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Archive for the ‘PPP’ Category

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

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