Tag Archives: IRS

COVID-19 Financial Relief, Education, Illinois, IRS, Site News, Tips

What The ARPA, ERC, PPP And Other Laws Mean For Your 2020 Taxes

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Recent new legislation from Congress and the White House, as well as guidance from the IRS and DOL, has caused sweeping changes for small business owners and individuals, and we tax preparers are still trying to wrap our heads around it — during what was already the most complex and demanding tax season on record.

Specifically, the American Rescue Plan Act (ARPA) included a few provisions that are retroactive to 2020 — and the IRS, various state Departments of Revenue, Department of Labor, and tax software programs are trying to figure out how best to implement these changes as efficiently as possible. (For a breakdown of key provisions in the Act, see this excellent summary.)

These changes include:

1) The first $10,200 per person of 2020 unemployment benefits will no longer be taxable at the federal level, though certain states will continue to tax the full amount (Illinois has asked all taxpayers with unemployment income to hold off on filing returns until the Dept of Revenue has addressed the situation). The IRS will be releasing a worksheet that the tax software companies then need to incorporate into the 1040 returns.

2) A 2020 “Repayment Holiday” for the Marketplace Health Insurance Advance Premium Tax Credit was issued, but implementation questions remain; IRS guidance is expected soon.

3) Another economic impact payment (stimulus check) is on its way. You do not need to file your 2020 tax return right now to claim your check, as the law allows for an additional payment in a few months if your 2020 tax return shows you are entitled to more (vs your 2019 tax return). Conversely, if your income went up in 2020 and you are now ineligible for the full benefit, you’ll want to wait to file your 2020 taxes until after your payment arrives, since you won’t have to pay back the overage on your 2021 tax return.

In addition to the above legislative shifts, the IRS recently released guidance concerning the Employee Retention Credit (ERC) that changed our expectation of how it would be handled on business tax returns for cash-basis business tax filers. Previously we had expected that those who received PPP funds in 2020 and can now (as of the Dec 21 Consolidated Appropriations Act) retroactively claim ERC would adjust for the related deductions on their 2021 tax returns. Not so. These adjustments will have to be made on the 2020 tax returns. As a result, we have had to put approximately 75% of our client business returns on extension.

(Technical note: keep in mind if you are doing tax returns for a client that claimed ERC, not only do you have to reduce deductible wages by the amount of the credit, but also recognize this reduction may impact Section 199A eligible wages for purposes of the 20% qualified business income deduction.)

And yet we are still awaiting essential guidance on whether or not the Employee Retention Credit can be taken on wages paid to >50% owners of a company. Interpretations by tax analysts so far are pretty much split evenly between whether the law as [sloppily] written provides reasonable basis in this area.

I’m guessing you see the challenge here: we don’t yet know the rules for claiming the ERC, and yet we have to report related adjustments (as a direct result of the credit calculation) on the 2020 business tax returns. Most of these returns have a flow-through relationship with the business owners’ personal tax returns — so those may have to be placed on extension as well if we do not get guidance soon.

(Related blog post: please call your representatives and ask for all taxes — estimated quarterly as well as corporate — to be extended; not just the Form 1040.)

We are also expecting guidance about how the IRS wants business owners to treat basis reporting for owners where PPP forgiveness causes issues.

Yet another example of a forced need to wait on certain returns: using tax filing software, we can e-file a return today, but set the payment direct-debit date to a future date — not later than the return due-date. This date has not yet been updated in most tax prep systems to go beyond April 15th to the new due date of May 17th.

It’s particularly frustrating for us as small business advocates, because filing a tax return is the only way to get a refund if you’re owed one, and many of our clients may be more in need this year than usual. And yet, for a large number of taxpayers right now, holding off on filing is the recommended approach.

All the while we are trying to help our small business clients respond to 2021 changes, such as important employment law updates; alterations to COBRA and Marketplace subsidies; major modifications to the current round of the Paycheck Protection Program (PPP); new relief programs such as the Shuttered Venue Operators Grant (SVOG) and the Restaurant Revitalization Fund (RRF); the aforementioned ERC/PPP maximization… and so much more.

