2020 Virtual Seminar Question & Answer Summary

Answers to Questions Posed at the Year-End Seminars

The Consolidated Appropriation made some changes to the PPP Loans. As of this date we have some preliminary information and will be awaiting guidance on several issues.  The questions posed at the year end sessions have been updated as it relates to the deductibility of expenses. There remain some issues which will require guidance.

PPP Loan Issues

1. Is it true that PPP loans are not taxable and if not, taxable what is to be done with expenses paid with the loan?

Answer: With the passage of the Consolidated Appropriations Act of 2021 (CAA) HR 133, Congress clarified that a PPP Loan is not taxable, and any expenses paid with the PPP loan are now deductible.  This reverses the Department of Treasury’s and Internal Revenue Service’s prior guidance; the Act provides that no deduction for business expenses funded with the proceeds of a forgiven PPP loan may be denied by reason of the exclusion of the loan forgiveness from gross income.

2. Do PPP loan clients that have corporate fiscal years beginning in 2019 and ending in 2020 have options about straddling covered expenses?

Answer: I would prorate based on the fiscal year. The PPP loan forgiveness application will clearly identify the 8 week or 24-week period during 2020 that the forgiveness applies to.  This means you will know exactly what payroll, interest, rental, utilities by the months incurred in your forgiveness application.  If your expenses straddle a fiscal year (i.e., June 30 year-end), then part of the expense limitation will occur prior to July 1st and the other part of the expense limitation will occur after June 30th.

3. On a Sub-Chapter S return if the PPP loan that was forgiven then increases the company’s profit and is not distributed to the shareholder why wouldn’t it increase the shareholder’s stock basis? What else would it be characterized as on the 1120S?

Answer: With the passage of CAA, it is clear there will be basis issues. The so called “flow-through entities,” require the partner or shareholder to have “basis” in the business. Losses are only allowable to the extent of basis; any excess losses are suspended and carried forward to a future year under either §704(d) (for partnerships) or §1366(d) (for S corporations). The issue is complex and rather than provide sketchy information it is best to wait for IRS to provide guidance on the overall basis issue as it applies to the PPP loans. There is no guidance and much speculation on how the basis of the entities will be calculated. Particularly “when” the basis should be adjusted.

4. If you claim the income from PPP can you deduct the expenses if you have your loan forgive 100%

Answer: CAA clarified that expenses are now fully deductible. There will be no need to include the loan amount in income.  Though CAA does provide for a “basis adjustment” we need guidance on that part of the issue.

5. There one issue that is a bit confusing is for a sole proprietor and partnerships without common law employees …. Forgiveness itself is not includable in gross income (per the CARES Act) but there are no qualifying payroll and nonpayroll costs that would be nondeductible. So, is the forgiveness in those cases just nontaxable income with no disallowance of deductions?

Answer: Based on what we know now, it is non-taxable income.

6. What about a Schedule C with a few employees? Would PPP expenses not be deductible? Or only not deductible to the extent of those wages?

Answer: CAA clarified that expenses paid with a PPP Loan are now fully deductible.

7. I have received a non-PPP loan for $8000 would I be able to claim the whole amount as a deduction.

Answer: Since it is a non-PPP loan any expenses paid with the loan would be fully deductible unless there is an exception.

8. For clients who have an SBA loan (where the SBA made 6 months of payments on the client’s behalf), are those payments required to be recorded as income to the client?

Answer: CAA made all payments made by SBA on eligible loans will not be a cancellation of debt/income to the recipient of the loan.

9. Will the PPP loan forgiveness be taxable?

Answer: No if taxpayer meets all qualifications for forgiveness. Three types of applications 3800, 3800S, 3800EZ are currently available for forgiveness and will be based on qualifying costs and employees before and after loan received. You usually want to choose 24-week period. Hence, payroll should cover all cost, but you can use rent utilities and interest. With the passage of CCA loans under $150,00 are automatically forgiven, BUT, if SBA audits a business, owners must have records that show the loan was used for qualified expenses as designed by SBA guidance. A new “simplified” one-page form will be used in applying for forgiveness.  SBA has 24 days to supply the form. We await the publication.

