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A New Kind of Challenge

The COVID-19 pandemic has tested area employers in every way imaginable. And soon, it will test many in a way that probably couldn’t have been imagined even a few months ago — vaccine mandates put in place by the Biden administration and set to take effect probably before the end of the year. The mandates are prompting lawsuits, generating questions that are often hard to answer, and creating high levels of anxiety for employers who are already dealing with a host of problems, especially an ongoing workforce crisis.

Amy Royal says she’s seen all manner of new regulations — state, federal, and local — that employers and their HR departments must contend with as they carry out business day to day.

But she speaks for all employment-law specialists — and those HR professionals as well — when she says she’s never seen anything quite like the COVID-19 vaccine mandates either already in effect or soon to be.

The mandates are far-reaching in their impact, in terms of everything from the number of businesses affected to the costs they will have to absorb to the very real possibility of losing more valued employees, said Royal, a principal with the Indian Orchard-based Royal Law Firm, which specializes in employment law, specifically representing employers. She summed up the measures and their bearing on employers with a single word. “It’s exhausting for companies.”

That would be an understatement.

Already, vaccine mandates enacted by states, individual cities and towns, healthcare providers, and private companies are resulting in thousands of people being fired or simply walking off the job. That list includes the football coach and several assistants at Washington State University, more than 100 state troopers in Massachusetts, police officers in countless communities, and a wide range of healthcare workers, especially nurses.

The recent developments raise questions on everything from just how safe many cities now are to which games NBA star Kyrie Irving can actually play in — none at his home court in Brooklyn, for starters.

And the next shoe — a rather large one — is set to drop in this unfolding drama. That would be the Biden administration’s vaccine and testing mandates, the ones affecting companies of more than 100 employees, any business with federal contracts, and federal employees — mandates the administration estimates will impact more than 80 million workers.

“People would be surprised at the array of businesses, both for-profit and nonprofit, that meet that federal-contractor test.”

Royal and other employment-law specialists we spoke with said there are far more businesses in the 413 in those categories than most people would think, and all of them are, or should be, working diligently to prepare for these mandates — which will take effect soon, although exactly when is a question.

Actually, that’s one of many, many questions, said John Gannon, an employment-law specialist with Springfield-based Skoler, Abbott & Presser, who said others include everything from whether employees get paid while they’re getting vaccinated or tested to who pays for those tests, to whether employees who ultimately lose their jobs to these mandates are eligible for unemployment benefits.

Amy Royal says far more businesses and nonprofits in the 413

Amy Royal says far more businesses and nonprofits in the 413 will be impacted by the Biden administration’s vaccine mandate than most people would believe.

“People are asking, ‘what do we do now — what can we do once the mandate is rolled out?’” he said. “They also want to know when it is going to release and how much lead time they’re going to have for compliance. And, unfortunately, we just don’t know the answers to those kinds of questions.”

Meredith Wise, president and CEO of the Employers Assoc. of the NorthEast, agreed, noting, as others did, that the vaccine mandates add new layers of intrigue, challenge, and polarization for employers who have seen more than enough of all three over the past 20 months.

When she talked with BusinessWest, Wise had recently left a roundtable of CHROs — chief human-resource officers — representing companies across the Northeast. The group meets every six weeks to discuss the challenges its members are facing, she noted, adding that the dominant topic of conversation was the new vaccine mandates and what they might mean for companies, especially in the broad realm of employee relations.

“People who have not wanted to get vaccinated may get tired of the testing and may eventually get vaccinated, but be disgruntled about it,” she said, adding quickly that, if employers have to pay the cost of testing — and pay employees while they’re getting tested — then there is little incentive, if any, to get vaccinated.

“There’s still a lot of questions about what the mandates are going to say, how it’s all going to come down, and whether we’re going to lose employees,” she went on, adding that employers may have to pay a steep price for a policy they didn’t implement themselves.

The best advice Gannon and the others we spoke with have for employers and the HR departments is to be as ready as they can be for these mandates and fully understand just what they are up against. This means knowing how many employees are vaccinated (and not) and having a plan in place for meeting the mandates.

Above all else, Wise and the employment-law specialists advise that businesses take the mandates seriously — even if enforcement of its provisions will be extremely difficult, if not impossible — and to be prepared.

