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.
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Nineteen states have effectively taxed this income, either directly or by denying related expenses. And interestingly enough, seven of those states have legislation currently pending to make these funds non-taxable; at this rate, they are unlikely to get approved before tax season is over.
(I may complain plenty about Illinois’ tax laws, but thankfully they have conformed with the federal guidance here.)
The Tax Foundation provides an excellent list of which states tax PPP income and/or deny PPP expense deductions — and goes deeper into the weeds for states that may not have Income Tax but do have a Gross Receipts Tax. Do yourself a favor and check it out before filing your taxes.
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Understandably, there is some confusion this year about unemployment compensation, how it is reported to recipients, and what tax forms taxpayers might need to report it on their returns.
The Illinois Department of Economic Security (IDES) created the helpful infographic above, as well as an Info Sheet, which I’m sharing in its entirety here so it’s easy for folks to find.
From the Illinois Department of Employment Security (IDES) – January 2021
Background
All individuals who received unemployment insurance (UI) benefits in 2020 will receive the 1099-G tax form.
ClaimantswhocollectedUIbenefitslastyearneedthe1099-GtaxformfromIDEStocompletetheirfederalandstatetaxreturns.The 1099-G tax form will be available by the end of January 2021 and mailed or emailed to IDES claimants based on previously selected claimant preference.
The 1099-G form is necessary for individuals who received state and/or federal benefits. This pertains to claimants who received both regular UI benefits and benefits paid under new federal pandemic relief programs including Federal Pandemic Unemployment Compensation (FPUC), state Extended Benefits (EB), Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Lost Wages Assistance (LWA).
How to Access the 1099-G Form
Upon establishing an IDES account, claimants are provided an option to receive their 1099-G form electronically. Those who opted for electronic delivery will receive an email notification towards the end of January 2021. This email will contain instructions to access the document from the IDES website.
For those who opted NOT to receive their 1099-G form electronically, IDES will mail a paper form during the last week of January. These claimants may also access and print their 1099-G form online by going to ides.illinois.gov/1099G, or calling Tele-Serve at (312) 338-4337.
Fraud Warning
If an individual did not receive UI benefits in 2020, yet still received a 1099-G form from IDES, this may indicate that a fraudulent claim was filed in their name. The IRS has provided guidance to states regarding these nationwide identity theft and unemployment fraud schemes. Individuals who may have erroneously received a 1099-G formshould immediately contact IDES at (800) 244-5631.
IDES representatives will return calls on a first-in, first-out basis to ensure the fraudulent claim is shut down, and to address the 1099-G form. Once a fraudulent claim is reported, investigated, and confirmed by IDES, the victim will not be held responsible for repaying any benefits fraudsters may have received in their name, nor will they be held responsible for tax implications resulting from a fraudulent claim. IDES understands the urgency associated with tax season and is committed to ensuring agency resources are available to assist individuals who received a form in error.
See the recent alert on 1099-G forms from the U.S. Department of Justice National Unemployment Insurance Fraud Task Force.
Additional Information and Questions
Additional information on 1099-G forms is available at ides.illinois.gov/1099G. For tax filing information, individuals are encouraged to call the IRS at (800) 829-1040 or visit their website at irs.gov.
Individuals can also contact the Department at 800-244-5631 and select the appropriate queue to speak with an expert:
• Select your language
• When prompted, press2to indicate you are an individual
• Next, press1if you received a 1099-G form in error, or press2for all other 1099-G related inquiries
If you are already awaiting a callback for a different inquiry, we will be able to handle your 1099-G related questions on that same call. There is no need to queue for an additional callback.
Additional FAQs are available here. With questions about tax filing, please visit the IRS.
