Last May, the AICPA's Tax Executive Committee polled CPAs about how the pandemic-prolonged 2020 filing season was going for them, and most indicated they'd rather get it over with on July 15 as scheduled than to draw it out still longer (see "July 15 Filing Date — Not to Move," AICPA Insights, June 23, 2020).
So it may be with equal reluctance that they contemplate tax season's approach once again in the new year. What follows are some of the issues and concerns CPA tax preparers may encounter.
For a handy reference covering many common thresholds, limitations, and other amounts, plus a list of many of the following special relief provisions, for use in preparing 2020 returns, see the "Filing Season Quick Guide — Tax Year 2020" (PDF download).
COVID-19 EMPLOYER PROVISIONS
A number of measures enacted as emergency relief for businesses and employees affected by the COVID-19 pandemic during the year will figure in their 2020 tax returns. These were contained for the most part in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and the Families First Coronavirus Response Act (FFCRA), P.L. 116-127.
"The new CARES Act provisions provide for several planning opportunities related to areas including, but not limited to, estate and gift planning, research and development credits, and net operating losses, which could result in substantial tax savings," said Debra Mitchell, a tax director at Marcum LLP in Providence, R.I., and a member of the JofA's board of editorial advisers.
As the Paycheck Protection Program (PPP) made loans administered by the U.S. Small Business Administration, many CPAs focused on helping business clients understand the requirements for the loans, apply for them, and then later to apply for forgiveness of the amounts borrowed. Now CPAs' roles shift to helping those clients reckon with the tax implications of loan forgiveness or repayment. The IRS made clear in Notice 2020-32 that although forgiveness of PPP loans is excluded from loan recipients' gross income, taxpayers cannot claim as income tax deductions any otherwise deductible expenses that resulted in loan forgiveness. Under Rev. Rul. 2020-27, taxpayers who reasonably expect a PPP loan to be forgiven in 2021 were told they could not deduct corresponding expenses in 2020. However, the Consolidated Appropriations Act, 2021, enacted in late December, overruled that IRS guidance. It confirmed that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan but also clarified that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis of the borrower’s assets and other tax attributes will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision also provided similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.
Loan forgiveness is predicated on the amount of a taxpayer's payments during the eight-week period beginning on the loan's origination date for payroll costs, covered rent or interest on a covered mortgage, and covered utility bills. The amount of the loan forgiveness is reduced if, during the covered period, the taxpayer reduces the number of full-time employees compared to the number of full-time employees during one of three past periods (with the period used elected by the taxpayer), or the average salary or wages of any employee meeting certain requirements during the covered period is reduced by more than 25%, compared with the employee's average salary or wages during the most recent full quarter before the covered period (CARES Act §1106(d)(2)).
Under the original CARES Act, PPP loan recipients (other than recipients who repaid the loan by May 18, 2020) could not claim the CARES Act’s employee retention credit, whether or not the PPP loan is forgiven. However, the Consolidated Appropriations Act, 2021, provided that that employers who receive PPP loans may still qualify for the employee retention credit with respect to wages that are not paid for with forgiven PPP proceeds.
Employee retention credit
Section 2301 of the CARES Act added the employee retention credit, a refundable payroll tax credit equal to 50% of qualified wages (wages, including qualified health plan expenses allocable to the wages) paid by eligible employers to certain employees from March 13, 2020, to Dec. 31, 2020 (now extended to June 30, 2021). Qualified wages are limited with respect to any employee to $10,000 for each calendar quarter. While employers claim the employee retention credit against payroll taxes, rules similar to Sec. 280C(a) apply (CARES Act §2301(e)), meaning that, for income tax purposes, an employer's deduction for wages paid in the tax year is reduced by the amount of the credit claimed, with all employees of a controlled group of corporations or other entities under common control treated as employed by a single employer. By the same token, employers cannot claim as qualified wages for purposes of the employee retention credit any wages for which they receive a credit for qualified sick or family leave under Section 7001 or 7003 of the FFCRA or the Sec. 45S credit for paid family and medical leave. Employers also may not claim the employee retention credit and the Sec. 51 work opportunity credit for the same employee for the same period of time (see IRS FAQs: Employee Retention Credit Under the CARES Act).