The provisions noted above — and others — may affect your return. Tax professionals everywhere need some time and space to learn about these changes, analyze their impact, and develop personalized recommendations to maximize your COVID-19 tax benefits. Please be patient with us during this extremely stressful time.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, IRS, Site News, Tips

PLEASE Ask Congress To Extend Key Tax Filing Dates

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As I outlined in a recent post, the IRS extended the individual tax date for filing, but not business and estimated tax dates, which are the ones that small business owners and their tax preparers truly need.

We are asking everyone to please take a moment to contact their Representatives and Senators in Congress to request these types of taxes be included in the recent extension announced by the IRS.

You can share this great article from Money Magazine with them, outlining the issues, or just ask them to google “AICPA tax deadline small business” — there are a ton of great articles that explain why the need for them to act is so great.

From the American Institute of CPAs:

For reference, here’s a copy of my personal message to them — I called and emailed both of my senators as well as my representative.

We in the small business accounting and tax world would immensely appreciate your taking a few moments of your time to help us and our small business clients out — it has been a tax season like no other and we need your assistance to make it to the other side.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Illinois, IRS, Site News, Tips

Tax Day Extended to 5/17… Kinda. Small Businesses Need Your Help!

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As I’m sure you’ve heard, it’s official — though it has a lot less meaning and impact than expected. The IRS has moved the individual income tax filing and payment date from the “usual” April 15 to my birthday: May 17, 2021.

But they did not include estimated tax payments or business returns in this extension. Please give me a real birthday present and contact Congress to request this essential small business relief.

IRS Commissioner Rettig neglected to do a few key things that were necessary to assist small business owners and their CPAs:

– Same as last year, the new date was announced after the March 15 deadline for filing S-Corp and Partnership tax returns; due to a long list of new guidance and still-awaited guidance, this forced us to do extra work to put approximately 75% of our clients in this category on extension.
– The extension does not apply to C-Corps and Co-ops, whose returns are still due on the original date of April 15th. This category represents approximately 15% of our struggling small business clients.
– The May 17th extension is only for 2020 tax year filings and, quite problematically, does not apply to first-quarter 2021 estimated taxes due on April 15th, which almost all of our clients are required to pay.

Furthermore, when recently questioned about whether or not there was a way the IRS could help small business owners by coordinating the first-quarter payment with the new deadline, Rettig flatly refused: “no”. Pressed regarding the consequences that not extending this due date would have on small business owners, Rettig said that they had to draw a line somewhere to keep wealthy taxpayers from “gaming the system” (for one month, really?); that small business owners challenged by this could just call the IRS if they have a problem (because that’s been going so well this season?); and tried to point out that the penalties aren’t really that high (so suck it up, and never mind that the state penalties are out of control?).

I cannot begin to express the frustration and disappointment with this decision, and I am not alone.

“The announcement is far too selective in who is receiving relief,” Barry Melancon, AICPA’s president and chief executive, said in a statement. “Failure to include estimated payments nullifies any benefit of a postponement since the tax return work has to be done to calculate estimated payments.”

“While this is welcome news for some taxpayers, there are a number of concerns that this limited extension does not address,” writes Frank Washelesky of ORBA. “The IRS extension does not extend the time for paying first quarter estimated income taxes for the 2021 tax year. It is difficult for taxpayers to determine the amount of the estimated tax required without, at least, a reasonable estimate of their 2020 tax situation. Without an extension of these payments, the filing extension to May 17, 2021 has minimal value for many taxpayers.”

Here’s what the problem is: most small business owners need to pay quarterly estimated taxes to the IRS based on either:
1) 100% of the prior-year’s tax liability; or,
2) 90% of the current-year’s tax liability (which we can’t know yet, so we extrapolate based on the actual profit from the quarter).

Based on a somewhat complex set of rules (which are often different at the state level), small business owners and their tax advisers calculate the actual amount to submit. But they generally need to know both these amounts — which is impossible if their tax return for 2020 hasn’t been filed yet. See why this mismatch in dates is a problem?

And to spice things up even further, not all states are going along with the IRS rules. Taxpayers and their advisers need to check with each agency separately (here’s a good running list at-a-glance). Illinois recently decided to comply with the IRS dates, meaning that the quarterly estimated tax problem exists with our Department of Revenue as well.

