Tax Guru – Ker$tetter Letter

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Tax Day For Texas is June 15

Posted by taxguru on February 22, 2021

Due to the massive Winter freeze and resulting loss of power, the entire State of Texas has been granted more time by IRS to file their 2020 income tax returns. 

Victims of Texas winter storms get deadline extensions and other tax relief

As explained in this news release from IRS, everyone in Texas, plus those outside that state who were affected by the storm, will have until June 15, 2021 to file their business (normally due March 15) and individual (normally due April 15) income tax returns.  

While there have been rumors of another nationwide extension of Tax Day based on the Covid-19 shut-downs, nothing concrete has been set regarding that. 

Posted in disaster, TaxDay | Comments Off on Tax Day For Texas is June 15

New Year Tax Changes

Posted by taxguru on December 31, 2020

It was publicized that the infamous 5,593 page Covid relief bill (Consolidated Appropriations Act, 2021) that President Trump recently signed contained a number of tax law changes.  Rather than comment on those based on speculation and rumors, I have been waiting for a detailed official analysis by one of the reputable tax publishing companies. 

I didn’t have time to read through all 5,593 pages of the law to spot the tax issues.  Heck, even our rulers in DC who vote on these monstrosities don’t ever read them, and they are paid the big bucks and treated like royalty.  Besides being a clear dereliction of duty, this enables staffers and lobbyists to sneak in all kinds of special provisions for their masters.

Once again, the first well written analysis of this new law that I have seen has been produced by the brilliant folks at The TaxBook, which has been my number one tax reference source for several years.  They were able to distill the tax related topics from those 5,593 pages into a much more reader friendly 22 page PDF document

This coming Tax Season, for 2020 returns, is certain to be confusing for many reasons. It’s not just business issues that are affected by these new changes.  There are plenty of new developments for personal matters, such as donations, medical expenses, and retirement plan withdrawals.  IRS is going to have to work like crazy to get their 2020 forms and software adjusted to be consistent with these last minute changes.

I don’t have the time or the inclination to discuss all of the tax topics covered in this summary; but I do want to cover two that I have been following and discussing for quite some time: the deductibility of business expenses paid from forgiven loans and a more generous deduction for the cost of business meals. 

Business Meals
With thousands of restaurants hit hard by the mandatory pandemic closures, it’s almost a no-brainer that one excellent way to steer more money into their accounts would be to allow businesses to deduct the full cost of business meals instead of the long-running ridiculous 50%.  I knew there had been proposals to make this change over the past several months, but there was no agreement on when the effective date of such a change would be.  Here is part of The TaxBook’s recap of this provision, from Page 5 of their newly released summary.   

The new law temporarily increases the business meal deduction to 100% for amounts
paid or incurred after December 31, 2020 and before January 1, 2023. This 100% deduction is allowed if the food or beverages are provided by a restaurant. Thus, food and beverages purchased at a venue other than a restaurant would still be subject to the 50% limitation rule. The new law does not define the term “restaurant” for purposes of this 100% deduction provision.

There is no mention if the deduction for business entertainment costs, which was eliminated in the late 2017 tax law, will be reinstated at 50% or 100% in order to help theaters and live music venues, which have been decimated by the Covid shut-downs.

 

Deducting Expenses Paid With Forgiven Loans
This is a topic that I have discussed on several occasions because even though the IRS and Treasury Secretary Mnuchin had publicly ruled that there would be no deduction for expenses that were paid from tax free income, there was always an undercurrent of discussion that Congress had not intended for that to be the case.  They had just forgotten to be more specific in their legislation, as they did their typical slap-dash job of drafting the legal language.  This new law officially specifies that there will be what many consider to be double-dipping; full deductions for all business expenses even if they were paid from PPP or EIDL loans or grants that never have to be repaid.

PPP Loans – from Page 11 of The TaxBook summary:

The new law clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. The new law also reverses the IRS interpretation of related expenses. The new law clarifies that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied by reason of the exclusion from gross income under the PPP loan program.