10. What about under the 50k or 150k they have talked about giving auto forgiveness? Should we go forward with having them apply for forgiveness? The SBA has come out with forms, but most banks have their own forms and have not come out with them so we cannot ask for the forgiveness even though the loan is under $50000.00.

Answer: Please review question 9.

11. When are applications due for PPP loans to submit for forgiveness?

Answer: When the loan is called a loan, within 10 months of end of 24 week or 8-week period. However, no later than 10/31/2021.

12. If we do not deduct the expenses paid with this loan in this year and the loan is forgiveness is done next year how do, we take the loan figure off our liability account?

Answer: With the passage of CCA all-expenses paid with the PPP loan are deductible. In addition, there will be a basis adjustment and we await guidance from IRS on how to handle. There is much speculation on this issue and it also appears that when the loan is forgiven has an impact.

13. How do we show the non-allowed expenses on the tax return?  Do we have to reduce salaries, employee benefits for insurance, rent, utilities, interest, on those applicable lines, or put it as a lump sum as PPP loan forgiveness expenses?

Answer:  With the passage of CAA expenses paid with a PPP Loan are fully deductible.

14. This year the SBA paid 6 monthly payments for clients who had existing 504 and 7A Loans in place prior to COVID-19. Are the principal payments paid by the SBA on client’s behalf taxable to the clients?

Answer: CCA clarified that the amounts paid on these loans of principal and interest are not income to the recipient. We are waiting for further guidance and how this will affect basis in a partnership, S corporation or and LLC treated as such.

15. On a Sub-Chapter S return if the PPP loan that was forgiven then increases the company’s profit and is not distributed to the shareholder why wouldn’t it increase the shareholder’s stock basis? What else would it be characterized as on the 1120S?

Answer: CAA made it clear that there will be a basis adjustment. We need guidance on this issue. It also appears there will be a timeline to any adjustment to basis.

Grants

1. Are grants from Iowa includible in income?

Answer: Grants are generally taxable, and a Form 1099 will be issued.  Several grants were offered in Iowa under a special fund in the CARES Act. If the grant is taxable any expenses associated with the business that the grant paid for would be deductible. CAUTION: It would be best to know what kind of grant and ask for a 1099. Some grants also limit what the money can be used for – like not allowable to by new property or such. Get a clear understanding of the grant.

2. Will the $10,000 grants farmers in Iowa receive from the Livestock Producer Relief Fund be taxable income for federal and state purposes in 2020? Will 1099s be issued for these?

Answer: This is part of the grant program I talked about in the first section.  A grant is included in income.  I assume 1099’s would be issued.

Distributions

1. If a client takes a distribution from a 401(k) and no longer works there in 2021, can the repayment be made to a traditional IRA?

Answer:  Yes

2. To avoid the 10% penalty on a COVID-19-Related distribution what tests must they meet?

Answer: You are a qualified individual if –

• You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention.
• Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
• You experience adverse financial consequences as a result of being quarantined, being furloughed, or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19.
• You experience adverse financial consequences as a result of being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19; or
• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
• The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19.
• The individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed, or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

Under §2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

3. Can I get an opinion……client lost job end of 2019, wife had reduced pay but not reduced hours in May and was reinstated pay in November? The husband took out $70,000 in terminated job 401K.  Do they qualify for exclusion from 10% penalty?

Answer: It would depend on when the money was taken from the 401(k). If you meet one of the over criteria, IRS will look at the date the money was withdrawn and see if that fits into the dates the wife had reduced pay.

4. How do we determine who is a qualified distribution and what due diligence are we required to do to determine that they are qualified?

Answer: Please review Question 2 under Distributions.

5. What would you think about adding an “other income” line for forgiven PPP funds?”

Answer: I would put under other income on the busines return, Sch C or 1065 etc.  Note it is PPP Loan in case of audit.  IRS has not changed any forms to provide a specific line for PPP, as they are assuming the client will reduce expenses.  They have not thought this out – in that most was used for wages and there is a matching process in place.  We do not know if SBA will provide loan amount to IRS for matching purposes.

