From: Nitti Gritty Tax By Tony Nitti @ Forbes - Wednesday Apr 07, 2021 02:32 pm
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Nitti Gritty Tax
Tony Nitti
Tony Nitti
Senior Contributor
Each spring, when the weather in Colorado finally warms enough for me to take the cover off my old jeep, I'm reminded of two things:
  • Tax season is almost over! But much, much more importantly...
  • If you want to buy something but your significant other advises you not to, you probably shouldn't buy it. But if they say, "You do what you think is right," man, you REALLY shouldn't buy it.
I've had the jeep for five years now. I had driven one just like it in my early twenties, and two decades later, I became determined to recapture a small taste of my lost youth. After a few months of searching, I found her listed locally on Craigslist for dirt cheap, and quickly made an appointment to meet the owner. I'd been married for 10 years at that point, and if there's one thing I'd learned during that time, it's that the problem with most couples is one of communication; specifically, too much communication. So I said nothing of my plans for fear that my wife would not welcome my mid-life crisis into the driveway.

The test drive went great, aside from the knocking sound that came with each rotation of the front left wheel. It was disconcerting enough that I wanted to run it by a mechanic, but the seller explained that he needed to move quickly -- parking in the Aspen core costs a small fortune -- and he assured me that once the car got up to speed on the highway, the sound would disappear. I'm a trusting fellow, so I told him we had a deal and said I'd be back the next day.

Once home, I broke the news to my wife. Predictably, it didn't go well, as she chose to focus on the practical aspects of the purchase that I had completely ignored:
There's nowhere to park it. It's unsafe for the kids. For that price, it's probably a piece of sh*t.

I pled my case. Boy, did I
ever plead my case: The kids will love it. The dog will love it. The guy seems honest, I'm sure it will run just fine.

Eventually, my wife threw up her hands and said it was my decision to make. Feeling empowered by my renewed sense of independence, I promptly asked her for an advance on my allowance, took the bus back to Aspen to pick up the jeep, and began the maiden voyage home. I pulled onto the highway to find that the seller was right...the knocking sound was gone!

As I drove along, I day-dreamed about removing the doors and dropping the windshield, and thought about how much fun I'd have with my new toy. As I laughed to myself about my wife's unfounded worries, I suddenly found myself...
tilted. Next came a terrible scraping sound, and a flurry of sparks...lots and lots of sparks. And then, in my peripheral vision, I watched my front left wheel rocket across four lanes of highway.

I hadn't made it
6 miles, and the car my wife warned me against buying was already reduced to three wheels and tethered to a tow truck. I didn't even bother to make the humiliating call; I simply texted her a photo of the jeep on the side of the road, accompanied by those three little words every spouse longs to hear above all others:

You were right.

There is, however, a happy ending. Feeling a twinge of guilt after nearly killing me, the seller paid to repair the damages, and half a decade later, the jeep is somehow still running. And while my wife may have never warmed to it, one member of my family is a VERY big fan.
Jeep Nitti
IRS Issues Guidance on Q1 and Q2 2021 Employee Retention Credits
Seventeen pages. Since December 27, 2020, the entire tax community has been trying to make sense of the 2021 Employee Retention Credit (ERC), and after three months of waiting, the IRS tries to satiate us with seventeen pages of largely useless guidance. If you're feeling frustrated, you're not alone.

In case you're new around here, let's start with a bit of background. In March of 2020, the CARES Act gave birth to the ERC, a fully refundable payroll credit of up to $5,000 per employee for 2020 only. In order to claim the credit, however, the 2020 calendar year had to first be broken into quarters, and a business had to identify at least one quarter in which either 1) business was fully or partially suspended due to government orders, or 2) the business experienced a precipitous drop in gross receipts compared to the same quarter in 2019.

But the thing was...nobody cared. And that's because as originally enacted, businesses couldn't claim the ERC if they opted instead to borrow a Paycheck Protection Program loan, and pretty much every business that was eligible to do so went the PPP route.

Fast forward to December 27, 2020, when Congress passed the Consolidated Appropriations Act, 2021, and did two things: 1) Retroactively allowed businesses to claim the ERC even if they had borrowed a PPP loan (you can read about those changes here), and 2) brought back the credit for the first half of 2021 in a much more advantageous manner (you can read about THOSE here).