Tax fraud can result in criminal penalties. Some of the criminal activities in violations of federal tax law include deliberately underreporting or omitting income or hiding or transferring assets or income. See https://www.irs.gov/compliance/criminal-investigation/types-of-fraudulent-activities-general-fraud. Federal criminal penalties can include fines and imprisonment. See 26 U.S.C. §7201, §7206, and §7207. Under Illinois law, intent to defraud for tax purposes may be inferred from conduct such as concealment of assets or covering up sources of income, or any other conduct, the likely effect of which would be to mislead or conceal. See 86 Illinois Admin Code 700.330(c). State law provides penalties for tax fraud. 35 ILCS 735/3-6.
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This year, along with the usual year-end forms we ask clients to submit so we can prepare their taxes, we are also asking them to provide Notice 1444 & 1444-B — respectively, the letters that arrived with each of the two stimulus payments (or if direct deposited, around the same time).
However, because these Notices didn’t look like official tax documents, but rather letters from the White House, many taxpayers didn’t read or retain them. The letters contained this information:
The amount of the payment
A phone number to call with issues
Where to find information about the payment on irs.gov
How the payment was made i.e. direct deposit, check, or debit card
Because the IRS does not have the resources this year to create an online “lookup tool” the way they did the last time the government issued stimulus checks — their “Get My Payment” system simply states whether or not a payment was received, and not the amount — then as tax preparers we need the Notice 1444/1444-B to know whether the full amount was issued, or a lesser amount.
Why would this matter? If a taxpayer did not receive the full amount, then they are entitled to recoup the difference on their 2020 tax return.
(But don’t worry: if you received too much, you don’t have to pay it back — unless it was obtained fraudulently.)
After attending numerous year-end tax update courses, we’ve come to the conclusion that the best solution to the missing stimulus payment letter is to have clients download their own 2020 Account Transcript. It’s free, reasonably easy, and reliable.
Keep in mind that Steps 2-9 are one-time only, to register for an account. Once you have a login and password, you can easily access the site anytime you need a transcript.
3. Click “Continue” to register for an account. Once you’ve done this, you should save your login information so you can use it every time you need to order a transcript of any type (for example, a transcript of your most recent tax return).
4. You will need to provide various types of information to validate your identity. Click “Continue” or “Yes” for the next few screens, until you reach the “Let’s Get Started” page.
5. Enter the required information, click “Send Code”, and then check your email for the code and enter it on the following screen.
6. Enter the required information exactly as it appears on your tax return (SSN, date of birth, street address and zip code), then click “Continue”.
When entering the information into the IRS address matching system note the following:
Refer to your most recent tax return and enter the address exactly as it is on your return; for example, spelling out the word “Street” rather than using the abbreviation “St” could be enough to cause an error.
However, addresses in the IRS system are sometimes auto-corrected through a postal-address validation program and frustratingly, may not match what you put on your tax return. If you are having problems getting the address to match, try running your address through the USPS and trying the auto-corrected version.
7. To validate your identity, the IRS will need an account number from one of your financial accounts. You are able to use any of the following: a) Credit Card Number (your credit card will NOT be charged); b) Auto Loan Account Number; c) Mortgage or Home Equity Loan Account Number; or, d) Home Equity Line or Credit Account Number.
(If you do not have one of these, the system will not work for you and you’ll have to request a transcript by mail. And given Covid-19 wait times, that could take months, sadly. Don’t get me started on how inequitable this is.)
8. Enter your Mobile phone number and an Activation Code will be sent to you. Enter your code on the screen and click “Continue”.
9. Create a User Name and Password and Login.
Now you have an account! The rest is easy.
10. Once you’re in the system, you’ll need to select the reason you need a transcript.
In this case, you would select “Other”.
11. Leave the Customer File Number blank and click “Go”.
12. The screen will display all four types of transcript options and the available years.
13. Select “2020” under “Account Transcript”.
Make sure you are selecting the right kind of transcript. (Click here for information on what each of the types of transcripts are.)
And like magic, a pdf pops up in a new tab of your browser with a letter from the IRS — and if you scroll down to the bottom, there’s section detailing all the transactions you need.
The two rounds of stimulus payments will have these codes:
At this point, print the file to pdf and save somewhere safe, along with the rest of your tax season documents.
