On Sept. 15, 2020, the IRS released a new webpage for the businesses and self-employed individuals involved in the marijuana industry. The webpage discusses, among other topics, the deductions allowed for these businesses and the handling of large cash balances. Although this business is not legal in Texas, it is not uncommon for Texas taxpayers to be involved in these activities in states where the business is legal.
In a letter to Treasury and the IRS, TXCPA’s Federal Tax Policy Committee endorses AICPA’s request for additional guidance to implement the Presidential Memorandum dated Aug. 8, 2020, on deferring payroll tax obligations and seeks additional guidance on related issues. The committee also disagrees with the approach taken in IRS Notice 2020-65, which requires employers to collect the deferred taxes, and recommends that certain aspects of the notice be reversed and clarified.
TXCPA’s Federal Tax Policy Committee sent a letter to IRS Commissioner Charles Rettig expressing concerns and offering suggestions for dealing with the mail backlog resulting from the pandemic and strategically targeting the timing and content of notices to improve taxpayer service. The committee recommends that the IRS suspend “all” notices – not just CP501, CP503 and CP504 – to allow for processing of existing, potentially responsive, correspondence and payments, and to allow taxpayers to use proof of delayed receipt of any notices during this pandemic as evidencing reasonable cause for abating any related penalty.
By Susan Roberts, CPA-Fort Worth, CGMA, CLA
The Small Business Association released a new interim final rule that has some limited, but critical new guidance:
- The owner-employee rules are not applicable to owner-employees with less than a 5% ownership stake in a C- or S-corporation. Owner-employees with less than a 5% ownership stake should be included in either Table 1 or Table 2 of Schedule A and use the amounts paid during the covered period, not 2019 earnings.
- Related party rent is eligible for forgiveness, but only to the extent that it represents the mortgage interest owed on the underlying property. So, if monthly rent is $5,000 and monthly mortgage interest on the building is $3,000, only $3,000 of the rent would be eligible for forgiveness. This is a treatment consistent with what we thought might be the case. The guidance also reiterates the requirement for the lease and the underlying mortgage to be in place as of Feb. 15, 2020.
- With respect to sub-leases, shared rent and home-based businesses, amounts related to sub-leases or tenants are not eligible for forgiveness. There are a few specific examples given:
- A lease for $10k per month with a sub-lease for $2,500 per month, only $7,500 per month is eligible for forgiveness.
- If a borrower owns a building subject to a mortgage and leases a portion of the building to a third party, only a portion of the mortgage interest related to the borrower occupied space will be eligible for forgiveness.
- If a borrower shares a rented space with another business, only the rent and utilities prorated in the same manner as on the borrower’s 2019 tax filings are eligible for forgiveness.
- For home-based businesses, costs eligible for forgiveness are limited to the share of expenses that were deductible on the borrower’s 2019 tax filings.
IRS.gov has numerous online options to assist tax professionals and their clients.
- All IRS updates on COVID-19 tax relief and economic impact payments continue to be posted immediately.
- Taxpayers can check the status of their economic impact payment at Get My Payment.
- Taxpayers who previously have been issued an identity protection PIN but lost it must use the Get an IP PIN tool to retrieve their numbers. Taxpayers who have an IP PIN need to provide it when they file their return or if they are using the non-filer tool to enter their economic impact payment information.
- Publication 5136, IRS Services Guide is a good source of information.
- Check a refund status and estimated delivery date at Where's My Refund?
- Get Transcript, view a transcript online and print it. Tax transcripts are currently only available online.
- Direct Pay, make tax payments or estimated tax payments directly debited from a checking or savings account.
- Individuals or businesses can make all types of federal tax payments at Electronic Federal Tax Payment System.
- Online Payment Agreement, set up installment payments to pay taxes owed.
- Where's My Amended Return?, track the status of an amended return.
- The Interactive Tax Assistant can help answer tax law questions. Currently, there are no email options that will generate answers to questions posed by taxpayers.
- About Your IRS Notice or Letter, get additional information about a letter or notice.
- Find and download all current IRS tax forms, instructions and publications.
- Where's My Application for Tax-Exempt Status?, get guidelines for when you can expect to hear from the IRS.
The IRS has indicated that 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 the IRS 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.
The IRS is providing relief from bad check penalties for dishonored checks received between March 1 and July 15 due to delays in processing. However, interest and penalties may still apply.
Due to high call volumes, the IRS suggests waiting to contact them about any unprocessed paper payments still pending. See www.irs.gov/payments for options to make payments other than by mail.
