Guidance on PPP Loan Forgiveness

By Tom Ochsenschlager, J.D., CPA

Rev. Proc. 2021-48 and Rev. Proc. 2021-49 provide guidance regarding the tax effects of loans forgiven under the Paycheck Protection Program (PPP). In accordance with the Coronavirus Aid, Relief and Economic Security Act (CARES Act) the amount of the loans forgiven for tax purposes does not have to be included in gross income and the expenses covered by the forgiven loans can be deducted. However, the forgiven amounts are included in gross income to determine thresholds such as whether a small business can use the cash method of accounting and filing requirements under Section 6033 for a tax-exempt entity.

Rev. Proc. 2021-48 clarifies the following:

Taxpayers have the option of deducting the expenditures that were covered by the forgiveness of PPP loans:

• when the expense was incurred,
• when the taxpayer files the application for forgiveness, or
• when the forgiveness is granted.

Initially, the CARES Act did not permit deductions for expenses incurred by PPP loan forgiveness. The Tax Relief Act of 2020 retroactively reversed that position, and this Rev. Proc. permits taxpayers who filed their return prior to the Tax Relief Act to claim the deduction in the first year after the passage of the Tax Relief Act or file an amended return.

Although the PPP loans that are forgiven are not taxable income, the forgiven amounts must be reported on a timely filed or amended return or using an administrative adjustment request under Section 6227.

Rev. Proc. 2021-49 provides instructions for how partnerships allocate the PPP loan forgiveness and the expenditures covered by the PPP loan among the partners to determine each partner’s income or loss and basis.

Similarly, for consolidated groups, the Rev. Proc. also addresses the allocation of the expenditures attributable to a PPP loan and the appropriate basis adjustment for each of the group’s members.

It should be noted that, for S corporations, the draft of the 2021 S corporation return specifies that expenses paid with PPP loan proceeds reduce the Accumulated Adjustments Account on Schedule M-2 of the Form 1120S return.  

IRS Rev. Proc. 2021-48

IRS Rev. Proc. 2021-49

Rev. Procs. 2021-48, 2021-49, 2021-50: Tax treatment of PPP loan forgiveness; partnership allocations and stock basis adjustments (assets.kpmg)

Tax Section Odyssey: To amend or not to amend — that is not the only question (libsyn.com)

FinCEN Issues Proposed Beneficial Ownership Reporting Rules

By David P. Donnelly, CPA-Houston

FinCEN, the Financial Crimes Enforcement Network, is proposing new regulations that will require disclosure of the beneficial ownership of newly formed and existing business and other entities. The proposed rules will implement reporting requirements under the Corporate Transparency Act, which was part of the Anti-Money Laundering Act of 2020 that became law Jan. 1, 2021.

Beneficial ownership is described as an individual who exercises substantial control over the company or owns or controls at least 25% of the ownership interest in the company. 

Reports for newly created or registered companies would be due to FinCEN within 14 days of creation or registration. Existing entities would have one year from the effective date of these regulations to report. Any changes in beneficial ownership are required to be reported within 30 days.

Information to be reported will include the full legal name of the beneficial owner, the owner’s date of birth, current residential address and a ”unique identifying number from an acceptable identification document.” It appears that once registered, an individual will be provided with a “FinCEN identifier.” The proposed rules specify that the reporting company provide a scanned copy of the ”acceptable identification document.” At present, there does not seem to be a requirement to provide the tax identification number of the beneficial owner.

The penalty for not reporting or for a person to ”willfully provide or attempt to provide, false or fraudulent beneficial ownership information” is $500 per day; there are also potential criminal penalties.

FinCEN’s notice of proposed rulemaking (NPRM) estimates the cost to prepare these reports at $45 each. CPAs in public practice will no doubt be called upon to prepare these reports for their clients. Given the time required to acquire the appropriate information, compile it, prepare the yet-unissued form(s) and comply with any reasonable document retention requirements, the FinCEN’s estimate of the cost to prepare these reports seems wildly optimistic. 

