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Education, IRS, QuickBooks Software, Tips

Rules for When to Issue a 1099 Form to a Vendor

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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.

The rule used to be that this form was issued to anyone who had more than 200 transactions or $20,000 worth of transactions — but starting in 2022, that threshold will drop to only $600.

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.)

What about the states?

Okay, this gets pretty overwhelming pretty fast, so I am linking to a site that has all the states’ rules in one place — https://www.taxbandits.com/state-filing-requirements/

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?

Check out my colleague Mark Kohler’s excellent blog post. His charts for deadlines and penalties are very handy.

Another colleague, Questian Telka, and I worked together on a video series on what a W-9 is, and how to prepare a W-9 for each type of entity; and she followed it up with another video on whether or not you need to issue a 1099.

And there you have it! Simple, see?

**many thanks to The Bookkeeping Buds for editing assistance**

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.

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.

Education, IRS, Software

New 1099-NEC Form For Independent Contractors

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The IRS’s new 1099-NEC Form

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.

I recommend this interesting article for background on why the change is being made, and more information on the specifics of filing 1099-NEC can be found in this excellent summary.

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

PPP Update: IRS Doubles Down — What Does It Mean For Your Taxes?

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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.

For the record, it wasn’t just me making this assumption. The entire American Institute of Certified Public Accountants thought the same thing (and in fact are now asking their members to contact elected officials to push for it). As did my most revered and favorite tax writer, Tony Nitti, who spent an entire article describing how wrong he was.

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.

As reported in Accounting Today:

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).

And if not?

I’ll share the recommendations of one of the most worthwhile practitioner-guests the AICPA has had on their Town Hall yet, Bill Pirolli (Partner, DiSanto Priest & Co.):

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)

**(CPA Academy is offering a course on how to launch a challenge to the IRS on this topic — and penalty-proof it — this Wed 11/25 and Mon 11/30.)

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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IRS Sending Overdue Notices For Checks Sitting In Its Unopened Mail

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A new notice appeared on the IRS website late on August 13th:

Pending Check Payments and Payment Notices: If a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to COVID-19. Any payments will be posted as the date we received them rather than the date the agency processed them. To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them. To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing. However, interest and penalties may still apply. Due to high call volumes, the IRS suggests waiting to contact the agency about any unprocessed paper payments still pending.

Claudia Hill, EA (always one of my favorite speakers at the annual IRS Tax Forum), wrote an excellent and somewhat scathing article in Forbes regarding the current disaster we as CPAs are dealing with on behalf of our clients — the IRS is many months behind in opening its mail, yet their automated system for sending out scary letters to taxpayers for unpaid taxes is back up-and-running.

Reports Claudia, having spoken to a “a hard-working, somewhat overwhelmed IRS customer service representative”:

… while IRS automated computer billings had resumed, any mail received at the Service Center between March 13 and June 30 was likely still unopened in the rooms of boxes containing mail that had arrived during the Covid-related shut-down. This included tax returns and payments directed to Service Center addresses. The Service Centers received about a million pieces of mail per week during that time. No one was there to open it.

IRS billing process is consistent; it is machine programmed. After the first letter goes out, approximately four weeks later if no money is deemed received, a second notice goes out. Each letter becomes sterner. By the third letter, IRS is reminding taxpayers of their rights to lien, levy and seize in the event of non-payment.

As she rightly points out, ignoring IRS notices can lead to serious problems — because their system is automated, a human being must intervene in order to (as I’ve always described it to clients) throw a cog in the wheel to stop it from churning.

The problem is exacerbated by the fact that these days, getting an IRS representative on the phone is rather difficult. If you are in this situation, I recommend calling the phone number on your notice during non-peak hours (7-10 am & 6-7 pm), Tue-Thu (if you do not have a number on your notice — the main one is 1-800-829-1040). Be ready to turn on your phone’s speaker and keep yourself busy with a project in the meantime. Or, as was recommended by John Sheeley, EA in his weekly tax update class yesterday, use an app that waits on hold for you and calls you back when a rep comes on the line.

Claudia offers these suggestions for the call:
1) Get your documentation ready:
– copy of the certified mail receipt
– copy of your checkbook showing you wrote the check
– copy of your bank statement showing it has not been cashed
2) If you are told about the mail delay, ask them to place a “stay-up” on your account for as long as they believe it will take to open the mail and process millions of pieces of correspondence and checks.

