Certain trust and estate related deductions are not miscellaneous itemized deductions
Proposed regulations clarified certain deductions to an estate or non-grantor trust are not miscellaneous itemized deductions, temporarily disallowed by the TCJA. Included are the following:
Administrative costs that would not have been incurred if the property were not held in the estate or non-grantor trust
Personal exemptions
Distribution deduction for estates and trusts accumulating income
The guidance also clarifies treatment of excess deductions that beneficiaries may claim on their individual tax returns.
Working abroad unexpectedly? No worries, you likely haven’t created a foreign branch
Revenue Procedure 2020-30 was released which rules that individuals temporarily conducting business activities abroad due to COVID-19 travel restrictions do not create a foreign branch for the company. The guidance is very helpful considering the worldwide pandemic has uprooted business functions, creating uncommon situations for many involved.
Work less than 60 days in that location and you’re clear from filing a Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches (if that’s the only related foreign activity you have), and considerations of creating a foreign branch for the dual consolidated loss rules under §1503(d).
Employee Retention Credit FAQs keep on rolling in
For the time being, the IRS and Treasury have decided FAQs are going to guide us. Though they are not authoritative, and certainly not ideal given they have been popping up a few here and there at a time, they give us an idea of how future official guidance may read.
Most recently, FAQ #79 tells us that if an employer repays its PPP (Paycheck Protection Program) loan by May 7th, 2020 it will be eligible for the ERC. This is important because the CARES Act disallows claiming an Employee Retention Credit if a PPP loan is received. And then PPP FAQ 45 goes further and gives until the safe harbor date of May 14th to repay the loan and still qualify. So this is a favorable position and makes sense!
**An hour after its initial posting, the ERC FAQs changed again! See updates to 64, 65, and 79.
What’s frustrating for people is the constant changing and adjusting of the rules, especially when guidance doesn’t align with the law. What we need is accurate, cohesive, and unchanging guidance so that taxpayers and tax pros can plan and take advantage of these very time-sensitive provisions. Luckily for #TaxTwitter, the IRS, Secretary Mnuchin, and various congressional leaders are kind of listening to our rants and sometimes making related changes! Keep it up, friends.
Deceased stimulus recipients requested to send back their payments
Immediately you see problems with this, I’m sure, and you’re not wrong. Another FAQ ridden CARES Act provision has been the economic impact payments (EIP), or stimulus/recovery rebate checks, whatever you call them – that’s the one.
New FAQ #41 provides instructions on how to return such payments that were sent to deceased individuals. The trouble is there’s no part of the CARES Act that requires repayment. In fact, overpayments are considered mathematical errors in the Act. But are the deceased individuals “eligible individuals”? The CARES Act defines eligible individuals as any individual other than:
Any nonresident alien individual
Any individual who can be claimed as a dependent on another person’s tax return
Estates or trusts
Where does it say recently deceased, or incarcerated for that matter, taxpayers are ineligible? How will a tax court view this repayment requirement? If you have received a payment for a deceased relative and are unsure if you need to repay it, a good idea is to hold onto it for now until further official guidance is released.
You gotta fight, for your right, to deduct PPP expenses
Congress: Here’s tax-free PPP loan forgiveness
IRS/Treasury: Nope
Tax Pros/Congressional Leaders: Excuse me, but you are not correct
The IRS decided the Paycheck Protection Program (PPP) is too good to be true, even though that was the idea. Last week Notice 2020-32 was issued stating that taxpayers receiving PPP loans are not permitted to deduct otherwise deductible expenses to the extent such expenses were reimbursed by a forgiven PPP loan. The Notice cites IRC §265 to disallow deductions claiming they are allocable to tax-exempt income.
Problem is, many tax professionals and even congressional leaders do not agree. Here’s why, in a nutshell:
IRC §265 should likely not apply as PPP related expenses are not allocable to a class of income exempt from tax, but instead initially from loan proceeds which have been forgiven
The CARES Act doesn’t include a provision which reduces tax attributes or denies deductions related to loan forgiveness
Most of the PPP expenses are for wages; why wouldn’t the business get a deduction when employees pick up the wages as income (I guess same theory for rent, utilities, and interest on debt too)
Not to mention that pesky thing called congressional intent, which was to not include (directly or indirectly) this loan forgiveness into taxable income
This Tax Notes ($) article lays out some of the arguments nicely. In addition, Senate Finance Committee Chairman Chuck Grassley, Ranking Member Ron Wyden, and House Ways & Means Committee Chairman Neal sent a letter to Secretary Mnuchin requesting the IRS to reverse course on disallowing deductions for PPP loan forgiveness related expenses.
A new bill was also introduced in the Senate, and backed by the AICPA, which would overrule the IRS notice and clarify that otherwise deductible expenses funded by PPP loans are tax deductible. The Small Business Expenses Protection Act of 2020, S. 3612, currently sits awaiting to further action, if necessary.
Newley introduced FAQs on coronavirus related relief for retirement plans and IRAs
Recall that FAQs are not authoritative, but for now, we’ll take what we can get. This newly released set of FAQs covers Section 2202 of the CARES Act which allows for special distribution, income inclusion, rollover, and loan rules related to coronavirus related retirement withdrawals. Hopefully taking from retirement accounts before you’re…in retirement…is a last resort. But in these dire times, if you need to do it, there is some flexibility for you that doesn’t normally exist. Always talk with a tax pro and financial advisor before touching these funds, though!
Letters to Mnuchin, a series?
Before sending Treasury Secretary Mnuchin a letter requesting a reversal of the PPP related deductions, congressional leaders Wyden, Grassley, and Neal also requested the IRS change its tune on a surprising ERC outcome.
One of the recently posted FAQs on the Employee Retention Credit states that health care costs paid for employees furloughed and not receiving wages are not eligible expenses to take the credit. That is contrary to how the CARES Act defines wages, as it includes health care costs as part of eligible wages.
The ERC already has an uphill battle to be useful, since it’s not allowed in conjunction with the PPP loan, and is severely limited for employers with greater than 100 employees. Let’s not take it away also for those employers trying to do the right thing by still paying for health insurance (during a national viral pandemic) even though they’ve had to temporarily lay off workers. I appreciate the goal of keeping employees on payroll, though.
**An hour after initial posting of this, ERC FAQ #64 changed favorably to allow health care expenses for furloughed workers not getting paid to count towards the credit. Someone is listening!
Tax lately is anything but dull. See you next week!
Amie K
Post is for informational purposes only and not to be considered tax advice. Consult with your tax, legal, or financial advisors to see how any of this pertains to your unique situation.