The IRS has been quite busy working on guidance to help taxpayers navigate the relief provisions recently afforded to them by Congress. Below are several items that taxpayers should know about.
Additional Filing Deadlines and Relief
The IRS, in Notice 2020-23, has provided further relief as follows:
- Taxpayers that need to extend beyond July 15 can file form 4868 to request an extension until October 15, 2020 (businesses file form 7004). Taxpayers who choose this option should estimate the tax owed and pay those taxes by July 15 in order to avoid any interest and penalties.
- The extension to July 15 has been clarified and includes all taxpayers that have a filing or payment deadline falling between April 1 and July 15.
- June 15 estimated payments (or any estimated payments due on or after April 1, 2020 and before July 15, 2020) have been extended to July 15, 2020.
- For 2016 tax returns, the ability to claim a refund has also been extended to July 15, 2020. Generally, there is a three-year window to claim refunds.
- The notice also allows any person performing “time-sensitive actions” to be deemed an “affected taxpayer,” thus permitted to have relief until July 15. Importantly for many farmers is that the 1031 exchange is included in those actions. In other words, the 45-day deadline to find replacement property and the 180-day deadline to close on property is extended to July 15.
With respect to Net Operating Losses (NOLs) in Notice 2020-26, the IRS has granted a six-month extension to file Form 1045 or Form 1139, depending on the type of taxpayer. This extension relates to the NOL carrybacks from a taxable year that began during the 2018 calendar year and ended on or before June 30, 2019. Additionally, Rev. Proc. 2020-24 provides guidance on the procedures for taxpayers with NOLs to follow.
For partnerships that have been unable to elect out of the centralized audit rules (i.e. those with more than 100 partners or those with other partnerships, disregarded entities, nominees, trusts or certain estates as partners), Rev. Proc. 2020-23 allows these partnerships to file amended tax returns for years beginning in 2018 and 2019 without having to file Administrative Adjustment Requests (AARs) so long as they follow the process outlined therein.
IRS Tools to Assist in Refunds
The IRS has begun sending taxpayers their Economic Impact Payments. For taxpayers who have historically not filed a tax return, the IRS has launched a tool where taxpayers can update their information. The goal is to determine eligibility for a refund and to ensure a quick transfer of any refunds to the taxpayer. This tool can be found here.
The IRS is also in the process of creating a tool called “Get My Payment,” where taxpayers can check the status of their payment. It will also allow taxpayers the ability to include bank account information so they receive the refunds quicker than through the mail (assuming the IRS has not already sent out the refund). To protect yourself from these scams associated with these refunds, it is important to understand how COVID-19 economic impact payments will be issued. Learn more here.
Deferment of Social Security Taxes
In my last Tax Talks, Important Tax Law Changes for Northeast Agriculture in the CARES Act, I mentioned that employers, as well as self-employed individuals, can defer the 6.2% employer share of Social Security taxes for their employees. Under this provision, these deferred taxes must be paid over the following two years (half by 12/31/2021 and the remaining half by 12/31/2022). This deferral applies between March 27, 2020 and December 31, 2020. The IRS plans to update the quarterly tax returns for the second quarter as well as provide guidance on how to treat these items for the first quarter. The good news is the IRS indicated employers will not have to make any special election in order to take advantage of these deferrals.
Paycheck Protection Program (PPP) Interaction: The IRS has clarified that employers who receive a PPP may defer deposit and payment of their share of social security tax that would otherwise be required (beginning on March 27) up until the date where the lender issues a decision to forgive the loan. Those deferred taxes must then be paid according to the rules above (i.e. half by Dec. 31, 2021 and the remaining half by Dec. 31, 2022.). However, once the employer receives the decision that the PPP loan is forgiven, the option to defer deposit and payments after that date is no longer permitted.
Employer Retention Credit Interaction: The IRS appears to have created an ordering rule where deferral of an employer’s share of social security taxes comes before determining credits (and the amount able to be retained) under either (a) the Families First Corona Response Act or (b) the employer retention credit.
Deductibility of Expenses Paid with PPP Loans
There is uncertainty surrounding the deductibility of the expenses paid with PPP loans. This issue stems from historical tax law and principles that basically say to do so would provide a double benefit to taxpayers. In other words, if a taxpayer were to receive a $100,000 PPP loan and then also be able to expense the $100,000 paid with the (presumably) forgiven loan, that would be a subsidy of expenses. In a worst-case scenario, that taxpayer who received $100,000 loan and is in the 37.3% tax bracket (income and self-employment) would have a net benefit of $62,700 ($100,000 - $37,300 tax). When further information comes to light, we will provide an update. The constant theme here is to continue to have a direct dialogue with your tax return preparer throughout the year.
State Guidance on Federal Changes
Taxpayers need to proceed with caution when it comes to assuming their respective state will conform to the changes passed by Congress. New York State is a prime example, where the recently enacted budget has “decoupled” from federal changes. Basically, they are not conforming their tax code to match the federal changes which will impact items such as the changes to interest deductibility under I.R.C. 163(j) and NOLs.
The guidance from the IRS and other government agencies continue to pour in from all sides. While we recognize there are still many unanswered questions in the relief packages passed by Congress, we will continue to provide updates as we receive additional guidance.