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July 2020

TXCPA Committee Comments on Tax Capital Reporting

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.


Refund of 2018 and 2019 Kiddie Tax Available

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The Further Consolidated Appropriations Act, 2020 (FCAA) enacted at the end of 2019 retroactively repealed this provision of the TCJA and reinstated the “historic” computation subjecting the child’s unearned income in excess of the threshold to the parents’ marginal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.

IRS Mail Backlog and Penalty Abatement Requests

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.

PPP Loan Forgiveness: Status of Notice 2020-32

By Donna Wesling, CPA-Austin


The question of whether expenses paid with Paycheck Protection Program (PPP) loan proceeds can be tax deductible remains unsettled at this time. It seems clear that the intent of Congress was for these loans, if forgiven, to have no tax consequence. The language of the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 specifically says that the loan forgiveness will not be income from cancellation of debt. However, in Notice 2020-32, the IRS has taken the position that expenses paid with the PPP loan proceeds are not deductible and Treasury Secretary Mnuchin is standing by that notice.


Senator John Cornyn (R-TX) introduced S. 3612 in the Senate to specifically make the PPP expenses deductible, but the bill has not been enacted. At TXCPA’s Annual Meeting of Members, Senator Cornyn indicated that he is hopeful this will be wrapped into additional coronavirus relief legislation in July.


Senator Cornyn also indicated that he is hopeful that the legislation would include a simplified forgiveness application for smaller loans (under $250,000). The U.S. Small Business Administration (SBA) has issued a form for the forgiveness application with a revision date of June 16, 2020.


The PPP loan guidance has been changing at a rapid pace so stay tuned for further developments.

Coronavirus-Related Distribution and Loans Guidance Released

By Julie Dale, CPA-Austin


The IRS issued Notice 2020-50 to provide further guidance on the coronavirus-related retirement plan distribution and loan provisions included in the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. The CARES Act provided for relaxed requirements for both receiving these distributions and the taxation or rollover of the distributions.


A coronavirus-related retirement plan distribution is limited to $100,000 and is available to a taxpayer who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, or who experiences adverse financial consequences as a result of coronavirus-related reduced compensation, lack of childcare or business interruption. These retirement distributions are not subject to the 10% penalty and the income can be recognized over three years instead of a single year. The distribution can also be repaid during the three-year time frame to receive tax-free rollover treatment.


The notice includes detailed guidelines on how these distributions will be taxed if the taxpayer chooses to roll over a portion or all the distribution in the allotted time frame and provides examples. A taxpayer has until the extended deadline for the return to roll over funds to claim it on the original tax return. For example, if a taxpayer takes a $30,000 distribution in 2020 and chooses to recognize the income over three years, then the taxpayer has until Oct. 15, 2021, to roll over $10,000 to eliminate the income recognition for 2020 assuming an extension is filed. If the taxpayer reports the income and later recontributes the funds, then an amended return is required.


For those spreading the income over three years, the IRS has chosen to treat rollover contributions as coming from the most recently reported income first and then rolling back to past income recognized. For example, if a taxpayer takes a $60,000 distribution in 2020 and contributes $30,000 on April 15, 2022, then the $30,000 recontribution first offsets the 2021 income to be reported of $20,000 and the 2020 tax return would need to be amended to reflect the remaining recontribution of $10,000. To avoid amending a previous return, the taxpayer can choose to carry forward the additional recontribution of $10,000 to the year 2022.


If the taxpayer rolls over one-third of the original distribution amount by the tax deadline for each of the three years, then there is potentially no need to amend tax returns to claim refunds. For example, if a taxpayer takes out a $90,000 coronavirus-related retirement distribution in 2020 and recontributes $30,000 on each of the tax return deadlines (April 15, 2021; April 15, 2022; and April 15, 2023), then the income from the $90,000 distribution can be excluded from the tax returns for the years 2020, 2021 and 2022.