IRS PROVIDES SAFE HARBOR FOR PPP RECIPIENTS CLAIMING DEDUCTIONS

The IRS issued Revenue Procedure 2021-20 on Thursday April 22nd. This revenue procedure provides a safe harbor to PPP borrowers that received loans, either had them forgiven or expected them to be forgiven and did not deduct expenses because of IRS guidance issued during 2020.

The IRS had issued guidance during 2020 which stated that any expenses paid with forgiven PPP funds were not allowed to be deducted based on the fact that the forgiven funds were not taxable income. The Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020 and overruled the IRS. The law specifically states that expenses paid with forgiven PPP funds are fully deductible.

Rev Proc 2021-20 states a covered taxpayer is able to deduct these expenses on the income tax return immediately subsequent to the one filed on or before December 27, 2020 instead of having to file an amended return for 2020.

By definition, a covered taxpayer is a taxpayer that satisfies all of the following:

1. The taxpayer received an original PPP covered loan;
2. The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 taxable year;
3. On or before December 27, 2020, the taxpayer timely filed, including extensions, a Federal income tax return or information return, as applicable, for the taxpayer’s 2020 taxable year; and
4. On the taxpayer’s Federal income tax return or information return, as applicable, the taxpayer did not deduct the original expenses because—

• (a) The expenses resulted in forgiveness of the original PPP covered loan; or
• (b) The taxpayer reasonably expected at the end of the 2020 taxable year that the expenses would result in such forgiveness.

The procedure applies to first draw loans taken before December 27, 2020 therefore no loans, whether first or second draw, received after December 27, 2020 are eligible.

The procedure does not permit any of the expanded costs (covered operations expenditures, covered property damage costs, covered supplier costs or covered worker protection expenditures) allowed for first or second draw loans taken after December 27, 2020 to be considered for this safe harbor.

What is unclear to me is when the procedure discusses timely filed 2020 returns, filed on or before December 27, 2020. Most 2020 returns would not have been filed until 2021 which makes the procedure not very useful. I’m not sure whether it only applies to 2020 returns or prior returns with 2020 expenses. Federal income tax returns use the year that contains December 31st as the year of the income tax return. A tax return with a year that ends September 30, 2020 would be a 2019 return since December 31st of that return year was 2019. Although this return is considered 2019, there are expenses incurred in calendar year 2020. This would generally only apply to C corporations. Individuals, partnerships, and S corporations almost all file on a calendar year basis.

Keep in mind, if you do not meet the criteria to use this safe harbor, you can always amend your 2020 return if you did not take the proper income tax deductions.

Other PPP Items

Schedule C Filers

On March 3, 2021 guidance was issued which allowed Schedule C filers to use their gross income rather than their net profit to determine their maximum PPP loan. This allows these borrowers to obtain larger loan amounts. The issue is the law only applies to loans not approved by March 3rd. This means any borrower that received a loan before March 3rd is not eligible which penalizes those borrowers that were the most efficient.

The AICPA has been pushing to allow Schedule C filers that received loans prior to March 3rd to amend their loans and obtain additional funds. At a recent AICPA town hall webinar, I attended it was indicated that while this change to the law is still possible, it is not probable.

PPP Funds Expected to Run Out

After months of fighting to extend the PPP filing deadline from March 31st to May 31st I have been consistently hearing for the past three weeks that PPP funds are expected to run out at the very end of April or beginning of May. It is unclear whether there would be any additional funds allocated to the program if it does run out. I have been pushing any clients that have not filed for either first or second draw loans to do so immediately just in case the funds run out and are not replenished.

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Jeff Skolnick, CPA, M.S. Taxation

HOW TO DEAL WITH THE UPCOMING MAY 17TH DEADLINE

As all of you know, the income tax deadline for filing individual income tax returns and any payments due on these returns has been extended to May 17th. My advice is that if you have not submitted your return, that you get on it quickly. One month will fly by more quickly than you think.  Keep in mind, even those returns on extension must have payments submitted by May 17th. An extension of time only grants you an extension of time to file income tax returns, not to pay them.