The NPRM was issued on Dec. 7, 2021, and the comments period closes on Feb. 7, 2022. 

 

Federal Register: Beneficial Ownership Information Reporting Requirements

Fact Sheet: Beneficial Ownership Information Reporting Notice of Proposed Rulemaking (NPRM) | FinCEN.gov

FinCEN Issues Proposed Beneficial Ownership Reporting Rule | BKD, LLP

The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information (americanbar.org)

Economic Impact Payment and Claiming the 2021 Recovery Rebate Credit

Individuals who did not qualify for the third economic impact payment (stimulus) or did not receive the full amount may be eligible for the recovery rebate credit based on their 2021 tax information.

In early 2022, the IRS will send Letter 6475 that contains the total amount of the third economic impact payment and any plus-up payments received. Individuals can also log into their IRS.gov online account to securely access their EIP amounts. This letter can be used to determine eligibility to claim the recovery rebate credit.

Questions and Answers about the Third Economic Impact Payment | Internal Revenue Service (irs.gov)

IRS updates the 2020 Recovery Rebate Credit Frequently-Asked-Questions

Claiming the Advance Child Tax Credit

In late January 2022, the IRS will send Letter 6419, Reconciliation Statement, to provide the total amount of advance child tax credit (CTC) payments to those taxpayers who received at least one payment during 2021. Letter 6419 will provide a summary of the advanced payments, how the amount was calculated and the conditions for repayment. Tax professionals may need to refer to this notice to claim the remaining CTC amount. The letter will be mailed to the taxpayer’s last known mailing address the IRS has on file as of the letter’s last mailing date.

Taxpayers can also obtain their payment amount via the online portal with an ID.me account to verify the details from the letter.

There are additional circumstances that could have affected the taxpayer’s CTC refund, including shared custody agreements and both parents opting out of the advance payments.

Provisions in the Build Back Better (BBB) Act would extend the expansion of the CTC and the advance payments through the end of 2022. However, with the Senate deadlock, it is unlikely that CTC payments will go out in January unless there is a Christmas miracle.

2021 Child Tax Credit and Advance Child Tax Credit Payments — Topic H: Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return | Internal Revenue Service (irs.gov)

Reporting Carried Interest

On March 22, 2021, we posted a blog discussing Section 1061 that was part of the Tax Cuts and Jobs Act. Generally, Section 1061 is effective for tax years beginning after Dec. 31, 2017, and is applicable to partnership partners (individuals, S corps, trusts or estates) that hold its interest in the partnership as compensation for services rendered to the partnership. This is fairly common in partnerships relating to real estate, hedge funds and private equity funds. For a partnership interest that is described in 1061, the partner disposing of the “carried interest” is only eligible for the long-term capital gains rates if the carried interest is held for three or more years.

The IRS has now issued News Release IR-2021-215 and addressed frequently asked questions, offering further guidance on final regulations 1.1061-1 issued last January in T.D. 9945. These specify requirements that both the affected partner and the partnership (and a flow through entity that is a partner such as an S corporation) must comply with when filing their returns. The requirements are effective for returns filed after Dec. 31, 2021.

The IRS guidance will require partnerships to attach a “Worksheet A” (provided in the FAQ) with the partner’s (or the flow through entity’s) Schedule K-1. Worksheet A identifies the proportion of the distributive amount that qualifies for a one-year or three-year holding period. The partner then utilizes Worksheet B to determine the characterization of the distributive amount on their tax return and attaches Worksheet B to the return when filed.

The FAQ document also describes how the taxpayer should specifically report the gains from the disposition of a carried interest on Schedule D.

Carried interest reporting FAQs and guidance posted - Journal of Accountancy

Get Up to Speed on the New International Reporting Schedules

As we indicated to you back in June, the IRS has finalized the new Schedules K-2 and K-3 for passthrough entities to report certain international income, deductions and other miscellaneous items. For tax years beginning in 2021, a partnership must file Schedule K-2, Partners’ Distributive Share Items – International, and Schedule K-3, Partner’s Share of Income Deductions, Credits, etc., - International.

