For this week’s in review, we are providing two practitioner insights on how expenses covered by the PPP loan will be treated as well as some top IRS audit triggers, the recently released Republican stimulus bill, and the release of the Biden campaign’s plan to increase benefits for child care and the elderly.
Specifically, we will be covering the following this week—
- Practitioner Insight: Expenses Forgiven As Part of PPP Loan Cannot Be Deducted
- Practitioner Insight: Top Audit Triggers
- Recent Republican Stimulus Plan Would Sent $1,200 Checks Again in August; and
- Biden Tax Plan to Target Like-Kind Exchanges in Order to Help Fund Care Plan for Children and Elderly.
Practitioner Insight: Expenses Forgiven As Part of PPP Loan Cannot Be Deducted
July 24, 2020 – The Paycheck Protection Program (PPP), created as part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act), has provided over 4.8 million loans to businesses impacted by the Covid-19 pandemic. If businesses use their PPP loans for business expenses such as rent, utilities, certain payroll costs, and mortgage interest then those expenses may be forgiven, subject to wage and full-time equivalent tests. This forgiveness is a critical feature of the program, incentivizing businesses to allocate funds toward supporting their employees and by extension their communities.
In fact, it is so important that Congress expressly excludes this forgiveness from gross income under the CARES Act. Forgiven disbursements are considered, “canceled indebtedness” and the CARES Act excludes this canceled indebtedness from gross income, providing, “any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness . . shall be excluded from gross income.”
While the CARES Act allows businesses to exclude from gross income expenses that are forgiven as part of their PPP loan, the IRS in a recently released guidance (Notice 2020-32), signaled its intention to deny corresponding deductions for such expenses. In general, businesses are able to deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Rent, utility payments, and payroll costs comprise typical trade or business expenses for which a deduction generally is generally appropriate. Mortgage interest payments are similarly deductible. If these costs were also excluded from gross income because they were eligible expenses as part of a PPP loan, then businesses may receive a potential double tax benefit, by both excluding the forgiven disbursement from income while also deducting the same expense. The double tax benefit provided for in the PPP is not a problem, but rather is the mechanism by which businesses are incentivized to allocate funds towards favored uses.
Notice 2020-32 clarifies the IRS position that the double tax benefit will not be permitted, providing, “no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a [PPP loan]…and the income associated with the forgiveness is excluded from gross income for purposes of the . . . of the CARES Act.”
Under the IRS position, businesses would be able to exclude forgiven disbursements from gross income, but would not be allowed to deduct such expenses, offsetting the double tax benefit.
Practitioner Insight: Top Audit Triggers
An IRS audit is a review of an organization’s or individuals accounts and financial information to ensure that it is reported correctly and to verify the reported amount of tax.
The trigger of an IRS audit can stem from many reason, but there are certain triggers that could bring a taxpayer to the attention of the IRS.
Some of these common issues are outlined below—
- Earning more than $200,000 in a given year
- Conducting transactions in cryptocurrency
- Failing to report income the IRS otherwise ahs record off
- Being self-employed or running a home based business
- Typographical errors
- Math errors on returns
- Several consecutive years of loss by a business
- Using wholly rounded numbers ($1,000 or $5,000) frequently in stead of exact numbers ($1,321 or $4,998)
- Deducting 100% of automobile use
- When expenses are disproportionate to income
- Utilizing the home office deduction
- Reporting high volumes of cash transactions
- Improperly reporting early withdrawals form qualified retirement account
- Ranking high on the IRS’ Discrimination Information Function (DIF), which is a mathematical system that judges income tax returns according to their examination potential
- Large amount of itemized deductions
- Owning and running a wholly cash based businesses
- Claiming a hobby as a business
- Earning income or holding assets in a foreign country, such as foreign bank accounts
- Claiming the Earned Income Tax credit
- Having high level of investment income
Recent Republican Stimulus Plan Would Send $1,200 Checks Again in August
July 23, 2020 – The recently released republican COVID stimulus plan would once again provide a $1,200 payment to individuals earning up to $75,000, as well as provide $500 of each of their dependent children.
The plan proposes that he IRS use the same parameters as the first round of stimulus checks provided to US taxpayers. This should mean that the IRS could quickly deliver the money to qualifying taxpayer’s bank accounts and mailboxes.
The overall plan proposes to provide about $300 billion more into the US economy over the upcoming weeks. The proposed second round of payments would arrive just when unemployment claims have had an uptick.
For those who did not yet receive their first stimulus check payment because weren’t required to file a 2019 tax return due to low levels of income or are a recipient of a federal benefit program, such as Social security, this plan still will not help them as the IRS will not have the necessary information to provide them with their related payment.
In addition, it has been reported that there are as many as 12 million homeless, long-term unemployed and other very low-income individuals who haven’t received their payments yet from the first round of stimulus checks passed. This figure was reported as an estimate from the Center on Budget and Policy Priorities in June 2020.
Biden Tax Plan to Target Like-Kind Exchanges in Order to Help Fund Care Plan for Children and Elderly
July 21, 2020 – This past week, Joe Biden unveiled a $775 billion plan to bolder child care and care for the elderly that would be financed, in part, by taxes on real-estate investors with income of more than $400,000, as well as increased tax compliance by high-income earners.
While not giving a full explanation as to how this plan would be funded, the Biden campaign did highlight certain tax breaks they would seek to end to fund the proposed plan.
The main tax break targeted by the Biden campaign is the well known like-kind exchange that many real estate developers, owners and investors utilize. Generally, like-kind exchanges allows owner and investors of real estate alike to roll the proceeds of real estate sales into future purchases, shielding the property’s owners from tax on their profit.
It is estimated that the use of this strategy will save real estate owners and investors $51 billion between 2019 and 2023 according to Congress’s Joint Committee on Taxation.
It is not exactly clear how Biden’s plan will change or remove this provision from the tax code, however, it appears that the move is more political than anything else. “Part of this is political, in the sense that people are looking specifically at real estate, because of the president’s ownership of the asset and also because of the sense that real estate owners have been particular winners during this administration,” said Chris Mayer, co-director of the Paul Milstein Center for Real Estate at Columbia Business School.
In the end, the bid to end the real estate tax benefit emerged, with very few details, as part of Joe Biden’s economic plan. The next administration will be looking for ways to raise revenue to fill holes in the budget from the COVID-19 shutdown.