TIME FOR A TAX CHECK-UP

This is a good time for everyone to examine their personal tax situation.  The last 14 months have made for some very strange looking tax returns. As we hopefully head for more stable economic times it is important that everyone assess their personal income tax situation in order to avoid surprises next April.

Self-Employment Tax

If you are an individual that is self-employed (sole proprietor or single member LLC), and you are subject to self-employment tax it is important to realize that the rate is approximately 14.1%.  In addition, individuals that own interests in partnerships or LLCs may also be subject to self-employment tax.  If an individual is subject to self-employment tax and does not account for this amount in their estimated tax payments it can be painful in April. I am therefore stressing to all those individuals that are subject to self-employment tax that they make quarterly estimated income tax payments to avoid pain and misery in April.

Additionally, self-employed individuals always have a more difficult time estimating their current tax situation then do W-2 employees. Income can vary greatly year to year, and you must monitor your individual situation in order to avoid surprises.

Changes in your personal situation

There may be changes in your personal situation that can affect your tax liability.  An example of this might be the child tax credit. Child tax credits which are available for children under the age of 17 in the amount of $2,000 have been expanded only for 2021.

The new credit allowed is $3,000 per child under age 18 and $3,600 per child under age 6. Again, these amounts are only for 2021.

One more change to this credit is the credit is fully refundable. The $2,000 credit is 70% refundable. If a family had a child eligible for the $2,000 credit but had no income tax liability, they would only receive $1,400 (70% of the $2,000 credit). If the family had an income tax liability of $500, they would be allowed a $1,900 credit ($500 vs. income tax and $1,400 refundable). If the tax liability were $600 or more, then this family would receive the full $2,000 credit. Under the expanded law, the family would receive the full $3,000 (or $3,600) regardless of whether or not they had an income tax liability.

One big thing to keep in mind are the AGI limits.

The expanded law uses threshold amounts of $150,000 for joint filers, $112,500 for head of household filers and $75,000 for everyone else. Credits phase out at the rate of 5% for each dollar of AGI in excess of these limits.

If you exceed the income limits just discussed there is still a $2,000 tax credit for children under the age of 17.   If you have a child that will reach age of 17 during the year, and your income exceeds the limits of the 2021 expanded credit, then the credit will not be available for you next April.  It is highly likely that you will still have a $500 credit, but you will not have a $2,000 credit. I also want to mention the income limitation on this ($2,000 or $500) credit although it is not nearly as important as it once was.  The credit starts to phaseout for married couples filing jointly at $400,000 and $200,000 for all others.

Medical expenses are not deductible unless they exceed 7.5% of your income.

Most married couples filing jointly did not itemize and used the $24,800 standard deduction in 2020.  This should be kept in mind as such things as charitable contributions, mortgage interest and real estate taxes may not impact your tax return as much as they did in the past.

In many instances individuals that have children in college are entitled to education credits either through the American Opportunity Credit or the Lifetime Learning credit.  Both of these credits, however, have income limitations and therefore a credit you are counting on now may not be available to you.  In some instances, it may make sense for a parent to not claim the child as a deduction and allow the child to claim the credit.  While this may raise the tax liability on the parents, the overall taxes on the family may be lower.  Additionally, the American Opportunity Credit is only available for the first 4 years of college and has a significantly higher income phaseout then the Lifetime learning Credit. Taxpayers should be alert as to how many years they have taken the American Opportunity credit and should plan for a potential reduced or completely phased out credit if they have already used the credit for 4 years.

Taxpayers should of course be reviewing their investment activity as well.  If a taxpayer has any capital gains, they may want to start to look at stocks that are not doing as well that could be sold at a loss to offset the gains. This strategy is typically performed closer to yearend, but taxpayers should monitor their capital gains and losses during the year to allow enough time to plan to offset some of these gains.

If you were subject to the Alternative Minimum Tax (AMT) this past year, it is a good idea to take a look at your estimated income and deductions to see if this tax will apply, although far fewer individuals are subject to this tax since the law was changed at the end of 2017.

Lastly, it is always important to remember that if you have any significant income not subject to withholding (income from a sole proprietorship or single member LLC, income from a partnership, multiple Member LLC, S corporation, trust, or investment income such as interest, dividends, or capital gains), then you will either have to increase the withholding on income that is subject to withholding or make quarterly estimated income tax payments.