 

Taking More Shots

BusinessWest asked a number of area business owners and nonprofit managers who fall under the categories of the Biden vaccination mandates to discuss the measures and what they could mean.

Not surprisingly, none really wanted to talk about it — on the record or even off. Indeed, the subject of vaccinations and the mandates regarding them are a hot-button, polarizing topic, to say the least. Most employers are staying away from it, figuring it’s best not to say anything than delve into a matter drenched in controversy.

Meredith Wise

Meredith Wise

“There’s still a lot of questions about what the mandates are going to say, how it’s all going to come down, and whether we’re going to lose employees.”

That goes for MassMutual, one of the region’s largest employers, with more than 6,000 workers, which offered only this statement from a spokesperson:

“We are waiting for the specifics of the OHSA guidance to be issued, after which we will be able to better evaluate what it will mean for our company and employees. In the meantime, we have begun to prepare by determining how much of our employee base is vaccinated, which is currently approximately 85%. We are also encouraging fully vaccinated employees to begin coming into the office if they are comfortable doing so and on a schedule that makes sense for them. We’ll continue to evaluate our broader return based on the status of COVID-19 as well as guidance from medical experts and government officials to ensure the health, safety, and well-being of our employees.”

With that, the company probably spoke for most employers in the region, who are waiting for OSHA (the U.S. Department of Labor’s Occupational Safety and Health Administration) to offer specifics while also assessing just where they stand with regard to what percentage of their workforce is vaccinated.

Here’s what is known at this juncture. The Biden action plan directs OSHA to issue an emergency temporary standard (ETS) that requires all employers with 100 or more employees to ensure their workers are either fully vaccinated or get tested weekly for COVID-19, Gannon said. Employers will also be required to provide paid time off to employees to get vaccinated and recover from any side effects from the vaccine.

Meanwhile, the Biden administration’s plan also includes two executive orders requiring federal employees and federal contractors (and subcontractors) to get vaccinated, regardless of workforce size. There is no weekly testing exception; employees working on or in connection with a federal contract, including subcontractors, must be fully vaccinated by Dec. 8.

And, as noted, there are more companies in the 413 that will be impacted by these measures than most would think. Indeed, while most businesses in this region fit the textbook definition of ‘small’ — under 100 employees — there are hundreds of companies, nonprofits, and institutions that count at least that many workers. That includes healthcare-related agencies, manufacturers, nursing homes, municipal departments, a few banks, and many more. Meanwhile, the provision regarding federal contractors — and subcontractors — brings many more businesses under the auspices of the Biden mandates.

“People would be surprised at the array of businesses, both for-profit and nonprofit, that meet that federal-contractor test,” said Royal, noting that her own firm has had federal contracts at different points in its history. “So this has an impact on a number of organizations up and down the valley — including small businesses and human-service agencies that may provide a service to the federal government in some way and come under the umbrella of being a federal contractor.

John Gannon

John Gannon

“When President Biden first issued his plan in early September, we told people, ‘let’s see what happens over the next 30 days.’ But now, we’re getting to a situation where employers have to begin planning and preparing.”

“It might even be retail-type product that is sold on a military base,” she went on, while detailing the broad scope of these measures. “This definitely has widespread implications.”

Beyond waiting — and perhaps hoping that the measure is delayed, which most experts say is possible but not likely — the best area employers can try to do is be ready, said Gannon, adding that, while it’s anyone’s guess as to just when the OSHA standard for companies with 100 or more employees will be issued, it will almost certainly be released before the end of the year.

“When President Biden first issued his plan in early September, we told people, ‘let’s see what happens over the next 30 days,’” he explained. “But now, we’re getting to a situation where employers have to begin planning and preparing.”

Indeed, the clock is certainly ticking on the Dec. 8 deadline for federal contractors, he noted, adding that anyone who takes a vaccine that requires two shots must wait several weeks after the first shot to get the second. And full vaccination, regardless of whether it’s a one-dose or two-dose vaccine, is not achieved until two weeks after the final dose.

“It can take employees at least 45 days, and that’s if they act as soon as possible, to make sure they’re vaccinated,” Gannon went on. “Meanwhile, employers are going to have to get testing programs in place and provide options for employees on how they get tested weekly if they are opposed to getting vaccinated.”

