Tax Strategy: Issues for the 2021 Tax Reporting Season
As the second COVID-dominated tax reporting season is now well underway, we hope businesses have successfully avoided remote working and have the technology to do so successfully. There are even suggestions that remote working won’t go away once we leave the pandemic behind.
Rather than eagerly awaiting a smooth tax filing season, however, new issues have arisen that create complications for this tax filing season as well. Tax legislation enacted in response to the COVID pandemic will make its first appearance in 2020 tax returns. Congress also followed its frequent habit of passing year-end tax legislation that included provisions impacting tax returns. 2020 tax returns. The Internal Revenue Service, which continues to struggle with tax changes to the Tax Cuts and Jobs Act, the CARES Act, and its own issues related to the COVID shutdown, was again faced with the need to make last minute changes to forms, instructions, and processing software in response to the Consolidated Appropriations Act 2021.
In short, it should be another very interesting tax season.
Delayed start. Due to the issues facing the IRS as a result of the CAA, the service announced that the filing season will not begin until February 12, 2021. This is the last start in recent memory and at least a few weeks old. later than recent. years. The IRS has yet to delay the April 15 tax filing deadline, although it has been asked to do so and it is still possible.
In theory, tax return preparation can begin before filing with the IRS begins, but getting clients to submit all of their information may be more difficult if the prospect of a quick tax refund. is not a motivation. If the more concentrated filing period is not extended, tax preparers may be more reluctant to accept new clients, and more clients may be encouraged to file extensions.
The RRC. New to the 2020 tax return is the recovery refund credit, where taxpayers can claim additional credit as long as they did not receive the full credit they were entitled to in the first or second round. economic stimulus payments. Return preparers should obtain Notices 1444 and 1444-B from the taxpayer as documentation for advance payments received.
Since advance payments were based on 2018 or 2019 tax returns and many taxpayers had lower income in 2020 due to COVID, many taxpayers may not have received the full credit they are entitled to on their returns. income 2020. Taxpayers who have lower income in 2020 may have an additional incentive to file earlier than receiving their reimbursement sooner. If the 2020 return is filed with the IRS before further economic stimulus is approved under President Biden’s tax proposals, the IRS will likely use the 2020 income as the basis for the stimulus payment rather than the. 2019 income.
Unemployment benefits.Many taxpayers may have received unemployment benefit in 2020 for the first time. They should receive a Form 1099-G documenting what they received. These benefits are taxable and, unless they have elected to have a withholding of the benefits or have paid estimated taxes in 2020, these taxpayers may find that they are subject to an underpayment of the benefits. estimated tax penalty.
Many other taxpayers receive 1099-G for benefits they did not claim and did not receive. These identity theft victims are encouraged by the IRS to try to have the 1099-G corrected by their state unemployment agency. The IRS also says they shouldn’t include the benefits listed on the 1099-G if they haven’t received them. State unemployment agencies have been inundated with work and it can take them several months to issue corrected 1099-Gs.
Charitable donations. For 2020 tax returns, the charitable contribution deduction will be an issue not only for retailers but also for non-retailers. Many taxpayers who are not used to claiming a charitable donation deduction may not have kept good records of donations for the year. Even though the deduction for non-retailers requires cash donations, the documentation requirements remain the same as for bill counters.
Withdrawals from the pension plan. Taxpayers who made withdrawals without penalty from the COVID-related pension plan in 2020 are required to pay taxes on one-third of those withdrawals with the 2020 tax return, unless they plan to repay the funds at the plan over the next three years. If taxpayers are unsure of their ability to repay the funds, it may be better to pay a third of the tax this year and then request a refund if they end up being able to return the funds to avoid d ” possible interest and penalties if they are unable to repay the funds within three years.
Work at home. Employees working from home during the pandemic are generally not eligible for a home office deduction for unreimbursed employee business expenses. Self-employed people can usually deduct these expenses. Employees working from home in a state other than their normal workplace may have connection issues that require filing a tax return in the state where they worked. A number of states have adopted special COVID linkage rules that state that the state will not seek to tax employees who only work temporarily in a state due to the COVID pandemic, but not all states have not adopted such a provision.
Some states also require employers to reimburse employees for necessary business expenses incurred by the employee while working from home. These reimbursed expenses should not result in taxable income if reimbursed under an accounting reimbursement plan.
Employee retention credit and PPP loans. Under the CARES Act, businesses had to choose between a paycheck protection program loan or employee retention credit. Under the CAA, employers can now claim both for 2020, provided they are for different wages. Due to the different definitions of salaries for each, confusing statutory language, and retroactive application for 2020, determining what ERC a company might be entitled to can require a very complicated analysis. It may also require guidance from the IRS to resolve uncertainties related to the wording of the law.
Paid sick leave and family leave credits. In addition to the ERC, payroll taxes were also reduced in 2020 for paid sick leave and family leave credits under the Families First Coronavirus Response Act. Calculating these credits will also place an additional burden on 2020 business returns.
Deduction of PPP expenses. CAA blessed the deduction of expenses paid with canceled PPP loans. This will generally be good news for taxpayers. There could still be complications if these PPP loans are not canceled before 2021 and some middle-class business owners need the base increase in canceled loans to fully utilize the expense deduction.
The ceiling of the SALT deduction. The IRS has blessed a state workaround for the SALT deduction cap involving state taxes paid by partnerships or S corporations, rather than the owners of those flow-through entities. Under the IRS guidelines, taxpayers in states that had already enacted such provisions prior to the issuance of the IRS guidelines can retroactively follow those guidelines to the date of the state’s enactment.
While many states will likely now adopt such SALT bypass provisions, only about half a dozen had such provisions before the IRS announced. For state taxpayers who as of 2020 had state taxes paid through these flow-through entities, tax preparers can now rely on these IRS guidelines to accept the workaround. of the SALT ceiling on the 2020 tax return.
Modified returns. The tax legislation in 2020 included several provisions that could require customers to change tax returns from previous years. This included net operating loss carrybacks, business interest deduction, loss limit for mid-level businesses, Kiddie tax, qualifying improvement properties and the over 30 expired tax extensions extended retroactively to 2018. The end of the year CAA legislation added to this list by retroactively modifying the depreciation period for rental properties built before 2018 from 40 years to 30 years.
Cryptocurrency Transactions. The IRS moved a question on whether the taxpayer engaged in cryptocurrency transactions from Form 1040, Schedule 1, where it appeared on the 2019 tax return, to the top of Form 1040, where it appears on the 2020 return. It will be much more difficult for taxpayers to “ignore” the question, and the IRS will monitor the return of any income related to any positive response to the question. The IRS has also been successful in obtaining third-party information from cryptocurrency facilitators about people who participated in such transactions.
As businesses have had a year to adjust to life with COVID, many changes to COVID-related tax laws will be seen for the first time on 2020 tax returns, creating challenges for taxpayers, preparers tax returns and the IRS.