Conclusion

If you found this year that your withholding was not sufficient to cover your liability you may have to increase your deductions or make quarterly estimated income tax payments in order to avoid being underpaid on your tax liability at yearend. You have over 8 months before yearend and almost a year before April 15th to remedy the situation which is much better than finding out a few weeks before your return is due.  Once again if you’re not sure, then check with a tax professional to help determine your tax position.

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

If you’d like to book an appointment with me, please click on the link below:

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

ESTIMATED INCOME TAXES DUE BY APRIL 15TH

IMPORTANT FILING DEADLINES

As most, if not all, of you know the Federal income tax deadline is extended from April 15th to May 17th, 2021. This extension is for individual income tax returns and any payments due on these returns. Any balances normally due on April 15th are extended to May 17th with no additional penalties or interest due regardless of the amount owed.

What the law does not extend are C corporation income tax returns, Trust and Estate income tax returns, gift tax returns and Estimated income tax payments. Each of these are still due on April 15th.

If you are a taxpayer that makes estimated tax payments, make sure to pay your first quarter by April 15th. If you have been unable to complete enough of your 2020 income tax return to accurately calculate your first quarter estimate, then do your best to approximate the amount. It’s better to make an estimate, even if it’s not totally accurate, then to not make any payment. If you pay in either too much or too little in the first quarter, you can adjust that in subsequent quarters.

Another alternative is to file your Federal extension, complete with payment, by April 15th. The reason for this is if you have an overpayment on your return and payment was made on or before April 15th, then it can be applied to your 2021 first quarter estimate and it should be considered timely.

If you file C corporation returns, trust returns, income tax returns of Estates or gift tax returns make sure to file by April 15th, or file for extension.

Additionally, individuals must check to see if their state individual income tax deadlines are moved.

Lastly, S corporations and partnerships which had a Federal due date of March 15th must be looked at because many of these entities have state filing deadlines on April 15th.

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

If you’d like to book an appointment with me, please click on the link below:

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

UPDATES TO TAX CALENDAR, UNEMPLOYMENT, PPP, AND RECOVERY REBATES APRIL 4, 2021

IMPORTANT FILING DEADLINES

As most, if not all, of you know the Federal income tax deadline is extended from April 15th to May 17th, 2021. This extension is for individual income tax returns and any payments due on these returns. Any balances normally due on April 15th are extended to May 17th with no additional penalties or interest due regardless of the amount owed.

What the law does not extend are C corporation income tax returns, Trust and Estate income tax returns and Estimated income tax payments. Each of these are still due on April 15th.

If you are a taxpayer that makes estimated tax payments, make sure to pay your first quarter by April 15th. If you have been unable to complete enough of your 2020 income tax return to calculate your first quarter estimate, then do your best to approximate the amount. It’s better to make an estimate, even if it’s not totally accurate, then to not make any payment. If you pay in either too much or too little in the first quarter, you can adjust that in subsequent quarters.

If you file C corporation returns, trust returns or income tax returns of Estates make sure to file by April 15th, or file for extension.

Additionally, individuals must check to see if their state income tax deadlines are moved.

IRS TO ISSUE REFUNDS TO TAXPAYERS THAT REPORTED UNEMPLOYMENT INCOME NOW EXEMPTED BEGINNING IN MAY

The Rescue Plan allows the first $10,200 of unemployment received by a taxpayer (or, in the case of a joint return, received by each spouse), to be excluded from income if the Adjusted Gross Income (AGI) of the taxpayer is less than $150,000. This rule only applies to 2020. The new law does not currently extend this same income tax treatment to unemployment received in 2021, therefore taxpayers should be aware of the tax ramifications.

The IRS stated last week that it will begin sending refunds to those taxpayers that filed their income tax returns before the Rescue Plan became law and paid income tax on unemployment benefits that are now not taxable. The IRS has stated that since the law was passed taxpayers that filed returns and paid income tax on these unemployment funds do not have to file amended returns. The IRS will automatically issue refunds.