Since that day, the tax industry has been scrambling to identify those who can benefit from the retroactive credit while also strategizing to maximize the ERC for 2021. But we've been doing it in what has effectively been the Wild West, because even questions that are fundamental in computing the credit remain unanswered, including the BIG THREE we are all waiting on:
  • Are wages paid to greater than 50% owners eligible for the credit?

    If I had a nickel for every time someone emailed me this question, I could afford to stop shamelessly and relentlessly shilling this newsletter. It is absolutely amazing that a full year after the ERC was created, we still don't have a definitive answer.

    The statute says rules "similar" to Section 51(i) apply to the ERC, which would be helpful if anyone could make sense of Section 51(i). While these rules seem to make clear that wages paid to a person related to a more than 50% owner are ineligible for the ERC -- with the IRS echoing this sentiment in their published FAQs -- the statute is silent as to the treatment of the owners themselves. I can tell you my position (>50% shareholders are out), but if you don't want to trust me (you should not), there are no shortage of great #taxtwitter threads from smarter guys like Ed Zollars (@edzollars) to assist you in your decision making.

    I formulated my position, in part, based on the 2015 committee reports to the extension of the Section 51 work opportunity tax credit, which states:

    The work opportunity tax credit is not allowed for wages paid to a relative or dependent of the taxpayer. No credit is allowed for wages paid to an individual who is a more than fifty percent owner of the entity.

    If the statutory text of Section 51 were only so clear, we wouldn't be in this mess. But as MY GOOD PAL Damian Martin at BKD says about interpreting Section 51(i), "it's all about where you place the commas in your brain."
  • When we compute the 2019 vs. 2020 gross receipts for purposes of the ERC, do PPP proceeds received or forgiven in 2020 count towards the test?

    If a business was not fully or partially shut down by government order, to start the clock on ERC eligibility in 2020, for at least one quarter during the year, gross receipts must have dropped at least 50% from 2020 to the same quarter in 2019. But what if a business received a PPP loan in 2020? Are those proceeds treated as receipts when received? (highly unlikely) But what about when the amounts are forgiven? (much more likely).

    I'm fairly confident my poor coworker Amie Kuntz has lost several years off her life trying to chase down the answer to this question, and I agree with her ultimately conclusion that one doesn't exist. We know PPP proceeds aren't gross income pursuant to Section 1106(i) of the CARES Act-- either when received or forgiven -- but does that necessarily mean they aren't included in gross receipts under Reg. Section 1.448-1T(f)? You be the judge, because I've changed my mind six times since Friday.
  • Are part-time employees combined to create "full time equivalents" for purposes of measuring the number of "full-time employees" in 2019?

    The number of full-time employees an employer had in 2019 is critical to the computation of the ERC. If the amount exceeded 100 in 2019, the credit can only be claimed in 2020 for wages paid to employees NOT to work. In 2021, that 2019 FTE limit increases to 500. We know that the determination of full-time employees is determined under Section 4980H, but a huge point of confusion is whether part-time employees are combined to create "full-time equivalents" (as defined under Section 4980H(c)(2)(e)) and added to the "full-time employees" (as determined under Section 4980H(c)(4). I argue they are not, and I get there through the statutory construction of Section 4980H, which to me, limits the concept of full-time equivalents under Section 4980H(c)(2)(e) to determining an applicable large employer for purposes of the Section 4980H penalty. That concept, I believe, should NOT apply for purposes of other provisions that reference Section 4980H, like the ERC.
Does Notice 2021-23 address any of these questions? And if not, does it tell us anything useful at all?

Well, for starters, let's make clear what the Notice DOESN'T deal with: it doesn't discuss the 2020 ERC -- that was covered in Notice 2021-20 -- nor does it provide guidance on the most recent revision to the ERC, the extension of the credit from July 1, 2021 to December 31, 2021 by the American Rescue Plan. Instead, the Notice is limited to providing guidance on the credit as it exists for the first six months of 2021, as extended by the Consolidated Appropriations Act, 2021.