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.
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.
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.
As is the case every year, we’re hearing from lots of folks confused about when to send a 1099 form or other “information returns” to someone. It is true that over time, these forms have continued to change, and the rules have become more specific… but the basics remain the same. The most important point is that only businesses need to issue 1099s — if you paid someone for personal purposes, you are not (yet) required to send them or the IRS a Form 1099.
Here’s a crash course for each type of form, followed by an FAQ.
1099-NEC This form was new for 2020 and replaces the old Box 7 of Form 1099-MISC. “NEC” stands for “non-employee compensation”. It is due to recipients and the IRS by January 31st (or the first business day after that, if 1/31 falls on a weekend).
If you paid: 1) a NON-corporation (*see below); 2) for services (not products); 3) via check, cash, ACH, or wire transfer — but not merchant services or electronic payments (such as credit & debit cards, PayPal Business, Venmo Business (**see below) — and starting in 2022 Zelle/QuickPay, CashApp, personal Venmo & PayPal); 4) $600 or more in a calendar year; then you need to send them a 1099-NEC.
(*) A lot of folks get confused and think the rule is if you paid an “individual,” but really the rule is a “non-corporation,” which means that partnerships and LLCs are included. Just because they have a business name doesn’t mean they’re incorporated. You cannot depend on the company’s name to determine corporate status, nor can you rely on the state LLC/Corp database, as it only indicates the entity type at the state level — almost any type of entity may elect corporate status with the IRS.
So, keep in mind that a company can be an LLC but be taxed as a corporation. In this case, you would not need to send them a 1099, because in the eyes of the IRS, they are incorporated. Here’s an example of a W-9 showing an LLC that is taxed as an S-Corp:
This is one of many reasons you should collect Form W-9 from all service vendors before giving them their first check, just to be safe. The person filling out the W-9 will indicate their entity type and whether or not they are taxed as a corporation.
There’s also an exception to the incorporation rule for attorneys and law firms. You must issue a 1099 to a lawyer or law firm regardless of whether they are incorporated. (Law firms and attorneys have so many specialized 1099 issues, they get their own blog post.)
(**) There’s a lot of confusion over Venmo and PayPal, because there are personal-use “Friends & Family” versions as well as business versions of both platforms. Legally, no business should be using the non-business versions of these payment types… but in real life, many do. It’s very hard to distinguish which payments were made using which method — in theory, a 1099-NEC would need to be issued to a vendor who was paid via a personal Venmo or PayPal method, but I’m not sure how this would be tracked. My recommendation (for many reasons) is to only use the business versions, and then the 1099-NEC is a non-issue (because Venmo and PayPal will issue a 1099-K instead). It also sounds like, starting in 2022, even the personal versions of these programs will be required to issue a 1099-K if $600 and over.
I know, that’s all very confusing. Here’s a nice decision-tree provided by our friends over at Bookkeepers.com, courtesy of Bookkeeping Buds.
1099-MISC
Items such as rent payments, royalties, attorney settlements (as mentioned above, not payments for legal services), and medical healthcare payments will still be reported on Form 1099-MISC, though the form has been redesigned and the boxes renumbered.
Report prizes and awards of $600 or more that are not for services performed in Box 3. Include the fair market value of merchandise won. And be careful here, as it is easy to accidentally include these on Form 1099-NEC if the recipient also provided unrelated services.
Rent paid ($600 or more) (Box 1)
Royalties paid of at least $10 or more (Box 2)
Prizes and awards and certain other payments ($600 or more, see instructions for Form 1099-MISC, Box 3 for more information)
Backup withholding or federal income tax withheld (any amount) (Box 4)
Amounts paid specifically to physicians, physicians’ corporations, or other suppliers of health and medical services ($600 or more) (Box 6)
Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (Box 7)
Gross proceeds paid to an attorney ($600 or more whether or not incorporated) (Box 10) – “made to an attorney in the course of your trade or business in connection with legal services, but not for the attorney’s services”; for example, a settlement agreement.