The logical next step for employers, if they haven’t done it already, is to determine their vaccination rates and thus get a handle on the scope of the problem they’re facing, he added.

“We’ve seen all sorts of numbers, but generally, employers fall somewhere in the 60% to 80% range,” he said. “And you’re allowed to ask people if they are vaccinated or not — several agencies have confirmed that there is nothing unlawful about that. You can’t ask them why, but you can generally survey your workforce population, and that should be the first step.”

 

Compounding the Problems

Flashing back to those days — it might even have been hours — after Biden announced his vaccination mandates, when the phone calls started coming in, Royal said the initial reaction was shock, followed by incredulousness.

“That’s because it represents a whole new layer of challenges for employers when they’ve already been navigating a number of challenges related to the pandemic, or just workforce-related issues,” she explained, adding that the overriding concern, beyond all the planning, logistics, and costs of meeting the new standards, regards the potential loss of valued employees at a time when workers are retiring and resigning at unprecedented rates (see related story on page 61), and replacing them has been increasingly difficult.

“Whether you’re in manufacturing or in human services, or are a professional service, there is a general worker shortage and shortage of prospects,” Royal noted, adding that the mandates, especially the one regarding federal contracts (because there is no provision for testing, only required vaccination), will make a serious problem that much worse.

Wise agreed. While she noted that the vaccine mandates for those companies in the listed categories relieve employers from having to implement such a polarizing policy themselves, it does bring a new and unwanted layer of challenge to the table, especially when it comes to workforce.

“They’re already hurting for staff as it is,” she told BusinessWest. “If they lose employees over this, that’s going to make it even harder for them to meet their customer demands and fulfill their orders.”

But there are other considerations, including the costs attached to all this and uncertainty over whether employers who don’t want to get vaccinated or tested can become eligible for unemployment benefits.

She said there has been no clear guidance on that, but she speculates that, if the federal government issues a mandate and an employee is unwilling to comply with that mandate, then the employee would not be eligible to collect unemployment benefits.

But that’s just one of many questions that remain unanswered at this juncture, she said, adding that employers of all sizes are pondering how to get ready for these mandates, but also just how seriously to take them, especially since the T in ETS stands for temporary.

“Apparently, under OSHA guidelines, unless OSHA makes it permanent, within six months this ETS will expire,” she said, adding that some employers may roll the dice and try to wait this out.

Indeed, while there are steep fines attached to the mandates — up to $13,653 per violation — Wise said some employers are wondering out loud just who is going to enforce all this.

“In my mind, this would be a risk that I, as a business owner, don’t think I’d be willing to take,” she told BusinessWest. “But there’s a piece to this that says, ‘how am I going to get caught?’

“OSHA isn’t going to be able to come in and audit every workplace, so there would probably have to be a complaint filed,” she went on, adding that, if an employee doesn’t want to get vaccinated, he or she is unlikely to file a complaint that their employer is not in compliance.

 

Bottom Line

Like Royal and Gannon, Wise said she’s never seen anything quite like the vaccine mandates when it comes to the many ways they might impact an employer.

“I’ve been in HR for more than 40 years, and I can say that there’s been nothing like this,” she noted. “There’s been a lot of regulations and guidelines that employers have to put in place — certain safety precautions, pay requirements, overtime laws — but there really hasn’t been anything that’s come down that has affected the individual and their bodies like this.”

Indeed, these measures are unprecedented in many respects, and they come at a time when beleaguered employers are already being challenged in every way imaginable.

Only time will tell what happens next, but it’s clear that employers will have their mettle tested even further.

 

George O’Brien can be reached at [email protected]

Banking and Financial Services

Know the Rules

By James T. Krupienski, CPA

 

At the start of the COVID-19 pandemic in the early parts of 2020, the concern of business survival was the number-one thought of countless businesses, with each industry having its own struggles. The medical industry was not without its own real concerns at that time, particularly given its role in the pandemic fight. People would continue to get sick, require treatment, and see their physicians, but how could it be done safely?

Recognizing the financial crisis that was about to overtake this industry, along with how detrimental it was for the industry to remain open and accessible to patients, the federal government took dramatic steps. In addition to Paycheck Protection Program (PPP) loans, for which medical practices were eligible, the Coronavirus Aid, Relief and Economic Security (CARES) Act also allocated funds directly to the medical industry through the Department of Health and Human Services (HHS) and the newly created Provider Relief Fund (PRF).