Here are the highlights; but as I've said...don't expect too much.
Previous-Quarter Election for Gross Receipts

As opposed to the 50% drop in receipts required to kick off an eligible quarter in 2020, for purposes of the 2021 credit, a 20% drop is necessary when comparing one of the first two quarters in 2021 to the same quarter in 2019. The statute, however, permits a business to determine its gross receipts test for one of the first two quarters of 2021 by comparing the immediately preceding quarter with the same quarter in 2019.

To illustrate, to determine eligibility in Q1 of 2021, the business can elect to compare Q4 2020 to Q4 2019. There had been some confusion as to whether making that election in Q1 -- or NOT making the election -- locked you into the same treatment in Q2. Notice 2021-23, however, certainly seems to indicate that this is not the case; as a result, if a business had the requisite 20% drop in gross receipts from Q1 2019 to Q1 2021, the test will automatically be met in Q2 as well, because the business could make the look-back election during that quarter.

Example. In Q1 2019, X Co. had $400,000 in gross receipts. In Q1 2021, X Co. had $300,000 in gross receipts. As a result, X Co. has experienced a drop in gross receipts in excess of 20%, and Q1 is an eligible quarter for purposes of the ERC. In Q2 of 2019, X Co. had $500,000 of gross receipts. In Q2 of 2021, X Co. had $450,000 in gross receipts. X Co. has not experienced a 20% drop when comparing Q2 of 2019 to Q2 of 2021; nevertheless, X Co. may elect to determine its eligibility for Q2 by comparing Q1 2019 and Q1 2021 receipts. Because that quarter has already satisfied the test, Q2 is also an eligible quarter for purposes of the ERC.

Advanced Payment of the ERC

We know a bit more about how to cash in on the advanced ERC available to "small eligible employers" -- those with fewer than 500 FTEs in 2019 -- in the first half of 2021. These employers can elect to receive an advance payment of the ERC in an amount up to 70% of the "average quarterly wages" paid in calendar year 2019. Notice 2021-23 then defines "average quarterly wages" as those amounts included in Section 3121(a) or Section 3231(e) and determined without regard to the social security wage base.

For 2021 small eligible employers that file Form 941, average quarterly wages for the 70% advance rule are calculated by averaging the amount required to be reported on Line 5c on all Forms 941 required to be filed in 2019. For 2021 small eligible employers that file an annual federal employment tax return, average quarterly wages for the 70% advance rule are calculated by dividing the amount required to be reported on the following 2019 forms and lines by four:
  • Line 4 on the Form 943,
  • Line 4c on the Form 944,
  • The sum of the amounts in the "Compensation" columns of Line 2, "Tier 1 Employer Medicare Tax - Compensation (other than tips and sick pay)," and Line 9, "Tier 1 Employer Medicare Tax-Sick Pay," on the Form CT-1.
Full-Time Employees

Lest I come down too hard on the IRS for Notice 2021-23, it appears we DID get an answer on the 2019 FTE issue. In footnote 3, the Notice states that the FTE number is determined under Section 4980H(c)(4), rather than the whole of Section 4980H. Section 4980H(c)(4) contains only the "full-time employee," language -- i.e., an employee who, for any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. It is Section 4980H(c)(2)(E) that adds to FTEs -- solely for the purposes of the large employer penalty under Section 4980H -- "full-time equivalents" in the form of part-time employees.