The IRS changed the way the $150,000 of AGI is calculated. Originally, taxpayers were required to include unemployment compensation when calculating AGI for purposes of the $150,000 limitation. The calculation was changed and taxpayers do not have to include unemployment received. This increases the number of taxpayers that are eligible to exclude unemployment benefits from taxable income.

You must keep in mind that not every state has decided to exempt the first $10,200 of unemployment compensation received from taxable income. Currently, New Jersey my home state, never includes unemployment compensation as taxable income, same with Pennsylvania. New York, however, does not exempt the first $10,200. All unemployment compensation is currently taxable in New York.

PPP

Last week (Tuesday March 30th) Joe Biden signed the law extending the Paycheck Protection Program (PPP) from March 31, 2021 to May 31, 2021.

With the changes made to the program both recently (an example would be Schedule C filers being allowed to use Gross income instead of net profit) and since the Consolidated Appropriations Act passed on December 27th, it makes sense to extend the deadline.

The changes made since passing the Act in December are, among other items, error codes put in place by the SBA to reduce fraud. While that is a very good idea, these codes have caused significant delays on applications that are legitimate. The extended time gives borrowers, the SBA, and professionals, like me, that are assisting borrowers much needed time to properly file necessary paperwork.

This also potentially allows taxpayers that received a first draw loan in 2021 to receive a second draw loan if their covered period for the first draw loan has expired and all funds have been expended.

RECOVERY REBATES

The IRS and Treasury announced last week that they would begin to send Recovery Rebates to Social Security recipients and other federal beneficiaries who do not normally file a tax return this weekend.

Per the IRS website, “Many federal beneficiaries who filed 2019 or 2020 returns or used the Non-Filers tool last year were issued Economic Impact Payments, if eligible, during the last three weeks. The update applies to Social Security retirement, survivor or disability (SSDI), Supplemental Security Income (SSI), and Railroad Retirement Board (RRB) beneficiaries who did not file a 2019 or 2020 tax return or did not use the Non-Filers tool.”

The IRS announced that as of March 18, 2021 the Recovery Rebate Credit will no longer be applied to past due federal income tax debts. While the IRS has the authority to offset these payments against prior tax obligations, they will not do so. This announcement does not apply to debts owed to other federal government or state agencies. This means money recovery rebates may be applied to debts owed to federal agencies (other than for income tax debt) as well as state agencies.

Below is a brief description of the current Recovery Rebate program:

The IRS has started sending recovery rebate checks, also known as Economic Impact Payments ($1,400 per person) to individuals ever since the President signed the American Rescue Plan Act into law on March 11th.

Many individuals have or will receive payment without having to do anything. Payments are based on either taxpayer 2020 income tax returns or 2019 if 2020 has not been filed. Individuals that have provided the IRS with banking information on their income tax returns or through the non-filer tool last year will most likely receive a direct deposit. Some taxpayers will receive paper checks.

As with the rebates issued in 2020 if taxpayers have not received their payments, then they may go to the “Get My Payment” site (https://www.irs.gov/coronavirus/get-my-payment)to to check the status. If the taxpayer is unable to use this tool (sometimes it doesn’t work), then ultimately the payment will be reconciled on the 2021 income tax return. This is the same way the rebates issued last year have worked. If taxpayers did not receive the payments in 2020, they may take credit on their 2020 income tax return. The downside with reconciling this on the 2021 return is taxpayers will be waiting over a year to receive this money. The other issue is if taxpayers receive payments based on their 2019 or 2020 income tax return that they would not have been entitled to because their 2021 income exceeds the limits for eligibility, they will not have to repay it, if these same taxpayers do not receive the money and reconcile on their 2021 returns they will not receive it if their income exceeds eligibility limits.

Below are the AGI limitations for the Recovery Rebate

Single taxpayers with AGIs of no more than $75,000 are fully eligible for the credit. The credit phases out for those with AGI in excess of $75,000 until they reach $80,000. There is no credit allowed for those with AGI of $80,000 or more.

Married taxpayers filing jointly must substitute the figures $150,000 for $75,000 and $160,000 for $80,000. 

Taxpayers classified as Head of Household must substitute the figures $112,500 for $75,000 and $120,000 for $80,000. 

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

If you’d like to book an appointment with me, please click on the link below:

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation