Tax News In A Nutshell - 12.28.20
What’s Up in Washington, D.C.
Despite several months of stalled negotiations, the long-awaited, much debated second COVID-19 stimulus package has been finalized. Relief for individuals and businesses made its way into the Consolidated Appropriations Act, 2021, a must-pass annual spending bill that will avert a government shutdown. It includes $900B of pandemic-related assistance and key changes to important programs, such as the PPP.
The bill overwhelmingly passed both House and Senate on Monday, December 21, and after a week of demanding post-passage changes, the President signed the bill Sunday night as-is. Highlights of the tax-related provisions of the bill can be found here.
One of the President’s grievances with the bill is its $600 direct payments to individuals; instead, he has called for the amount to be increased to $2,000 per adult and $600 per child. In response to the President’s request, the House is planning a vote Monday on the Cash Act to increase checks to $2,000 and the Senate has also indicated they will vote on the matter as well. The bill would also expand the definition of “dependents” eligible to receive a payment, from those qualifying children under §24(c) –who must be under the age of 17 - to dependents as defined under §152, which would include college students under the age of 24 and qualifying adult dependents as well. But, the amount of direct checks has been a hotly debated topic in stimulus discussions and there is no guarantee the increase will pass both chambers.
Now that the stimulus bill has been enacted, the SBA has ten days to issue guidance on a second round of PPP loans. Several trade groups, including the American Bankers Association and National Restaurant Association, sent a letter to the Department of Treasury and the SBA requesting rules and guidance of any new PPP enhancements or programs be “issued and finalized before the program goes into effect.”
Final regulations were released on TCJA’s changes to §451 revenue recognition and advance payments, and in response to comments, provide several changes to the proposed regulations.
The TCJA generally required accrual method taxpayers to recognize income no later than when recognized in an applicable financial statement (AFS), which accelerated income for many and the proposed regulations did not allow for cost offsets to this inclusion. The final regulations provide taxpayers with inventory a new AFS cost offset method for reducing the income inclusion by a portion of COGS. Taxpayers may also reduce income inclusion by amounts that lack an enforceable right to recover at the end of the taxable year. Other adjustments regarding transaction prices, credit card fees, and disputed income are discussed as well.
TCJA changes to advance payment income inclusion generally allows accrual method taxpayers with an AFS to elect to defer the inclusion of income of advance payments for goods and services to the next taxable year if it deferred on the AFS. This rule was part of Rev. Proc. 2004-34 that had been used by taxpayer for years. The final regulations generally adopt proposed regulations on advance payments, but discuss certain new adjustments and offsets.
Additional guidance is expected to help taxpayers transition to the new revenue recognition rules.
Small Business Accounting Methods
Small business accounting methods received final regulations that implement favorable changes to sections 263A (UNICAP), 448 (limitation on using the cash method), 460 (long-term contracts), and 471 (inventory) brought about by the TCJA that generally affect taxpayers with average annual gross receipts for the three-year period ending immediately before the current tax year is not more than $25M (adjusted for inflation).
A worry of many with regard to small business accounting methods is the barring of taxpayers classified as tax shelters from using the provisions, even if the gross receipts test is met. A taxpayer may unexpectedly become a tax shelter if they are a syndicate – meaning they have more than 35% of taxable losses during the year allocated to limited partners or limited entrepreneurs. The proposed regulations included a lookback election that would allow a taxpayer to use prior year activity in determining syndicate status, but it was a permanent lookback and therefore only allowed a one year buffer. The final regulations keep the lookback rule, but make it an annual election, that will be very beneficial to taxpayers who are not consistently in loss situations.
Another concern was the inability to use an automatic method change if a taxpayer had previously made a change in that same category within five years. Automatic method changes are preferred to nonautomatic method changes for their simplicity, cost, and timing of filing. The final regulations remove the five-year restriction on making automatic method changes in certain situations.
One last highlight is the final regulations remove the requirement to capitalize direct labor into inventory when the §471(c) non-incidental materials and supplies method is used, leaving direct materials as the costs to include.
Notice 2021-02 provides the 2021 standard mileage rates for taxpayers in computing deductible expenses. Below is a comparison of 2020 to 2021, in cents per mile.
Notice 2021-03 extends the relief from the physical presence requirements for participant elections under qualified retirement plans that are required to be witnessed by a plan representative or a notary public.
New Year – New Resolution?
We do it every year, say the next one will be better! Is that realistic? Maybe, if we commit to making it so regardless of what life throws our way. 2020 had unique challenges and sorrow, no doubt, but hopefully it also helped us see the value in things we may have taken for granted. So much of life is perspective, and I’m betting we all gained a new one in some shape or form this past year.
Cheers to the end of a challenging year and the hope of a safe and happy New Year!
Information provided is for educational purposes and attempted humor (sorry, none today). Please consult your advisors.