American Rescue Plan: Impact for tax year 2022

On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA). Tax advisors saw some of the effects of the new bill, such as the third recovery rebate credit (also known as the Economic Impact Payment) and the Advanced Child Tax Credit. But there are also some new laws that became effective Jan. 1, 2022, and some changes that differ from tax year 2021. Here is a rundown of some significant changes for 2022.

Schedules K-2 and K-3 relief for 2021 filing requirements

The 2021 Schedule K-2, Partners’ Distributive Share Items—International, reports items of international tax relevance, and is an extension of Form 1065 or Form 1120-S Schedule K. In general, Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International, reports a partner’s distributive share of items of international tax relevance, and is an extension of Form 1065 or Form 1120-S Schedule K-1. In tax years beginning in 2021, flow-through entities with items of international tax relevance must complete these new schedules.

The IRS created Schedules K-2 and K-3 to provide certainty and consistency for international information, helping partners and shareholders to comply with their filing and reporting obligations. However, these new schedules have been the subject of unfavorable commentary among tax practitioners. On Feb. 16, 2022, the IRS began providing an additional exception for tax year 2021 to filing Schedules K-2 and K-3 for certain domestic partnerships and S corporations. To qualify for the exception the following must be met:

• In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
• In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign source income (see Section 1.861-9(9)(3)).
• In tax year 2020, the domestic partnership or S corporation neither provided to its partners or shareholders, nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
  • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
  • Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, Section 864(c)(8), Section 721 (c) partnerships, and Section 7874) (line 17d for Form 1120-S).
• The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

If a partnership or S corporation qualifies for this exception, the domestic partnership or S corporation does not need to file Schedules K-2 and K-3 with the IRS, or with its partners or shareholders. However, if the partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete their tax return, then the partnership or S corporation must provide the information to the partner or shareholder. If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the conditions for the exception are not met and the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder, and file the Schedules K-2 and K-3 with the IRS.¹

Third-party settlement origination reporting requirements

If your clients use Venmo, CashApp, or a similar mobile payment service, ARPA created a new rule effective Jan. 1, 2022, that would require these mobile payment services to issue them a Form 1099-K on their business transactions that exceed $600 per year. Prior to Jan. 1, the threshold for a 1099-K was more than 200 business transactions that totaled at least $20,000. With this much lower threshold, your clients will have more income source documents.

Note that these payments will only affect business transactions, defined as a payment for a good or service, including tips. On the other hand, personal transactions, such as being reimbursed for a lunch with a friend, won’t count toward the $600 threshold.

Each mobile payment service will have different ways to implement these changes, and it is important to advise each client who uses these services to make sure they are keeping accurate records of what is and isn’t considered income. There could be some situations where your customers issue you a 1099-NEC for money paid through Venmo, and Venmo would subsequently send you a 1099-K for the same income your customer paid you. This is where it becomes vitally important to keep adequate books and records for your clients.

Unemployment benefits are taxable

For tax year 2020, ARPA allowed for an Unemployment Compensation Exclusion (UCE) of $10,200 per individual. For tax years 2021-2022, the UCE benefits have expired and benefits will be taxable. Be sure to take note that there is not going to be an exclusion of income for your 2022 tax planning clients.

Charitable donations

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended two changes enacted by the CARES Act. The law allows a deduction of up to 100 percent of adjusted gross income in qualified charitable donations if a taxpayer plans to itemize their deductions. Those who will file the standard deduction may claim an above-the-line deduction of up to $300 (or $600 for married filing jointly) for charitable contributions made in cash.

Child tax credit

A major change in 2022 is that the advanced payment of the child tax credit and extended child tax credit ends in 2021. Families who received the advanced payments will need to compare these advances with the amount they are eligible for on their 2021 tax return. The IRS has a Child Tax Credit Update Portal that helped taxpayer’s determine their eligibility for advance payments, modify bank account information and mailing address, and view processed payments. Updates to the taxpayer’s account could be made through the portal in the event the client’s dependency status changes. Since these advance payments only applied to 2021, when preparing the taxpayer’s 2021 return, it is helpful to access the IRS portal to verify the amount of advanced child tax credit payments that were processed for the taxpayer.

¹Transition relief is only related to the 2021 tax year and is subject to change. At the time of writing this article, no guidance has been provided for the 2022 tax year.