Practitioners for a partner or S corporation shareholder should access these forms early because the level of detail needed to complete them is daunting, and the forms and instructions are long and complex.

Fortunately, the IRS has provided some transition relief in Notice 2021-39 for certain tax penalties for tax years beginning in 2021 if a filer of incorrect or incomplete reporting meets the IRS’ good faith effort requirements. You should document the efforts taken to update the information-gathering and reporting systems, processes, etc.

Frequently Asked Questions (FAQs) for 2021 Short-Tax Year Pass-Through Entity Returns and Schedules K-2 and K-3 | Internal Revenue Service (irs.gov)

Navigating the new Schedules K-2 and K-3 (thetaxadviser.com)

More TAS Case Acceptance Restrictions

By Jim Smith, CPA-Dallas, and Dave Stubblefield, EA

This is an update to tax professionals regarding Taxpayer Advocate Service (TAS) Form 911 referrals and current procedures on case acceptance criteria. It is a fluid situation and could change at any time; however, practitioners should advise clients that this may further delay the IRS’ issue resolution process.

The severe, unprecedented IRS mail and processing backlog is causing a similar TAS crisis. TAS’ policy is that it does not accept cases in which it cannot meaningfully expedite or improve resolution for taxpayers. Currently, the TAS Intake Units will not take the following types of cases if this is their primary or sole issue.

A listing of the “non accept” cases is as follows:

• IRS delays in processing all (paper-filed and electronic) amended returns
• Economic Stimulus Impact cases
• Child Tax Credit cases
• Coding processing errors and unpostable code cases
• Delays in the IRS issuing any refunds on tax returns claiming the Earned Income Tax Credit or Additional Child Tax Credit until Feb. 15, 2022, as directed by the provisions of the Protecting Americans from Tax Hikes (PATH) Act.

There is no action TAS can take to speed up this process.

If referred cases are denied, the TAS will respond to the referring party via mail or telephone call.

These directives are from an internal memo and not widely shared with taxpayers. In the interim, additional information may be helpful by accessing the IRS link, Can TAS help me with my tax issue - Taxpayer Advocate Service (irs.gov).

TAS continues to work with the IRS to expedite the processing of these returns.

TAS Not Accepting Cases Based Solely on Amended Return Status - TXCPA Federal Tax Policy Blog (typepad.com)

NTA Blog: IRS Delays in Processing Amended Tax Returns Are Impacting TAS’s Ability to Assist Taxpayers - Taxpayer Advocate Service

TXCPA Committee Requests Changes in IRS Statute of Limitation Practices

TXCPA’s Federal Tax Policy Committee recently asked the IRS to establish procedures to accept taxpayer requests to limit the scope of statute of limitation extensions. Where the IRS does not agree to the limitation, the IRS should notify taxpayers in writing as to the specific reason for the refusal and provide a procedure to appeal the decision. 

https://www.tx.cpa/docs/default-source/advocacy/irs/irc_statute_of_limitation_concerns_120121.pdf?sfvrsn=f686d5b1_2

Employee Retention Credit Mostly Terminated Sept. 30

In response to the COVID pandemic, Congress passed the American Rescue Plan in March of this year that provided employers with the Employee Retention Credit (ERC) through the end of 2021. However, the bipartisan infrastructure bill, H.R. 3684, signed into law by President Biden on Nov. 15, generally terminates the ERC Sept. 30. 

Accordingly, for most employers, it will only apply to qualified wages paid before Oct. 1, 2021. The exception is for “recovery startup businesses” that are enabled to continue to claim the ERC for wages paid before Jan. 1, 2022. For this purpose, a business qualifies as a recovery startup business if it has had average annual gross receipts of no more than $1 million over the three-year period 2018-2020 and a new trade or business was begun after Feb. 15, 2020 (a new company or an existing company that has begun a new line of business).

Employers that do not qualify as recovery startup businesses will have to repay any ERC benefits taken after September. Practitioners of these employers should watch for additional IRS guidance.

