New Law Provides Flexibility for Health FSAs, Plus Other Tax Filing Reminders for Businesses

IRS News & Alerts for Employers, Businesses, and Corporate Reporting

The 2021 tax filing season has begun and there are a number of reminders that the IRS is issuing for employers and businesses. It is important to prepare an accurate tax return and pay attention to any new tax laws, particularly as the Coronavirus pandemic has resulted in a variety of new tax programs to help assist struggling Americans.

This article covers tax preparation and filing reminders for businesses, plus other IRS news and alerts that may affect how you file this year.

Reminder: March 1 Tax Deadline for Farming & Fishing Businesses

Those who earn income from a farming or fishing business can avoid making estimated tax payments if they file and pay their entire tax due by March 1, 2021. In general, this rule applies as long as farming/fishing income was at least two-thirds of the taxpayer’s total gross income in either the current tax year or the preceding tax year. Those who do not file by March 1 should already have made an estimated tax payment by January 15, 2021 in order to avoid an estimated tax penalty.

Farming business income and expenses are reported on Schedule F (Form 1040): Profit or Loss From Farming. Fishing business income and expenses are reported on Schedule C (Form 1040): Profit or Loss From Business (Sole Proprietorship). Those with income from a farming or fishing business should also use Schedule SE (Form 1040) to calculate their self-employment tax if their annual net earnings are $400 or more.

More Flexibility for FSAs & Dependent Care Assistance Programs

Due to the COVID-19 crisis, the IRS is providing additional flexibility for employee benefit programs that offer health FSAs (Flexible Spending Arrangements) or dependent care assistance programs. Thanks to the COVID-Related Taxpayer Certainty and Disaster Tax Relief Act of 2020, these employee benefit plans now have greater discretion to adjust their programs in 2021 and 2022 to help employees who are dealing with the unanticipated consequences of COVID-19 (such as changes in the availability of medical care and dependent care).

IRS Notice 2021-15 clarifies the temporary special rules for health FSAs and dependent care assistance programs under 125 cafeteria plans. The notice provides flexibility for employers in the following areas:

  • Provides flexibility with respect to carryovers of unused amounts from the 2020 and 2021 plan years;
  • Extends the permissible period for incurring claims for plan years ending in 2020 and 2021;
  • Provides a special rule regarding post-termination reimbursements from health FSAs during plan years 2020 and 2021;
  • Provides a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency; and
  • Allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

Before the Taxpayer Certainty and Disaster Tax Relief Act of 2020 was signed into law (on December 27, 2020), prior guidance granted flexibility to employers with cafeteria plans through the end of 2020. During that time, employers could allow their employees to apply unused amounts from health FSA amounts and dependent care assistance programs to pay for (or reimburse) medical care expenses or dependent care expenses. This new law essentially provides similar flexibility for those plans in 2021 and 2022.

Businesses Reporting Large Cash Transactions

The IRS issued a reminder to businesses that large cash transactions (i.e. payments over $10,000) must be reported using Form 8300 (Report of Cash Payments Over $10,000 in a Trade or Business). While many large cash transactions are legitimate, the IRS and the Financial Crimes Enforcement Network (FinCEN) may sometimes use the information reported on Form 8300 to help stop tax evasion, money laundering, and other illegal activities.

The IRS encourages businesses to e-file, which can help to ensure that accurate and compete forms are being submitted. In order to file Form 8300 electronically, a business must create an account with the Financial Crimes Enforcement Network’s BSA E-Filing System.

IRS Issues Alert About Domestic Production Activities Deduction (DPAD)

The IRS published an alert regarding amended tax returns and those claiming the Domestic Production Activities Deduction (DPAD). This was a tax law provision that was repealed for taxable years after December 31, 2017 by the Tax Cuts and Jobs Act. After the repeal, the IRS has reportedly received numerous questionable amended returns and claims for tax benefits totaling billions of dollars.

Doug O'Donnell, Commissioner of the Large Business and International Division, said, "We have no qualms with taxpayers claiming benefits allowed by law, but a very high percentage of the claims for the now repealed Domestic Production Activities Deduction are not properly supported by those claiming it. Meritless claims are harmful to tax administration and voluntary compliance. Any corporate taxpayer who is considering filing such a claim should reconsider. Taxpayers who have already filed can withdraw prior to IRS audit contact to avoid penalties."

Many of the questionable filings include taxpayers who are claiming the DPAD for the first time but seem to be making unreasonable assumptions of the law. Tax examiners are auditing the claims and the IRS will continue to monitor this issue.