And good luck!

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IRS Confirms July 15 Tax Deadline

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The IRS confirmed in a press release that the July 15th due date for filing will remain as-is, with no further changes.

Treasury Secretary Mnuchin had said last week that he hadn’t ruled out moving the deadline again, but this newest announcement makes it clear that July 15th is the new April 15th.

Taxpayers who can’t meet the July 15 due date can request an automatic extension of time to file — it’s a six-month extension from the original filing date of April 15 (not the extended due date), which means it will extend the time to file to October 15, 2020.

The IRS offers a plethora of filing and payment options and reminds folks that filing an extension gets you more time to file your return, but not to pay any balance due. If you think you’ll have a balance due, I recommend you work with a professional to calculate what it might be, and submit payment with your extension, to avoid penalties and interest on late payment.

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.

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Pandemic Leads To “Paradigm Shift” At IRS

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IRS Officials at Thursday’s NYU Tax Controversy Forum, presented by CPA Academy.

As the IRS begins slowly opening its offices in various states over the next four weeks, a panel of IRS officials discussed the recent changes and next steps at Thursday’s NYU Tax Controversy Forum, presented via CPA Academy.

Accounting Today released an excellent article yesterday, detailing much of what was shared. I’m providing a summary of quotes from their write-up.

I had been frustrated recently by a pretty big “fail” on the part of the IRS, where suddenly all of their notices — the letters that were not sent out during the period when employees were offsite — were mailed to taxpayers months late, causing a great deal of confusion and anxiety. As it turns out, for as many changes as the IRS was able to make to allow employees to process work offsite, one thing the IRS was not able to pivot effectively was anything that involves paper.

Sunita Lough, Deputy Commissioner for Services & Enforcement at the IRS, explained, “we’ve had 136 million returns filed and we’ve processed 134 million, but there are a number of paper returns that are in the mail that need to be opened and processed. We estimate that we receive 1 million new pieces of mail each week. Think about all of the weeks that we were closed. Our mailrooms are opening 5 million per week. We’re working really hard to open them. We currently have about 11 million pieces of mail that are unopened, but we are continuing to make progress.”

Accounting Today reported that among the areas where improvements were made, the IRS was able to offer some more flexibility for communicating with taxpayers and tax professionals by enabling secure email to be sent. “We created a way for people who are in compliance contact with us or have applications pending like the exempt organizations to be able to communicate with us through email, which is something we have never done,” said Lough.

They also reported that Eric Hylton, Commissioner of the IRS’s Small Business/Self-Employed Division, said he has seen more collaboration than he’s ever seen before in his 30 years at the IRS. “We’ve been extremely busy,” he said. “A lot of long conversations, late-night conversations….”

“Yes, we were hit with the crisis, but we also thought about what is the opportunity that we can take advantage of. I think we did yeoman’s work as it relates to getting our nonportable workforce into a telework environment. With SB/SE, we increased our numbers by 40 percent, which was outstanding. We had a lot of different efforts and a lot of different managers doing outstanding work to try to assist employees to get telework ready. Ultimately, that’s going to be a paradigm shift for us as we move forward.”

He believes telework will offer more flexibility with new seasonal hires, as well as office space. “There are certain pockets around the country where we could actually have more employees if we have the space, so it gives us an opportunity to look at this environment and turn this crisis into an opportunity,” said Hylton.

Doug O’Donnell, Commissioner of the Large Business & International Division, is seeing more collaboration across divisions. He also highlighed the new secure email system. “This really improved our ability to work in a telework environment. In addition to being able to send and receive documents, we also had an improved capability to accept signed documents,” he said. “We greatly improved our ability to operate in that environment and are actually progressing on work from our homes, which was a significant change from where we’ve been operating previously.”

Tammy Riperda, Commissioner of the IRS’s Tax Exempt and Government Entities Division, said that some of the managers in the her division would retrieve applications for tax-exempt status that arrived in the mail and deliver them curbside to the determination specialists who were driving up in their cars. The employees could then take the applications home and work through them in a telework environment. “Kudos to those managers and the ingenuity that they had and the ambition that they had to keep things going,” said Riperda.