The deadline for providing this form to recipients is the same as above, January 31st. However, the deadline for filing 1099-MISC with the IRS is February 28 if filing on paper, and March 31 if filing electronically.
1099-K
It’s unlikely that anyone reading this will be in the position of issuing Form 1099-K to vendors — but you should know about this form, for a few reasons: 1) You are likely to receive one. 2) It’s the reason you don’t have to issue 1099-NEC to anyone you pay via credit card/debit card, Zelle, QuickPay, a business PayPal account, or a business Venmo account. 3) You may need to reconcile this form against the amount of sales income you report on your tax return.
Form 1099-K is for payments made in settlement of “reportable payment transactions”, which is any credit card, payment card or third-party network transaction. So if you receive payments in this way (unless you only accept checks, e-checks, ACH, or zelle/QuickPay, you probably do), then you’ll get a 1099-K for this total.
But because these amounts are reported to the IRS for you, you don’t need to issue 1099-NEC or 1099-MISC forms to vendors whom you paid using one of these methods. In that case, the recipient could end up having the same income reported to the IRS twice.
As a bookkeeper, accountant or tax preparer, it’s important to protect your small business clients by making sure all taxable income is being reported on their books/returns. If the 1099-K is for an amount that is lower than what’s on the income section of the Profit & Loss, it’s not likely to be an issue. But if it’s higher, you’ll need to do a reconciliation to show that the difference was due to non-taxable receipts such as sales taxes collected, tips collected, refunded sales, and the like.
1099-INT
This form is issued to anyone who lent your business money, and your business paid them at least $10 of interest in the past calendar year. It includes owners, partners, and shareholders.
Note: do not issue this form for accrued interest; it is only for actual payouts of interest in cash or trade.
The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.
If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.
Another note: I have had clients reach out confused by the language “You are not required to file Form 1099-INT for interest on an obligation issued by an individual”. This means if the loan were TO an individual rather than FROM one, and the individual paid interest to the company. (This is not usually the case.) In that situation, the individual would not have to issue the company a 1099-INT (although the company would still have to declare the interest income).
1099-DIV
This form is issued to a shareholder of a C-Corporation for dividends or other distributions paid in the past calendar year.
Most folks don’t think this applies to them — but if you own a business that is taxed as a C-Corp, and you took money out that wasn’t W-2 or loan repayments, then you may have issued yourself dividends. (And if it was for a loan repayment, did you pay the required amount of interest? If so, see the “1099-INT” section above.)
The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.
If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.
1098
This form is to report mortgage interest and real estate taxes. You may not think it applies to you, but if you do the bookkeeping for or are a member of a housing cooperative, you may find that it does. This needs to be issued to housing co-op members for their allocated portion of mortgage interest and real estate taxes paid by the cooperative, so they can deduct them on their personal tax return, Form 1040, Schedule A. If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.
Frequently Asked Questions
What do I do if the vendor will not give me their Tax ID Number, which I need to file the 1099?
First off, it’s the business’ responsibility to obtain this number. That’s why I recommend getting the W-9 from the vendor before giving them their first payment. But in the case where it’s 1099-time and you still don’t have that TIN for some reason, respectfully let the vendor know that not having their info will not prevent you from filing the 1099. It just means the IRS will receive it with “REFUSED” written in the field where the number should be (or if you use an e-filing program, you will check the box that the number is unavailable). This will almost always trigger an audit for both the business and the recipient, which no one wants. Presented with this information, I find that most non-compliant vendors are suddenly able to fill out that W-9 form after all.
Do I really have to send one to my landlord? They get angry when I bring it up.
If your landlord is not incorporated, yes, you do. If it makes them mad, then consider why… are they trying to avoid declaring it as taxable income? Is that the type of person you want to rent from?
What if you forgot to issue a 1099 to someone?