6. One of my clients was laid off for several weeks in 2020 due to COVID-19, and they withdrew $100,000 from their retirement plan. I doubt that their income was reduced by $100,000 but does the full amount still qualify for exemption from the 10% penalty.  Are there any limitations to how much can be withdrawn?

Answer: $100,000 is the maximum.

7. I have a new client that just took money out of his IRS thinking he has COVID-19 relief…but is using it to buy property…however, he did not lose his job nor had COVID-19….won’t they be auditing these…I told him he didn’t qualify for it.

Answer: He would not qualify for 10% exception unless he meets one of the exceptions.

8. Did you say that the 1099R needed a special code to know that the recipient is eligible? Or the Plan perhaps would not know these facts?

Answer: If the distribution is a qualified distribution, and the 1099-R comes as code 1, Just File 5329 and use other exception with explanation.

9. Does ‘eligible retirement plans’ for CRDs include Traditional IRA’s along with SEPs, and SIMPLE IRAs? The 8915-E includes traditional IRAs.

Answer: That is correct a CRD includes all mentioned.

10. I have a client whose business allowed for the CRD but I’m suspect if he was not diagnosed with corona or had a financial hardship but just wanted the money. Is he then ineligible for the benefits of the CRD?

Answer: In order to receive a CRD from a qualified, you must be a qualified individual (based on the criteria that we discussed during the presentation).  A participant will be providing the Plan administrator a certificate that acknowledges that the participant is a qualifying individual, and the individual is responsible to the IRS regarding fact and not the qualified plan representative.

Qualified Charitable Distributions

1. Please explain the rules concerning using QCD IRA distributions and the deductible IRA after 70 1/2. Do all deductible and ROTH IRA contributions need to be deducted from QCD distributions before the income exclusion can be claimed?

Answer: You must be 70½ or older to be eligible to make a QCD.

QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.

The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)

For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.

Contributing to an IRA may result in a reduction of the QCD amount you can deduct. (The aggregate amount of deductible IRA contributions you make to your IRA after you turn 70 1/2 will reduce the amount of the QCD that is not includible in your gross income.)

The account types that are eligible for QCDs include:

• Traditional IRAs
• Inherited IRAs
• SEP IRA (inactive plans only*)
• SIMPLE IRA (inactive plans only*)

Example:

Michael is 71 years old and works part-time at a nonprofit organization.  Every year, he contributes the maximum $7,000 to his traditional IRA for ten years until he finally retires.  Michael’s total post-age 70 ½ IRA contributions amount to $70,000 ($7,000 x 10 years). After he retires, he assumes the chair of the board of another nonprofit organization.  In one of his first acts as Board Chair, Michael uses some of the assets of his IRA to make a sizeable contribution to the organization’s capital campaign in the amount of $80,000.  This is Michael’s first QCD.

Under the new QCD anti-abuse rules, Michael must first deduct the total amount of all his post-age 70 ½ deductible traditional IRA contributions in order to calculate his allowable QCD amount. Essentially, all Michael’s post-age 70½ deductible traditional IRA contributions will have to be “burned through” before the pre-age 70 ½ deductible traditional IRA contributions assets are reached (tax-deductible contributions made to an IRA prior to reaching age 70 ½ are not subject to the QCD anti-abuse rule).

Only after all of Michael’s post-age 70 ½ deductible traditional IRA contributions ($70,000) has been subtracted from Michael’s post-age 70 ½ charitable contribution ($80,000) will the remaining amount of his contribution qualify as a QCD.

The $70,000 worth of post-age 70 ½ deductible IRA contributions is subtracted from Michael’s contribution to the charity, and therefore only $10,000 of his contribution will qualify as a QCD and be excluded from his taxable income for that year. The $70,000 that would otherwise have qualified as QCD is disallowed due to the anti-abuse rule. However, if Michael itemizes his taxes, subject to the rules regarding charitable contributions and adjusted gross income limits, Michael may be able to deduct the $70,000 from his taxes as a charitable contribution.

Economic Stimulus Payment

1. If you have a client’s POA, can you see their EIP on their account transcripts.

Answer: Yes, it already appears on the transcript.

2. Any idea how to handle the EIP when taxpayers sent the money back? Amish

Answer: Mail the payment to the IRS address – based on the state the person lives in – as indicated.