“This selective decision by the IRS unfortunately creates more bureaucracy and confusion and is out of sync with real world stresses that taxpayers, tax practitioners and small businesses are dealing with,” said Melancon.

How can you help?

You can call or email your politicians and ask them to include estimated and corporate taxes in the new deadline.

We in the accounting profession would be greatly appreciative if you could contact your Congressional Representatives and Senators and ask them to move ALL tax return and payment due dates, including estimated tax payments and corporate taxes.

I know it’s a pain, but AICPA insists that this type of grassroots work really does have an impact… and if you care about the physical and mental health of your tax preparer, and about the anxiety level and financial well-being of millions of small business owners, you’ll hopefully take a moment to make our request go a bit further.

Thank you!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, IRS, Tips

IRS Provides American Rescue Plan Guidance – DO NOT FILE AMENDED RETURNS YET

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From National Association of Tax Professionals (NATP) less than an hour ago (7:15 pm Central, March 12, 2021):

The IRS strongly urges taxpayers not to file amended returns related to the new legislative provisions or take other unnecessary steps at this time.

The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable.

For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with the software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return.

For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Tips To Maximize 2020 Employee Retention Credit (ERC) & PPP Interaction

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I recently wrote about reasons to hold off on Paycheck Protection Program (PPP) forgiveness applications for the time being. Among them is the complex interaction between PPP and the Employee Retention Credit (ERC), which previously was not permitted as an option for financial relief for those that had received PPP funding.

Because ERC is now available for small businesses who have accepted PPP funds — but not for the same payroll dollars (no double-dipping) — there are some pretty complicated calculations that, if done right, could generate a great deal of financial relief to a lot of independent business-owners in need.

The IRS came out with guidance on March 1. The Journal of Accountancy summarizes:

The notice explains (1) who are eligible employers; (2) what constitutes full or partial suspension of trade or business operations; (3) what is a significant decline in gross receipts; (4) what is the maximum amount of an eligible employer’s employee retention credit; (5) qualified wages; (6) how an eligible employer claims the employee retention credit; and (7) how an eligible employer substantiates the claim for the credit.

Summary of the 2020 Employee Retention Credit

As a reminder, the 2020 ERC is a payroll tax credit available to business owners whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. (Note: in the new IRS guidance it also states that if “the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order”, your business may be eligible for ERC — even though there was no governmental order in your area.)

The credit comprises 50% of up to $10,000 in wages to each employee. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC.

The ERC is claimed as a reduction of payroll taxes on quarterly Form 941 (or a prepaid refund on Form 7200). The IRS updated the form on July 1, and a handy breakdown of the new lines can be found here. There are different rules for eligible businesses to be able to claim the 2021 ERC moving forward — a topic for another day — but this post concerns the opportunity to “scoop up” payroll dollars from 2020 that would have been eligible for ERC had it not been for the PPP Loan. These can be claimed by filing an amended Form 941 for each relevant quarter.

Keep in mind that the ERC is complex, and this blog post will not walk you through the specifics — I’ve included a list of some of my favorite resources below. The goal here is to share the steps in our firm’s approach toward these calculations for our clients.

So let’s start with a couple of things to be aware of before we go through the steps that my firm plans to walk through come May/June.

  1. First, the ERC is not generally as valuable as the PPP. It is a payroll tax credit, rather than actual cash funding (though you can file for an advance on it).
  2. And the ERC did not get the benefit of having Congress declare its related expenses deductible, like the special treatment that PPP costs received. So you will lose all the deductions for the payroll tax dollars on which you receive the credit. Deductions aren’t worth as much as credits, so you still come out ahead. But if you’re choosing PPP or ERC for a given payroll dollar, you want to pick the PPP first — up to the minimum 60% requirement for that loan to be forgiven.
  3. However, once you’ve reached that 60% requirement, if you can use non-payroll costs for the remaining 40%, then you “free up” the rest of the payroll dollars to be used for ERC. So you’ll want to work on PPP1 forgiveness applications at the same time as 2020 ERC calculations — they are related to each other, and changing one will potentially affect the other.
  4. But what does this mean for companies filing income tax returns for 2020? Businesses that later decide to retroactively claim the ERC will need to file amended income tax returns — or preferably, put their income tax returns on extension until they have claimed the ERC for 2020. We had previously thought that cash-basis filers could potentially claim the income for the credit and the associated reduction in payroll costs on the 2021 income tax return, but that was ruled out with the most recent IRS guidance.