James T. Krupienski

James T. Krupienski

“While the COVID-19 relief provisions, as part of the CARES Act, provided a lifeline for many medical, dental, and other healthcare-related practices during the pandemic, that support was not without certain compliance requirements and reporting.”

The first round of funding, which was completely unexpected to many, occurred in early April 2020, when $30 billion was deposited directly into the accounts of eligible practices. Throughout 2020, additional funds were later rolled out in phases 2 and 3, as well as through targeted distributions to specific industries, such as rural providers and skilled-nursing facilities. Of importance is that, for all practices receiving these funds, there are several rules to be followed.

While the COVID-19 relief provisions, as part of the CARES Act, provided a lifeline for many medical, dental, and other healthcare-related practices during the pandemic, that support was not without certain compliance requirements and reporting, which we will dive into within this article.

 

Attestations

First, within 90 days of receipt of the funds, each provider was required to attest to certain terms of use. For those electing to return the funds, it was required to be done within 14 days of this attestation. Attestations were required for receipt of funds in all phases and were to be completed through use of a portal with the HHS (www.hhs.gov/coronavirus/cares-act-provider-relief-fund/for-providers/index.html#how-to-attest).

 

Reporting

As part of the attestation process, any provider receiving more than $10,000 in payments through the PRF would be required to report on use of the funds. While the specifics on the exact reporting took months to be finalized and continued to be reworked by the HHS, the general guidelines were known. Barring no future changes, PRF dollars are to be applied in the order of:

1. Certain qualifying expenses that can be directly attributable to coronavirus; and

2. Lost revenues.

Of greatest importance is the understanding that the use of these funds must be kept separate and distinct from the use of other coronavirus-relief aid. For example, if you report on the use of a personnel or payroll related expense, it cannot also be tied to dollars used in applying for PPP loan forgiveness. Essentially, a practice cannot ‘double-dip.’

Initially, reporting was set to begin back in the summer of 2020, which was then pushed to the fall of 2020 and then again to Jan. 15, 2021. However, because of updated legislation and a change in administration, reporting had been delayed even further. In late June 2021, the reporting requirements were finalized, and the reporting portal is now open to many, depending on when funds were received (see chart).

For all recipients of the fund, it is important to continue to monitor this process so that a reporting deadline is not missed. To stay on top of this process, the HHS has been updating its site (www.hhs.gov/coronavirus/cares-act-provider-relief-fund/reporting-auditing/index.html) with current regulations.

 

Audit Requirement

One stipulation, not known to many, is that a government single audit is required if the combined federal funds (PRF and other federal assistance) received were more than $750,000. Note that PPP funding does not count towards this total.

A single audit would be required of an organization that has $750,000 or more in federal awards. While typically, federal funding is awarded to not-for-profits and governmental organizations, the HHS PRF has opened many organizations, including for-profit medical practices, to these compliance requirements. If a practice has received combined federal awards though the Provider Relief Fund in excess of $750,000, a single audit will be required.

While the majority of relief programs under the CARES Act (such as the Paycheck Protection Program) are subject to reporting requirements, the PRF has its own distinct rules to navigate. If your healthcare practice took advantage of the PRF in any amount, it is highly encouraged that you speak with an advisor as soon as possible to fully understand the compliance requirements. Navigating federal compliance can be intimidating and confusing, especially if this is your first time doing so. Speaking with an advisor can demystify this process and help ensure that you understand the regulations.

 

James T. Krupienski, CPA, MSA, is a partner in the Healthcare Services niche for Holyoke-based Meyers Brothers Kalicka, certified public accountants and business strategists; (413) 536-8510; www.mbkcpa.com

Accounting and Tax Planning Coronavirus Special Coverage

Year-end Tax Planning

By Kristina Drzal Houghton, CPA, MST

 

This year has been unlike any other in recent memory. Front and center, the COVID-19 pandemic has touched virtually every aspect of daily living and business activity in 2020. In addition to other financial consequences, the resulting fallout is likely to have a significant impact on year-end tax planning for both individuals and small businesses.

