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Photo from CBS News.

2019 Tax Delinquency Letters Generated During IRS Backlog

February 11, 2021

The Internal Revenue Service (IRS) like many government agencies is experiencing a backlog due to the pandemic. I’m hearing about North Carolinians who paid their federal 2019 taxes but are getting letters from the IRS saying the taxes have not been paid.

The IRS letters threaten late fees, penalties and even property seizure. In many cases, when the IRS got the tax payment checks they were cashed immediately BUT were not posted.

The automated responses are generated to send delinquency notices because the payment wasn’t posted to the taxpayer’s account. While the pandemic is part to blame, so is the archaic computer system in many of our government agencies.

According to a story by CBS 4 in Denver on this topic, when the pandemic took hold in 2020, the IRS sent nearly 60,000 employees home to work and more than 500 IRS offices were shut down. The remote workforce meant lots of mail that didn’t get opened in a timely manner and a gap in customer service as phone calls from the public were not answered.

The story reported that as of late last year, there were approximately one million unprocessed tax returns from 2019 and three million pieces of unopened mail. Paper tax returns and letters from taxpayers sat unopened in trucks in post office parking lots for months while IRS offices were closed.

So, if you get a letter from the IRS about unpaid 2019 taxes, you are not alone. Be patient and wait for the IRS to sort through its backlog. In the meantime, find proof of your tax payment (such as the cashed check, etc.) and have it ready if necessary.

Payroll Protection Program Loans and How They Affect Your Taxes

February 11, 2021

Many different forms of financial aid were developed to help taxpayers and business owners during the pandemic. One of the most popular forms of relief, is the Paycheck Protection Program (PPP), which is a loan program offered by the Small Business Administration (SBA) meant to help employers retain and pay their employees.

In December 2020, the Consolidated Appropriations Act, 2021 (CAA 2021) was signed into law, which extended the program through March 31, 2021, and required the SBA to publish clearer implementing guidance on the loan’s eligibility and taxation.

Federal and state tax treatments of PPP loans and their forgiveness can be different. It’s important for taxpayers to be informed on the new guidance provided by the SBA regarding the Second Draw PPP loans and also understand how these loans will affect their taxes.

Here are the updates you need to know:

Second Draw PPP Loans

The SBA is accepting applications until March 31, 2021. Businesses who received a loan under the first PPP program, may qualify for a Second Draw PPP loan. Borrowers are generally eligible if:

  • They’ve received a First Draw PPP loan and will use, or have used, the full amount only for authorized uses.
  • They employ 300 or fewer employees.
  • They can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020.
  • Their business was in operation on Feb. 15, 2020, and is not a publicly traded company.

Here’s the Paycheck Protection Program Second Draw Loan Borrower Application Form on the SBA’s website. 

Federal and State Tax Treatment of PPP Loans

It is important for taxpayers to carefully consider their state’s tax treatment of PPP loans and what it means for them if their loan is forgiven. States respond to PPP loan forgiveness and expenses differently.

Federally, covered expenses paid with PPP funds can be deducted and forgiven PPP loan amounts will not be counted as gross income. Whether a borrower’s PPP loan forgiveness is taxable at the state level depends on the state’s conformity rules.

North Carolina, for example, has already passed legislation and guidance on PPP loan forgiveness and expenses and how it will affect taxpayers. The state will not include the amount of forgiven PPP loan in an individual’s or corporation’s taxable income. However, any expenses paid using the proceeds of the PPP loan that are deducted for federal tax purposes are not able to be deducted when calculating North Carolina taxable income.

Potential PPP Loan Tax Issues

The deductibility of PPP-funded expenses may cause some tax consequences for PPP loan recipients and taxpayers should be aware that tax deductions for expenses paid using PPP loan proceeds may require some additional tax planning.

Typically, cancellation of debt reduces tax attributes, which are economic benefits such as tax credits or depreciable assets; however, this is not the case with PPP loans.

If the tax deductions and cancellation of debt occur in different years (2020 and 2021), this can cause a business owners’ distributions and/or losses to be more than their stock’s tax basis.

This is a problem because then the taxpayer’s distributions are treated as taxable income and/or can create suspended losses, which are not deductible until the business owners have increased their stock basis and/or debt basis, by putting cash into the company in the form of profit, additional paid in capital, a personal loan, etc.

Remember, for S Corporations, specifically, PPP loans do not count towards increasing your shareholder stock’s tax basis. The Internal Revenue Service does not allow third party debt, such as a PPP loan, to count toward tax basis that taxpayers can then use to take distributions.

PPP loan forgiveness will likely increase an S corporation’s other adjustments account (OAA), which will limit the amount of distributions to shareholders that may be a tax-free, because such distributions are restricted by the amount of the accumulated adjustments account (AAA).

Whether you’re a small business in the middle of tax planning or an entrepreneur needing to pay estimated taxes, it’s important to know and understand your federal and state’s tax treatment of PPP loans.

Contact Anthony Hoffmaster, CPA, CES, MST, with questions about the new provisions of PPP loans and how they may affect your federal or state taxes. You can reach him by phone 919-435-4413 or email.

2021 Tax Filing Season Begins Feb. 12, Tax Returns Still Due April 15

February 1, 2021

The start date to file individual tax returns is later than usual this year. The Internal Revenue Service (IRS) announced it will start accepting and processing 2020 returns beginning Friday, Feb. 12, 2021.

Tax changes approved by Congress the end of last year are the reason for the pushed back date. The IRS says it needs the additional time to update its computer systems to reflect those tax changes and ensure that eligible people will receive any remaining stimulus money as a Recovery Rebate Credit when they file their 2020 tax return.

The IRS is urging taxpayers to file electronically with direct deposit as soon as they have all their necessary documents and information and they’re able, so that they receive their tax refund as quickly as possible. Filing early also reduces the likelihood of tax-related identity theft.

Currently, the filing deadline for individual returns and calendar-year regular corporations (C Corps) is April 15, 2021. The deadline for calendar-year S corporations and partnerships is March 15.

Recent Tax News and Changes You Need to Know

Two of our recent blog posts, titled Possible Tax Changes Under the New Administration and 12 Economic and Tax Relief Changes in the New Year, share some of the latest tax news and changes taxpayers need to know.

At this time, President Biden’s number one priority continues to be COVID-19. He has introduced his stimulus plan, which currently proposes additional stimulus checks in the amount of $1,400, a one-year increase in the child tax credit and dependent care credit, and a temporary expansion of the earned income tax credit.

It has also recently been announced that there is the potential for the Biden administration to make changes to estate and gift tax regulations. President Biden has indicated he may lower taxpayers’ federal estate tax exemptions. Nothing has been decided yet, but it will be important to keep an eye on this possible tax-related change.

Now is the perfect time to contact Anthony Hoffmaster, CPA, CES, MST, about preparing and filing your 2020 taxes. You can reach him by phone 919-435-4413 or email.

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