Steps to Evaluate Payroll for PPP vs ERC

The hope is that in most cases you’ll be able to do Steps One and Two and skip the rest. But just in case, Steps Three and Four will take you the rest of the way there.

Step One
When figuring out how to combine ERC and PPP, literally make a calendar for each client and work from that.

a) Determine dates for which you qualify for ERC, based on either:
– the full or partial shut-down period, or
– a gross receipts decline of 50% over the same quarter in 2019
(the latter qualifies you from the beginning of that quarter to the end of the quarter where receipts go back up to 80%)

Keep in mind that both scenarios may apply, but for different periods — for example, the business was shut down on 3/18/20, and then later fully reopened… and then the 50% revenue drop started in the following quarter.

Note: you may want to find out the exact dates that your client’s city/county/state decreed full-capacity indoor dining was illegal — for those dates, restaurants qualify for ERC based on “full/partial shut-down” rules. If your client is a gym, bar, or other type of non-essential business that had hours limited, find out the exact full-or-partial shut-down dates decreed for that industry in that specific area.

b) Determine PPP covered period. For most folks, this will be the 24 weeks starting on the date of loan fund disbursement.

c) Determine the “bookend” periods — the time both before and after the PPP covered period; for the timeframe when the client qualified for ERC but was not in the PPP realm.

Step Two
You may be able to skip the rest of the steps by eyeballing whether you’re able to claim the entire 2020 ERC of $5k per employee (on the first 10k paid to each) all in one quarter — for most businesses this would usually be the final quarter of the year. Then, not only will you not have to worry about overlapping PPP and ERC payroll dollars, but you also will be able to claim this through most payroll companies and not have to manually amend the 4Q 2020 Form 941. Double-bonus!

If not, then see if you can get the full $5k per employee ERC (again, on the first 10k paid to each) using only the periods before and after the PPP1 covered period. You at least eliminate the need to juggle the PPP payroll dollars along with the ERC payroll dollars during the covered period.

Step Three
If that’s not an option — if you can’t get to the full 10k within the bookend periods — then:

Before you work on PPP1 forgiveness, subtract whatever the 2020 unallocated ERC balance is after Step 2 (not to exceed 10k of wages per employee) from the payroll amounts during the PPP covered period — before putting numbers in the forgiveness application, just to make sure you can still get full forgiveness at this rate. This is just a “gut check” to see if you can eliminate the need to run the actual ERC calculations for the PPP covered period.

If so, then go ahead and take ERC on the difference, even if you haven’t figured out the specifics of your PPP1 forgiveness yet.

Step 4
If you can’t get full forgiveness on PPP1 at this rate, then go ahead and fill out the PPP1 application in full, using only 60% of the PPP funds to allocate payroll.

Then see how many payroll dollars are “left over” to be used for ERC.

And remember that you can use payroll from employees who made over $100k annually for ERC during the PPP period — because those dollars are not eligible for PPP (due to rules and limitations specific to that program), but they are eligible for ERC.

You can also count — for ERC purposes — dollars that were above 60% of the PPP loan, and therefore are not needed for forgiveness (presuming the business has sufficient eligible costs to make up the 40% “non-payroll” portion of PPP forgiveness).

Think of it this way: you are effectively reducing the ERC subtraction amount per-employee from PPP forgiveness until you get to full PPP forgiveness… and taking 2020 ERC on the balance (since as I mentioned before, the PPP payroll dollars are more tax-advantaged than the ERC dollars).

Does this four-step process sound easy? No! It’s not. It may not in fact be worth it for most small business clients to pay a professional to scoop up the remaining piddly amounts in the PPP covered period — in which case, consider just using Steps One and Two: the amounts in the bookend periods, or even better, just the amount from the final quarter (because that way they don’t have to pay you to manually prepare a 4Q Form 941, either).