When returning a paper check that was not cashed or deposited taxpayers should:

• Write Void in the endorsement section on the back of the check.
• Mail the voided Treasury check immediately to the appropriate campus.
• Don’t staple, bend or paper clip the check.
• Include a brief explanation of why they return the check.

When returning a direct deposit or a paper check that was cashed or deposited taxpayers should:

• Mail a personal check, money order, etc., to the appropriate campus
• Make the check or money order payable to U.S. Treasury and write 2020 EIP, and the taxpayer identification number, Social Security number or individual taxpayer identification number of the person whose name is on the check.
• Include a brief explanation of why they are returning the Economic Impact Payment.

Taxpayers should visit Economic Impact Payment Information Center on IRS.gov for information on how to return or request a replacement EIP debt card.

When returning a payment for someone who has died:

A payment made to someone who died before they received the payment should be returned to the IRS. Return the entire payment unless it was made to joint filers and one spouse is still living. In that case, return half the payment, but not more than $1,200.

If someone cannot deposit a check because it was issued to both spouses and one spouse has died, the individual should return the check. Once the IRS receives and processes the returned payment, an Economic Impact Payment will be reissued to the surviving spouse.

3. Is the stimulus received subject to tax?

Answer: Not taxable.

4. Will there be an online source for us or clients to confirm EIP amounts received?

Answer: IRS has not as yet discussed this issue.  We are hopeful, but it is a wait and see issue. It now appears you will need a tax transcript.

5. How is the Economic Stimulus Payment going to affect the tax return, is it going to affect the return or balance due?

Answer: The Economic Stimulus Payment provision is just a reconciling of the payment received. If the client was entitled to additional payment because of income in 2020 may have been less than the EIP (which could have been based on 2019 Tax filing) they would get an additional amount.  If in 2020 they were eligible to claim a child that they did not claim in 2019 – they may get an additional amount.  If the amount they received is in excess of what they were entitled to – they do not have to repay any amount back, unless it is for a deceased taxpayer.

Home Ownership – Sale of a Principal Residence

1. A couple owns their home in Ohio; wife gets a job in Vermont & the couple buy a house in Massachusetts for wife to use while in Vermont. She uses that home for three years while working in Vermont. She remains an Ohio resident during this time – license and voting registration are in Ohio files an Ohio resident tax return. Now, the 3-year job in Vermont is over and they sold the house in Massachusetts. Is that a “residence”? do they (or does she) qualify for the exclusion?

Answer: Each spouse is considered single and qualify for $250,000.  Review                 § 121(b)(2)(B)

2. If a taxpayer sold their home and was eligible for the §121 exclusion, are there any exclusions regarding repayment of the 1st time homeowner credit?

Answer: Yes – let me get you a reference, Look at Form 5405 instructions page 1 and the form should calculate the remaining amount still to be repaid.

3. If they take a mortgage to make improvements to the primary house AND pay off the credit cards, can the interest be pro-rated for deductibility?

Answer: Depends on the amount of acquisition debt – if you pulled out $100,000 to pay off credit card debt and buy a car, only the acquisition portion of debt would remain eligible for the itemized tax deduction.

4. Does a foreign home qualify for §121 exclusion?

Answer: §121 of the US Internal Revenue Code allows for the exclusion of up to $250,000 ($500,000 for a married couple filing jointly) in gains arising from the sale of a “principal residence.” The exclusion applies whether the residences in the US or a foreign country.

5. Is the maximum exclusion of gain on sale and lifetime or for each residence sale over lifetime?

Answer: For each residence as long as you have not violated the 2-year holding period.

6. So, if you lived in the home for only 6 months and you suddenly had to move, would 75% of the gain be taxable?

Answer: If you meet certain criteria and the move was work related, you may get a partial exclusion – 25%.

7. What happens if the spouse who claimed office in the home for the last ten years passes away? Will there still be depreciation recapture if the spouse sells the house in future.

Answer: Yes, Depreciation will be reported as income.

