The IRS has released new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The form allows eligible self-employed individuals to calculate the amount to claim for qualified sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). They can claim the credits on their 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021.

The IRS has released new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The form allows eligible self-employed individuals to calculate the amount to claim for qualified sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). They can claim the credits on their 2020 Form 1040 for leave taken between April 1, 2020, and December 31, 2020, and on their 2021 Form 1040 for leave taken between January 1, 2021, and March 31, 2021.

The FFCRA allows eligible self-employed individuals who, due to COVID-19, are unable to work or telework for reasons relating to their own health or to care for a family member, to claim the refundable tax credits. The credits are equal to either a qualified sick leave or family leave equivalent amount, depending on circumstances. To be eligible for the credits, self-employed individuals must:

• conduct a trade or business that qualifies as self-employment income; and
• be eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act as if the taxpayer was an employee.

For IRS frequently asked questions on the credits, go to https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs. The FAQs include a special section on provisions related to self-employed individuals.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

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

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

• a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19; or
• a decline in gross receipts in a calendar quarter in 2021 where the gross receipts for that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50-percent of those in the same 2019 calendar quarter).

In addition, effective January 1, 2021, the definition of "qualified wages" for the ERC has been changed:

• For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
• For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts, regardless of whether the employees are providing services.

The IRS points out that, retroactive to the enactment of the CARES Act on March 27, 2020, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

PPP Loan Forgiveness

In a recent posting on its webpage (see "Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941"), the IRS has clarified that, under section 206(c) of the 2020 Taxpayer Certainty Act, an employer that is eligible for the ERC can claim the credit even if the employer received a Small Business Interruption Loan under the PPP. Accordingly, eligible employers can claim ERS on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Note, however, that any wages that could count toward eligibility for ERC or PPP loan forgiveness can be applied to either program, but not to both programs.

If an employer received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and the employer's request for forgiveness was denied, the employer an claim the ERC related to those qualified wages on its 4th quarter 2020 Form 941, Employer's Quarterly Federal Tax Return. An employer can could report on its 4th quarter Form 941 any ERC attributable to health expenses that are qualified wages that it did not include in its 2nd and/or 3rd quarter Form 941.

Employers that choose to use this limited 4th quarter procedure must:

• Add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of their original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter).
• Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of its original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3a (in the 941 Instructions).
• Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3b.

The IRS recognized that it might be difficult to implement these special procedures so late in the timeframe to file 4th quarter returns. Therefore, employers can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.

More Information

For more information on the employee retention credit, the IRS urges taxpayers to visit its "COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs" webpage (at https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs).

The IRS has announced that lenders who had filed or furnished Form 1099-MISC, Miscellaneous Information, to a borrower, reporting certain payments on loans subsidized by the Administrator of the U.S. Small Business Administration (Administrator) as income of the borrower, must file and furnish corrected Forms 1099-MISC that exclude these subsidized loan payments.

The IRS has announced that lenders who had filed or furnished Form 1099-MISC, Miscellaneous Information, to a borrower, reporting certain payments on loans subsidized by the Administrator of the U.S. Small Business Administration (Administrator) as income of the borrower, must file and furnish corrected Forms 1099-MISC that exclude these subsidized loan payments.

On January 19, 2021, the Department of the Treasury and the IRS issued, Notice 2021-6, I.R.B. 2021-6, pursuant to section 279 of the COVID Relief Act, to waive the requirement for lenders to file with the IRS, or furnish to a borrower, a Form 1099-MISC reporting the payment of principal, interest, and any associated fees subsidized by the Administrator under section 1112(c) of the CARES Act ( P.L. 116-136). The filing of information returns that include these loan payments could result in IRS correspondence to borrowers regarding underreported income, and the furnishing of payee statements that include these loan payments to borrowers could cause confusion.

The Service further announced that if a lender has already furnished to borrowers Forms 1099-MISC that report these loan payments, whether before, on, or after December 27, 2020, the lender must furnish to the borrowers corrected Forms 1099-MISC that exclude these loan payments. In addition, if a lender has already filed with the IRS Forms 1099-MISC that report these loan payments, whether before, on, or after December 27, 2020, the lender must file with the IRS corrected Forms 1099-MISC that exclude these loan payments. Directions for how to file corrected Forms 1099-MISC are included in the 2020 Instructions for Forms 1099-MISC and 1099-NEC and the 2020 General Instructions for Certain Information Returns. If a lender described in this announcement furnishes corrected payee statements within 30 days of the furnishing deadline, it will have reasonable cause for any failure-to-furnish penalty imposed under Code Sec. 6722. A lender described in this announcement must file corrected information returns by the filing deadline in order to avoid Code Sec. 6721 failure-to-file penalties.