 

UPDATE: On Dec. 6, the IRS released guidance regarding the retroactive termination of the ERC in Notice 2021-65:

Notice 2021-65, Termination of the Employee Retention Credit under Section 3134 of the Code in the Fourth Calendar Quarter 0f 2021 for Certain Employers (irs.gov)

Changing Tide for IRS Enforcement of Microcaptive Insurance

By Leo Unzeitig, CPA, J.D. - San Antonio

Congress passed Section 831(b) in 1986. It provides important tax benefits to small insurance companies. Namely, net premiums received are not taxed as income as long as they remain under $2.2 million.

Not surprisingly, taxpayers have availed themselves of the important benefits provided by the provision by forming insurance companies. The problem is that “insurance” is not defined by the Code. And over the last 35 years, Treasury and the IRS have chosen not to provide any of the sorely needed guidance letting taxpayers know what qualifies as insurance for Section 831(b). Instead, the IRS has listed so-called microcaptive insurance as a “transaction of interest” requiring disclosure on a Form 8886. The IRS has 12 exam teams collectively termed the “Tiger Team” who use the list of taxpayers from the Forms 8886 to open examinations, disallow the benefits provided by Section 831(b) and assert 40% lack-of-economic substance penalties. A recent American Bar Association Tax Section panel comprised of the IRS authorities on insurance confirmed that no captive insurance arrangement has been sustained at the exam level. Following a string of victories at Tax Court, the IRS has had strong winds at its back in its enforcement mandate.

However, the tide appears to be turning. In the recent case of Puglisi v. Commissioner, Dkt. No. 2796-20, the IRS conceded the deficiency determination for a microcaptive insurance company before trial. This is the first instance in recent years where the IRS has done so. The question is, does this change anything?

Like all microcaptive insurance cases, the captive insurance company in Puglisi “reinsured” risks pooled by hundreds of independent but similarly situated taxpayers (picture 100 taxpayers across the country forming insurance companies that all collectively insure each other in small part). This arrangement was previously approved by the IRS in numerous letter rulings issued in 2012. However, the IRS quickly (and without explanation) abandoned the reasoning in those letter rulings. 

Fast forward a decade and the IRS appears to be coming back around. The taxpayer in Puglisi participated in a version of a relatively common reinsurance structure that was nonetheless rejected by the Tax Court in recent cases. Thus, it is unlikely that the structure itself was cause for concern to the IRS. The distinguishing facts that the IRS may have deemed more hazardous to its litigating position are that (1) before forming the captive to insure unusual perils (i.e., losses arising from avian flu), the taxpayer sought and was unable to find the same coverage in the commercial market, and (2) the taxpayer made several significant claims. 

The distinctions in Puglisi make it a stronger case than others, but not necessarily. This is because the claims were likely reinsured by over 100 other insurers. Thus, the Puglisi’s captive insurance company likely covered some of their losses, but the rest of the unrelated insurance companies likewise covered a portion, as well. Thus, every other taxpayer participating in the reinsurance pool should arguably be treated the same as the taxpayers in Puglisi because of the effects of the pooling arrangement. They likely used the same actuary to price policies, the same management firm to manage the captive insurance companies, the same claims processer to evaluate claims, and they all agreed to assume and reinsure risks by the same arm’s-length standards. The only differences may be the extent to which the individual insureds suffered losses leading to claims.

Given the significant resources the IRS has devoted to challenging captive insurance companies and the Section 831(b) election, it is unlikely that the Tiger Team will slow or disband. But the result from Puglisi is promising in at least one regard: the IRS apparently believes that there are instances in which taxpayers may qualify for the election. Let’s just hope that someone at the IRS considers the pooling effects on other taxpayers and likewise issues reliable guidance so that taxpayers are spared the expense of more unnecessary audits and trials.

The IRS seems to believe that Section 831(b) works in some situations. It would be great if we had reliable guidance on what those situations are and might make the IRS’ enforcement responsibilities a bit easier.