It’s never too late! Since the statute of limitations never starts if you don’t file a return, penalties and interest can continue to accrue forever. If you noticed that you forgot to file a 1099, even for a prior year, reach out to the recipient in question and make sure they declared and paid taxes on the income you inadvertently forgot to remind them about — and hopefully they have. In this case, no amended return will be required on their end, and the form’s arrival will not come as an unwelcome surprise. If not, then that’s a bigger concern. It is the responsibility of each recipient of income to declare it on their return, regardless of having received the 1099. Not getting the form does not exempt a taxpayer from declaring the income they earned. So, the business owner needs to evaluate the risk involved to their company in knowingly refusing to comply with tax law, versus the recipient’s desire to evade taxes.
What do you do if you receive a 1099 that is incorrect or unnecessary?
If you receive a 1099 that has incorrect information on it, simply reach out to the issuer to ask for a corrected 1099. Do this as soon as possible, as it will help them to fix it before it is submitted to the IRS.
If they will not correct the total, then declare the full amount on your tax return, but “back out” the incorrect amount as a negative, with an explanation to the IRS for why this amount was inaccurate. If you receive an audit notice, provide the IRS with the documentation showing why your calculation is correct, and the support showing you reached out to the issuer when you realized the form was not right.
If you should not have received a 1099 at all, follow the same advice as above. A good example of this would be if you received a 1099-K for credit card payments, but also received a 1099-NEC from the company that paid you (this is quite common… it is extremely challenging in most bookkeeping software to distinguish how a bill was paid in most reports). In this case, if the customer will not void the 1099 form for some reason, simply declare the full amount on your business’ tax return and “back out” the amount that was double-issued, with the explanation that it was already declared in income via 1099-K or some similar wording.
However, if the reason you should not have received the 1099 was that you are taxed as a corporation, and you’ve already declared this income on your tax return, then you can ignore the form — it will have no effect on anything and was just a waste of time on the part of the issuer.
How do I run the 1099 report in QuickBooks? Won’t it tell me who needs a form from my company?
Most bookkeeping professionals don’t use the 1099 report that QuickBooks generates — it’s too prone to user error when setting up the vendors, accounts, and dollar-thresholds. Instead we run the detail of the cash accounts and filter by transaction type – Check, Expense, Bill Payment… then sort by Name. The problem may be that there is not a name in there, or it is not a Vendor Name: another great reason to make sure you’re setting up bank rules and being careful about data entry to include vendor information on all transactions.
How does PayPal work?
Oh my goodness, is this ever complicated.
If you pay a business using your personal bank or Paypal account, or pay through “Friends & Family” PayPal you do need to send a 1099 (if over $600), because PayPal thinks this was a personal transaction — because, as I mentioned at the top of this post, personal transactions do not require 1099 forms. If you had used “Business” PayPal, then PayPal would send the 1099-K and there would be no reason to issue a 1099-NEC.
A colleague of mine recently called PayPal support about this and here was their response: If the transaction detail says “money sent”, those qualify as Friends & Family transactions. However, if the transaction says “invoice paid” or “payment”, then it is a business payment — even if it’s within a personal Paypal account.
What about Venmo?
According to Venmo’s term of service, using it for business is a violation, and they can seize whatever money you have sitting in your Venmo account if they catch you using it for business.
However, we know sometimes this is the best way to collect money from folks, or that customers will send you Venmo funds without thinking about it, or that you’ll do the same with your vendors.
Venmo is considered a “peer-to-peer transfer service”, and not a third-party network. Therefore, treat these like cash payments from a business and send a 1099 form to your vendor.
(Side note: Venmo is starting to accept applications from a number of businesses for a new “Business Venmo”, but it’s brand new and very limited. Be careful with this. The problem with Venmo, PayPal, Bento, and other similar companies like that is that they don’t act like they’re banks — and their staff doesn’t realize that banking is actually the primary function of the company they work for — they don’t get the same kind of intensive training that bankers do. I recommend avoiding Venmo for business payments as much as possible.)