Kristina Drzal Houghton

Kristina Drzal Houghton

Furthermore, if the election of Joe Biden is confirmed and the Republican party does not hold a majority in the Senate following the runoff elections in Georgia, it is likely to affect the tax situation in 2021 and beyond. This article will first address 2020 planning and then summarize some of the Biden tax proposals at the end.

In response to the pandemic, Congress authorized economic-stimulus payments and favorable business loans as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act also features key changes relating to income and payroll taxes. This new law follows close on the heels of the massive Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA revised whole sections of the tax code and includes notable provisions for both individuals and businesses.

This is the time to paint your overall tax picture for 2020. By developing a year-end plan, you can maximize the tax breaks currently on the books and avoid potential pitfalls.

 

BUSINESS TAX PLANNING

Depreciation-related Deductions

Under current law, a business may benefit from a combination of three depreciation-based tax breaks: the Section 179 deduction, ‘bonus’ depreciation, and regular depreciation.

• Place qualified property in service before the end of the year. Typically, a small business can write off most, if not all, of the cost in 2020.

• The maximum Section 179 allowance for 2020 is $1,040,000 provided asset purchases do not exceed $2,590,000.

• Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2020.

• If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $25,000. The ‘luxury car’ limits do not apply to certain heavy-duty vehicles.

• If your deduction is limited due to either the income threshold or the amount of additions, a first-year bonus depreciation deduction of 100% for property placed in 2020 is also available.

• Massachusetts does not follow the bonus depreciation, but does allow the increased Section 179 expense; however, many states do not follow that increased expense either.

 

Business Interest

• Prior to 2018, business interest was fully deductible. But the TCJA generally limited the deduction for business interest to 30% of adjusted taxable income (ATI). Now the CARES Act raises the deduction to 50% of ATI, but only for 2019 and 2020.

• Determine if you qualify for a special exception. The 50%-of-ATI limit does not apply to a business with average gross receipts of $25 million (indexed for inflation) or less for the three prior years. The threshold for 2020 is $26 million.

 

Bad-debt Deduction

During this turbulent year, many small businesses are struggling to stay afloat, resulting in large numbers of outstanding receivables and collectibles.

• Increase your collection activities now. For instance, you may issue a series of dunning letters to debtors asking for payment. Then, if you are still unable to collect the unpaid amount, you can generally write off the debt as a business bad debt in 2020.

• Generally, business bad debts are claimed in the year they become worthless. To qualify as a business bad debt, a loan or advance must have been created or acquired in connection with your business operation and result in a loss to the business entity if it cannot be repaid.

 

Miscellaneous

• If you pay year-end bonuses to employees in 2020, the bonuses are generally deductible by your company and taxable to the employees in 2020. A calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2021 on its 2020 return.

• Generally, repairs are currently deductible, while capital improvements must be depreciated over time. Therefore, make minor repairs before 2021 to increase your 2020 deduction.

• Switch to cash accounting. Under a TCJA provision, a C-corporation may use this simplified method if average gross receipts for last year exceeded $26 million (up from $5 million).

• An employer can claim a refundable credit for certain family and medical leaves provided to employees. The credit is currently scheduled to expire after 2020.

• Investigate Paycheck Protection Program (PPP) forgiveness. Under the CARES Act, PPP loans may be fully or partially forgiven without tax being imposed. Despite recent guidance, this remains a complex procedure, so consult with your professional tax advisor about the details.

 

INDIVIDUAL TAX PLANNING

Charitable Donations

Generally, itemizers can deduct amounts donated to qualified charitable organizations, as long as substantiation requirements are met. Be aware that the TCJA increased the annual deduction limit on monetary contributions from 50% of adjusted gross income (AGI) to 60% for 2018 through 2025. Even better, the CARES Act raises the threshold to 100% for 2020.

• In addition, the CARES Act authorizes an above-the-line deduction of up to $300 for monetary contributions made by a non-itemizer in 2020 ($600 for a married couple).

• In most cases, you should try to ‘bunch’ charitable donations in the year they will do you the most tax good. For instance, if you will be itemizing in 2020, boost your gift giving at the end of the year. Conversely, if you expect to claim the standard deduction this year, you may decide to postpone contributions to 2021.

• For donations of appreciated property that you have owned longer than one year, you can generally deduct an amount equal to the property’s fair market value (FMV). Otherwise, the deduction is typically limited to your initial cost. Also, other special rules may apply to gifts of property. Notably, the annual deduction for property donations generally cannot exceed 30% of AGI.

• If you donate to a charity by credit card in December — for example, if you make an online contribution — you can still write off the donation on your 2020 return, even if you do not actually pay the credit-card charge until January.

 

Family Income Splitting

The time-tested technique of family income splitting still works. Currently, the top ordinary income-tax rate is 37%, while the rate for taxpayers in the lowest income tax bracket is only 10%. Thus, the tax rate differential between you and a low-taxed family member, such as a child or grandchild, could be as much as 27% — not even counting the 3.8% net investment-income tax (more on this later).

• Shift income-producing property, such as securities, to family members in low tax brackets through direct gifts or trusts. This will lower the overall family tax bill. But remember that you are giving up control over those assets. In other words, you no longer have any legal claim to the property.

• Also, be aware of potential complications caused by the ‘kiddie tax.’ Generally, unearned income above $2,200 received in 2020 by a child younger than age 19, or a child who is a full-time student younger than age 24, is taxed at the top marginal tax rate of the child’s parents. (Recent legislation reverses a TCJA change on the tax treatment.) The kiddie tax could affect family income-splitting strategies at the end of the year.

 

Higher-education Expenses

The tax law provides tax breaks to parents of children in college, subject to certain limits. This often includes a choice between one of two higher-education credits and a tuition-and-fees deduction.

• Typically, you can claim either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). The maximum AOTC of $2,500 is available for qualified expenses of each student, while the maximum $2,000 LLC is claimed on a per-family basis. Thus, the AOTC is usually preferable. Both credits are phased out based on modified adjusted gross income (MAGI).

• Alternatively, you may claim the tuition-and-fees deduction, which is either $4,000 or $2,000 before it is phased out based on MAGI. The tuition-and-fees deduction, which has expired and been revived several times, is scheduled to end after 2020, but could be reinstated again by Congress.

• When appropriate, pay qualified expenses for next semester by the end of this year. Generally, the costs will be eligible for a credit or deduction in 2020, even if the semester does not begin until 2021.

 

Medical and Dental Expenses

Previously, taxpayers could only deduct unreimbursed medical and dental expenses above 10% of their AGI. When it is possible, accelerate non-emergency qualifying expenses into this year to benefit from the lower threshold. For instance, if you expect to itemize deductions and have already surpassed the 7.5%-of-AGI threshold this year, or you expect to clear it soon, accelerate elective expenses into 2020. Of course, the 7.5%-of-AGI threshold may be extended again, but you should maximize the tax deduction when you can.

 

Estimated Tax Payments

The IRS requires you to pay federal income tax through any combination of quarterly installments and tax withholding. Otherwise, it may impose an ‘estimated tax’ penalty.

However, no estimated tax penalty is assessed if you meet one of these three ‘safe harbor’ exceptions under the tax law:

• Your annual payments equal at least 90% of your current liability;

• Your annual payments equal at least 100% of the prior year’s tax liability (110% if your AGI for the prior year exceeded $150,000); or

• You make installment payments under an ‘annualized income’ method. This option may be available to taxpayers who receive most of their income during the holiday season.

If you have received unemployment benefits in 2020 — for example, if you lost your job due to the COVID-19 pandemic — remember that those benefits are subject to income tax. Factor this into your estimated tax calculations for the year.

 

Capital Gains and Losses

Frequently, investors time sales of assets such as securities at year-end to produce optimal tax results. For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. If you sell securities at a loss and reacquire substantially identical securities within 30 days of the sale, the tax loss is disallowed.

• Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15%, or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching up to 37% in 2020.

• Review your investment portfolio. Depending on your situation, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.

 

Net Investment-income Tax

In addition to capital-gains tax, a special 3.8% tax applies to the lesser of your net investment income (NII), or the amount by which your modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers or $250,000 for joint filers. (These thresholds are not indexed for inflation.) The definition of NII includes interest, dividends, capital gains, and income from passive activities, but not Social Security benefits, tax-exempt interest, and distributions from qualified retirement plans and IRAs.

• Assess the amount of your NII and your MAGI at the end of the year. When it is possible, reduce your NII tax liability in 2020 or avoid it altogether.