But reviewing this approach before going in and working on all the client ERC and PPP calculations should help a great deal in identifying where the bulk of the payroll dollars are that will qualify for the ERC program, and will allow you to make intelligent decisions about which periods to mine for this type of financial relief for your small business clients.

Resources

For a wonderful in-depth explanation of the Employee Retention Tax Credit, please see Tony Nitti’s two-part Forbes article:
– Breaking Down Changes To The Employee Retention Tax Credit In The New Covid Relief Bill, Part 1
– Breaking Down The Changes To The Employee Retention Credit In The New COVID Relief Bill, Part 2
– Part 2 also links to an earlier article of his that goes through the details of calculating the ERC according to the 2020 rules.

KBKG is offering a free one-hour webinar on March 17:
– Employee Retention Tax Credits: Qualifications, Benefits & Refunds (kbkg.com)
–This is the same firm that offers the free 2021 ERC estimator calculator.

The three paid courses I’ve taken so far that were the most valuable were:
– Tom Gorczynski‘s Employee Retention Credit Update, which included an Excel Calculation Template.
– AICPA – The NEW Employee Retention Credit: More for Eligible Employers
– NATP (natptax.com) – Calculating the Earned Income Credit

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Illinois, IRS

IRS & Illinois Open Tax Season On February 12

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Just a confirmation that both the IRS and the Illinois Department of Revenue have delayed the start of tax filing season to the same date — February 12, 2021.

The IRS announced January 15th that they will begin accepting and processing 2020 tax year returns later than usual.

The February 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the December 27 tax law changes that provided a second round of Economic Impact Payments and other benefits. This programming work is critical to ensuring IRS systems run smoothly. If filing season were opened without the correct programming in place, then there could be a delay in issuing refunds to taxpayers. These changes ensure that eligible people will receive any remaining stimulus money as a Recovery Rebate Credit when they file their 2020 tax return.

On January 26th, the Illinois Department of Revenue (IDOR) announced that it will begin accepting 2020 state individual income tax returns on the same date that the Internal Revenue Service (IRS) begins accepting federal individual income tax returns, Friday, February 12th.

To speed refunds during the pandemic, both the IRS and IDOR urge taxpayers to file electronically with direct deposit. Due to limited staffing at both agencies, paper filings are taking many months to be processed. If you have a balance due, be sure to pay it online to avoid issues with paper checks sitting unopened in the mailroom.

As for whether tax season will be extended, the current answer from both agencies is: no. But IRS Commissioner Rettig did mention recently that a third round of stimulus checks might make hitting the April 15th deadline impossible. We shall see — tax professionals are mixed about the idea.

It will be a challenging season, to be sure. See my colleague Claudia Hill’s Forbes article for her take on “Top Ten Tax Season Concerns”.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, QuickBooks Software, Tips

FREE Bookkeeping Buds Webinar Recording – Troubleshooting The New ERC Rules

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Scroll to the bottom of this post for a link to the full webinar.

As I’ve mentioned in recent posts, one of the main sources of financial relief from the congressional legislation that was finally signed recently is that the Employee Retention Credit (ERC or ERTC) will now be available to businesses who also accepted Paycheck Protection Program (PPP) funds. Not only will eligible businesses be able to claim this moving forward, but they have an opportunity to “scoop up” payroll dollars from 2020 that would have been eligible had it not been for the PPP Loan.

As a reminder, this credit is available to business owners (regardless of size) whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. The credit comprises 50% of up to $10,000 in wages to each employee paid by an eligible employer whose business has been financially impacted by COVID-19. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC. It is claimed as a reduction of payroll taxes on quarterly Form 941 (or a prepaid refund on Form 7200). The IRS updated the form on July 1, and a handy breakdown of the new lines can be found here.

For a wonderful in-depth explanation of the Employee Retention Tax Credit, please see Tony Nitti’s two-part Forbes article:
– Breaking Down Changes To The Employee Retention Tax Credit In The New Covid Relief Bill, Part 1
– Breaking Down The Changes To The Employee Retention Credit In The New COVID Relief Bill, Part 2
– Part 2 also links to an earlier article of his that goes thorough the details of calculating the ERC according to the 2020 rules.