As a result, I am of the opinion that this footnote lays bare the Service's position that in measuring 2019 FTEs, we only look to full-time employees. This can result in HUGE credits for 2021, because while part-time employees may not count against the FTE count, you are certainly entitled to claim the ERC on wages paid to a part-time employee. It's win-win.
At this point, it is what it is. If the IRS intended to address the >50% owner and PPP gross receipts issues, it would have done so in Notice 2021-20. Regulations don't seem to be on the agenda, so we'll remain in the unenviable position of being asked to compute what are often million dollar credits with nothing but hastily written statutory text, a couple of IRS Notices, and FAQs that can't be relied upon. It may not be ideal, but it is the new normal.
The Latest on Legislation
Biden's Build Back Better Agenda Met with Criticism from All Sides
A few hours after last week's newsletter was published, President Biden formally proposed the first piece of his Build Back Better agenda -- the American Jobs Plan -- a $2.25 trillion proposal to address infrastructure and climate change, paid for by revamping the corporate tax code. The bill would:
  • Increase the corporate rate from 21% to 28%.
  • Impose a global minimum tax of 21%, to be determined on a country-by-country basis.
  • Deny deductions to foreign corporations attempting to strip earnings out of the U.S. if their home countries have not also adopted a worldwide minimum tax.
  • Repeal the foreign-derived intangible income (FDII) deduction.
  • Eliminate deductible expenses from offshoring jobs.
  • Force large corporations to pay a minimum tax of 15% of their financial statement income. For more on what this would like like, check out Senator Elizabeth Warren's proposal below.
  • Eliminate subsidies and foreign tax credits for the fossil fuel industry, and
  • Fund the IRS in a manner necessary to enforce the above changes, to be paired with a broader enforcement initiative.
WASHINGTON, DC - APRIL 2: U.S. President Joe Biden and First Lady Dr. Jill Biden depart the White House and walk to Marine One on the South Lawn of the White House on April 2, 2021 in Washington, DC. The Bidens are spending the Easter weekend at Camp GETTY IMAGES
In the coming weeks, President Biden will also unveil the second part of his agenda -- the American Families Plan -- which will reportedly address other domestic priorities, including free community college and pre-K care, to be paid for with tax increases on individuals earning more than $400,000. The President is hoping to receive bipartisan support for at least one of the two bills, leaving the other the option of being pushed through via the streamlined budget reconciliation process, where votes from all 50 Democratic Senators will get the job done.

Early indications, however, are that bipartisan support for the American Jobs Act is a lost cause. Republican leaders have predictably panned a bill that largely reverses the corporate cuts enacted by President Trump just two years ago in the Tax Cuts and Jobs Act (TCJA), arguing it will undercut the economy. Senate Minority Leader Mitch McConnell
called the bill a "Trojan Horse" -- which, I was surprised to learn, has nothing to do with equine prophylactics -- for raising taxes and flatly stated that the bill is "not going to get support from our side."

Republican opposition was certainly anticipated, which is why most political pundits expect that if any future legislation containing tax increases is to get done, the Democrats will once again need to use the budget reconciliation process. With a slim majority in the House and NO majority in the Senate, however, Democrats would need to be unified behind the President's agenda for that process to prove fruitful, and as of the moment, there is far from universal support for the American Jobs Act from within the President's own party.

Most predictably, Senator Manchin of West Virginia -- who has long established himself as a moderate member of the party -- declared a 28% corporate rate a non-starter, arguing instead that Congress should look to broaden the base by removing preferences and loopholes. Other Democrats, however, ripped the bill for not being bold
enough, with Representative Pramila Jayapal calling the $2.2 trillion proposal "far too small."

A geographically-specific aversion to the bill then arose in the House, where eight Democrats -- seven hailing from high-tax states New Jersey and New York -- sent a letter to Treasury Secretary Janet Yellen stating that they "could not vote for a bill" that does not eliminate the $10,000 cap on deductible state and local taxes enacted as part of the Tax Cuts and Jobs Act. This creates a dilemma for the Biden administration; on the one hand, if no Republican support is to be had in the House, the President can afford only four Democratic defections, meaning he'll ultimately need to win the favor of the eight members of the "No SALT, No Deal" coalition. On the other hand, the President has built his tax proposal by arguing that the TCJA was a windfall for the rich and promising that high-income taxpayers will pay for his spending initiatives, and eliminating the SALT cap will
overwhelmingly benefit those at the top of the food chain, with 57% of the benefit ending up in the pockets of the top 1%.

Clearly, even reaching a consensus among Democrats will be no easy task, but it also won't be enough to ensure the success of the President's full agenda. Even if the President can get everyone at board, not every provision in the President's proposal would be eligible for that process. And while I'll confess that the only thing that confuses me more than parliamentarian procedure is the commercial success of Billie Eilish, it's my understanding that the President's climate change and labor union initiatives are ineligible to be included in a reconciliation bill, and will thus need to find bipartisan support and be passed through conventional measures. As a result, some have speculated that the infrastructure aspects of the American Jobs Act could be isolated, as they generally enjoy bipartisan support, with other domestic priorities and tax increases reserved for a budget reconciliation bill. And while that may sound like a feasible option, Congressional Republicans have already indicated that they won't get on board for an infrastructure bill only to be left out in the cold on subsequent partisan legislation, with Senator John Thune stating, “It’s a pretty cynical ploy to try and appeal to Republicans to vote for all that stuff, and then do reconciliation to do all the other hard stuff."