The IRS is providing a safe harbor for eligible educators to deduct certain unreimbursed COVID-19-related expenses. The safe harbor applies to expenses for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 in the classroom, paid or incurred after March 12, 2020. All amounts remain subject to the $250 educator expense deduction limitation.

The IRS is providing a safe harbor for eligible educators to deduct certain unreimbursed COVID-19-related expenses. The safe harbor applies to expenses for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 in the classroom, paid or incurred after March 12, 2020. All amounts remain subject to the $250 educator expense deduction limitation.

Deduction for Educator Classroom Expenses

Employees generally cannot deduct unreimbursed business expenses as miscellaneous itemized deductions in tax years 2018 through 2025. Despite this general rule, teachers may be able to treat some of their unreimbursed classroom expenses as an "above the line" deduction and deduct them from gross income. An eligible educator can deduct up to $250 each year for classroom expenses ( Code Sec. 62(a)(2)(D)). Deductible expenses include those for books, supplies, and computer equipment used in the classroom.

An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

COVID Act Expands Eligible Expenses

The COVID Tax Relief Act of 2020 ( P.L. 116-260) requires the Secretary of the Treasury to clarify that COVID-19 protective items used for the prevention of the spread of COVID-19 paid or incurred after March 12, 2020 are eligible educator classroom expenses. As a result, the IRS has issued a safe harbor revenue procedure.

Under the revenue procedure, COVID-19 protective items include face masks; disinfectant for use against COVID-19; hand soap; hand sanitizer; disposable gloves; tape, paint, or chalk used to guide social distancing; physical barriers (such as clear plexiglass); air purifiers; and other items recommended by the Centers for Disease Control and Prevention (CDC) to be used for the prevention of the spread of COVID-19.

The revenue procedure applies to such unreimbursed expenses paid or incurred after March 12, 2020. All amounts remain subject to the $250 educator expense deduction limitation.

With some areas seeing mail delays, the IRS has reminded taxpayers to double-check before filing a tax return to make sure they have all their tax documents, including Form W-2, Wage and Tax Statement, and Forms 1099. Many of these forms may be available online. However, when other options are not available, taxpayers who have not received a W-2 or Form 1099, or who received an incorrect W-2 or 1099, should contact the employer, payer, or issuing agency directly to request the documents before filing their 2020 tax returns.

With some areas seeing mail delays, the IRS has reminded taxpayers to double-check before filing a tax return to make sure they have all their tax documents, including Form W-2, Wage and Tax Statement, and Forms 1099. Many of these forms may be available online. However, when other options are not available, taxpayers who have not received a W-2 or Form 1099, or who received an incorrect W-2 or 1099, should contact the employer, payer, or issuing agency directly to request the documents before filing their 2020 tax returns.

Taxpayers who are unable to reach the employer, payer, or issuing agency, or who cannot otherwise get copies or corrected copies of their Forms W-2 or 1099, must still file their tax return on time by the April 15 deadline (or October 15, if requesting an automatic extension). They may need to use Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. to avoid filing an incomplete or amended return. If the taxpayer does not receive the missing or corrected form in time to file their return by the April 15 deadline, they can estimate their wages or payments made to them, as well as any taxes withheld.

If the taxpayer receives the missing or corrected form after filing and the information differs from their previous estimate, the taxpayer must file Form 1040-X, Amended U.S. Individual Income Tax Return.

Unemployment Benefits

Taxpayers who receive an incorrect Form 1099-G, Certain Government Payments, for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. Taxpayers who are unable to obtain a timely, corrected form should still file an accurate tax return, reporting only the income they received.

The IRS has highlighted how corporations may qualify for the new 100-percent limit for disaster relief contributions, and has offered a temporary waiver of the recordkeeping requirement for corporations otherwise qualifying for the increased limit. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the limit, to up to 100 percent of a corporation’s taxable income, for contributions paid in cash for relief efforts in qualified disaster areas.