Sick and family leave credits for self-employed individuals
While qualified sick and family leave credits likewise are taken against payroll taxes by employers, self-employed taxpayers may claim a refundable credit against income tax equal to their qualified sick leave or qualified family leave equivalent amounts. Eligible self-employed individuals use Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to determine the amount of the credits to claim and then include the credits on Schedule 3, Additional Credits and Payments, of Form 1040, U.S. Individual Income Tax Return. The credits are intended to be equivalent to the amount of paid sick or family leave that a self-employed individual would be entitled to under the FFCRA if the individual were an employee of an employer (other than himself or herself).
In calculating the credit, a self-employed taxpayer offsets qualified sick leave or qualified family leave equivalent amounts by any qualified sick or family leave wages paid by an employer (see IRS COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs). Tax preparers will want to ensure that self-employed clients claiming the credits retain documentation of the days they were unable to work and the details of the qualifying circumstances.
CARES ACT LOSS AND INTEREST LIMITATION RELIEF
Many business taxpayers' 2020 income tax returns will be affected by CARES Act temporary provisions, including those that change the rules regarding the carryback of net operating losses (NOLs), the limitation on excess business losses, and the limitation on the deduction of business interest expense.
NOL carrybacks and excess business losses
CPAs with taxpayers having an NOL for 2020 will want to calculate a carryback of five years under Sec. 172(b)(1)(D), added by Section 2303(b) of the CARES Act, and assess whether this option is likely to result in the greatest possible tax savings. A quick refund of taxes from carrying back a 2020 NOL can be obtained by filing an application for a tentative refund within 12 months from the end of the NOL year. For corporate taxpayers, the tax arbitrage possibilities of applying the loss to a year in which the top corporate income tax rate was 35% rather than the current 21% (i.e., in tax years beginning before 2018, before being lowered by the law known as the Tax Cuts and Jobs Act, P.L. 115-97) may be appealing. In addition to allowing a five-year carryback of NOLs for tax years 2018, 2019, and 2020, the CARES Act temporarily suspends the 80%-of-taxable-income NOL deduction limitation for those tax years.
Noncorporate taxpayers may be able to claim a business loss greater than $250,000 ($500,000 for married taxpayers filing jointly) in 2020 under the CARES Act's temporary suspension of the Sec. 461(l)(1) rule limiting excess business losses for tax years 2018, 2019, and 2020 (see "Deducting Losses in the CARES Act's Window," JofA, Nov. 2020).
Lifting of interest deduction limitation
Larger business taxpayer clients with large interest deductions may experience relief on 2020 returns with the CARES Act's temporary increase (for tax years beginning in 2019 and 2020) in the deductibility of interest expense, from 30% of taxable income to 50% (plus business interest income and floor plan financing interest).
RELIEF FOR INDIVIDUAL TAXPAYERS
Recovery rebate credit
Taxpayers who were eligible for an advance payment of a recovery rebate credit, known as an economic impact payment (EIP), under Sec. 6428 (enacted by the CARES Act) but did not receive it can claim a refundable tax credit in the corresponding amount: $1,200 for a single taxpayer or $2,400 for married taxpayers filing jointly, plus $500 per qualifying child under Sec. 24(c). The Consolidated Appropriations Act, 2021, added surviving spouses, as defined in Sec. 2(a), to married taxpayers filing jointly as eligible for a $2,400 payment or credit. Like the payment, the credit is phased down by 5% of adjusted gross income (AGI) over $75,000 for single individuals ($150,000 for a joint return and $112,500 for a head of household). The second round of economic impact payments, in the amount of $600 per eligible taxpayer, enacted by the Consolidated Appropriations Act, 2021, are similarly treated as an advance payment of a refundable tax credit.
The IRS used information from taxpayers' 2019 or 2018 returns to determine eligibility for the EIP and the bank direct deposit information or address for where to send it; if the taxpayer did not file those returns (and did not use the IRS's web portal for nonfilers) or the return information was lacking or changed, the taxpayer could need to claim the credit. The IRS advises on its Economic Impact Payment Information Center webpages that taxpayers should have received Notice 1444, Your Economic Impact Payment, within 15 days after receiving their payment to confirm it. The IRS also states that when taxpayers file their 2020 tax return they can refer to Notice 1444 and claim additional credits if they are eligible for them. Individuals who received an EIP that was calculated based on their 2018 or 2019 return do not have to repay all or a portion of the EIP they received if, based on their 2020 return, they would qualify for a lesser amount (see Topic J: Reconciling on Your 2020 Tax Return, question J3). No credit is allowed to taxpayers who could be claimed as the dependent of another taxpayer (even if required to file a return), to nonresident aliens, or to individuals without a Social Security number valid for employment in the United States.
