New Guidance Released on Deductibility of Expenses Paid with PPP Funds

Nov 19, 2020

Yesterday, the U.S. Treasury Department and Internal Revenue Service (IRS) released guidance clarifying the deductibility of expenses paid with paycheck protection program (PPP) loan funds.

The two significant rulings can be found here: Revenue Ruling 2020-27 and Revenue Procedure 2020-51. Both address issues related to the deductibility of expenses paid with PPP funds.

What is the significance of the new guidance?
Previously, it was unclear what would happen if a taxpayer incurred the expenses in one year (2020), but received forgiveness in the next year (2021).

Rev. Rul. 2020-27 states if a business reasonably believes a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Meaning, if you used all of your PPP funds in 2020 and expect to receive full forgiveness, those expenses are not deductible, regardless of whether or not you have applied for or have received forgiveness notification as of the end of 2020.

What happens if loan forgiveness is partially or fully denied in 2021 after one has filed their 2020 return?
Revenue Procedure 2020-51 establishes a safe harbor for taxpayers whose loan forgiveness applications are partially or fully denied, or who decide not to apply for forgiveness after filing their 2020 tax return.

While these expenses may ultimately become deductible with a future act of Congress, we encourage you to connect with your William Vaughan Company advisor to assist you in determining the best path forward for you and your business.

Need further PPP guidance? Check out our COVID-19 Resource Center.

Categories: COVID-19, Other Resources, Tax Planning


IRS Modifies 1099 Forms & (Re) Introduces 1099-NEC

Sep 01, 2020

The IRS is making some significant changes to the 1099 process. Beginning with the 2020 tax year, a new 1099-NEC form will be used for reporting non employee compensation (NEC) payments. Previously NEC was reported in Box 7 of the 1099-MISC form. These payments will now be reported in Box 1 of the new 1099-NEC form. The 1099-NEC made an appearance in the 1980’s and is now making a comeback to alleviate deadline confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. Companies will start reporting on the new Form 1099-NEC in January 2021.

There are several parts of the new 1099-NEC form worth noting:

  • Box 1 is where you key in the dollar amount of non employee compensation.
  • Box 4 is used for any amount you held back to comply with backup withholding requirements.
  • Boxes 5-7 are used to report any state withholding.

In addition, the removal of NEC payments on the 1099-MISC form has resulted in a reordering of information and corresponding boxes. These changes are listed below:

  • Box 7 is where you will now key in payer-made direct sales of $5000 or more
  • Box 9 is where you will report crop insurance proceeds
  • Box 10 is used for gross proceeds to an attorney
  • Box 12 is for Section 409A deferrals
  • Box 14 is for reporting non qualified deferred compensation income
  • Boxes 15, 16, and 17 is where you will report state taxes withheld, the state identification number, and the amount of income earned in the state.

The deadline for both paper and electronic filing of the 1099-NEC form for 2020 is February 1 for both the recipient and the IRS. The 1099-MISC is due to recipients by February 1 while they are due to the IRS by March 1 for paper filing and March 31st for electronic filing.

For up-to-date information on these changes, you can visit the IRS website or connect with us at 419.891.1040.

By: Aaron Gray, Accountant

Categories: Tax Compliance


Interest Payments For On-Time Tax Filers

Aug 19, 2020

Nearly 14 million Americans will receive an interest payment check from the IRS sometime this week. Here’s what you need to know:

What happened?
Due to the recent pandemic, this year’s tax filing deadline was pushed back to July 15 which is considered “disaster-related postponement.” As a result, the IRS, by law, must pay interest calculated from the original April 15 filing deadline to anyone who filed their individual return by the postponed deadline. Please note, businesses do not qualify for an interest payment.

What does this mean for me?
If you met the July 15 tax deadline and either received a refund in the past three months or anticipate receiving a refund, you will be receiving an interest payment! Funds will be directly deposited into the same bank account your tax refund was deposited otherwise you will be receiving a check in the mail. The amount of Interest is paid at rates set by law with the average payment being $18.

What is the taxability of these payments?
You must report the interest as taxable income on your 2020 federal income tax return you will file next year. In January 2021, the IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10.

Next steps?
If you have questions regarding your interest payment check, please contact your William Vaughan Company advisor or contact us at 419.891.1040. We’d be happy to help!