Last week, I offered a webinar to members of my favorite professional bookkeeping group, and they have been kind enough to allow me to share the recording here at no charge. The purpose of the session was to explain the credit and the related challenges, and to brainstorm how we might move forward to calculate the totals and claim it for our eligible clients. Our conclusions have been enforced since then:

1. Identify which clients might qualify and make sure their books are up-to-date (even though we are still waiting on a lot of guidance — for example: what receipts are we looking at when we calculate a 50% drop in revenue? Does it include state and local emergency grants?)

Here is the Excel template I used in class to track client eligibility:

Client PPP-EIDL-ERC templateDownload

2. Reach out to the payroll companies to see what they will need to claim the credit;

3. The likelihood that this will all happen quickly enough to claim the 2020 ERC on the 4Q Form 941 is very slim; plan on filing amendments for Q2, Q3 and Q4 later.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

IRS, Tips

2021 IRS Standard Mileage Rate is 56-Cents-Per-Mile

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Thank goodness, we still get plain old boring expected news from the IRS once-in-a-while. It’s honestly a relief, and oddly reassuring.

The IRS announced last week that beginning on January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020,
  • 16 cents per mile driven for medical, or moving purposes for qualified active duty members of the Armed Forces, down 1 cent from the rate for 2020, and
  • 14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020.

Per the IRS, taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Taxpayers can use the standard mileage rate, but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

Accounting Web explains the reasons for this year’s decrease in the rate.

While it may not feel surprising to see a lower rate in a down economy, this is only the second time in the past decade that there have been two consecutive rate reductions. The rate itself is calculated with data provided by Motus, which uses insights from the world’s largest retained pool of drivers to conduct statistical analysis of data from the prior year in order to inform the IRS about trends in business driving.

Trends from 2020 that affected driving costs include:

  • Significantly lower fuel prices, which are on pace to finish approximately 17 percent below the national average when compared to 2019
  • Slowed depreciation rates – caused in part by vehicle inventory shortages associated with the COVID-19 pandemic production stoppages – that have resulted in increased residual vehicle values
  • Rising insurance premiums that, despite reduced travel and accident rates nationwide, are now 29 percent higher than they were a decade ago

They go on to say “to meet their obligations under federal wage and hour laws, employers do not need to reimburse employees at the IRS standard mileage rate,” and to offer some alternative reimbursement approaches.

In general, for small businesses, reimbursing employees at the standard rate is the easiest approach. However, when calculating reimbursements or deductions on a higher-cost vehicle, the actual cost method tends to be more favorable, though it is more work, since all costs (gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments) must be tracked. Either way, a mileage log is required. I recommend MileIQ to my clients; or a spreadsheet with the date, number of miles, and business destination/purpose.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Tips

New Relief Package Passes Congress

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I will be spending the afternoon in webinars learning the details of the recent financial relief package that will become law soon, including “PPP2”, and will share what I learn in a post here later today. In the meantime, the National Association of Tax Professionals has prepared a summary for its members — it’s the clearest, most succinct explanation of “what you need to know” that I’ve read in the past two days. Many thanks to them for allowing us to pass along this info to clients.

Both houses of Congress voted to pass the latest COVID relief legislation and all indications are that the president will sign it into law. We know that more guidance will be provided as this rolls out, but here are the highlights as we know them:

PPP and small business support: New COVID-19 relief package provides much needed support for small businesses. Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with Congressional intent in the CARES Act. In addition, the loan forgiveness process is simplified for borrowers with PPP loans of $150,000 or less. Unspent funds totaling $138 billion will be reinvested in the PPP program.

Economic impact payments (EIP): The bill includes a second round of EIPs for qualifying Americans.

The IRS will use the data it already has in its system to begin making payments at the end of December through the first two weeks of January. If the IRS has your direct deposit information, you will receive a payment that way. If it does not, you will receive your payment as a check or debit card in the mail. If you are eligible but don’t receive your check for any reason, you can claim the payment when you file your 2020 taxes in the spring of 2021.

In regards to eligibility, any person who has a valid work-eligible Social Security number (SSN), is not considered as a dependent of someone else and whose adjusted gross income (AGI) does not exceed certain thresholds (see below) is eligible to receive the credit. This means workers, those receiving veterans’ benefits, Social Security beneficiaries and others are all eligible.