 

Required Minimum Distributions

As a general rule, you must receive required minimum distributions (RMDs) from qualified retirement plans and IRAs after reaching age 72 (70½ for taxpayers affected prior to 2020). The amount of the RMD is based on IRS life-expectancy tables and your account balance at the end of last year

• Take RMDs in 2020 if you need the cash. Otherwise, you can skip them this year, thanks to a suspension of the usual rules by the CARES Act. There is no requirement to demonstrate any hardship relating to the pandemic. Finally, although RMDs are no longer required in 2020, consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may benefit your overall tax picture.

 

IRA Rollovers

If you receive a distribution from a qualified retirement plan or IRA, it is generally subject to tax unless you roll it over into another qualified plan or IRA within 60 days. In addition, you may owe a 10% tax penalty on taxable distributions received before age 59½. However, some taxpayers may have more leeway to avoid tax liability in 2020 under a special CARES Act provision.

• Take your time redepositing the funds if it qualifies as a COVID-19-related distribution. The CARES Act gives you three years, instead of the usual 60 days, to redeposit up to $100,000 of funds in a plan or IRA without owing any tax.

• To qualify for this tax break, you (or your spouse, if you are married) must have been diagnosed with COVID-19 or experienced adverse financial consequences due to the virus (e.g., being laid off, having work hours reduced, or being quarantined or furloughed). If you do not replace the funds, the resulting tax is spread evenly over three years.

• This may be a good time to consider a conversion of a traditional IRA to a Roth IRA. With a Roth, future payouts are generally exempt from tax, but you must pay current tax on the converted amount. Have a tax professional help you determine if this makes sense for your situation.

 

Estate and Gift Taxes

Since the turn of the century, Congress has gradually increased the federal estate-tax exemption, while eventually establishing a top estate-tax rate of 40%. The TCJA doubled the exemption from $5 million to $10 million for 2018 through 2025, inflation-indexed to $11.58 million in 2020.

Under the ‘portability provision’ for a married couple, the unused portion of the estate-tax exemption of the first spouse to die may be carried over to the estate of the surviving spouse. This tax break is now permanent.

Finally, guidance has been published establishing that, when the exemption is decreased in the future, a recapture or ‘claw-back’ of the extra exemption used will not be required.

Update your estate plan to reflect current law. You may revise wills and trusts to accommodate the rule allowing portability of the estate-tax exemption. Additionally, consider the maximum gifting currently as allowable in your financial position.

 

Miscellaneous

You can contribute up to $19,500 to a 401(k) in 2020 ($26,000 if you are age 50 or older).

 

BIDEN’S NOTABLE TAX PROPOSALS

Business Tax

• The statutory corporate tax rate would be increased from 21% to 28%.

• The benefits of the Section 199A/qualified business-income deduction would be phased out for individuals with taxable income greater than $400,000.

• The real-estate industry will potentially be impacted. The Biden campaign had suggested potential changes to the §1031 like-kind exchange provisions as well as changes to effectively limit losses that may be utilized by real-estate investors.

 

Individual Tax

Many of the revenue-raising aspects of the Biden tax proposal for individuals apply only to those taxpayers with taxable income over $400,000. It has not been specified whether this threshold is to be adjusted for filing status.

• The top ordinary rate would be restored to 39.6% for taxpayers with income over $400,000. This reflects a return to pre-2017 tax reform when the top ordinary rate was dropped to 37%.

• For top income earners, this rate is currently capped at 20% (plus 3.8% to the extent subject to the net investment-income tax). Under the Biden plan, capital gains and qualified dividends will be subject to the top rate of 39.6% for individuals with more than $1 million in income.

• The Section 199A/qualified business-income deduction would begin to phase out for individuals over $400,000 in taxable income.

• Itemized deductions would be capped to 28% of value. Additionally, benefits would begin to phase out for individuals with taxable income over $400,000.

• The child and dependent care credit would be increased to a maximum of $8,000 for low-income and middle-class families. In addition, the credit would be made refundable.

• First-time homebuyers could receive up to $15,000 of refundable and advanceable tax credit.

• There could be temporary expansion of the child tax credit, depending on the progression of the pandemic and economic conditions. This expansion would increase the credit from $2,000 to $3,000 for children 17 or younger with an additional $600 for children under 6. The credit would also be refundable and allowable to be received in monthly installments.

