Category: Guest Article of the Month

The coming shakeup of the executive branch, along with Republican control of both houses of Congress, means tax changes are highly likely in 2025 and beyond. Positioning for new and amended tax provisions is already off to the races.

Regardless of the political landscape, on rare occasions, some measures have broad bipartisan support. One such bill is called the Methane Reduction and Economic Growth Act. It proposes adding a new credit for sequestering “qualified” methane from mining activities.

Looking Ahead Into 2025

Proponents of the Methane Reduction and Economic Growth Act hope the tax credit will have a beneficial economic impact and create jobs. The idea is to capture and utilize the methane for productive industrial uses or as an alternative for heating buildings. The methane emitted by mines that qualify have long lifespans, with some abandoned mines emitting methane for up to 100 years. The long lifespan of the methane source is hoped to support the significant capital investment required to get the process up and running.

There is also significant potential for job creation in areas most impacted by the shutdown of coal-fired power plants, which in turn devastated the coal mining industry. The concept of using mine methane as an energy source could support rural American jobs.

Landscape and Potential for the Credit

There is a lot of mine methane to capture, with most not currently being captured. The U.S. government estimates abandoned coal mines produce about 237,000 metric tons annually. This methane has many potential uses, including hydrogen production.

Details on the New Subsection

The new section of 45Q credits would be based on the quantity of qualified methane that is sequestered. The captured methane must then be sent to the pipeline and used for producing heat or electricity. To be considered “qualified methane,” it must be captured from certain types of mines, including closed, abandoned, and surface mines. Finally, the methane captured must have otherwise been sent into the atmosphere if it had not been for the capture equipment activity.

Only qualified facilities may obtain the credit. Among other factors, the taxpayer needs to capture a minimum of 2,500 metric tons of methane each year to qualify. There are a lot more technical regulatory requirements related to the specific nature of the methane capture, but those are beyond the scope of this article.

Conclusion

Typically, tax bills are split down the aisle based on political partisanship. This makes the passage of tax legislation difficult at best, due to competing interests and a divided government. The tax credits related to methane capture, however, appear to be unusually bipartisan in nature. This is due to the unique intersection of democratic support from an environmental and climate perspective, meeting with Republican interest to support economic development in rural coal mining areas where the industry has been devastated. Put these two interests together, and you have the makings for a widely supported bipartisan bill that is very likely to pass.

Every year, the IRS announces annual inflation adjustments related to tax rate schedules, deductions, cost-of-living adjustments, etc. What many taxpayers do not realize is that they also adjust the cost of fines and penalties as well. This means that the penalties for late filings and missing tax forms are getting more expensive. In this article, we will look at the penalties for failing to file various types of tax returns as well as failing to file certain types of forms.

Failure to File Penalties

There is simply no way around it, skipping out on filing a tax return is going to cost you. Each type of return has its own penalty associated with it. For returns to be filed in 2024, the failure to file penalties are as follows.

Income Tax Returns

Failure to file within 60 days of the due date, the minimum penalty is $510 (up from $485 in 2023) and can increase depending on the circumstances – up to 100 percent of the taxes on the return.

Partnership Return

Failure to file a partnership tax return incurs a $245 penalty (up from $235 in 2023).

S-Corporation Return

Failure to file an S-Corporation return incurs a $245 penalty (up from $235 in 2023).

Beyond these simple financial penalties, things can get serious depending on the length of time a return has not been filed and the amount of past due taxes. This includes liens, levies and passport restrictions.

Passport Revocation or Denial

In cases of serious tax delinquency, defined as a tax debt of $62,000 or more in 2024, your application for a new passport can be revoked or denied renewal.

Liens

If a taxpayer fails to pay a properly assessed tax bill, the IRS can file a Notice of Federal Tax Lien. This type of lien puts creditors on notice that the federal government has legitimate claim over your property. This means that when you sell any of your property or assets, you can be forced to send the proceeds to the IRS.

Levies

Levies are the legal seizure of your property. Typically, any property can be levied to fulfill a tax obligation. There are exceptions for certain, small amounts of personal property such as provisions, furniture and other household personal effects, and business property needed to carry on a trade or business; but these are negligible thresholds (less than $12,000). Further, wages can be levied and are subject to a formula that calculates a maximum weekly amount.

In any case, a levy is the last resort of the IRS but is obviously something you want to avoid.

Conclusion

Paying penalties is no fun and no one wants to pay them. You may feel overwhelmed due to personal or business circumstances or other reasons, but the absolute worst thing you can do is to ignore your tax filing obligations. Even if you are late, the sooner you file versus burying your head like an ostrich the better – as it’s “better late than never” when it comes to the IRS.

The main lesson is that ignoring things won’t make them better.

The IRS recently issued an important ruling on the taxability of cryptocurrency staking rewards, determining that staking rewards are essentially “income” and, therefore, taxable upon receipt and not deferrable until sale or swapping. Below, we will look at the ruling in more detail and what it means for taxpayers. But first, let us revisit the concept of cryptocurrency staking as a refresher.

Crypto Staking 101: What Is Staking?

Staking, at its most basic form, is a way for holders of cryptocurrencies to earn rewards or passive income on their digital assets without needing to sell.

One way to think of staking is like a high-yield savings account. When you stake digital assets, you deposit and lock up your coins. This helps run and maintain security on different blockchains (depending on the asset staked). In return, you typically receive more of the digital asset staked. 

Rates of return on digital asset staking can be lucrative; however, staking is not without risks.