The short version here is that not all states have the same rules. Some allow the IRS filing of certain information returns to substitute for state filing requirements, and some don’t. Some require e-filing and some allow physical mailings. In past years, the IRS offered state-filings with the 1099-MISC, but didn’t bring that into the modern era when they released 1099-NEC. So please, do your homework when it comes to state filings.
Where can I find more info on due dates, penalties, and real-life scenarios?
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.
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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The IRS has released — or technically, re-released — a new form for Non-Employee Compensation called the 1099-NEC for use starting early 2021 for Tax Year 2020.
It’s actually an old form that hasn’t been in use since 1982 that was redesigned — originally it was for reporting fees, commissions and other compensation, but in 1983 it was retired and we’ve been reporting these types of income on Form 1099-MISC ever since.
Moving forward, instead of using 1099-MISC Box 7 to report Non-Employee Compensation, we’ll all use 1099-NEC Box 1. Box 4 is to report any federal withholding in relation to the compensation. Boxes 5, 6, and 7 are for reporting state tax withheld, state ID numbers, and state income, respectively. IRS instructions can be found on their website.
To clarify: the requirements for reporting nonemployee compensation have not changed — only the form on which it is reported.
Forms 1099-NEC must be filed with the IRS by January 31 of the year following the calendar year to which the return relates. For tax year 2020, the deadline is February 1, 2021, since January 31 falls on a Sunday. The deadline applies whether filing the form electronically or on paper. Unfortunately, unlike Form 1099-MISC, the IRS will not forward data to states for Form 1099-NEC, so processes for filing these will be determined by each state.
Items such as rent payments, royalties, attorney settlements (not payments for services), and medical healthcare payments will still be reported on Form 1099-MISC, though the form has been redesigned and the boxes renumbered. For tax year 2020, the deadline for filing 1099-MISC is February 28, 2021 if filing on paper, and March 31, 2021 if filing electronically.
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In an effort to push Congress into action, the IRS reiterated its stance on the PPP last week.
Late last week, the IRS and Treasury issued both a revenue ruling and a revenue procedure, doubling down on their stance that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.
This isn’t new news, of course. The IRS is bound to statute on this one and doesn’t have any wiggle room — only Congress can legislate on the topic of what is taxable and deductible, whereas the IRS only has administrative oversight in this arena. They made it clear very early in the game — April 30th, in fact — that they had no intention of accepting deductions for expenses that were paid for with PPP funds.
But in the ensuing months, Congress — despite broad bipartisan support for a measure to render these costs deductible — has been stuck in gridlock and failed to pass legislation making it so. This recent action on the part of the IRS seems designed to signal Congress that only by their action will the original intent of the CARES Act be realized.
However, the IRS took this particular set of guidance one unfortunate step further, at least as far as my clients are concerned.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”
Now, I have been attending the AICPA Town Halls since nearly the beginning of the pandemic, and they are still strongly recommending that no one apply for forgiveness before year-end unless: 1) they need to sell their business; 2) loan covenants are at risk; or, 3) they need to reduce FTEs after meeting a date-driven safe harbor.
Part of the reason for this suggested delay is the aforementioned statutory requirement that prohibits the IRS from permitting any deductions for expenses paid for with non-taxable income. (Also: likeliness of legislation authorizing automatic forgiveness under a certain threshold; and the need for further guidance in many areas that remain unanswered.)
The idea was that if forgiveness was not granted in 2020, then the deductions could be made as usual on tax returns filed in the first-half of 2021. When forgiveness was eventually granted on these PPP loans, one of two things would have happened: 1) Congress would since have acted to protect the deductions and therefore PPP funds could be accepted into non-taxable income; or, 2) Congress would not have acted, in which case the PPP income would effectively be made taxable in 2021.