So what's the President to do? The next few months will be fascinating theater, as Democratic leaders gauge support from both sides of the aisle, and then segregate or combine aspects of the overall agenda in the manner most likely to achieve passage. That task was just made easier on Monday night, as word came down that t
he Senate parliamentarian approved the availability of a second remaining reconciliation bill at the Democrat's disposal. This is significant, because it means that rather than President Biden being reduced to stuffing every provision shunned by Republicans into one monster bill earmarked for the budget reconciliation process and running the risk that the entire proposal fails, he can instead instruct Congressional leaders to split the priorities into two bills with the hopes that at least one can earn the requisite 50 votes in the Senate.

Despite the opposition on all sides, Democratic leaders press on, with Speaker of the House Nancy Pelosi setting a deadline of July 4 to pass the President's proposals in that chamber, with the bill -- or bills -- moving to the Senate shortly thereafter.
Yellen, Wyden Seek to Reform International Taxation
President Biden isn't taking on international reform on his own. While the President has proposed increasing the minimum worldwide tax on profits of of U.S. corporations earned abroad to 21%, he is relying on Treasury Secretary Janet Yellen to ask other nations to get on board and agree to a global minimum tax rate. Such a move is viewed as necessary to prevent an exodus of U.S. operations to offshore locales should the President prove successful in increasing the tax rate on domestic corporations from 21% to 28%. The initial overtures by Yellen apparently went well, with Japanese and German leaders calling Yellen's remarks "a step toward a deal" and "a breakthrough," respectively.

Senator Ron Wyden also got involved, releasing his nine page framework for overhauling international taxation, which while an interesting read, is woefully bereft of proposed tax rates. Wyden's international framework largely mimics the President's, but there are some subtle differences that international policy wonks will want to keep track of. MY GOOD PAL Richard Rubin at the WSJ has a nice write-up on the framework here.
What's the Future of Section 199A?
For all the talk about increasing the corporate tax rate to 28%, I have yet to read a suggestion or proposal as to the fate of Section 199A. Sure, a few Republican Senators recently proposed making the provision permanent, but that's not the "fate" I'm referring to.

As a reminder, Section 199A -- which provides a deduction to owners of pass-through businesses equal to 20% of the income earned in the business -- was added to the Code as part of the TCJA
solely because the corporate rate was reduced from 35% to 21% by the same legislation.

The idea was to preserve the historical 10% effective federal tax rate advantage passthrough owners enjoyed over shareholders in a C corporation. Think about it: prior to the TCJA, the corporate rate was 35% and the top dividend rate was 23.8%, resulting in a combined effective top rate on C corporation shareholders of right around 50%. The top rate on passthrough income, however, was 39.6%. Thus, there was a little over a 10% benefit to establishing a business as a passthrough rather than a C corporation.

When the corporate rate was cut to 21%, the effect of double tax dropped precipitously to 39.8%, but the top rate on passthrough income was only reduced by the TCJA to 37%. As a result, if nothing else had changed, the 10% advantage passthrough owners previously enjoyed would have largely disappeared.

To prevent this result, Congress conjured up a 20% deduction against passthrough income in the form of Section 199A, reducing the top marginal rate on such income to 29.6% (37% * 80%). And just like that, the previous 10% advantage for operating as a passthrough was maintained (39.8% v. 29.6%).

But the problem with tying an individual deduction to the corporate, ordinary income, and dividend rates is that if any of those rates change but the deduction remains the same, you end up defeating the original purpose of the deduction, because the difference between the effective rates levied on corporations and passthroughs will swing one direction or the other. Consider these two possible outcomes of impending legislative changes:

Scenario 1: The corporate rate is increased to 28%, the top individual ordinary income rate is increased to 39.6%, and the top dividend rate is increased to 39.6% on those earning more than $1 million. In this situation, the top effective rate on shareholders in a C corporation would increase to 59%(!), and if Section 199A remains intact, the top rate on passthrough income would land at 31% (39.6% * 80%), creating a whopping 28% incentive for high-earners to form their business as a passthrough rather than a corporation.