TXCPA’s Federal Tax Policy Committee issued a comments letter on IRS Notice 2020-43 on proposed requirements for partnerships to use only one of two alternative methods to satisfy tax capital account reporting on Form 1065. The committee’s primary view continues to be that individual partners should ultimately be responsible for tracking their own basis using amounts reported on Schedules K-1. This is not a responsibility that should be placed on partnerships as Notice 2020-43 seeks to do.
Historically, to prevent parents from shifting income to their children with lower tax rates, the “kiddie tax” applied the parents’ marginal tax rate to unearned income in excess of a de minimis amount ($2,100 in 2018 and $2,200 in 2019) for children under age 18 (24 if a full-time student).
The Tax Cuts and Jobs Act (TCJA) changed this computation for 2018 and subsequent tax years, simplifying preparation of kiddie tax returns, but subjecting the child’s unearned income to higher taxes. The rates for individuals and estates and trusts are the same, but they are reached at lower income thresholds for estates and trusts, so the kiddie tax rate on net unearned income was 10% for amounts up to around $2,500, 24% for income up to around $9,000, 35% for income up to around $12,500 and 37% for anything over that. This resulted in the minor being taxed at approximately $6,000 on $20,000 of net unearned income or approximately $30,000 on net unearned income of $90,000. These amounts were much higher than would have been paid previously because the rate brackets were much broader for individuals than for estates and trusts.
The Further Consolidated Appropriations Act, 2020 (FCAA) enacted at the end of 2019 retroactively repealed this provision of the TCJA and reinstated the “historic” computation subjecting the child’s unearned income in excess of the threshold to the parents’ marginal tax rate. This was done to prevent the unintended heavy tax on military death benefits paid to children of Gold Star families, on non-tuition scholarships paid to low-income students and on tribal distributions to Native American children.
Accordingly, the FCAA permits taxpayers to apply the parents’ marginal rate provisions retroactively to a child’s 2019 and 2018 unearned income under the pre-TCJA rules. This can be accomplished by filing a Form 8615, Tax for Certain Children Who Have Unearned Income, with an amended return or an initial return if the child’s 2019 return has not been filed. The savings would depend on the parents’ marginal tax rate, with no savings if the parents were at the highest income tax rate because the individual and trust tax rates would be the same.
2019 Estimated Tax Underpayment Penalty Calculations Stop at April 15, 2020; Interest on Overpayments of Income Taxes Runs from April 15
Taxpayers normally calculate and pay any penalty for underpayment of estimated taxes with their individual income tax return. However, this year the due date of the individual income tax return was postponed until July 15, 2020, so many taxpayers could not calculate and pay the penalty by April 15. TXCPA’s Federal Tax Policy Committee asked the IRS to provide penalty relief for 2019 estimated tax underpayment penalties in a letter dated March 26, 2020. In response, the IRS did not extend the penalty calculation past April 15. If the 2019 estimated taxes are not paid by July 15, 2020, the penalty will be calculated as a failure to pay penalty, so no matter when 2019 estimated taxes are paid, the underpayment penalty calculation stops as of April 15.
For overpayments of income taxes, the IRS will pay interest on refunds from April 15, even if the return was filed after that. This could be a significant amount because processing times have been delayed, particularly for paper returns, with millions of unopened envelopes containing returns and payments piling up at service centers. Normally, refund checks include any interest due to the taxpayer, but this year the interest payment may be sent separately.
By Kathy Ploch, CPA-Houston
The IRS has recently disclosed that it has approximately 11 million pieces of unopened mail, primarily due to staffing reductions as a result of the pandemic. After the government shutdown in January 2019, the IRS had over five million pieces of unopened mail. It will probably take months for staff to sort through and respond to this correspondence.
When faced with an IRS notice assessing your client penalties and interest for whatever reason, the practitioner’s general course of action is to request abatement of the penalties and interest due to reasonable cause. Another tool in the toolbox may be requesting the first-time abatement penalty relief if facts support the position.
However, if the penalty assessment is due to the backlog of mail that the IRS is experiencing, practitioners are cautioned not to use either of these abatement requests and to always be careful when using the first-time abatement.
AICPA is working on a letter asking the IRS to automatically curtail collection of penalties and interest due to the backlog.
A best practice for mailing correspondence or documents to the IRS is to do so via Certified Mail, Return Receipt Requested and make a copy of your envelope before mailing.