The IRS has highlighted how corporations may qualify for the new 100-percent limit for disaster relief contributions, and has offered a temporary waiver of the recordkeeping requirement for corporations otherwise qualifying for the increased limit. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (P.L. 116-260) temporarily increased the limit, to up to 100 percent of a corporation’s taxable income, for contributions paid in cash for relief efforts in qualified disaster areas.

Qualified Disaster Areas

Under the new law, qualified disaster areas are those in which a major disaster has been declared under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This does not include any disaster declaration related to COVID-19. Otherwise, it includes any major disaster declaration made by the President during the period beginning on January 1, 2020, and ending on February 25, 2021, as long as it is for an occurrence specified by the Federal Emergency Management Agency as beginning after December 27, 2019, and no later than December 27, 2020. See FEMA.gov for a list of disaster declarations.

The corporation must pay qualified contribution during the period beginning on January 1, 2020, and ending on February 25, 2021. Cash contributions to most charitable organizations qualify for this increased limit, but contributions made to a supporting organization or to establish or maintain a donor advised fund do not qualify. A corporation elects the increased limit by computing its deductible amount of qualified contributions using the increased limi,t and by claiming the amount on its return for the tax year in which the contribution was made.

Substantiation

The 2020 Taxpayer Certainty Act, which was enacted December 27, 2020, added an additional substantiation requirement for qualified contributions. For corporations electing the increased limit, a corporation's contemporaneous written acknowledgment (CWA) from the charity must include a disaster relief statement, stating that the contribution was used, or is to be used, by the eligible charity for relief efforts in one or more qualified disaster areas.

Because of the timing of the new law, the IRS recognizes that some corporations may have obtained a CWA that lacks the disaster relief statement. Accordingly, the IRS will not challenge a corporation's deduction of any qualified contribution made before February 1, 2021, solely on the grounds that the corporation's CWA does not include the disaster relief statement.

The IRS has announced that tax professionals can use a new online tool to upload authorization forms with either electronic or handwritten signatures. The new Submit Forms 2848 and 8821 Online tool is now available at the IRS.gov/TaxPros page. The new tool is part of the IRS's efforts to develop remote transaction options that help tax practitioners and their individual and business clients reduce face-to-face contact.

The IRS has announced that tax professionals can use a new online tool to upload authorization forms with either electronic or handwritten signatures. The new Submit Forms 2848 and 8821 Online tool is now available at the IRS.gov/TaxPros page. The new tool is part of the IRS's efforts to develop remote transaction options that help tax practitioners and their individual and business clients reduce face-to-face contact.

Here are a few highlights related to the new online tool:

• The Submit Forms 2848 and 8821 Online has "friendly" web addresses that can be bookmarked: IRS.gov/submit2848 and IRS.gov/submit8821.
• Authorization forms uploaded through this tool will be worked on a first-in, first-out basis along with mailed or faxed forms.
• To access the tool, tax professionals must have a Secure Access username and password from an IRS account such as e-Services. Tax professionals without a Secure Access username and password should see IRS.gov/SecureAccess for information they need to successfully authenticate their identity and create an account.
• Forms 2848 and 8821 and the instructions are being revised. Versions dated January 2021 are available. The prior version of both forms will be accepted for a period of time.
• Tax professionals may use handwritten or any form of an electronic signature for the client or themselves on authorization forms submitted through the new online tool. Authorization forms that are mailed or faxed must still have handwritten signatures.
• Tax professionals must authenticate the identities of unknown clients who signed the authorization form with an electronic signature in a remote transaction. IRS Frequently Asked Questions (at https://www.irs.gov/tax-professionals/submit-forms-2848-and-8821-online#2848-8821-faqs) provide authentication options for individual and business clients.
• For business clients, in addition to authenticating the taxpayer, tax professionals must also verify that the individual has a covered relationship with the business.
• Tax professionals entering the tool for the first time must accept the terms of service. This is a one-time entry.
• The tool will ask a series of questions that a user must answer to correctly route the forms to the proper Centralized Authorization File (CAF) unit.
• The client’s taxpayer identification number must be entered before the tax professional selects the authorization file for upload.
• Once the uploaded file is visible, the tax professional selects "submit" to send the file to the CAF.
• Tax professionals can use various file formats, including PDF or image files such as JPG or PNG. Only one file may be uploaded at a time.
• The word "success" will appear if the submission goes through. The tool then gives tax professionals the option to upload another file without the need to go through secure access again.
• Tax professionals can also view an "Uploading Forms 2848 and 8821 with Electronic Signatures" webinar, at https://www.irsvideos.gov/Webinars/UploadingForms2848And8821WithElectronicSignatures.

The tool is intended to be a bridge until an all-digital option launches in the summer of 2021. The IRS has plans to launch the Tax Pro Account in 2021 which will allow tax professionals to digitally sign third-party authorizations and send them to the client's IRS online account for digital signature.

The IRS has urged taxpayers to e-file their returns and use direct deposit to ensure filing accurate tax returns and expedite their tax refunds to avoid a variety of pandemic-related issues. The filing season opened on February 12, 2021, and taxpayers have until April 15 to file their 2020 tax return and pay any tax owed.

The IRS has urged taxpayers to e-file their returns and use direct deposit to ensure filing accurate tax returns and expedite their tax refunds to avoid a variety of pandemic-related issues. The filing season opened on February 12, 2021, and taxpayers have until April 15 to file their 2020 tax return and pay any tax owed.

"The pandemic has created a variety of tax law changes and has created some unique circumstances for this filing season," said IRS Commissioner Chuck Rettig. "To avoid issues, the IRS urges taxpayers to take some simple steps to help ensure they get their refund as quickly as possible, starting with filing electronically and using direct deposit," he added.

Telecommuting not only offers employees flexibility, but accommodates lives that can often be hectic. While employees love the lifestyle and family/home advantages of telecommuting, the potential improvement to the bottom line is what appeals to employers.

Telecommuting not only offers employees flexibility, but accommodates lives that can often be hectic. While employees love the lifestyle and family/home advantages of telecommuting, the potential improvement to the bottom line is what appeals to employers. For example, turnover may decrease as satisfied employees are less likely to jump ship; absences may decrease since inclement weather and sick children do not prevent a home-bound employee from working; and overhead is reduced as less office space and support staff are required. Employees also enjoy financial benefits as they find their expenses for clothing, lunch and commuting are drastically reduced.

Tax implications of telecommuting

Although it may not be a top consideration as you and your employees contemplate the desirability of telecommuting, the question should nevertheless be addressed: what is the tax effect of such an arrangement?

Employer

If your employees telecommute, you probably won't feel a thing. The employee is paid just as he would be if he were on-site; the collection and payment of employment taxes will still be your responsibility as the employer; supplies and computer that you provide will still be deductible as an ordinary and necessary business expense.

Employee

But what about a telecommuting employee? Can telecommuting lead to an increase or decrease in net income? A change in deductions? An increase in the amount and types of required recordkeeping? The answer is yes... to all of the above.

Home office deduction. A discussion of telecommuting deductions should begin with the telecommuter's home office. A home office offers not only the possibility of a tax deduction in and of itself; it also affects the employee's ability to deduct other items that he may provide in order to do his job, such as computers and peripherals.

Strict requirements are applied by the IRS to home offices: expenses of the office are deductible only if certain conditions are met. The area used for business must be used (1) for the convenience of his employer and (2) regularly and exclusively as a principal place of business (or as a place to meet with clients or customers, but that will not usually be the case for a telecommuting employee).

• Convenience of the employer. When is an employee's home office used for the "convenience of the employer"? Courts, taxpayers and the IRS have struggled with this issue. The U.S. Supreme Court has said that it is a response to a business necessity. This test is satisfied if it is the employer who wants the arrangement. It is possible, however, that if it is the employee who asks for telecommuting, the IRS will conclude that the arrangement is not for the convenience of the employer. If your employee plans to take a home office deduction, it will be easier for him to meet the test if your records document that you requested the arrangement or that you mutually decided that telecommuting was preferred.

• Principal place of business. If the convenience of the employer test is met, the employee still has to show that his home office is his principal place of business. If he strictly telecommutes, this should not be a problem. If he alternates between his home office and your office location, he will meet this test if (1) he uses his home office for administrative and management activities related to the business and (2) there is no other place where he conducts substantial activities of this type. If this test doesn't produce a clear answer, the determination will have to be made based on (1) which location he spends more time at and (2) the relative importance of the business activities he conducts at both.

If the home office qualifies for deduction, all of the expenses relating to the office and its use may be deductible. These expenses include direct expenses, such as repairs to the room, installation of carpeting, etc. and indirect expenses, which relate to the office as part of the entire house, such as utilities, rent or mortgage interest, real estate taxes, etc. If the employee's income from the business use of his home equals or exceeds total business expenses, all of the expenses can be deducted.

Deducting computers and peripherals. How a telecommuting employee treats computers and related equipment depends on whether these items are the property of the employer or the employee.

• Supplied by employer. If the employer supplies them, he is entitled to deduct the cost. The tax result to the employee is less clear. It is possible, and in fact most likely, that the items will simply be treated as any other untaxed supplies and equipment provided to on-site employees to do their job, like paper and pens and a desk.

Alternatively, although it is difficult to support an argument that an employee's use of a computer in doing business for his employer should be treated as a fringe benefit, this is relatively new territory for the IRS and it has not officially tackled the issue. If employee non-office business use of employer-provided equipment is determined to be covered by the Internal Revenue Code, it seems likely that it would be treated as an excludable working condition fringe benefit. If so, employees will have to substantiate their business use in order to qualify for the exclusion. And what about an employee's personal use of the employer's computer? If the employee who uses an employer-provided computer can substantiate his business use of the computer and if his personal use is minimal, that benefit may be a de minimis fringe benefit he can exclude from taxation.

• Supplied by employee. If the computer is supplied by the employee, he can expense or depreciate the computer if it is both (1) required as a condition of employment and (2) used for the convenience of the employer. Qualifying for the home office deduction operates somewhat as a safe harbor for computer-related deductions. If the employee couldn't satisfy the requirements for a deductible home office, he will have to substantiate his business use in order to depreciate the computer and/or deduct related expenses. Substantiation requires the employee to keep adequate records documenting the time and amount of the business use, the date of expenditure or of use of the computer, the business purpose of the use of the computer, and the amount of each expenditure respecting the computer, such as the acquisition cost. If he met the requirements for taking a home office deduction, however, he does not have to substantiate the business use of the computer. Regardless, if the computer is not acquired or used by the employee as a condition of his employment and for the convenience of his employer, he can't depreciate or expense it. In addition to these requirements, computer expenses, just like all other business expenses, must be ordinary and necessary.

If the employee does use the computer for the employer's convenience and as a condition of his employment but can't meet the requirements for a home office deduction and must substantiate his business use in order to depreciate or deduct his computer, the amount deductible will be that proportion of expenses that correlates to the business use of the computer. The depreciation method available to the telecommuting employee will depend on whether the computer or other related equipment is used more or less than 50% for business. If more than 50%, he can use MACRS 200% declining balance depreciation for the business-use portion of the property plus that portion of the computer he personally used in the production of investment, royalty or rental income. If business use was less than 50%, the employee is limited to the straight-line method of depreciation. If the employee wants to expense the computer, he can only do so if its business use was more than 50%, and then he can expense only that portion of the property that was allocated to business use.

Dealing with reimbursed expenses. What about employer-reimbursed expenses? A telecommuting employee may be reimbursed for utilities, phone expenses or similar charges related to his home office and may be supplied with office materials or other supplies. All of these amounts will be considered either (1) employer owned items used in performing the employer's work and not income to the employee or (2) working condition fringe benefits and tax-free to your employee if he could deduct them as ordinary and necessary business expenses if he had paid them himself. In order to categorize these amounts as working condition fringes, the employee must be able to establish his home office as his principal place of business.

Telecommuting is increasing in acceptance and favor as a work option providing significant benefits to employee and employer alike. As its use expands, employers and employees should be aware that there is more to telecommuting than reduced costs and a more relaxed lifestyle. Careful and creative tax planning will help avoid any surprises or pitfalls.

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

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

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

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

First-in, first-out (FIFO)

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

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

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

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

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

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

Specific identification

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

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

Mutual funds

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

Securities received in reorganization

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

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

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

Rising healthcare costs affect small businesses

If you are like most employers today, you have been dealing with the sting of rising prices for health benefits for some time. As a matter of economic survival, many small businesses have had to pass on at least some of the cost of providing health, dental and prescription benefits to their employees. As the prices continue to rise to fund these benefits, employees have been required to pay an increasing share of these costs. Establishing a cafeteria plan can be a way to make this problem more palatable for your employees at relatively little cost to your business.

Cafeteria plans defined

Technically, a cafeteria plan is a program through which you can offer your employees a choice between two or more "qualified benefits" and cash. The plan must be set forth in a written document and it can only be offered to employees. Depending on what you want to accomplish through a cafeteria plan, the plan can vary from being extremely simple (e.g., premium conversion plans) to being somewhat more complex as more features are added (e.g. flexible spending accounts).

Premium conversion plans: Popular and simple

A very simple type of cafeteria plan that is very popular among small to mid-size employers is sometimes referred to as a "premium conversion" plan. Establishment of a premium conversion plan would not require you to provide any significant additional funding for benefits other than what you are currently spending.

Here's how it works: through the structure of a cafeteria plan, you can offer your employees the ability to use pre-tax dollars to pay the portion of premiums you require them to contribute for their health, dental, and prescription benefits (including the cost of dependent benefits). Using pre-tax dollars to pay for their portion of health care premiums saves your employees money and will result in more net dollars in their paychecks. It may seem surprising, but your employees will appreciate even this small dollar-saving benefit.

With a premium conversion plan, the only costs to you as an employer is the expense of hiring an attorney or other benefits professional to draft a cafeteria plan document for you and the expense of making the small adjustment to your system of payroll deductions so that the employees' portion of the health benefit premiums is deducted from their gross pay rather than their after-tax pay.

Flexible spending accounts

Another benefit that can be made available under a cafeteria plan is a flexible spending account option. These accounts permit employees to have a specific amount withheld from each paycheck and set aside to be used for reimbursement of medical expenses not covered by the group health insurance plan or to be used to cover dependent care expenses. Keep in mind, however, that if you want to establish flexible spending accounts through a cafeteria plan, it will involve more ongoing administrative expense on your part than a simple premium conversion cafeteria plan.

Additional options

You also may want to offer your employees a cafeteria plan which provides them a set dollar value that each employee can take either as additional salary or choose to spend on a variety of benefits, e.g., health insurance, dental coverage, dependent care, or retirement plan contributions. With this type of plan, all benefits other than additional salary are not taxable to the employee. This type of plan can provide desirable flexibility to your employees, but will also cost more to establish and administer.

As you make the determination regarding what type of benefit program you would like to offer your employees, there are many other options that should be taken into consideration. If you require additional guidance, please contact the office for a consultation.

An employee stock ownership plan (ESOP) is a retirement plan option that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

An employee stock ownership plan (ESOP) is a retirement plan option that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

The Internal Revenue Code offers great benefits for tax-qualified retirement plans such as ESOPs. Employers can get a tax deduction for contributions made on employee's behalf to the plan, while employees do not have to pay immediate income tax on these contributions. An employee stock ownership plan (ESOP) is a very specialized type of qualified retirement plan that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

Inadequate planning can be costly

Unfortunately, it is all too common for owners of closely held businesses to approach retirement age without having an adequate business succession plan in place that will allow them to comfortably retire and enjoy the fruits of their labor. In many cases, these businesses may be very successful but not readily marketable due to heavy dependence on the input from the business owners on an ongoing basis. In these situations, the owner may find it very difficult to sell the business for its full value and due to inadequate planning, may have to sell the business for a fraction of its worth at retirement.

ESOP to the rescue

If you are a business owner considering selling your business at retirement and are concerned about getting the full fair market value for your business, the answer may be right in front of you. In many cases, the most logical buyers for your business may be your key employees. These key employees are familiar with your business including customers, vendors, and processes as well as your long-term vision for the business. They have an excellent chance to continue fostering the success of your business after your departure.

However, in many circumstances, your employees will not have the cash to buy your business outright and therefore, the business must, in one way or another, provide them with the means to pay the purchase price. This is a situation when an ESOP can be used as an effective planning tool to "save the day" by providing a financially effective way to help fund the sale of your business to your key employees at full market value.

Tax benefits are many

There are numerous tax benefits that are available to you as an owner to sell your business to your employees through the use of an ESOP. These benefits allow you t

These benefits mean that by using an ESOP, you can sell your business tax-free and at full value (as determined by an appraiser) to your employees who are more able to pay because they can deduct the purchase price. These tax benefits provide a mechanism for you to receive maximum value for your business in cases where there may not be any other way to accomplish this.

Benefits that keep on giving

Providing business succession to key employees through an ESOP may not only give you adequate funds on which to retire, but also can leave your family with a portfolio of liquid investments in the form of the proceeds from the tax-free stock sale of your stock back to the ESOP, instead of a business that your family may have not know-how to run nor have any desire to run. Further, an ESOP can also help if you have one or more children that want to remain active in the business, while others want to receive an equal share of the your estate and do not want to be required to remain involved in the operation of the business.

Special notes for S Corps

Subchapter S corporations have been permitted to establish an ESOP for the last couple of years. If you are operating as an S corporation and are interested in establishing an ESOP, it is important to be aware of the differences between ESOPs that can be established for standard corporations and S corporations.

An ESOP is an extremely specialized type of profit sharing or stock bonus plan and must comply with all of the requirements for any other tax-qualified retirement plan that are imposed under the Internal Revenue Code and the supporting Treasury regulations. However, an ESOP is only slightly more complicated to establish than a profit sharing or 401(k) plan. For more information about how an ESOP can be used in your business succession plans, please contact the office to schedule a consultation.

Incentive stock options (ISOs) give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

ISOs give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

How are ISOs taxed?

An incentive stock option is an option granted to you as an employee which gives you the right to purchase the stock of your employer without realizing income either when the option is granted or when it is exercised. You are first taxed when you sell or otherwise dispose of the option stock. You then have capital gain equal to the sale proceeds minus the option price, provided that the holding period requirement is met.

Note. The IRS has temporarily suspended collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

How long do I need to hold ISOs to get capital gain treatment?

To obtain favorable tax treatment, the stock acquired under an incentive stock option qualifies for favorable long-term capital gain tax treatment only if it is not disposed of before the later of two years from the date of the grant of the option, or one year from the date of the exercise of the option. If this holding period is not satisfied, the portion of the gain equal to the difference between the fair market value (FMV) of the stock at the time of exercise and the option price is taxed as compensation income rather than capital gain. In this case, you may be subject to the higher rate of income imposed on ordinary income.

For example, your employer granted you an incentive stock option on April 1, 2006, and you exercised the option on October 1, 2006, you must not sell the stock until April 1, 2008, to obtain favorable tax treatment (the later of two years from the date of the grant or one year from the date of exercise).

What key dates should I remember?

Because of the importance of receiving capital gain treatment, it is important that you keep in mind key dates such as the date of grant of the ISO and its date of exercise. These periods are measured from the date on which all acts necessary to grant the option or exercise the option have been completed. Therefore, the date of grant is treated as the date on which the board of directors or the stock option committee completes the corporate action which constitutes an offer of stock, rather than the date on which the option agreement is prepared. The date of exercise is the date on which the corporation receives notice of the exercise of the option and payment for the stock, rather than the date the shares of stock are actually transferred.

Will I be subject to alternative minimum tax?

The effect of the alternative minimum tax (AMT) on ISOs can amount to a potential trap for the unwary. This is because under the regular tax there is no tax until the stock is sold or otherwise disposed of. Under the AMT, however, the trap takes place when the ISO is exercised, since alternative minimum taxable income includes the difference between the FMV of the stock on the date the ISO is exercised and the price paid for the stock (the "ISO spread").

If you pay AMT, you are given a credit against regular income tax for the portion of the AMT attributable to ISOs and other tax preference items that result in deferral of income tax. The credit is taken in later years when no AMT is due, and may be taken to the extent that regular tax liability exceeds tentative minimum tax liability. The effect of this is that the AMT is a prepayment of tax, rather than an additional tax.

Since the AMT only applies if it is higher than your regular income tax, one strategy is to time the exercise of ISOs each year to come under the AMT exemption levels. Purely from a tax standpoint, the ideal situation is to exercise ISOs each year that would result in AMT equal to your regular tax. Of course, other factors, such as market conditions, financial needs, etc. may play a greater role in deciding when to exercise an option. If you pay high property tax or state income tax, you may find it more challenging to calculate the optimum exercise of ISOs in relation to the AMT, since both of these deductions are counted against their annual AMT exemption.

ISOs can be a nice additional employee benefit when considering a job offer. However, because the tax implications surrounding certain key trigger events related to ISOs can have a significant impact on your tax liability, we suggest that you contact the office for additional guidance.