EIDL Grants – from Page 17 of The TaxBook summary:

The new law clarifies that gross income does not include forgiveness of certain loans,
emergency EIDL grants, and certain loan repayment assistance, as provided by the
CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. This provision is effective for tax years ending after March 27, 2020. A similar treatment applies for Targeted EIDL advances and Grants for Shuttered Venue Operators, effective for tax years ending after December 27, 2020.

As has been my M.O. since I began this blog, I will be posting other summaries and analyses of this new law as I come across them.


Update 1/5/21
– Another of my favorite reference services, NCPE Fellowship, has posted some nice and concise summaries of the new tax law:

Items Affecting Individual Taxes (6 six page pdf)

Items Affecting Business Taxes (6 six page pdf)

Update 1/7/21 – IRS has announced their acceptance of the new law that allows deductions for expenses paid with forgiven loan funds and declared their earlier pronouncements forbidding that as obsolete.

Eligible Paycheck Protection Program expenses now deductible

Update 1/8/21 – As with any law of this size, there will be a constant stream of rules, regulations and interpretations on how to implement its details in real life.  Yesterday, I attended the first of what will be many webinars over the next few years on this topic from my favorite CPE provider, CCH-CPELink.  It was too short at only 60 minutes, and there were changes that needed to be covered since the slides had been prepared, but it was still very informative.  Some of the useful supporting documents that were provided to attendees:  

Five page summary of the law from CCH

32 page PDF version of the slides used during the webinar

Update 2/23/21 – For today’s monthly tax update webinar on CPELink, the instructor had this updated 53 page pdf of the tax law portions of the almost 6,000 CAA bill.

Posted in meals, NewTaxLaws, PPP | Comments Off on New Year Tax Changes

IRS Mileage Rates For 2021

Posted by taxguru on December 23, 2020

With plenty of time for employers to adjust their employee reimbursement rates for next year’s business trips, IRS has published what the standard mileage deductions will be for 2021 tax returns.

Beginning on January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

    56 cents per mile driven for business use, down 1.5 cents from the rate for 2020,
    16 cents per mile driven for medical, or moving purposes for qualified active duty members of the Armed Forces, down 1 cent from the rate for 2020, and
    14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020.

 

My normal comments on this subject still apply.

It’s a good idea to keep track of actual vehicle expenses during the year, because there are plenty of times when they will exceed the IRS’s calculation of average operating costs.

I have yet to hear an explanation from the wizards in Congress who write our tax laws as to why they believe that it costs so much less to operate a vehicle when it is being driven on non-business trips, such as for charity, medical or moving.  Just another oxymoron, Congressional Logic.

Posted in Deductions, IRS, Vehicles | Comments Off on IRS Mileage Rates For 2021

TaxMan By Classic Albums Live

Posted by taxguru on December 4, 2020

Classic Albums Live (CAL) is a very talented group of musicians who recreate classic albums on stage.  Many of the albums, such as from the Beatles, were studio masterpieces and never performed in concert by the original groups, so this is quite an achievement.  Over the past three plus years, we have seen them present 13 different albums in Ocala and The Villages and had tickets to several more shows before the pandemic shut them down. 

Their shows normally consist of members from their home base in Toronto, plus others who live down here in the USA, including some in Florida.  We were finally able to see them live again a few weeks ago at the Reilly Arts Center in Ocala.   

The Canadian members have been held as “prisoners” in their country for the past several months and unable to cross the border.  As many musicians have been doing since this pandemic shut down normal live music venues, for the past few months they have been performing a weekly show in an empty or limited audience theater and streaming the show over the internet.  The shows are free to watch, but voluntary tips are welcomed.

After performing a number of Led Zeppelin albums, they are now in the midst of several Beatles records.  This past Wednesday night, they finally got around to Revolver from 1966, the opening track of which is George Harrison’s “TaxMan” which has been my theme song and phone ring tone for decades.