Scenario 2: The corporate rate goes to 28%, the top ordinary rate goes to 39.6%, the dividend rate doesn't move, and President Biden phases out the Section 199A deduction once taxable income exceeds $400,000. In this case, the rate on C corporation shareholders would rise to 45%, but with the top passthrough rate rising to 39.6%, suddenly the 10% historical rate advantage for passthrough owners would be cut in half, making a C corporation more attractive when you factor in other advantages (tax-free fringe benefits and Section 1202 come to mind).

As we've learned over the past three years, Section 199A is rife with problems. but it's biggest shortcoming is also it's most fundamental: by being a manufactured deduction tied to other rates, if the 20% deduction rate doesn't move to respond to other legislative changes, unanticipated consequences will arise.
Bipartisan Bill Would Pay You to Learn Tax, Consume Cookies
I teach at a LOT of conferences. Some I really enjoy (I'm looking at you, AIPCA National Tax Conference). Others, eh....not so much. I'm sure the conferences themselves are just fine, it's just that if you stand in front of a room enough times, you're bound to have some bad experiences, and man, those moments stick. I've had more than my share, but if I had to narrow it down, here are my three most memorable conference nightmares (honorable mention goes to the time a guy put his finger into my chest because I made a joke about West Virginians):

#3. Durango, Colorado; 2015. A woman walked in ten minutes after I started, sat down in the front row directly in my line of sight, and spent the next eight hours knitting a sweater, without ever opening her book or glancing at the slides.

#2. Stamford, Connecticut and Washington D.C.; 2017. I still can't get over this one. Some guy came to my session in Connecticut and slept the ENTIRE class. Three months later, I'm teaching at another conference in D.C., and a guy in the back is unconscious throughout. The class ends, the guy stands up, and IT'S THE GUY FROM CONNECTICUT. I had to convince myself he was narcoleptic just to salvage my pride.

#1. Syracuse, NY; 2014. Mid-afternoon break rolls around, and there are no cookies. There are supposed to be cookies. What follows can only be described as a mass mutiny. The class REFUSES to come in from break until I go to the front desk of the hotel and demand an immediate delivery of assorted treats.

Despite those moments, I'm really looking forward to teaching and learning live again, and I'm betting you are too. And if a bipartisan team of Congressmen have their way, the IRS will be making it worth our while to do so.

H.R. 1346 -- the Hospitality and Commerce Job Recovery Act of 2021 -- would create a refundable payroll tax credit for up to 50% of the cost of hosting or attending a live conference, seminar, business meeting or trade show. The bill would also extend the ERC through 2022, allow a 50% deduction for entertainment expenses until 2023, create a new tax credit incentivizing shuttered restaurants to restart, and most notably, offer a tax credit to people for personal travel costs.

As for that final proposal, Section 262 denies a deduction for any personal or living expenses. There are obviously exceptions -- home mortgage interest, medical expenses and real estate taxes come to mind -- but reimbursing people for personal travel via the tax Code? I'll believe it when I see it.

But hey....maybe the conference credit will become law. That might be the final push Brian Streig (@cbriancpa) needs to get busy making this #taxtwitter CPE in Breckenridge a reality for January 2022.
News You Need to Know About News You Need to Know
IRS Set to Automatically Adjust Returns for Unemployment Exclusion
For 2020 only, the American Rescue Plan added a retroactive $10,200 per-taxpayer exclusion from unemployment income for individuals with adjusted gross income of less than $150,000. Unfortunately, the move came after many people had already filed their 2020 returns. Rather than force those taxpayers to file amended returns, the IRS announced last week that it will make the adjustment for them and pay the refunds automatically, a move that is equal parts heart warming and terrifying, like a rescued kitten playing with a loaded handgun.

The recalculations will be done in two phases, starting with those taxpayers eligible for just one $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for up to $20,400 of exclusions, and then others with more complex returns.

Here's the twist...let's say the exclusion brings into play a credit that was previously unavailable, like the Earned Income Tax Credit. If you DID NOT claim the EITC on your originally filed return, you SHOULD amend the return to claim the credit; the IRS will not compute a credit that was not already on the return.

