed for a taxpayer under a written contract that is not binding and that is entered into prior to construction for use in the taxpayer’s trade or business. The definition of a larger constructed property is also clarified.

Qualified Improvement Property
The 15-year recovery period for qualified improvement property applies only to improvements "made by the taxpayer." The final regulations clarify that an improvement is considered made by a taxpayer if the property is constructed for the taxpayer. However, qualified improvement property received by a transferee taxpayer in a nonrecognition transaction described in Code Sec. 168(i)(7) is not eligible for bonus depreciation.

Mid-Quarter Convention
The final regulations clarify that depreciable basis is not reduced by the amount of bonus deduction in determining whether the mid-quarter convention applies.

Binding Contracts
Generally, property acquired pursuant to a binding contract entered into after September 27, 2017, does not qualify for bonus depreciation at the 100 percent rate. The final regulations clarify that a contract for a sale of stock of a corporation that is treated as an asset sale as the result of a Code Sec. 336(e) election made for a disposition described in Reg. §1.336-2(b)(1) is a binding contract if enforceable under state law.

Floor Plan Financing
The IRS intends to issue guidance relating to transition relief for taxpayers with a trade or business with floor plan financing indebtedness that want to revoke elections not to claim bonus depreciation for property placed in service during 2018.

The IRS will not allow a taxpayer to limit the amount of its otherwise deductible floor plan interest in order to qualify for bonus depreciation. However, guidance will address transition relief for the 2018 tax year for taxpayers that treated Code Sec. 168(j)(1) as providing an option for a business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the tax year.

Effective Date
In general, the regulations apply to property acquired after September 27, 2017, and placed in service during or after a tax years that begins on or after January 1, 2021. However, they may be relied on for earlier tax years.

Final regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. These regulations finalize, with some changes, previously released proposed regulations, NPRM REG-100814-19.

Final regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. These regulations finalize, with some changes, previously released proposed regulations, NPRM REG-100814-19.

Changes to Code Sec. 274 under the TCJA
For most expenses paid or incurred after 2017, TCJA:

• repealed the "directly related to a trade or business" and the business-discussion exceptions to the general disallowance of entertainment expense deductions;
• eliminated the general business expense deduction for 50 percent of entertainment (but not meal) expenses; and
• repealed the special substantiation rules for deductible entertainment (but not travel) expenses. Taxpayers may rely on the proposed regulations until they are finalized.

Entertainment Expenses
Among other things, Reg. §1.274-11:

• restates the statutory rules of Code Sec. 274(a), including the entertainment deduction disallowance rule for dues or fees to any social, athletic, or sporting club or organization;
• substantially incorporates the existing definition of "entertainment" from Reg. §1.274-2(b)(1); and
• confirms that the nine exceptions in Code Sec. 274(e) continue to apply to deductible entertainment expenditures.

The regulations also confirm that "entertainment" does not include food or beverages unless they are provided at or during an entertainment activity, and their costs are included in the entertainment costs.

Food and Beverage Expenses
As under the proposed regulations, Reg. §1.274-12 allows taxpayers to deduct 50 percent of business meal expenses if:

• the expense is an ordinary and necessary business expense;
• the expense is not lavish or extravagant; the taxpayer or an employee is present when the food or beverage is furnished;
• the food or beverage is provided to a current or potential business customer, client, consultant, or similar business contact; and
• food and beverages that are provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.

With respect to the fourth requirement listed above, the final regulations adopt the definition of "business associate" in Reg. §1.274-2(b)(2)(iii), but expands it to include employees. Thus, these requirements would apply to employer-provided meals to employees as well as non-employees. The final regulations also flesh out the fifth requirement listed above, and clarify that the separate charges for entertainment-related food and beverages must reflect their actual cost, including delivery fees, tips, and sales tax. Indirect expenses such as transportation to the food are not included in the actual cost.

Exceptions and Special Rules
Food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs. The final regulations apply the TCJA changes to the exceptions and special rules for deductible food and beverages in Code Sec. 274(e), Code Sec. 274(k) and Code Sec. 274(n), including:

• reimbursed food or beverage expenses;
• recreational expenses for employees;
• items available to the public; and
• goods or services sold to customers.

The final regulations also provide examples on several specific scenarios to illustrate the rules.

The IRS has issued a final regulation addressing tax withholding on certain periodic retirement and annuity payments under Code Sec. 3405(a), to implement amendments made by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA). The regulation affects payors of certain periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments. The final regulation adopts, without modification, a proposed regulation that updated and replaced the provisions of three questions and answers with a new regulation regarding the default withholding rate on periodic payments made after December 31, 2020.

The IRS has issued a final regulation addressing tax withholding on certain periodic retirement and annuity payments under Code Sec. 3405(a), to implement amendments made by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA). The regulation affects payors of certain periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments. The final regulation adopts, without modification, a proposed regulation that updated and replaced the provisions of three questions and answers with a new regulation regarding the default withholding rate on periodic payments made after December 31, 2020.

Withholding on Periodic Payments
Before the TCJA, if a withholding certificate (Form W-4P) was not in effect for a periodic payment, the default withholding rate on the payment was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended Code Sec. 3405(a)(4) so that the default withholding rate on such a periodic payment is instead determined under rules prescribed by the Treasury Secretary.

After the TCJA was enacted, the IRS issued three notices providing that, for calendar years 2018, 2019, and 2020, the default withholding rate on periodic payments under Code Sec. 3405(a)(4) is based on treating the payee as a married individual claiming three withholding allowances ( Notice 2020-3, I.R.B. 2020-3, 330; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2018-14, I.R.B. 2018-7, 353).

Under new Reg. §31.3405(a)-1, the default rate of withholding on periodic payments made after December 31, 2020, is determined in the manner described in the applicable forms, instructions, publications, and other guidance prescribed by the IRS.

Applicability Date
The final regulation applies to periodic payments made after December 31, 2020.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages. The final regulations:

• address the amount of federal income tax that employers withhold from employees’ wages;
• implement changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned Form W-4, Employee’s Withholding Certificate, and related IRS publications.

TCJA Changes
The TCJA made many amendments affecting income tax withholding on employees’ wages. The TCJA made many amendments affecting income tax withholding on employees’ wages.After the TCJA was enacted, the IRS issued guidance to implement the changes (for example, Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020-3, 330). The IRS updated Form W-4 and its instructions with significant changes intended to improve the accuracy of income tax withholding and make the withholding system more transparent for employees. It also released IRS Publication 15-T, Federal Income Tax Withholding Methods, which provides percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year.

On February 13, 2020, the IRS published a notice of proposed rulemaking ( REG-132741-17) to update the regulations under Code Sec. 3401 and Code Sec. 3402 to reflect the legislative changes, and expand the rules to accommodate changes necessary to fully implement the redesigned Form W-4 and its related computational procedures, along with most existing computational procedures that apply to 2019 or earlier Forms W-4.

The final regulations adopt the proposed regulations with a few revisions.

Form W-4
The final regulations do not require all employees with a 2019 or earlier Form W-4 in effect to furnish a redesigned Form W-4. Comments expressed concerns that the proposed regulations and the related forms, instructions, publications, and other IRS guidance would require employers to maintain two different systems for computing income tax withholding on wages: one for 2019 or earlier Forms W-4, and another for the redesigned Forms W-4.

In response, the IRS is acknowledging concerns with (1) instructions to the redesigned Form W-4 for employees with multiple jobs and (2) optional computational “bridge” entries permitted under the regulations and described in Publication 15-T that will allow employers to continue in effect 2019 or earlier Forms W-4 as if the employees had furnished redesigned Forms W-4.

The final regulations revise Reg. §31.3402(f)(4)-1(a) to provide that an employer’s use of the computational bridge entries to adapt a 2019 or earlier Form W-4 to the redesigned computational procedures as if using entries on a redesigned Form W-4 will continue in effect such a Form W-4 that was properly in effect on or before December 31, 2019.

Lock-in Letters
The IRS issues a "lock-in" letter to notify an employer that an employee is not entitled to claim exemption from withholding, or is not entitled to the withholding allowance claimed on the employee’s Form W-4. The lock-in letter prescribes the withholding allowance the employer must use to figure withholding. After the lock-in letter becomes effective, the IRS may issue a subsequent modification notice, but only after the employee contacts the IRS to request an adjustment to the withholding prescribed in the lock-in letter.

Under the final regulations, employers are not required to notify the IRS that they no longer employ an employee for whom a lock-in letter was issued. Further, the final regulations do not require the IRS to reissue lock-in letters or modification notices solely because of the redesigned Form W-4.

The final regulations revise Reg. §31.3402(f)(2)-1(g)(2)(iv) relating to lock-in letters. and Reg. §31.3402(f)(2)-1(g)(2)(vii) relating to modification notices, to provide that an employer may comply with a lock-in letter or modification notice that is based on a 2019 or earlier Form W-4, as required by the regulations, if the employer implements the maximum withholding allowance and filing status permitted in a lock-in letter or modification notice by using the computational bridge entries as set forth in forms, instructions, publications, and other IRS guidance to calculate withholding for such a Form W-4.

Estimated Tax Payments
The final regulations revise Reg. §31.3402(m)-1(d) to allow employees to take estimated tax payments into account, as long as the employee (1) follows the instructions to the IRS’s Tax Withholding Estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator) or IRS Publication 505, (2) is not subject to a lock-in letter or modification notice, and (3) does not request withholding from wages that falls below the pro rata share of income taxes attributable to wages determined under forms, instructions, publications, and other IRS guidance. The IRS intends to update its Tax Withholding Estimator and Publication 505 to reflect this rule.

Applicable Date
The final regulations generally apply on the date they are published in the Federal Register. Reg. §31.3402(f)(2)-1(g), regarding withholding compliance, applies as of February 13, 2020. Reg. §31.3402(f)(5)-1(a)(3), regarding the requirement to use the current version of Form W-4, applies as of March 16, 2020. The removal of Reg. §31.3402(h)(4)-1(b), regarding the combined income tax withholding and employee FICA tax withholding tables, applies on and after January 1, 2020.

Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the final regulations on and after January 1, 2020, and before their applicability date set forth in the regulations.