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  • Writer's pictureTimothy E. Brown, CPA

Most qualifying families will automatically receive the expanded payments, but those who don't have to file taxes or haven't done so will need to update their information with the IRS.

The payments, which were included in the American Rescue Plan, change an existing tax credit by expanding the eligibility pool and increasing the money families get. Under the expanded credit, the IRS, also for the first time, is offering the option to receive the payments monthly, rather than in a lump sum as a tax refund.

The expanded payments are expected to significantly decrease the number of children living in poverty; the White House estimates that child poverty could be reduced by as much as 50 percent.

Most of the roughly 39 million families who are eligible have filed taxes recently or received stimulus checks and do not need to take any additional steps to receive the monthly benefit. But an estimated 4 million to 8 million eligible children are at risk of missing out because their families are not required to file taxes or they have not done so.

Non-filing households tend to be more vulnerable and the most in need of assistance. And although the Biden administration has rolled out a number of online portals where families can update their information, cumbersome government websites, language and technology barriers, and a general lack of public awareness threaten the impact of the program.

Who qualifies?

People who claim children 17 or younger as deductions on their taxes are eligible.

The full enhanced credit will be given to single filers who earn as much as $112,500 and joint filers making up to $150,000 a year. The payments begin to decrease for those making more, with the credit completely phasing out for single payers earning more than $200,000 or for married couples with incomes above $400,000.

The IRS determines the age of a child by how old the child is at the end of the 2021 calendar year. So children turning 18 this year will not be eligible.

There are no work requirements, and you do not need a permanent home to claim the credits.

How much money do you get?

That depends on how old the children are (and how much money you make).

How will the money be distributed?

If you filed taxes in 2019 or 2020 or received a stimulus check, you should get a direct deposit. If the IRS does not have your current banking information, then keep an eye out for a check in the mail.

If you do not see a direct deposit payment Thursday, you can visit the Child Tax Credit Update Portal to see whether your information is up to date.

When will you get the payments?

The IRS plans to send direct deposits on the 15th of each month, so: July 15, Aug. 13 (this payment is early because the 15th falls on a Sunday), Sept. 15, Oct. 15, Nov. 15 and Dec. 15.

If you do not want to get payments on a monthly basis and would prefer to get the cash in a lump sum during tax season, you can update that preference on the IRS website. A White House official said about 1 million people have chosen to do that so far.

What if you don't file taxes?

If you were not required to file taxes in 2019 or 2020 or did not do so, you must update your information with the IRS to receive the benefit.

The IRS released an online tool where parents can register their information electronically. The tool does not work well on mobile devices, so it is best to use it on a laptop or a desktop computer. The tool is available only in English, but an administration official said Spanish and other languages are in the works. If you did not receive the pandemic stimulus checks, the IRS will also use information uploaded to the non-filer tool to make sure you get those payments. Lost your job? Got married? Had another kid? If you had any significant life change that could affect how much money you are eligible for, you will need to update the information in a different IRS online tool (separate from the non-filer tool).

Changes in dependents, marital status and income, however, cannot be made until later in the summer. As long as the information is updated this year, the IRS will give you back pay for any missed monthly credits.

When will the monthly expanded credit end?

The expanded credit ends in December. Biden has called for a four-year extension, which would need congressional approval. Other Democrats have called for making the expansion permanent.

How can the money be used?

However you'd like. Unlike other benefits, such as food stamps or housing vouchers, the child tax credit is unrestricted

Summarized from Data Source Lauren Egan, NBC News

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Taxpayers may face delays in getting their refunds this season, a Treasury watchdog warned, because the Internal Revenue Service is still dealing with last year's backlog and faces difficulties hiring enough workers to process old and incoming returns.

"Of particular concern is the continued challenges in hiring sufficient staff needed to both continue to work backlog inventory and process Tax Year 2020 tax returns at the same time," the Treasury Inspector General for Tax Administration wrote in a report released on Wednesday. "This could further affect taxpayers awaiting refunds and additional Recovery Rebate Credits associated with these Tax Year 2020 returns."

At the end of 2020, the IRS had a backlog of more than 11.7 million paper returns, both individual and business, that needed to be processed. Some taxpayers with unprocessed returns may have trouble contacting the understaffed IRS, further delaying those returns. Additionally, the IRS may need to divert resources for the backlog to the ongoing distribution of the third round of stimulus checks.

"The backlog of returns, correspondence, and other types of work resulting from the pandemic has and will continue to have a significant impact on the associated taxpayers," the report said.

While the IRS increased their hiring goals for the 2021 fiscal year, they "have been unable to hire as many new employees as they expected," the report found. Too few applicants and problems processing applications delayed hiring.

The IRS is slower processing individual tax returns versus last year. As of March 12, the IRS had processed 88.5% of the total tax returns it received, while last year at this time the agency had processed 96.5% of total received returns, according to agency data. Overall, the IRS has processed 15 million fewer returns this year compared with the same time last year.

This year, the filing season opened on February 12, a delayed start compared with previous years, leaving Americans with less time to prepare their returns. The initial April 15 deadline for personal tax returns also has been pushed to May 17.

Taxpayers can claim the first and second round of stimulus checks on their 2020 taxes as a Recovery Rebate Credit if they didn't receive a stimulus payment or received the wrong amount.

Additionally, the IRS recently announced that jobless workers who already filed their taxes and are eligible for the newly-implemented tax break on the first $10,200 of unemployment benefits do not need to amend their return if they filed already. Instead, the agency will send a second refund automatically for the difference.