8. My question from earlier about the §121 exclusion did not get answered. Any chance it could be answered now?  When married taxpayers live separately (but file jointly) and they each meet the 2-year use and ownership test with respect to the home they live in, but they do not meet the 2-year use test with respect to the home their spouse lives in, do they still get to exclude either $250k or $500k when either of the houses is sold (and which would it be – $250k or $500k)?

Answer: Each home and qualification would be as if he were single.

9. If you ever rented the home, then even waiting 5 years to sell, does not get you to full exclusion does it? There would always have to keep the rental years in the numerator and total years owned in the denominator.  The fraction would keep getting smaller but would never get to 0% exclusion.

Answer: That is correct: Example for a SINGLE Client – Single taxpayer purchases vacation residence costing $500,000 on April 1, 2005. On April 1, 2013, taxpayer converts the property to her principal residence. On April 1, 2020, taxpayer sells the property for $800,000, realizing a gain of $300,000. Taxpayer owns property for 15 years and used it as a principal residence for 7 years. 46.667% of gain (7/15) is eligible for the $250,000 exclusion. Remainder of gain, 53.333% (years (8) as non-qualifying use / years (15) of ownership) will be taxed at the capital gains rate that applies in the year of sale for taxpayer.  $140,010 (46.667%) qualified use is eligible for 121 exclusion $159,990 (53.333%) non-qualified use is taxable

10. If a homeowner enters a nursing home and is probably not coming back out, would it be better to sell their house while they are still alive?

Answer: This would depend on several factors. The answer could be different in differ scenarios. There is not enough information to provide guidance.

11. Clients vacation rental, would visiting a couple weeks a year still qualify as necessary (inspections and improvements)?

Answer: Must be really related to. But it could be argued.

Centralized Partnership Audit Regime

1. Interesting to note that even disregarded entities like revocable trusts or single-member LLC’s make a partnership ineligible to opt out. Is there anything else a partnership that cannot elect out needs to have in its records or does it just need to name a Partnership Representative on the 1065?

Answer: I would have a partnership agreement updated to reflect the change in the law.  In addition, much should be in writing concerning the partnership representative. The text discusses several issues as it related to appointment and firing.

2. If the partnership pays the tax for the federal audit balance due. Don’t we still have to amend the state returns? Seems like a good thing for the IRS not the State returns.

Answer: Yes – but not all states have adopted the CPAR, check with your state.  You may need to amend partners returns to reflect the federal changes if the state does not follow CPAR.

3. With push-out, does that mean each partner amends 1040 and pays tax at their respective rates? no push out, the partnership pays at what rate?

Answer: Technically that is correct.

4. Can one of the partners be a trust for the audit rule?

Answer: That answer is no for trusts that are partners in a partnership.

5. I have a client that was a shareholder in a S-Corporation and the tax return was done by a firm that does not exist anymore, I found out that the return in 2017 the percentage of ownership was figured wrong, I have 2016 return and the 2016 is correct. I cannot locate the other stockholder and my client wants me to correct the incorrect return, but I do not have the other shareholders permission.  What should I do?  Can I correct the K-1 and send a letter with the tax return? So, I can correct my shareholders return K-1?

Answer:  The goal here is to make your client’s return correct. I would correct and then attach a letter acknowledging your efforts to locate other shareholder and emphasis you just want to make the client’s return correct. I would probably attach a calculation and other documents you used to arrive at the correct ownership amount.

6. So, if you have less than 10 partners you don’t need to opt out because you are under TEFRA rules regardless?

Answer: No, you must opt out, If the number of the K-1 is 100 or less the 10 does not come into play – you must elect to opt out otherwise you will be audited under the new regime.

7. Does Iowa follow Federal in regard to CPAR?

Answer: Under H.F. 2641, Iowa creates a procedure for taxpayers to report changes to federal taxable income that result from federal partnership audits under the procedures detailed in the BBA. Such procedures closely align with the model statute adopted by the Multistate Tax Commission. Specifically, Iowa’s new law provides for the following:

Partnerships and certain partners may elect to pay any additional Iowa tax, interest, and penalty arising from a federal partnership audit on behalf of the partnership’s owners; and

• The Iowa Department of Revenue (DOR) may conduct entity-level audits of partnerships and other pass-through entities through a state partnership representative, and the procedures for reporting these Iowa audit adjustments and electing to make payment on behalf of the partnership’s owners are similar to the procedures required under the federal partnership audit rules.