But she acknowledged there is still a delay with paper-filed information returns, such as the Form 990 series. “We’re still trying to proceed with the processing of those as best we can,” said Ripperda. “But even those, as well as the processing of the applications, we’re unable to get them uploaded to TEOS, the Tax-Exempt Organization Search tool on IRS.gov, because of some back-end processing requirements for those uploads.

“But really it can almost be seen as fortunate timing that we stopped accepting paper applications for 501(c)3s on April 30 of this year.” Lough pointed out that the Form 1023 application for tax-exempt status was mandated to be electronically filed after that date.

“It was just kind of dumb luck,” Riperda agreed.

Read the full article here: Accounting Today | IRS Employees Are Returning To Offices Amid Coronavirus

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.

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IRS Free File Program For Taxpayers With $69,000 of Income Or Less

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The IRS has a partnership with ten leading tax preparation software companies that allows users with income of $69,000 or less to use their Free File Software program — though fees for state returns and/or e-filing will apply, and the service is not available for all tax forms.

(As a tax preparer, I feel an obligation to point out that how much money a person makes rarely correlates to their being qualified to self-prepare tax returns, and that there are many situations when working with a qualified and responsible CPA or EA will be a much better decision. However, if you are going to be preparing and filing your own taxes anyway, why not take advantage of the Free File program if you meet the requirements?)

Free File Software provides free federal tax prep and e-file for taxpayers. Select a brand-name software program, create an account, and then the software guides you through return preparation.

  • Use free brand-name software to prepare and print.
  • Software guides you through return preparation.
  • Need Help with an error or the software? Contact the company for free customer service.
  • State return preparation and e-file is available for free but fees may apply.
  • Available if your Adjusted Gross Income (AGI) is $69,000 or less.
  • Offers the most commonly used forms.

Source: About the Free File Program | Internal Revenue Service

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When to Expect Your 2020 Tax Refund

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CPA Practice Advisor has released their annual estimated timeline for when a taxpayer is likely to receive their refund based on when they file, based on what we currently know about the upcoming tax season and projections based on prior years. They point out that the TCJA tax reform is still affecting many Americans’ ability to file timely, that Congress often delays tax season by issuing last-minute tax laws in December, and the IRS is also delaying refunds on tax returns that include the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Barring any of these issues, here’s what they’re predicting.

IRS Accepts Between These Dates ===> Direct Deposit Sent (Or Check Mailed)

1/20/19 – 1/24/19 — >   Friday 1/31/20 *  

1/27/19 – 1/31/19   — > Friday 2/7/20

2/3/19 – 2/7/19   — > Friday 2/14/20 **  

2/10/19 – 2/14/19 — >   Friday 2/21/20 **  

2/17/19 – 2/21/19   — > Friday 2/28/20

2/24/19 – 2/28/19 — >   Friday 3/6/20

3/2/19 – 3/6/19   — > Friday 3/20/20 ***  

3/9/19 – 3/13/19 — >   Friday 3/27/20

3/16/19 – 3/20/19 — >   Friday 4/3/20

3/23/19 – 3/27/19   — > Friday 4/10/20

* = IRS may delay tax filing season by one week or more due to changes in tax law.

** = Returns with EITC or CTC may have refunds delayed until late February to verify credits.

*** = Filing during peak season can result in slightly longer waits.

3/29/19 – 4/3/19 — > Friday 4/17/20

4/6/19 – 4/10/19 — >   Friday 4/24/20

4/13/19 – 4/12/19 — >   Friday 5/1/20

4/20/19 – 4/24/19 — >   Friday 5/8/20

4/27/19 – 5/1/19 — >   Friday 5/15/20

5/4/19 – 5/8/19 — >   Friday 5/22/20

5/11/19 – 5/15/19 — >   Friday 5/29/20

5/18/19 – 5/22/19   — > Friday 6/5/20

5/25/19 – 5/29/19   — > Friday 6/12/20

6/1/19 – 6/5/19   Friday 6/19/20

IMPORTANT: If you file electronically (using an online tax program or preparer), the IRS will notify you of the actual date they “accepted” your return. This is often 1-3 days from the time you actually hit the “file” button, and it is this date that you need to use for the above chart.

Taxpayers who mail a paper version their income tax return can expect at least a 3-4 week delay at the front-end of the process, as the return has to be digitized before it can be processed.

Source: 2020 IRS Refund Chart: When to Expect a Tax Refund