But...if you claimed the EITC on the originally filed return -- only now it will increase because of the unemployment exclusion -- you DO NOT need to amend the return; the IRS will do the math for you and recompute the credit.

Then, of course, there's the whole matter of addressing state tax returns, which may or may not piggyback on the federal unemployment exclusion. But the IRS can't help you there; you're on your own.

SBA Updates
  • It was (mercifully) a quiet week on the SBA front. Just remember that tomorrow, the Shuttered Venue Operators Grant portal officially opens for applications. You can apply here.
  • While the availability of PPP loans was recently extended through the end of May, that extension doesn't do much good if there's no money left. According to Politico, the remaining $66 billion in PPP funds are likely to run out later this month, so if you're still considering a loan, don't delay.
RubinBrown's Amie Kuntz contributed to this article.
With Real Estate Market Booming, Time to Brush Up on Your Section 121 Exclusion
I've spent every summer of my adult life in the beach community of Surf City, New Jersey. My folks live there full time, and my in-laws live one block over. When we arrived this past June, I set out to purchase two staples of summer -- a grill for my dad and a beach cruiser for myself -- and I found nothing.

And that's when I realized that things had changed. The complete dearth of barbeques and bikes told me that my town was no longer merely a weekend getaway for New Yorkers and the bridge-and-tunnel crowd; it had become home. It was as if COVID-19 had suddenly awakened people to the realization that a tiny Manhattan apartment loses it's luster when you actually have to be there all day, and they all sought refuge at the good ol' Jersey Shore.

The local real estate market would soon verify my theory. Home prices skyrocketed; in fact, my parents' place appreciated so much, they've finally stopped pressuring me to repay them for the cost of food I consumed as a child.

This scene has been playing out all across America, as newfound work flexibility and historically low mortgage rates have caused a mass migration from the city to the suburbs. Of course, if someone is buying, that means someone else is selling, and many homeowners are seizing the opportunity to cash out at prices that were once unfathomable.

For many of these people, the sale will trigger the single largest taxable event of their lives, and create no shortage of fear and confusion. The prospect of generating hundreds of thousands of dollars of gain is terrifying, particularly if the cash needed to pay the tax was rolled into another home purchase.

But for you, trusted tax advisor...this is your time to shine. You get a chance to play hero by bailing clients, friends or family out of up to half-a-million dollars in gain, but
only if you're up to speed on Section 121.

In general, it's fairly straightforward: if you
owned and used your home as your principal residence for two of the five years prior to it's sale, you can exclude up to $250,000 of gain if you're single, and $500,000 if married filing jointly. What I'd like to instill in you during this discussion, however, is that there are plenty of situations where we might think someone doesn't satisfy the ownership and use test, but either the statute or regulations throw them a bone, bailing them out of at least part of their gain.

Let's start with a married couple. Reg. Section 1.121-2 provides that in order to obtain the full $500,000 exclusion:
  • either spouse must meet the ownership test, but
  • both spouses must meet the use test.
Example. H bought a house in 2015. On January 1, 2019, H&W marry, and W moves in. The house remains in H's name only. The house is sold in 2021. The full $500,000 exclusion is available, because H passes the ownership test, and both H&W pass the use test.

But what if W had only moved in ONE year before the sale, and thus didn't satisfy the use test. Would H&W lose the entire exclusion? Reg. Section 1.121-2(a)(3) provides a bail out by stating that if one spouse doesn't pass the use test, we determine each spouse's limitation separately as if they were single, and then combine the amounts. For these purposes, each spouse is treated as having owned the property for the period of the other spouse's ownership.

Example 2. H bought a house in 2015. On January 1, 2020, H&W marry, and W moves in. The house remains in H's name only. The house is sold in 2021. Here, W doesn't pass the use test, because she did not live in the home for two years prior to sale. As a result, the exclusion is determined separately: if H were single, he would be entitled to a $250,000 exclusion because he passed both the ownership and use test. If W were single, while she would be attributed H's period of ownership, because she only used the home for one year, she would be ineligible for any exclusion (unless the sale was caused by unforeseen circumstances as discussed below). Thus, the total exclusion is $250,000.

Next, Reg. Section 1.121-4 provides that if a spouse dies, the surviving spouse is treated as owning and using the home for the entire time the deceased spouse owned and used the property. This rule only applies, however, if the spouse doesn't remarry before the sale.

