Tax Tips for January 2021

Click on the links below to jump to each section in this article:

• Standard Mileage Rates for 2021
• Understanding the Excise Tax
• Protecting Business Taxpayers From Identity Theft
• Employee Business Expense Deductions: Who Qualifies?

Standard Mileage Rates for 2021

Starting January 1, 2021, the standard mileage rates for the use of a car, van, pickup, or panel truck are as follows:

• 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020
• 16 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, down 1 cent from the rate for 2020, and
• 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

Before tax reform, these optional standard mileage rates were used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. However, it is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.

Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses.

Leased vehicles. Typically, if the standard mileage rate is chosen, then leased vehicles must use the standard mileage rate method for the entire lease period (including renewals). Due to the COVID-19 pandemic, however, the IRS is allowing employers to switch from the vehicle lease valuation method to the cents-per-mile method (56 cents for 2021 and 57.5 cents for 2020) when determining the value of an employee’s personal use of a vehicle during the pandemic, and is effective as of March 13, 2020.

If you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins, do not hesitate to contact the office.

Understanding the Excise Tax

An excise tax is a tax that is generally imposed on the sale of specific goods or services, or on certain uses. Examples of things a federal excise tax is usually imposed on include the sale of fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, and tobacco, as well as other goods and services. Excise taxes are imposed on a wide variety of goods, services and activities and may be imposed at the time of:

• Import
• Sale by the manufacturer
• Sale by the retailer
• Use by the manufacturer or consumer

Many excise taxes go into trust funds for projects related to the taxed product or service, such as highway and airport improvements. Excise taxes are independent of income taxes. Often, the retailer, manufacturer or importer must pay the excise tax to the IRS and file the Form 720. They may pass the cost of the excise tax on to the buyer.

Some excise taxes are collected by a third party. The third party then sends the tax to the IRS and files the Form 720. For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline.

When to File

Businesses must file the form for each quarter of the calendar year. Here are the due dates:

Quarter 1 – January, February, March: deadline, April 30Quarter 2 – April, May, June: deadline, July 31

Quarter 3 – July, August, September: deadline, Oct. 31

Quarter 4 – October, November, December: deadline, Jan. 31

If the due date for filing a return falls on a Saturday, Sunday or legal holiday, the due date is the next business day.

How to File

Businesses that are subject to excise tax generally must file a Form 720, Quarterly Federal Excise Tax Return to report this tax to the IRS. The IRS does accept paper excise tax returns; however, electronic filing is strongly encouraged, when possible.

To make this process easier for taxpayers, the contact information for all approved e-file transmitters of excise forms is listed on IRS.gov. Businesses can submit forms online 24 hours a day. When businesses e-file, they get confirmation that the IRS received their form. Also, e-filing reduces processing time and errors. To electronically file, business taxpayers will have to pay the provider’s fee for online submission.

Excise tax forms available for electronic filing are:

• Form 720, Quarterly Federal Excise Tax.
• Form 2290, Heavy Highway Vehicle Use Tax.
• Form 8849, Claim for Refund of Excise Taxes, Schedules 1, 2, 3, 5, 6 and 8.

Please call the office if you have any questions or would like more information about federal or state excise taxes.

Protecting Business Taxpayers From Identity Theft

Starting December 13, 2020, the IRS began masking sensitive data on business tax transcripts. Previously, only sensitive data on individual tax transcripts was masked.

Here’s what you need to know about this new initiative to protect business taxpayers from identity theft:

What is a tax transcript?

A tax transcript is a summary of a tax return and is often used by tax professionals to prepare prior year tax returns or when representing a client before the IRS. Lenders and others use tax transcripts for income verification purposes.

What is visible on the new tax transcript?

• Last four digits of any Employer Identification Number listed on the transcript: XX-XXX1234
• Last four digits of any Social Security number or Individual Tax Identification Number listed on the transcript: XXX-XX-1234
• Last four digits of any account or telephone number
• First four characters of the first, and last name for any individual (first three characters if the name has only four letters)
• First four characters of any name on the business name line
• First six characters of the street address, including spaces
• All money amounts, including wage and income, balance due, interest and penalties

Customer File Number

For both the individual and business tax transcript, there is space for a Customer File Number. The Customer File Number is an optional 10-digit number that can be created usually by third parties that allow them to match a transcript to a taxpayer. The Customer File Number field will appear on the transcript when that number is entered on Line 5 of Form 4506-T, Request for Transcript of Tax Return, and Form 4506T-EZ.

What happens when a taxpayer seeks to verify income for a lender?

1. The lender will assign a 10-digit number, for example, a loan number, to Form 4506-T. The Form 4506-T may be signed and submitted by the taxpayer or signed by the taxpayer and submitted by the lender.
2. The Customer File Number assigned by the requestor on Form 4506-T will populate on the transcript. The requestor may assign any number except the taxpayer’s Social Security number or Employer Identification Number.
3. Once received by the requester, the transcript’s Customer File Number serves as the tracking number to match it to the taxpayer.

If you have any questions or need more information about this topic, please contact the office.

Employee Business Expense Deductions: Who Qualifies?

Prior to tax reform, an employee was able to deduct unreimbursed job expenses, along with certain other miscellaneous expenses, that was more than two percent of adjusted gross income (AGI) as long as they itemized instead of taking the standard deduction. Starting in 2018, however, most taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator.

No other type of employee is eligible to claim a deduction for unreimbursed employee expenses. In other words, employee business expenses can be deducted as an adjustment to income only for eligible educators and specific employment categories such as:

• Armed Forces reservists
• Qualified performing artists
• Fee-basis state or local government officials
• Employees with impairment-related work expenses

Qualified Expenses

A qualified expense is one that is:

Paid or billed during the tax year
• Used for carrying on a trade or business of being an employee, and
• Ordinary and necessary

Nondeductible Expenses

Taxpayers should also know there are nondeductible expenses as well. Examples of nondeductible expenses include club dues, commuting expenses, fees and licenses, such as car licenses, lunches with co-workers, meals while working late, expenses to improve professional reputation, and capital expenses. A full list of nondeductible expenses can be found in Publication 529, Miscellaneous Deductions.

Please call if you have any questions.