Retirement plans: RMDs and distributions
For retirees, the CARES Act's suspension of required minimum distributions (RMDs) in 2020 could open up possibilities for tax savings from recognizing capital gains at a rate lower than they would have incurred in a higher-income year, or longer-term benefits from a Roth conversion (see "The COVID-19 Era: Planning for the Year End and Beyond," JofA, Dec. 2020, and "Time to Consider a Roth Conversion," JofA, Oct. 2020).
The CARES Act also significantly eased rules allowing early distributions from eligible retirement plans in 2020 for pandemic-related reasons, for which it also provided generous recontribution timetables. Notably, the definition of a qualified individual for purposes of a coronavirus-related distribution includes not just those who contracted the illness but individuals and their spouses or other household members experiencing a variety of adverse financial circumstances. While qualified individuals may self-certify their eligibility to plan administrators, tax preparers will want to check that the certification was made and may wish to discuss with taxpayers recontribution strategies going forward (see Notice 2020-50; see also "Tax Clinic: Early Distributions From Retirement Plans Related to COVID-19," The Tax Adviser, Nov. 2020).
OTHER NEW FEATURES
Virtual currency transactions
The 2020 Form 1040 contains a question directly under the taxpayer name and address fields asking, "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" with check boxes yes or no. The same question with respect to 2019 appeared on that year's Form 1040, Schedule 1, Additional Income and Adjustments to Income, which is required only if a taxpayer has an item reportable on it. Now, everyone filing a Form 1040 or 1040-SR, U.S. Tax Return for Seniors, will encounter the query front and center, reflecting the IRS's increased attention to nonreporters and updated guidance on reporting gain or loss on cryptocurrency transactions in Rev. Rul. 2019-24.
The draft instructions for Form 1040 indicate that transactions requiring a "yes" response include receiving or transferring virtual currency for no consideration, including from an airdrop or hard fork, and exchanging virtual currency for goods or services or for other property, including other virtual currency. Reportable transactions do not include merely holding virtual currency in a virtual wallet or account or transferring it from one wallet or account to another under the taxpayer's control.
Above-the-line charitable contributions
Also new (and for 2020 only) on the front of Form 1040 is an opportunity for taxpayers who do not itemize deductions to claim up to $300 in charitable contributions as a deduction in determining AGI (see "Tax Practice Corner: The New Charitable Deduction for Nonitemizers," JofA, Sept. 2020).
IRS ADMINISTRATION AND PROCEDURE
PTIN fees now payable
For the first time since 2017, paid tax return preparers obtaining a new preparer tax identification number (PTIN) or making the required annual renewal of their existing PTIN must pay a fee. Currently, the PTIN fee totals $35.95 (of which $14.95 goes to a third-party contractor). PTIN renewals for the 2021 season opened this autumn with the fee requirement. Although, as the IRS noted in proposed regulations reinstituting the fee, the fee amount at that time remained in litigation, an injunction against charging it had been lifted (see "Tax Practice Corner: Preparers Beware: PTIN Fees Are Back," JofA, Nov. 2020).
For some CPA firms, staffing for busy season promises to be more robust than previously, with more preparers working remotely.
"We have found that this environment is increasing our access to talent, and, as a firm, have recently hired several experienced CPAs that do not, and likely will not, live in the proximity of one of our offices," said Steven J. Brown, CPA, vice chairman, partner, and chairman of tax services of RubinBrown LLP in St. Louis, who is also a member of the JofA's board of editorial advisers. The outlook is similarly bright for hiring and training slightly more interns than last year, he said.
"The entry-level talent pool for interns and new hires still feels competitive," Brown said, with the firm's hiring process cycling more quickly from interview to hiring and starting work.
Similarly, Marcum LLP has already adapted its work arrangements to the pandemic, Mitchell said.
"Marcum has been involved with alternative work arrangements for some time, and the change to remote working during the past tax season was seamless, with a focus on both safety and client service," she said.
With time to prepare for pandemic-related adjustments rather than being hit with them midseason as last year, CPAs may well feel confident of a more normal workload. And although many of their clients may be under financial duress, CPAs can advise on how the above relief measures may raise those clients' prospects going forward.
About the author
Paul Bonner is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at Paul.Bonner@aicpa-cima.com or 919-402-4434.
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