Deadlines to report federal audit changes

For all federal audit adjustments other than those resulting from a federal partnership audit, H.F. 2641 amends Iowa Code Sec. 421.27.2.c to increase the statute of limitations for reporting such audit changes from 60 days to 180 days from the final determination date.

As amended, partnerships receiving a final determination resulting from a federal audit must notify the Iowa DOR and its partners within 90 days of the final determination date whether the partnership will report the changes and pay any resulting tax due directly to the Iowa DOR. If the audited partnership chooses not to directly report the federal audit changes and make payment to the Iowa DOR, the partners have 180 days from the final determination date to both report the federal audit changes and remit any payment due.

Payroll Issues

1. Has “grossing up” a payroll check been just an accepted method or is it actually legal? “

Answer: The formula to calculate a tax gross-up is: Gross-up = [Net Amount / (1 – Tax Rate)]. In this formula, the net amount is the dollar amount you want to end up with after taxes, and the tax rate is the rate of tax to apply to the payment (expressed as a percentage). IRS outlines the information in Circular E.

Foreign Tax Issues

1. Is getting a verbal response about having or not having a foreign bank account sufficient or does the taxpayers response need to be in writing?

Answer: There is no requirement to have it in writing that I am aware of, but I would have the client verify in writing that they did have foreign income or investments.  This protects you as a tax professional if the client is audited and foreign income is identified. You have something in your records that you asked the client and they verified; no such income was present.

Meals, Entertainment and Travel

Please note the Consolidated Appropriation Act (CCA) made the following changes to meal and entertainment.

• Meal deduction for Tax Year 2021 and 2022 goes from 50% to 100% as long as the meal is provided by a
  • NOT for 2020

The meals must be:

• Ordinary & Necessary
• Not lavish or extravagant under the circumstances
• Taxpayer {or an employee of taxpayer} is present
• Provided to current or potential ‘business contact’
• Business entertainment remains non-deductible

3. What about groceries purchased to feed farmers?

Answer: Those groceries are personal and not-deductible.  Receipts for workers for the convenience of the employer should have separate receipts from personal expenses.

4. Is a potential client meal deductible?

Answer: Yes

5. Per diem is only allowed for self-employed person. Is a Sub S owner self-employed person?

Answer: First an employer or a self-employed business can use per diem, it is not restricted to just a self-employed individual. 27 years with IRS and we used per diem reimbursement from day one. Therefore, a Sub S employer regardless of ownership would be allowed per diem.

6. What about meals under §119(a) for convenience of employer. Are those subject to 50% haircut?

Answer: 50% but there is an IRS Technical Advice Memorandum (TAM) 201903017, as well that you should review

7. Can partners go out for a meal and discuss business and have the meal deductible?

Answer: Deductible and subject to 50% limitation on the meals. I would have some documentation of what was discussed. Just a caution if this happens infrequently there will probably not be an issue.  BUT if is daily IRS may consider that abusive. Common sense must rule here. No client has to be present.

6. For the employer paying meals under an accountable plan…they are still limited to 50%, correct? They cannot take the entire amount due to paid to employees under an accountable plan, can they?

Answer: Limited to 50% for 2020. Please note the change for 2021 and 2022.

7. Meals paid to employees like the truck driver under the accountable plan….is this limited to 50%/80% on the employer’s return or is the entire amount allowed as a deduction on the business return when it is paid under an accountable plan?

Answer: 80% – it would appear that for 2021 and 2022 that amount would increase to 100%. The 80% would still apply to 2020.

8. If you have a salesman that brings several of his contacts hunting from Georgia to Iowa and stay a week, are these hotels, meals, mileage expenses considered to be entertainment and non-deductible or deductible ones?

Answer: In my opinion that would be entertainment and not deductible.

9. If I take out an individual who is not a prospective client and wine and dine, would that be a deductible expense?

Answer: Generally, not deductible.

10. What constitutes deductibility for “Social Gathering for All Employees”?

Answer: Company picnics; X-mas parties, etc.

