Polaris Tax & Accounting Newsletter – July 2024

Maximize Your 2021 Self-Employed COVID-19 Sick and Family Leave Credits Today

Were you self-employed during 2021? You might qualify for COVID-19 sick and family leave credits worth up to $32,220.

Many self-employed individuals and partners missed out on these tax credits due to limited publicity. Unlike the widely known employee retention credit, the self-employed COVID-19 credits remained under the radar, even for many tax professionals.

Eligibility: You qualified for these credits if you couldn’t work or telework due to COVID-19-related reasons, such as contracting the virus, being in quarantine, undergoing COVID testing, or caring for someone affected by the virus.

Credit Periods:

  1. Sick Leave Credit: January 1, 2021 – March 31, 2021
  2. Family Leave Credit: January 1, 2021 – March 31, 2021
  3. Sick Leave Credit: April 1, 2021 – September 30, 2021
  4. Family Leave Credit: April 1, 2021 – September 30, 2021

Credit Amounts:

  • Sick leave: Up to 10 days per period, with a maximum of $511 per day ($200 per day if caring for others).
  • Family leave: Up to $200 per day, with up to 50 days from January to March and an additional 60 days from April to September 2021.

Action Required: If you missed claiming these credits on your 2021 tax return, you can still amend it. File a 2021 IRS Form 7202 along with Form 1040-X to claim the credits. Keep supporting documentation (e.g., calendar entries, medical records) with your tax records.

Deadline: File your amended return by April 18, 2025, or October 15, 2025, if you filed an extension. Don’t wait—amend your return today to get your money back sooner.

Shutting Down Your S Corporation: Tax Implications

When closing your S corporation, understanding the federal income tax implications is essential. Here’s a guide for two common scenarios: stock sale and asset sale with liquidation.

Scenario 1: Stock Sale

  • Selling your S corporation stock results in a capital gain. Long-term capital gains (held over a year) are taxed up to 20%, affecting only high-income individuals.
  • Passive investors may owe the 3.8% Net Investment Income Tax (NIIT), while active participants are exempt. State income tax may also apply.

Scenario 2: Asset Sale and Liquidation

  • Selling all assets, paying off liabilities, and distributing remaining cash to shareholders has distinct tax implications.
  • Gains and losses from asset sales are passed to shareholders via Schedule K-1.
  • Gains on assets held over a year are taxed as Section 1231 gains at long-term capital gains rates. Depreciation-related gains may be taxed as ordinary income.
  • Liquidating distributions exceeding your shares’ tax basis result in capital gains, while distributions below basis result in capital losses.

Tax-Saving Strategy: Allocate more sale price to assets generating lower-taxed gains (e.g., land, buildings) and less to those generating higher-taxed ordinary income (e.g., receivables, heavily depreciated assets).

Compliance: Report asset sales on IRS Form 8594 and file the final federal income tax return using Form 1120-S, including final shareholder Schedule K-1s.

Avoid the 10% Penalty on Early IRA Withdrawals

Early withdrawals from a traditional IRA before age 59 1/2 usually incur a 10% penalty. However, several exceptions can help you avoid this penalty:

  1. Substantially Equal Periodic Payments
  2. Medical Expenses exceeding 7.5% of AGI
  3. Higher Education Expenses
  4. First-Time Home Purchase (up to $10,000)
  5. Birth or Adoption (up to $5,000)
  6. Emergency Expenses (up to $1,000 annually starting January 1, 2024)
  7. Disaster Recovery (up to $22,000)
  8. Disability
  9. Long-Term Care (starting December 29, 2025)
  10. Terminal Illness
  11. Post-Death Withdrawals
  12. Military Reservists on active duty for at least 180 days
  13. Health Insurance Premiums During Unemployment
  14. Domestic Abuse Victims (up to $10,000 starting January 1, 2024)
  15. IRS Levies

Note: SIMPLE IRAs have a 25% penalty for early withdrawals within the first two years. Roth IRAs have different rules, allowing penalty-free access to contributions but potentially penalizing earnings withdrawals.

Stay informed and consult with us to maximize your tax savings and ensure compliance. Contact Polaris Tax & Accounting today for personalized tax advice and support.