Data Source Denitsa Tsekova

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  • Writer's pictureTimothy E. Brown, CPA

Updated: Nov 23, 2020

Shareholder tax brackets and effective tax rate are important. An effective tax rate is the actual rate a taxpayer pays, calculated by dividing total tax by taxable income. A marginal tax rate is the rate at which the next dollar of income is taxed. I wouldn’t consider the marginal tax rate. The top tax rate is important. While the top tax rate is a flat 21 percent for C corporations and personal service corporations, the top rate for shareholders of an S corporation is 37 percent, but it is a graduated rate, so I believe the effective tax rate must be considered.

Another issue that must be considered for this analysis is that it appears most likely that we will have a new presidential administration next year, and some of the benefits of any entity type may very well disappear. That complicates tax-planning matters, but not entirely.

There are issues related to the recognition of income, the deduction of expenses and tax credits that should be considered, but many of these are the same for every business type. Note that I did not include the tax provisions of the CARES Act and the Families First Coronavirus Relief Act below because many of those issues are temporary. The tax credits in each, and the deferral of payroll taxes, apply to all entities.

Some advantages of an S corp are:

1. Shareholders are not subject to double taxation on income in retained earnings. 2. The income and loss of the S corp are allocated pro rata on a daily basis to each shareholder based on their ownership of all the shares of an S corp. 3. Capital losses are also allocated to the shareholders based on their daily pro rata share of total shares in the S corp. 4. An S corp is not subject to Social Security and Medicare taxes on pass-through income because it is not “self-employment income.” 5. An S corp can pay its shareholders a reasonable salary and only be taxed for Social Security and Medicare purposes on that salary, and not on the distributive allocation. The best source of information to determine the reasonable salary is the government’s own Bureau of Labor Statistics, but the IRS doesn’t normally get concerned about this unless the compensation is zero or very little. 6. The corporation can have an unlimited life and shares can be transferred easily to other people or entities. 7. Shareholders get the maximum protection for their personal assets if they keep their business affairs completely separate from their personal affairs. The courts can pierce the veil of a corporate entity if business affairs are not kept separate from personal affairs. 8. S corps are not subject to the Net Investment Income tax. 9. Fringe benefits for employees and owners of 2 percent or less of the S corp are not considered income for the shareholder or employee. They are also deductible by the S corp. 10. A greater than 2 percent owner of an S corp can deduct 100 percent of health care premiums paid by the corporation under a plan established by the corporation. 11. An S corp is eligible for the 20 percent Section 199A deduction on qualified business income, except as disallowed by law generally for certain service corporations. 12. A shareholder has basis in certain debts of the S corp to the shareholder, to be adjusted over time. 13. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, the people who are in control (as defined in section 368(c)) of the corporation. Section 368(c) defines control to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. Other property received, called boot, is taxable in the transaction. 14. A shareholder can include loans the shareholder made to the S corp in basis, but not liabilities to outside persons or entities.

Some disadvantages of an S corp are:

1. It can only have 100 shareholders. A husband and wife are one shareholder but become two shareholders if they divorce. 2. It cannot have nonresident aliens as shareholders. 3. Shareholders must be individuals and certain trusts. 4. Partnerships, C corporations and multi-member LLCs cannot be shareholders. 5. It can generally only have one class of stock. 6. State tax law may not recognize an S corp. 7. A shareholder cannot include debt in their basis of the entity for debt to outside parties. 8. An S corp with more than 100 employees earning at least $5,000 in the prior year cannot claim the pension plan startup costs credit. 9. Shareholders in an S corp may be subject to the tax on income items related to their investments in the corporation. 10. There are restrictions on the ordinary income treatment on Section 1244 qualified small business stock. 11. Owner-employees who own more than 2 percent of the S corp stock may have to include fringe benefits in their gross income. 12. An S corp that is not a closely held corporation must use the “simplified look-back” method of accounting for long-term contracts if almost all of its income under a long term contract is from sources in the United States. 13. There are limitations on some deductions that are generally itemized deductions of shareholders and certain other expenses such as alimony. 14. Distributions to shareholders may be taxable if they exceed the AAA account first, earnings and profits second, and then the remaining basis in stock. 15. S corps must generally use a calendar year for reporting profits and losses, but may apply for a fiscal year from the IRS for business purposes, or it can elect a Section 444 tax year. 16. An S corp must make a proportionate allocation and distribution based on ownership interest. 17. A deduction for health insurance benefits is not allowed in excess of the earned income of the owner-employee from that business. 18. An S corp can have “built-in gains” if it does not become an S corp in its first year. Built-in gains are gains that are embedded in an S corp’s assets before it became an S corp. The gains on assets in this case are frozen and are then taxable to the S corp at the applicable corporate rate when they are sold. The gain or loss on “built-in gains or losses” is allocated to all shareholders on a pro rata basis, even when the property creating the “built-in gain or loss” was contributed by one shareholder, or several specific shareholders. 19. The “at-risk” rules apply to S corporations and this is applied at the shareholder level Shareholders cannot deduct losses unless they are at risk of losing property or paying a liability in the amount of the loss. Shareholders of an S corp cannot be liable for non-recourse debt. 20. The passive activity rules also apply at the shareholder level, but certain determinations related to a passive activity must be made at the corporate level. 21. An S corp can only claim a deduction for stock given to an employee for services in the amount and the year the employee includes the stock in income. This generally occurs when the stock vests in the employee and the amount of income is the difference between the amount the employee paid for the stock and its fair market value at the date the employee vests in the stock.

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