11. Did he say the business travel was considered 100% deductible, but meals were 50%?

Answer: Travel would be 100% such as hotel, taxi, etc.  Meals would be 50% for 2020.  CAA made meals 100% deductible for 2021 and 2022.

12. Can an accountable plan be effective for non-employees (e.g., Independent Contractors) also?

Answer: You may structure expense reimbursement arrangements with Independent Contractors. An agreement on out-of-pocket expenses must be agreed upon before the job begins. This is usually determined by the contractor as part of the bidding process.  They may choose to bill the client under an accountable plan based on expenses incurred.

13. Does an accountable plan need to be in writing?

Answer: Best practices would require such a plan to be in writing.  You will probably have a major problem with an IRS auditor without some sort of written document.

14. Under an accountable plan, are meals still only 50% deductible to the employer.

Answer: That is correct.  The reimbursement to the employee is not income.  But the meal expense reimbursement by the employer is subject to the 50% deduction limit, for 2020. CAA made business meals 100% deductible for 2021 and 2022.

15. What about meal during education and training?

Answer: Subject to 50% limitation. Please note CAA change.

16. Please clarify – are travel meals, where overnight stay is required, 100% deductible or 50% deductible?

Answer:  They have always been 50% deductible the last few years. Please note CAA changes as mentioned above.

17. Can a Stadium suite where corporate clients entertain their clients? If they conduct business meeting before a game be a deductible.

Answer: Only the cost of meals would be deductible but must be separately stated.  No expense for the suite would be deductible.

Superseded Returns

1. For the 2019 return, could a superseded return be filed by July 15^th (the extended due date for the 2019 return)?

Answer: IRS has not addressed this specifically, but the IRS stated it must be filed by the due date of the return. I would assume Yes.

2. Is a superseded return paper file only?

Answer: Yes, but please note not all states accept superseded returns.

3. If an extension is filed are you allowed to file a superseded return before the extended date? Can a superseded return be filed within the extended due date?

Answer: NO – In fact once you file a return during the extension time period, that starts the statute of limitation on that return.  You may only change the return via filing an “amended” tax return.  There was a CCA on this issue. This answer is correct – erroneously answered this question when I addressed it in an earlier question.

4. Is there a form to use to do a superseding return?

Answer:  Use a regular return and mark superseded in red on top of form page 1.

Distribution for Birth or Adoption of Child

1. Concerning distribution from parent’s retirement plan that had a baby in 2020. Can the distribution be made in 2021? (We don’t always know until the following year that a baby was born.)

Answer: Example:  Assume the child was born on September 6, 2020.  The parents have the opportunity to take a $5K distribution (by each parent or a total of $10K) from September 6, 2020 through September 5, 2021.  The distribution must be taken within a 12-month period after the birth or final adoption of the child, if the parent’s want to take advantage of this issue.

Qualified Business Income

1. If an S-Corp has an ownership interest in an LLC and the S-Corp receives a K-1 that shows a positive pass-through profit is that profit included in the QBI total for the S-Corp?

Answer: If the K-1 from the LLC passes through QBI on the K-1, yes, it is QBI for the S Corporation.

Charitable Contributions 

Please note that CAA changed this amount for 2021 to $300 for single individuals and $600 if married filing a joint return.

1. The $300 on the front of the 1040 would not then be included on the Schedule A,

Answer: That is correct. Please note that the $300.00 adjustment to income must be a cash contribution, NO property.

2. If a client, who does not itemize, has a large number of charitable deductions, do you put the actual amount given, or just up to $300?

Answer:  Only $300.00 of cash contribution is allowed as an adjustment to income.

Miscellaneous Issues

1. Could we touch on state taxability to those who work remotely? For example, someone who resides in North Carolina, but their employer is headquartered in Massachusetts. I would assume that they would have to pay tax in both states but get credit in their home state for tax paid in the other state.  I do think there will be situations where the taxpayer will have to pay tax in both states without an available resident credit.  Sorry that this is off topic.