Categories: COVID-19, Tax Planning


Economic Impact Payments Received by Deceased or Ineligible Recipients

May 18, 2020

The CARES Act stimulus package passed by Congress in late March provided Economic Impact Payments to eligible recipients which been remitted throughout the last month. According to the Act, eligible individuals include U.S. citizens and qualifying resident aliens who are not a dependent of another taxpayer and have a work-eligible Social Security number with adjusted gross income (AGI) up to the following:

  • $75,000 for individuals filing single or married filing separately
  • $112,500 for the head of household filers
  • $150,000 for married couples filing jointly

These eligible recipients have received or will receive payments of $1,200 to individuals and $2,400 to married couples, plus $500 per dependent child. Taxpayers will receive a reduced payment if their AGI is between:

  • $75,000 and $99,000 for individuals filing single or married filing separately
  • $112,500 and $136,500 for the head of household filers
  • $150,000 and $198,000 for married couples filing jointly

As with any new program, glitches have been identified. Eligibility was determined using 2018 or 2019 tax returns. Discrepancies between information on these previously filed returns and current status have led to deceased taxpayers, trusts, and other ineligible individuals mistakenly receive funds. Those ineligible to receive Economic Impact Payments include:

  • Individuals who were deceased before the date of payment
  • Individuals or married taxpayers filing separately with AGI greater than $99,000
  • Taxpayers filing head of household with AGI greater than $136,500
  • Married taxpayers filing jointly with AGI greater than $198,000
  • Individuals who can be claimed as a dependent on another person’s return (For example, a child or student claimed on a parent’s return
  • Individuals who do not have a valid Social Security number
  • Nonresident aliens
  • Individuals who filed Form 1040-NR, 1040NR-EZ, 1040-PR, or 1040-SS for 2019
  • Individuals who are currently incarcerated

How do I determine if I received misappropriated funds?
The IRS has set up an Economic Impact Payment Information Center that includes information about which taxpayers are eligible and how to return payments received by those disqualified by the factors above.

In many instances, the family or beneficiaries of a deceased individual or trust have received payment on behalf of the deceased. This is particularly common in situations where the individual had passed away in late 2019 or 2020, and a 2019 tax return had not yet been filed on their behalf. By definition, these payments to trusts or family of a deceased individual are considered payments to an ineligible recipient.

What should I do if I received funds for a deceased or an ineligible recipient?
Economic Impact Payments given to deceased or otherwise ineligible recipients previously listed must be returned to the IRS. For payments received by joint filers where only one spouse is deceased or ineligible, only the portion of the payment made for the ineligible spouse must be returned ($1,200 unless the AGI exceeds $150,000). Ineligible recipients of the payments, or those who received payment on behalf of an ineligible or deceased recipient, should follow the IRS repayment instructions to return the payments.

If the payment was a paper check:
1. Write “Void” on the endorsement section on the back of the check.
2. Mail the voided Treasury check immediately to the appropriate IRS location.
3. Do not staple, bend, or paper clip the check.
4. Include a note stating the reason for returning the check.

If the payment was a paper check and you have cashed it, or if the payment was a direct deposit:
1. Submit a personal check, money order, etc., immediately to the appropriate IRS location.
2. Write on the check/money order made payable to “U.S. Treasury” and write “2020EIP,” and the taxpayer identification number (Social Security number, or individual taxpayer identification number) of the recipient of the check.
3. Include a brief explanation of the reason for returning the payment.

Appropriate IRS mailing addresses can be found in the IRS repayment instructions located on the Economic Impact Payment Information Center.

If you feel you have received funds for an ineligible individual but are unsure how to proceed, contact your William Vaughan Company advisor and they can guide you through the appropriate process for your given circumstance.

Categories: Other Resources


IRS Denies Tax Deductions for Expenses Related to Payroll Protection Program Loan Forgiveness

May 11, 2020

What happened?
On April 30, 2020, the IRS released Notice 2020-32 (the Notice) answering a major tax question involving the Paycheck Protection Program (PPP). It ruled that any deductible expenses that result in forgiveness of a PPP loan will not be deductible in computing the taxpayer’s income. This conclusion contradicts the language in the CARES Act (the Act) under Section 1106(i) which states the cancellation of indebtedness of a PPP loan, under the provisions of Section 1106(b), “shall be excluded from gross income” in computing the taxpayer’s taxable income.

The IRS points out in the Notice that while the Act provides that PPP loan forgiveness is not taxable income, no provisions of the Act address the ability to deduct eligible expenses paid from such loan proceeds.

What’s Next?
Stay tuned! It is unlikely the end of this controversy. First, it is possible a taxpayer may decide to challenge this position in court. Whether they would or would not prevail is open to question, and the other big problem is being able to afford the litigation. The more likely scenario is that Congress would reverse the notice by simply enacting an amendment in the next Coronavirus bill (if there is one) to make clear expenses used to justify PPP loan forgiveness are deductible, regardless of any provision by the IRS.

Visit the WVC COVID-19 Resource Center for more insights by clicking here.

Categories: Other Resources, Tax Compliance, Tax Planning