To me, whether the expenses paid with PPP proceeds were deductible hinged on whether forgiveness was obtained; as a result, I strongly maintained that those expenses did NOT become nondeductible until that “condition subsequent” occurred. As a result, if a business were filing its 2020 tax return before word on its forgiveness application had come down from the SBA, the expenses would be fully deductible. After all, we have a little something called the “tax benefit” rule, which allows a taxpayer a full deduction if at the time of filing the return, no event has occurred to render the amount nondeductible. Then, if a future event occurs that is fundamentally inconsistent with the premise on which the previous deduction was based (for example, an unforeseen refund of deducted expenses, or in this case, the forgiveness of a loan), the taxpayer must take the deducted amount into income. Applying the principles of Section 111 to PPP loans, the taxpayer would be entitled to a full deduction in 2020, with a potential income pick-up in 2021 when the loan was forgiven.
But with this recent IRS guidance, as Tony points out — he was wrong (again).
According to the Ruling, it matters not whether the application for forgiveness has been filed by the time the tax return is ready to go; rather, what matters is that the taxpayer apparently knows, in their heart of hearts, that the loan will ultimately be forgiven. After all, as the Ruling explains, “Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients… with clear and readily accessible guidance to apply for and receive covered loan forgiveness,” a sentence which I would have found laughable had the lies contained within it not ruined the past six months of my life.
I won’t get into the details of what it means to “reasonably expect” forgiveness, or determine partial forgiveness, or whether or not the new safe harbor applies if you “reasonably expect” wrong. (I’ll let Alan Gassman, another fan of Tony’s, dive into those weeds.) But as a short summary: 1) You can deduct expenses on your 2020 return if you find out before the return is filed that the PPP loan didn’t get forgiven or if you decide not to apply for forgiveness; 2) If you guessed wrong about the amount of forgiveness (and therefore deductions), you can either a) amend the 2020 return to adjust the disallowance, or b) deduct the improperly disallowed expenses for 2020 in the year forgiveness is determined.
Somehow, with not only a revenue procedure but also a revenue ruling, the IRS managed not to address two big issues that their rulings raise: 1) How should a Schedule C filer handle the deduction question? For a self-employed person, it’s not the expenses that determine forgiveness, but rather a calculation based on their 2019 income. 2) Which deductions will be limited, and in what order (payroll, rent, mortgage interest, utilities)? This has serious ramifications for the §199A Qualified Business Income deduction, Research & Development credits, and the §163(j) Interest Deduction limitation.
But I am not even going to touch on those two issues. Why? Because I truly believe the IRS made this announcement to rile up Congress members into finally taking action. It might have worked.
The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.
In the meantime… as an accountant, what do you tell your clients? As a small business owner, what do you do?
Well, if I’m right, and Congress is duly riled, then hopefully we’ll finally see some movement here, preferably before the end of the year, but (dear lord please) at least before tax season. At which point — poof — it becomes a non-issue (with the exception of the countless hours I and others have spent worrying and writing about it).
Tax Filing Approaches for Consideration 1) Wait and see • Use extensions until additional guidance or legislation is available • Pass-through entities don’t need to be concerned until March/April 2021 deadlines 2) File return and pay taxes • Assumes expenses paid with PPP funds will not be tax deductible • If this changes, the borrower can file an amended return 3) File return and deduct expenses** • Contrary to current guidance (but in the spirit of the PPP legislation)
For what it’s worth, Bill describes himself as a “wait and see” kind of guy. (I strongly suggest watching Bill’s participation in the most recent AICPA Town Hall — from 32:00 through 52:40. His logical process, description of history and legislative intent, and arguments are thought-provoking.)
I’ve already spoken with my tax partner, and our plan is to put all partnership and corporate clients on extension to avoid the unnecessary cost of approach #2 and the unnecessary risk of approach #3. Haven’t yet decided how to handle Schedule C self-employed filers… but also hoping we won’t have to cross that bridge.
In the meantime, it’s business as usual, trying to close out books and prepare for 1099s… as if it were any other pandemic year-end.
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From the IRS “e-News for Tax Professionals” comes a reminder that even though we are scrambling after an elongated tax season to get our S-Corp and Partnership returns filed by the September 15th deadline, this won’t be the weekend to e-file them.
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