Answer: This varies from state to state. Massachusetts will not assert nexus. Until the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted, the Department will not consider the presence of one or more employees working remotely from Massachusetts solely due to the COVID-19 pandemic to be sufficient in and of itself to establish corporate nexus.  Massachusetts Technical Information Release No. 20-10, 07/21/2020.  North Carolina has no specific information on this issue.  This is a state-by-state issue, not blanket issue.  I would research each state to find information as needed. Not all states have addressed the issue. My son works remotely for a California Company, but his W-2 are for Iowa.

2. Are they thinking about extending tax season, again?

Answer: As of now IRS states that they are not going to extend the 2021 filing season.

3. A farmer dies in 2019. In 2020 his wife sells all the farm equipment. Does she get 50% or 100% step up in basis? How is it determined how it is owned when there are no titles on farm equipment and Schedule F is only in deceased farmers name?

Answer: It depends how the equipment was owned. If owned strictly by deceased, then 100% step up basis. If the Schedule F shows the deceased name, we can only assume that they were sole owner and surviving spouse would get stepped up basis.

4. Will there be a special code for these CRD distributions on the 1099 for 2020?

Answer: None that I am aware of.  Your software identifies the QCU on the dotted line. Check your software for this procedure and how to follow it.

5. Would it be a best practice for farmers to annually file the election to be excepted from the business interest expense limitation?

Answer: That would have to be decided on a client-by-client basis of what is right for them.

6. Will the IRS publish a new RMD chart for persons now taking RMDs for the first time at age 72?

Answer: It was published but not effective until 2022.

7. Is the minimum distribution IRA or 401k distribution age changed to 72?

Answer: RMD for 2020 forward will be age72.

8. Do accrued payroll tax owner owes count as expenses or do they need to have been paid? i.e.: FUTA

Answer: If they are cash basis, they must have been paid.

9. Can both parents in a divorce situation be head of household in alternate years if they have share parenting?

Answer: Great Question. Yes, if the meet all requirements, be careful – they have to meet the H of H tests and that is hard to do because it says “more than half the year.  Only the custodial parent in most cases gets Head of Household.  50/50 joint custody does not work. Each parent must ensure they have custody for one more day in the year they claim H of H.  Easy to do as long as client listens to the advice you give.

10. How do you “stack” the years of balance due? Does it require a new installment agreement form for the total of all years? got it.  So, if there is an existing installment agreement for 2020 and if there was a case to “stack” a 2021 balance due, logistically a new installment agreement application would be filed for 2021 for total owed for all years. correct?

Answer: Yes, IRS previously would not allow, now they are being more lenient – they will allow stacking for a limited time

11. Since they corrected the Qualified Improvement Property to 15-year property, is the property for Iowa 39 or 15 years since they do not honor bonus?

Answer: https://tax.iowa.gov/cares-conformity   The answer can be found here.

12. There are couples that like to sign for their spouse on the return, can they do so if the spouse signs a document that allows the spouse to sign on their behalf?

Answer: The taxpayers each have to sign unless they are unable due to some physical condition or military – military spouses can sign for other spouse.

13. How are Derecho insurance payments handled when the building/repairs/replacement property expenses cannot be replaced until 2021 or later?

Answer: Review Publication 547 pages 8 and 9, you will have a disaster issue. Also review the Form 4684 instructions. Business is handled different from individual losses.

14. Conflict of interest – what about represent a sibling or parent?

Answer: Conflict of interest is still an issue.

15. Now that most businesses are holding virtual meetings, some are providing uber eats/food gift cards (currently taxable income to recipient) to provide meals since meals would have been provided for in person meetings. Has there been any guidance or “talk” as to how meals would be handled in our virtual environment, we are working in.? Thank you.

Answer: None that I am aware of at this time – IRS has not thought that far ahead.  Many issues remain that need to be addressed.

16. Do you think having clients establish an online login with the IRS is a good idea?

Answer: Excellent question.  Yes, it can be an advantage to the client to establish an IRS Account. If the client owes, they can monitor the account for payments made.  They will have access to pay online and have knowledge of the total amount due at any time. Having access to their account is also good for check-up’s in withholding, copies of the return transcript are at their fingertips and they do not have to search for the information. It could in situation save them appointing you and a POA, as they will have access to transcripts and provide them to the tax professional as needed. It also makes them more financially literate when it comes to filing taxes and understanding the importance of tax compliance.