 

Gift and Estate Tax

The gift- and estate-tax exemption amount would be reduced. Many are suggesting that Biden is looking to reduce the gift- and estate-tax exemption to the pre-TCJA levels.

 

Conclusion

This year-end tax-planning letter is based on the prevailing federal tax laws, rules, and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Finally, remember that this article is intended to serve only as general guideline. Your personal circumstances will likely require careful examination. u

 

Kristina Drzal Houghton, CPA, MST is partner, Executive Committee, and director of Taxation Services at Meyers Brothers Kalicka; (413) 536-8510.

Accounting and Tax Planning

Changes in Benefit Plans

By Melissa English

Melissa English

Melissa English

Audits of employee-benefit plans continue to evolve, and the pace of this evolution is unpredictable.

Areas such as technology and skills continue to grow, as well as industry standards. Now, throw COVID-19 into the mix, and we have to adjust not only to new ways of having these plans audited, but to additional standards that come into play with it.

The Auditing Standards Board has recently been issuing new standards. These standards go hand-in-hand with changes in technology and skills. These standards will improve the provisions of plans, affect the audits of plans, and address risk assessment and quality control. Auditors, as well as plan sponsors and administrators, should understand what these changes are and how they will affect retirement plans.

So what are some of the changes we can expect to see in the near future?

• Accounting Standards Updates (ASU) 2018-09 and 2018-13, which improve the standards on valuation of investments that use net-asset value as a practical expedient and improvements to fair-value disclosures. These both will be effective for years beginning after Dec. 15, 2019; and

• Statement on Auditing Standards (SAS) 134-141, with the biggest impact on limited-scope audits, which will now be called ERISA Section 103(a)(3)(c) audits. These standards will also affect the form and content of engagement letters, auditors’ opinions, and representation letters. The Statement on Auditing Standards was previously effective for years beginning after Dec. 15, 2020 but, due to COVID-19, has been moved, and is effective for years beginning after Dec. 15, 2021.

“Now, throw COVID-19 into the mix, and we have to adjust not only to new ways of having these plans audited, but to additional standards that come into play with it.”

In addition to these new standards, new acts recently came into law:

• The Bipartisan Budget Act of 2018, which was signed into law on Feb. 9, 2018. This act made changes in regulations for hardship distributions;

• The SECURE Act which became law on Dec. 20, 2019. This act will make it easier for small businesses to set up safe-harbor plans, allow part-time employees to participate in retirement plans, push back the age limit for required minimum distributions from 70 1/2 to 72, allow 401(k) plans to offer annuities, and change distribution rules for beneficiaries. This act also added new provisions for qualified automatic contribution arrangements (QACAs), birth and adoption distributions, and in-service distributions for defined benefit plans; and

• The CARES Act, which was signed into law on March 27, 2020 and acts as an aid and relief initiative from the impact of the COVID-19 pandemic. This act allows participants who are in retirement plans the option of taking distributions and/or loan withdrawals early without penalties during certain time periods for qualified individuals.

Lastly, there are constant discussions on cybersecurity. Cybercrime is one of the greatest threats to every company. Some questions to consider: does your company have a cybersecurity policy in place? Do you have insurance for cybersecurity? What is management’s role on cyber risk management? Do you offer trainings on how to handle cybercrime for both your IT department and all employees of the company? Cyberattacks are a normal part of daily business, but they can be significantly reduced if companies understand the risk, offer adequate resources and trainings, and maintain effective monitoring.

These changes affect most defined-contribution and defined-benefit plans. Plan sponsors should be evaluating these changes and the impact they have on retirement plans.

Some of these changes are optional, some are required, and some require amendments to plan documents. Plan sponsors should be discussing these changes as soon as possible with their third-party administrators and auditors. Remember, it’s the fiduciary’s responsibility to run the plan in the sole interest of its participants and beneficiaries, and to do this in accordance with all industry rules, regulations, and updated standards.

Melissa English is an audit manager at MP P.C. in its Springfield location. She specializes in employee benefit-plan work, such as audits; researching plan issues; compliance regulations, including voluntary plan corrections and self-corrections; and DOL and IRS audit examinations; (413) 739-1800.

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