Example 3. H bought a house in 2015. On January 1, 2020, H&W marry, and W moves in. The house remains in H's name only. H dies on December 31, 2020. W inherits the house, and sells it in 2021. Here, W doesn't pass the ownership or use test on her own, but by virtue of the regulations allowing her to tack on H's ownership and use, she meets both tests and may exclude $250,000 of gain. Interestingly, if W had satisfied the use test on her own prior to H's death, a sale of the property within two years of H's death would give W a full $500,000 exclusion pursuant to Section 121(b)(4).

Another common scenario involves a house that is transferred from one spouse to another upon divorce under Section 1041, and is then immediately sold before the transferee spouse has met the two-year ownership test. In this case, Reg. 1.121-4(b)(1) treats the transferee spouse as if they owned the property for the period it was owned by the transferor spouse.

Example 4. H bought a house in 2015. On January 1, 2019, H&W marry, and W moves in. The house remains in H's name only. H&W divorce on December 31, 2020, and H transfers the home to W during 2021 in a transaction governed by Section 1041. W sells the home on December 31, 2021. Despite the fact that W only owned the house for a few months in 2021, because W received the property in a Section 1041 transfer pursuant to divorce, W is treated as having owned the property for the entire period it was owned by H. In addition, W has used the property for more than two years. As a result, W gets a $250,000 exclusion.

Finally, it's important to understand that in some cases, you can fail BOTH the ownership and use test and still get a reduced exclusion. Reg. 1.121-3 provides that if you are forced to sell your home before the two-year ownership and use tests are met because of a change of employment, health, or "unforeseen circumstances," you can claim a prorated exclusion equal to the full exclusion (depending on filing status), multiplied by the number of months you owned and used the home, divided by 24.

Example 5. A purchased a home in Colorado as his principal residence on January 1, 2020. On January 1, 2021, his employer transferred him to New Jersey, and he was forced to sell his home. On June 30, 2021, the home was sold. A may exclude $187,500 of gain ($250,000 * 18 months /24 months).

There are a few more nuances to Section 121 -- military moves, nonqualified use as a rental property, home office depreciation, etc...-- but this should be enough to help you out of most sticky situations and save family, friends and clients real money.
Got a question about tax law, life in public accounting, or the 2008 Phillies? Shoot me an email at I can't promise I'll try to answer it, but I'll try to try.
Quick Reads
  • In case you're confused as to why both President Biden and Senator Elizabeth Warren have proposed forcing large, profitable corporations to pay a minimum tax based on their financial statement income rather than their taxable income, it's reports like these that angry up the blood of registered voters. This one found that 55 of America's largest corporation's combined for billions in profits last year, but paid zero federal income tax. The report, however, is based on the tax provisions reported on 2020 financial statements, so take it for what it is.
Thank you to all who have subscribed during the first four weeks of the newsletter; the response has been better than I could have possibly hoped. Next week is a pretty busy one in tax world, but there WILL be a newsletter, because while I asked Forbes if I could take a break from writing the week of April 15th, their high-powered legal team tricked me into agreeing to take off "the week after tax season," a date which, apparently, does not exist.

Until next week,


hello world
Tony Nitti
Partner-in-Charge of National Tax at RubinBrown

I am Partner-in-Charge of National Tax at RubinBrown, one of the nation’s leading accounting and professional consulting firms. I am a licensed CPA in Colorado and New Jersey, an adjunct professor at the graduate tax programs of the University of Denver (DU) and Golden Gate University, and hold a Masters in Taxation from DU. My specialties include corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring.

Check out my latest Forbes articles. Follow me on Twitter.

The contents of this newsletter are the expressed views, statements and opinions of Tony Nitti and not those of Forbes or RubinBrown. Further, the information contained herein is for guidance and informational purposes only and is not intended nor should it be construed in any way as providing any accounting, tax, legal or other professional advice on any specific factual situation. As such advice must be tailored to the specific circumstance of each case, the general information provided herein is likewise not intended nor should it be construed as a substitute for the advice of a professional advisor. If accounting, tax, legal or other expert assistance or professional advice is needed, the reader is strongly encouraged to consult with or engage the services of a professional advisor.”

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