Tax Day: What you need to know

As the tax deadline approaches, it is important to be aware of changes affecting individual and business filings. Below are key tips to keep in mind as you file your 2021 taxes and plan for 2022.

Cryptocurrencies, NFTs and digital assets

IRA contributions and withdrawals

Business meal deductions

Charitable contributions

Teleworking

Employee Retention Credit

Cryptocurrencies, NFTs and digital assets

  • Cryptocurrencies, non-fungible tokens (NFTs) and other digital assets are treated as property for tax purposes, rather than as fiat currency. Meaning that anytime cryptocurrency is sold for cash or exchanged for goods, services or other cryptocurrencies, there is a tax event. For example, purchasing an NFT with cryptocurrency and selling an NFT are two separate taxable events.
  • Cryptocurrency is not subject to the same wash sale rules as stock investments. Investors can take advantage of this by selling their cryptocurrency holdings at a loss and repurchasing them at the same price to harvest tax losses to offset other sources of income.
  • Applying wash sales to cryptocurrency, and other digital assets, was included in the Build Back Better Act. Taxpayers should be wary of potential retroactive legislation in 2022 that would close the loophole on this type of transaction for the 2021 tax year.
  • Individual taxpayers who own cryptocurrency or other digital assets should be aware of the question on page 1 of Form 1040 asking whether they have a financial interest in any virtual currency. This should be answered appropriately when filing a tax return. 

IRA contributions and withdrawals

IRAs continue to be one of the few tax-deferred strategies for taxpayers of all income levels.

  • Contributions: Taxpayers can take advantage of several types of IRAs, depending on income levels, and can contribute until April 18, 2022 for the 2021 tax year.
    • Traditional IRA contributions may be fully, partially, or non-deductible when made, providing tax-deferred, compounded growth over time.
    • Roth IRA contributions, which are non-deductible today but provide tax-free (vs. tax-deferred) growth over time, if certain conditions are met.
    • A “back-door” Roth IRA contribution is a strategy for high income taxpayers in which they first contribute to a traditional, non-deductible IRA and then immediately convert it to a Roth IRA.
  • Withdrawals: Taxpayers can, and sometimes must, withdraw IRA funds from all the above types of IRA.
    • Taxation depends on the type of contributions made, the age of the taxpayer and other factors.
    • At age 72, certain types of IRAs have “required minimum distributions” or RMDs, which are based on the IRS Uniform Lifetime Table and the value of the IRA as of the prior December 31.
    • There are strategies to reduce the tax impact of IRA withdrawals such as avoiding taking two distributions in the initial required year, transferring up to $100,000 of the RMD directly to charity, and using the once a year rollover strategy to put the funds back into the IRA within 60 days. 

Business meal deductions 

  • The Consolidated Appropriations Act, 2021, increased the business meal deduction for the cost of food and beverages provided by a restaurant from 50% to 100% in 2021 and 2022, if certain conditions are met.
  • The IRS provided guidance on when the 100% deduction for business meals is available, and when the 50% limitation on the deduction for food and beverages applies.
  • Taxpayers that incur trade or business expenses for food or beverages may deduct 100% of those expenses if they purchase food or beverages from a business that prepares and sells food or beverages to retail customers for immediate consumption.
  • The new rule excludes employer-operated eating facilities and certain other eating facilities on an employer’s premises. 

Charitable contributions

  • For taxpayers who don’t itemize deductions in 2021, eligible individuals can deduct up to $300 of qualified cash charitable contributions as an "above-the-line" deduction. The maximum deduction for married individuals filing joint return is $600. The following cash contributions cannot be deducted above the line:
    • Carryovers from prior years.
    • Contributions made to private foundations or charitable remainder trusts.
    • Contributions intended to establish or maintain Donor Advised Funds. 
  • For taxpayers who itemize deductions in 2021, eligible cash contributions to qualified charitable organizations are limited to 100% of AGI.

Teleworking

The rise in telecommuting during the COVID-19 pandemic has transformed into a long-term increase in remote work, a trend that has tax implications for employers and employees, as workers perform their jobs across state and jurisdictional lines.

  • For a business, having employees work in new jurisdictions or states could create nexus for income or sales tax purposes.
  • Telecommuting employees can impact a business's apportionment — changes in worker location could affect how service receipts are sourced via cost of performance, or they could alter an employer’s payroll factor in a state.
  • Employers may have to deal with additional state and local withholding obligations resulting from employees telecommuting from different jurisdictions.
  •  “Convenience of the employer rules” can require an employer operating in a state to withhold tax on the income of their employees when they work out of state instead of in their assigned in-state office. If the state deems the remote work arrangement to be for the employee’s convenience rather than out of necessity, the state tax applies to the employee’s income earned while working from home outside the state.
  • Employees face potentially complex tax compliance requirements for remote work, as they may be subject to double-taxation in some instances where convenience of employer states and resident states both claim the ability to tax the same income.

Employee Retention Credit

  • Taxpayers who received Paycheck Protection Program (“PPP”) loans cannot use wages applied to PPP loan forgiveness for the Employee Retention Credit (“ERC”).
  • Taxpayers who have claimed the ERC cannot use ERC wages as eligible wages for the Research Credit.
  • Taxpayers who claimed the ERC must add back the amount of the credit into taxable income for the year in which the wages were paid.
  • Taxpayers have three years from filing of an original Form 941 to claim the ERC by amending Form 941. Claiming the ERC after the year’s income tax return has been filed may also require the income tax return to be amended to adjust taxable income for the ERC claimed.