Staking risks include:

The inherent volatility of cryptocurrencies, where the rewards earned can be less than the change in the underlying digital asset price (causing an overall loss).

Minimum lock-up periods, where staked assets cannot be unstaked and sold or swapped and therefore are illiquid for a period.

Counterparty risk if operating as part of a staking pool, where rewards can be negated as a bad actor and therefore never paid out.

The staking pool or underlying digital asset can be hacked, leading to a loss of funds (remember, there is such a thing as FDIC insurance to protect depositors in the cryptocurrency realm).

Taxability of Staking Rewards

The tax treatment of buying and selling cryptocurrencies is clear. In IRS Notice 2014-21, the government declares that crypto trades should be treated as property, resulting in capital gains treatment like other property bought and sold. Staking, however, is different than trading.

To clarify, given the vague mechanisms of crypto staking, the IRS recently issued a ruling declaring that crypto staking rewards need to be included when received in a taxpayer’s gross income. This ruling formalizes the position taken by the IRS in the Jarrett case.

The argument in the Jarrett case was that the coins received as staking rewards are new property that was created and not the same as income, interest, etc. Essentially, this means the staking rewards are zero-basis assets that would be taxed when sold and not upon receipt. They made the argument that staking rewards were like the products of a baker, where each new cake, although from the same recipe, is a newly created product/asset and, therefore, taxable upon sale.

The court determined that staking rewards, due to their proof-of-stake creation mechanism, are not a new asset, but compensation for helping to maintain and provide validation of the underlying blockchain, with the staked assets used as collateral.

Conclusion

As a result, staking rewards are income when “received.” The taxable amount is the fair market value of the coins when the taxpayer receives the staking reward in an “unlocked” manner. In other words, once the taxpayer controls the staking rewards, the taxpayer is capable (regardless of exercising this capability) of selling them.

The CARES Act created the Employee Retention Credit as part of the government’s relief package to mitigate the economic impact of COVID-19. Recently, on Dec. 28, 2020, Congress enacted the Consolidated Appropriations Act, 2021, which clarified and expanded the scope of the Employee Retention Credit (ERC).

Below is a summary of the changes in key provisions of the credit and the new guidance. Noteworthy updates include a broader application of the credit and news that changes are retroactive.

Time of Availability

Previously, the credit only applied to qualified wages paid between March 12, 2020, through Dec. 31, 2020. The new legislation extends the credit period for six more months – through June 30, 2020.

Eligibility Requirements

There are two main triggers for eligibility. The first applies in all instances, with the credit available to any business whose operations were partially or totally suspended by a governmental COVID-19 order during the time the order is in effect.

The second option to become eligible differs under the new act. Previously, businesses were eligible if gross receipts were less than half of the same quarter in 2019 and remained eligible until reaching 80 percent – compared to the prior year. Under the revision, gross receipts were still compared to the same quarter in 2019. Still, beginning Jan. 1, 2021, eligibility starts at less than 80 percent for the comparable period (you don’t have to get to less than 50 percent). Further, if a business didn’t begin operations until 2020, they can compare to 2020 instead of 2019.

Percentage of Wages and Maximum Credit

The percentage of wages qualified for the credit increased from 50 percent to 70 percent. The cost of providing healthcare benefits to employees remains deductible as before.

Coupled with this is an increase in the maximum credit amount. Previously, the annual maximum credit per employee was $5,000; but starting Jan. 1, 2021, this increases to $7,000 for both the first and second quarters, for a $14,000 annual maximum.

Employer Size for Whether an Employee is Working or Not

The employer size threshold is another notable change. The original act prevented companies with more than 100 employees from taking the ERC for any employee still performing services – even if at a reduced capacity. Starting in 2021, this increases to 500 employees.

Paycheck Protection Program Loans versus ERC

Previously, companies who participated in the PPP loan program were not eligible for the Employee Retention Credit, including affiliated companies. The updated law retroactively changes this requirement. Companies that received PPP loans are now eligible for the ERC credit, but there are restrictions.

The change applies to wages paid on or after March 13, 2020. Prior PPP loan recipients cannot claim the credit for wages paid with proceeds from a PPP loan receiving forgiveness. If the company paid qualified wages over the amount of the forgiven quantity, they could claim the credit retroactively. The IRS is expected to issue more guidance on this topic.

Advance Payments

There was no advance payment option; employers were required to pay employee wages before they could receive the credit. While this is still not settled, it is expected that the IRS will draft guidance allowing for advance payment of the ERC for companies with 500 or fewer employees based on 70 percent of the average quarterly payroll for the comparable quarter in 2019.

Eligibility of Governmental Entities

Previously, the ERC was not available to governmental agencies at any level; however, starting Jan. 1, 2021, public colleges and universities, agencies that provide medical care, and select other agencies such as federal credit unions are now eligible.

Conclusion

The Consolidated Appropriations Act, 2021 extended and clarified many of the Employee Retention Credit provisions up through June 30, 2021. Overall, the ERC is expanded in terms of amount, employer size, and more flexible gross receipts test. Further, PPP loan recipients are now also eligible for the credit if they meet certain criteria.

Most likely, employers will need to file amended payroll tax returns for the second and third quarters, but guidance is still pending for this and PPP loan recipients who want to access the credit.

The changes can be complex, and compliance can be cumbersome, so if any of the information outlined above applies to you, be sure to reach out to us to help you capture the most value from the changes to the Employee Retention Credit rules.