During the last week of 2020, the president signed into law the Consolidated Appropriations Act (CAA), 2021. The act combines some $900 billion in pandemic-related relief together with a $1.4 trillion omnibus spending bill. We discuss some of the tax-related provisions of the massive legislation, even though for the most part the provisions bypass tax withholding and reporting functions.
The act does, however, extend deductibility of mortgage insurance premiums, which impacts Form 1098 reporting for tax year 2021. Also, as we head into the coming reporting season, tax reporting teams should keep an eye out for state-level guidance for nonemployee compensation reporting since the new Form 1099-NEC is outside of the Consolidated Federal/State Filing program this year. In other news, we discuss an issue raised by the Investment Company Institute (ICI) regarding investment fund tax disclosures for designated dividend distributions.
- The Consolidated Appropriations Act provides $900 billion in pandemic-related relief but has limited impact to tax reporting, except that it will require Form 1098 reporting for mortgage insurance premiums for tax year 2021.
- The ICI argues that annual tax disclosures of the tax character of certain dividend distributions posted on investment company websites should be sufficient to satisfy required tax designation of such income distributions.
- Since Form 1099-NEC is currently not part of the Consolidated Federal/State Filing Program, tax-reporting teams with nonemployee compensation payment reporting obligations will need to monitor, more so than in prior years, state-level guidance on nonemployee compensation reporting.
1. Consolidated Appropriations Act
Enacted during the last week of 2020, the Consolidate Appropriations Act (CAA) contains some $900 billion in pandemic-related relief.
a) Big-dollar items
Among the large-dollar pandemic relief items are:
- $325 billion for small businesses, which includes $284 billion for expanding forgivable loans under the Paycheck Protection Program, and making expenses incurred using such funds deductible;
- New $600 direct stimulus checks to individuals, estimated to cost $166 billion;
- $120 billion for an extension of increased federal unemployment benefits;
- Some $82 billion in aid for schools and universities;
- $69 billion for vaccine procurement and distribution, testing and healthcare providers; and
- $25 billion for state and local governments for rental assistance programs.
b) Stimulus checks and charitable donations
With respect to stimulus checks under the CAA, individuals receive a reduced $600 instead of $1200 under the CARES Act passed last spring. However, they also receive $600 per qualifying child instead of $500 per child under the CARES Act.
Same income thresholds apply as under the CARES act. Benefits are being reduced by 5 percent for adjusted gross income above $75,000 for individuals, $112,500 for heads of household, and $150,000 for married couples filing jointly.
Given the generally lower payment amounts, eligibility for the CAA stimulus checks will mostly phase out at lower income levels than under the CARES Act (e.g, $87,000 for individuals with no qualifying children).
For individuals, the CAA also provides a $300 ($600 for joint filers) above-the-line deduction for charitable contributions for 2021. This deduction is allowed even if the filer does not itemize deductions for purposes for return filing.
The CARES Act had provided a $300 above-the-line deduction for charitable contributions for 2020, but joint filers appear to be limited to $300 rather than $600. In either case, the deduction does not apply to contributions to certain supporting organizations and donor-advised funds.
c) Wage withholding and mortgage insurance premiums
In August 2020, President Trump signed a memorandum that allowed employers to defer withholding and deposit of the employee portion of certain payroll taxes. Under the memorandum, the deferred taxes were payable between January 1 2021 and April 30 2021. The CAA extends the repayment period to December 31 2021.
As part of the broader spending legislation, the CAA also extended certain credits and deductions that normally are extended annually. Some of these were made permanent; others received extensions of one year or more.
Among the extensions was the deduction for mortgage insurance premiums under section 163(h)(3)(E) for the 2021 tax year. This extension will trigger Form 1098 reporting for MIPs for tax year 2021, filed in 2022.
2. ICI letter on disclosing tax character of dividend distributions on fund websites
In December, the Investment Company Institute submitted a letter to the IRS requesting confirmation that posting information relating to the tax character of certain dividend distributions on investment company websites would be sufficient to satisfy regulated investment company (RIC) income designation rules.
Under section 852 and certain other provisions of the code, a RIC can designate a dividend distribution as falling within a particular distribution type if the distribution satisfies the criteria for that type of dividend.
Such distributions may be designated, for example, as a capital gain dividend, an exempt-interest dividend or even an interest-related dividend for NRA withholding purposes.
In each case, there is a general requirement that the RIC reports the dividend as such in “written statements furnished” to its shareholders.
For most shareholders, this is accomplished through Form 1099 reporting. However, certain shareholders, such as corporations, tax-exempt entities and retirement plans, are exempt from such reporting. Because of this, RICs would generally provide such tax disclosures in annual reports that are provided to shareholders even though often this information is also posted on the RICs’ websites.
The ICI letter mentions a couple of securities law rule changes that may affect the current delivery procedure for these tax disclosures.
First, ICI notes that as of January 1 2021, RICs may be able to rely on SEC Rule 30e-3 for providing shareholder reports. Under this new rule, if the RIC meets certain criteria, it would be able to file its annual report with the SEC and only mail shareholders a postcard notifying the shareholder that the shareholder report is available on the RIC’s website.
In addition, the SEC has also recently proposed a change to shareholder disclosures where an investment fund would produce a streamlined report, perhaps only several pages, to shareholders that would contain basic shareholder-relevant information but may not include tax disclosures.
In its letter, the ICI noted that with these changes, tax disclosures may no longer be included in the usual shareholder mailings or reports. Therefore, if mailing of tax statements were required, RICs may have to conduct separate tax mailings.
The ICI requested that the IRS provides guidance confirming that a RIC’s placement of tax designation information on its website would satisfy the requirement of furnishing written statements to shareholders with respect to its dividend distributions for tax-designation purposes.
The request is consistent with the recent trend towards further digitization of communications between financial institutions, the IRS and investors. We will likely see more issues relating to electronic tax disclosures/reporting and communications arise. The past year’s experience with remote communications during the COVID-19 pandemic will only accelerate the trend.
3. Monitoring state-level guidance for nonemployee compensation reporting
New Form 1099-NEC will be used for tax year 2020, to be filed in 2021. The new form is used for reporting nonemployee compensation that used to be reported in Box 7 of Form 1099-MISC.
A number of states have in the past relied on Form 1099-MISC Box 7 reporting to determine nonemployee compensation income earned by residents. Previously, Form 1099-MISC was included in the Combined Federal/State Filing Program. Withholding agents filing electronically via the FIRE platform could designate the Form 1099-MISC to be included as part of the CF/SF Program and have the information shared with participating states.
For this year, however, Form 1099-NEC is not part of the CF/SF Program. Moreover, a number of states have yet to provide updated guidance on how nonemployee compensation is to be reported given the form changes. Reporting teams responsible for nonemployee compensation reporting will need to closely monitor state-level developments in this regard as we head into the 2021 reporting season.
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