  • Spouses of military members are eligible without an SSN
  • An adopted child can use an Adoption Tax Identification Number to be eligible

Under the CARES Act, joint returns of couples where only one member of the couple had an SSN were ineligible for a rebate. This latest round of relief changes that provision. These families will now be eligible to receive payments for the members of the family who have SSNs. This change is retroactive, meaning those who fall under this category who missed out on the first round of EIPs can claim that money when filing 2020 tax returns in the spring of 2021.

The full credit amount is $600 per individual, $1,200 per couple and $600 for children. It is available for individuals with AGI at or below $75,000 ($112,500 for heads of household), and couples with AGI at or below $150,000. If you have children, you will receive an additional $600 per child.

For those above this income level, your tax rebate amount will be reduced by $5 for each $100 your AGI exceeds the above thresholds.

This means:

  • An individual without children will not receive any rebate if their AGI exceeds $87,000.
  • A couple without children will not receive any rebate if their AGI exceeds $174,000.
  • A family of four will not receive any rebate if their AGI exceeds $198,000.

The IRS will use the same methodology for calculating payments as it did for the first round of economic impact payments.

Unless obtained by fraud, rebate checks do not need to be repaid. If an individual experienced an income loss in 2020, or if they have an increase in family size, they may be able to claim an additional credit of the difference when the individual files their 2020 tax federal income tax return in spring of 2021.

If you are eligible and the IRS does not have your direct deposit information, you will receive your payment as a paper check or a debit card as long as the IRS has your address. If the IRS does not have updated contact information for you, you can claim the payment when you file a tax return in spring 2021.

Someone who is claimed as a dependent on another taxpayer’s tax return is not eligible to receive the $600 refund check themselves. Children 17 and older are not eligible for the $600 per child tax credit.

For those with taxable income, you will need to file a tax return for the 2020 tax year, which you can do during the coming filing season that is expected to begin in late January and end on April 15, 2021. Those with little or no taxable income are encouraged to use the IRS’ free file program.

Other than Social Security beneficiaries (retirement and disability), railroad retirees and those receiving veterans’ benefits, individuals with no taxable income will be able to file a simple form provided by the IRS specifically for the purpose of receiving the rebate check.

Social Security retirement and disability beneficiaries, railroad retirees and those receiving veterans’ benefits do not need to file to receive their rebate. The IRS has worked directly with the Social Security Administration, Railroad Retirement Board and the Veterans Administration to obtain information needed to send out the rebate checks the same way benefits are paid.

The credit is not taxable, consistent with other refundable tax credits.

The rebate is considered a tax refund and is not counted towards eligibility for federal programs for both income and asset test purposes. The rebate checks are not subject to the majority of offsets, including student debt and state debts. The only administrative offset that will be enforced applies to those who are subject to a child support garnishment court order.

A family with a child born in 2020 is eligible for the $600 per child rebate amount (assuming all other requirements are satisfied). The IRS will calculate the payment based on the most recent tax data in its system. If a child was born since the family’s last filing, the family will not automatically receive the $600 rebate amount for the child born in 2020. To receive the credit the family can claim the $600 credit on their 2020 tax return filing made in spring 2021.

If you believe you are eligible for an economic impact payment but did not receive a round one or round two payment, you will have the opportunity to claim the payment on your 2020 tax return. This year’s tax forms will provide a place for individuals to claim the payments. If you don’t normally file taxes and are eligible for a payment, make sure to file a return this spring to claim the payments.

The IRS has not announced the exact date the coming filing season will begin, but it typically begins near the end of January. If you need to update your information by filing your tax return, keep an eye out for an IRS announcement about the start of the filing season.

Individuals can claim the payment by filing a simple tax return when the tax filing season opens in late January 2021.

Unemployment assistance: For those who are unemployed, the pandemic unemployment insurance program will be extended by 16 weeks. Supplemental federal unemployment benefits of $300 per week will continue into April 2021 instead of ending in December.

Rental assistance: The current CDC eviction moratorium will be extended until Jan. 31, 2021.

Student loans: Extension of student loan forbearance provisions created in CARES and extended by executive order, from the current expiration date of Jan. 31, 2021 through April 1, 2021.

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