Here is that first track from that concert on December 2, 2020 at the Empire Theatre in Belleville, Ontario.

 

You can also stream the entire show via their Vimeo link.  Besides the entire Revolver album, there are several other great Beatles songs, which is how they normally structure their in-person shows.  

Posted in Music, TaxMan, video | Comments Off on TaxMan By Classic Albums Live

The PPP Loan Forgiveness Enigma

Posted by taxguru on December 3, 2020

Normally, during this last month of the year, we tax pros are working with our calendar year clients to get a handle on what their income taxes will look like so they can take any necessary steps to bring their numbers into sync with their goals by December 31. 

This year, there is a new twist to the calculations we are doing: SBA and lender forgiveness of PPP loans; both those waived by 12/31/20, as well as those expected to be canceled next year.

There is no uncertainty regarding the fact that the amount of the forgiven loans will not be considered to be taxable Cancellation of Debt income.  However, there is still a lot of confusion and difference of opinion regarding whether the expenses that had been paid from those loan proceeds can be deducted on the 2020 tax returns.  It’s even trickier in relation to expenses paid during 2020, with an expected forgiveness in the future, as compared to situations where the loan has been cancelled as of 12/31/20. There are disagreements on how we should handle this.

Since the actual tax returns aren’t due until April 15, 2021 for most businesses, there is still plenty of time for there to be an official resolution to this dilemma.  However, for year-end tax planning purposes, we don’t have the luxury of those four extra months.  Decisions need to be made now.  If our rulers don’t nail this issue down until next February or March, it will be too late for business managers to take the steps they needed to have done by December 31.

The AICPA has some good summaries of the situation:

From the Journal of Accountancy: IRS doubles down on nondeductibility of PPP-funded expenses

 

From The Tax Advisor: Expenses used for PPP loan forgiveness: Deductible or not?

From an AICPA press release that I received today (12/3/2020):

The AICPA and a coalition of more than 560 organizations representing millions of employers and American workers sent Congressional leaders a letter urging passage of legislation making it clear that expenses related to a forgiven Paycheck Protection Program (PPP) loan are tax deductible. The letter states that without legislation, there is “…the specter or a surprise tax increase of up to 37 percent on small businesses when they file their taxes for 2020.”

The actual letter that was sent to our rulers in DC comprises just the first two pages of this PDF document.  The remaining 17 pages list the various organizations “signing” the letter.  How successful this request will be in motivating an official resolution of this question is impossible to predict.

Posted in Deductions, IRS, PPP | Comments Off on The PPP Loan Forgiveness Enigma

IRS Releases 2021 Inflation Adjustments

Posted by taxguru on October 26, 2020

The Tax Game never ends.  As 2020 nears its end, people are starting to look ahead to what we can expect for 2021.  Every year, many items in the Tax Code are adjusted to reflect the official increase in the Cost of Living since the prior year. 

There are also a lot of things in the Tax Code that have been set in concrete by our Rulers in DC and have not been increased for decades, such as the measly $3,000 of net capital loss that can be used to offset other kinds of income.  I long ago gave up any hope for such concepts as Fairness or Consistency in the Tax Code in order to hold onto my sanity in this profession.

While some tax publishers had already released what they calculated as the inflation adjustments a few weeks ago, it’s not really official until IRS makes its calculations known, which has happened today.

They have a good summary of the changes in their news release:

IRS provides tax inflation adjustments for tax year 2021

 

All of the nitty-gritty specifics are spelled out in much more detail in the official 28 page Revenue Procedure 2020-45

Besides adjustments that affect Income taxes, there are some that affect Estate and Gift taxes.  One item that is closely watched is the change in the annual amount that can be gifted without the need to file a Gift Tax return (Form 709).  Many people have gifting plans that utilize this allowance in the amounts that are gifted each year.  Unlike the other inflation adjusted items, which normally increase every year and result in “odd-looking” numbers, the Gift tax allowance can only be increased when the cumulative inflation since the previous adjustment is close to an even $1,000.  That’s not happening in 2021.  The annual exemption will remain at $15,000 per donor (giver) per donee (recipient).

[Update 10-28-2020] – As they have done each year, the folks at TheTaxBook have posted this very handy one-page summary of the 2021 figures side by side with what they were for 2019 and 2020.

Posted in inflation, IRS | Comments Off on IRS Releases 2021 Inflation Adjustments

Escape From New York

Posted by taxguru on August 7, 2020

 

CloseOffNYC(8-17-20)

Everyone has their own personal breaking point; how much fiscal and other kinds of torture they are willing to tolerate before packing up and leaving.  High taxes and extreme regulations weren’t enough for many New Yorkers; but the insane and deadly way they have been treated during this pandemic seems to have been the final straw for many.

LeftCity-HighTaxes

New York exodus accelerates amid pandemic as some residents head south

 

MillionairedFleeingNY(10-2-20)

 

Florida sees nearly 1,000 people move there daily as high-tax residents seek shelter

MovingOutOfNY

New York’s wealthy taxpayers may not return, Cuomo fears

 

SalesPlummetingInNY(8-29-20)

NYC relocations accelerating at ‘substantial’ pace, local movers say

A mad rush for the exits as New York City goes down the tubes

cuomobegs3webcr-8-7-20_orig

Just as with the states where tax refugees from California have relocated, there are some pitfalls to this migration.  Besides driving up real estate prices, the newcomers to low tax states often bring their big government ideology with them and end up destroying the environment that attracted them in the first place.  With so many New Yorkers moving down south here to Florida, that is a very valid concern.

KissNYCReturnees(8-17-20)

 

Fleeing New Yorkers resulted in an estimated $34 billion in lost income

Posted in New York | Comments Off on Escape From New York

Can A.I. Handle Accounting?

Posted by taxguru on July 29, 2020

Over the past few years, as robots and artificial intelligence (AI) have made huge inroads into several industries, I have seen many CPAs and bookkeepers fret over the possibility of having no work to do.  DIY tax return programs and AI were supposedly going to make them obsolete and they sincerely worried about their futures.

Whenever possible, I have assured these doomsayers that as long as they are not just “form-fillers” they will never run out of work.  Tax and accounting rules and regulations will continue to grow more and more complicated until the end of time.  There will thus always be a need for people to apply their knowledge and experience to solving and complying with those rules and regs. 

Having been in this business for almost 45 years, I have seen and been a part of the evolution from doing books manually in big heavy ledgers, to in-house computers,  to working in the cloud.  These have all been means of recording transactions for businesses, much like going from a pencil to a typewriter.  There has always been a need for humans with proper accounting expertise to determine where and when transactions should be recorded in a company’s books.  While it may be possible for a computer to be programmed to play games such as Chess, being able to analyze and properly book accounting entries is too much science fiction for me to accept.

However, that doesn’t mean that other people who are less grounded in the realities of making accounting decisions don’t think it’s possible.  This article in Forbes about a company called ScaleFactor, that was able to con investors out of $100 million dollars for its promised AI accounting system, is very interesting.  I have to admit that I had never heard of this company before seeing this Forbes article.  Surprisingly, their website is still active; so the Forbes expose hasn’t shut them down yet.

Reading the Forbes article, describing how the company used actual human accountants in the Philippines to perform the shoddy accounting tasks while claiming that their magical AI software was actually doing it, reminded me of the extremely interesting documentary I saw not too long ago about Theranos, called The Inventor: Out for Blood in Silicon Valley.  That company claimed to have invented a one drop blood testing machine that could quickly test for a huge number of things, including cancer.  It turned out that the machine didn’t work, but they pretended it did and had human lab workers run tests, often erroneously, in their “fake it ‘til you make it” scheme to con over $700 million from gullible investors.  Paying powerful celebrities for their endorsements also helped convince people that it was worth sinking their money into.  They literally bought credibility because they couldn’t earn it properly.

As always, we should try to learn from these kinds of mistakes that other people make so that we don’t need to suffer the same kinds of losses that they had.  The “fake it ‘til you make it” approach to start-up companies isn’t new by any means.  Sometimes they actually work.  I remember attending meetings in Silicon Valley where some successful entrepreneurs actually bragged about using that tactic.  I have no statistics on how many of the fakers actually made it to their goals and produced real products and services.  I would hazard a guess that for every one that did make it, there are dozens of fakers who didn’t make it, often crashing in flames.  Investors, which include employees of companies promising “magical” things, should be extra cautious.

Posted in Accounting, scams | Comments Off on Can A.I. Handle Accounting?

Tax Day Remains July 15–File Extensions For More Time

Posted by taxguru on June 30, 2020

After a lot of speculation that the official Tax Day for 2019 income tax returns would be moved out to September 15 or October 15, IRS ended the confusion with a news release.

Taxpayers should file by July 15 tax deadline; automatic extension to Oct. 15 available

The big difference between having IRS just push the Tax Day to October 15 versus us filing the 4868, is when any expected tax balances need to be submitted to IRS and the States.  IRS pushing Tax Day to 10/15 would have meant that no form would need to be filed by July 15 and no money would have to be sent in until Oct 15.

I had actually been expecting the additional delay, not just for the hassles of getting everything together to prepare 2019 tax returns by July 15, but also for the fact that allowing people to hold onto their 2019 and 2020 tax payments until October 15 would have been a much more efficient method of providing economic stimulus money to people than the previous method was.  Of course, this is SOP for government operations, to choose the least efficient method of doing things

Most State tax agencies have been piggy-backing on the IRS deadline, so extensions should be filed with them as well. Check your states’ websites to be better informed.  As of today, I notice that the AICPA’s chart of State tax filing dates hasn’t been updated since 6/18/20.  Hopefully, that will be amended soon to take into account the various States’ conformity or not with IRS’s declaration.

I am a little disappointed that Tax Day wasn’t moved until later, but I am grateful that at least IRS didn’t wait until July 14 to spring this announcement on us.  That gives us two weeks to do rough calculations of 2019 taxes and prepare the extension forms.

Posted in extensions, TaxDay | Comments Off on Tax Day Remains July 15–File Extensions For More Time

Reduced Stimulus Payments

Posted by taxguru on June 4, 2020

From a Client:

Good Morning Kerry I’ve a question ~ I received my “Economic Impact Payment “ due to COVID-19 I understood the checks to be $1,200.00 …mine was only $875.60 Were taxes to be taken out of these?

 

My Reply:

What you received is actually the correct amount per the current payment schedule. The amount can be as high as $1,200 per person, but is phased down for people whose most recently reported AGI was more than $75,000. I just used a handy phase-out calculator that I found on the web and entered your 2018 AGI of $81,488. Attached you can see the result of $876.

IRS-StimulusCheckAmount

It is still possible that you can get the additional $324, but that won’t be for more than a year. When we prepare your 2020 Federal income tax return, there will be a schedule to recalculate the proper amount using your 2020 AGI. If you qualify for more than the $876, you will get a credit for the extra amount. As it is currently being discussed, if you actually end up qualifying for less than what you received, you will not be forced to pay back the over-payment. That could change by next year. All of these special Covid related programs are still very fluid and being tinkered with constantly. There is even talk right now of a second round of stimulus payments in the next few months; so there will be no end to the confusion.

So, there is no need to contact IRS about your payment. They did send you the correct amount for this first round of payments.

I hope I have explained this adequately. Let me know if you have any other questions.

Kerry

Posted in COVID-19, IRS | Comments Off on Reduced Stimulus Payments