Tax Week in a Nutshell 10.19.20
WHAT'S UP IN WASHINGTON, D.C.
With COVID-19 relief negotiations failing and public frustrations mounting, Senate Majority Leader Mitch McConnell stated last week that, “When the full Senate returns on October 19th, our first order of business will be voting again on targeted relief for American workers, including new funding for the PPP.” McConnell plans to hold a vote for a standalone PPP funding bill Tuesday and despite President Trump’s recent encouragement in the form of a tweet reading, “Stimulus! Go big or go home!!!” the Senate’s preference reportedly remains targeted relief, similar to their previously released $500B skinny bill.
House Speaker Nancy Pelosi has set a deadline for Tuesday of this week to reach a relief bill agreement with the White House before the November election. If a deal is reached, McConnell reportedly has agreed to bring it to the Senate floor for a vote.
Tax Court Time-Out
The United States Tax Court has to cooperate with software updates, too! A new case management system will be implemented in late 2020, rendering the e-filing system inaccessible. While past cases will remain electronically viewable, the Court doesn’t plan to issue any opinions from November 21st through December 28th, 2020. Statutory deadlines for appeal, petitions, etc. can be met by filing paperwork via regular mail.
Passthrough Deduction Instructions Quietly Changed
Recently released draft 2020 instructions for Form 8995, Qualified Business Income Deduction Simplified Computation, provided two changes:
1) A worksheet to track and compute previously disallowed losses or deductions, and
2) Removal of the charitable contributions mention in the QBI Flow Chart which maps if an item of income, gain, deduction, or loss is included in QBI.
Previously, there was confusion on if charitable contributions should be reductions in computing QBI, which would reduce the §199A deduction. The 2020 Form 8995 instructions do not reference charitable contributions in determining qualified business income, indicating a welcome change in IRS position on the matter.
The Social Security Administration has released its 2021 cost-of-living adjustments (COLA) revealing a 1.3 percent change from the 2020. The Social Security wage base for 2021 was also announced as $142,800, up $5,100 from $137,700.
The 10/15 deadline came and went last week, but don’t forget that several natural disasters have extended filing deadlines for affected taxpayers. Also, many state returns have due dates that differ from the federal deadline every year, and this year to cope with the pandemic, some states have provided additional time to file for corporate taxpayers. If needed, make sure to check if states have extended their deadlines as well for federally declared natural disasters or the pandemic.
Final regulations were released on TCJA and CARES Act changes for consolidated group NOLs, adopting proposed regulations issued this summer with the exception of Prop. Reg. §1.1502-21(b)(3)(ii)(C) and (D) regarding the election for consolidated groups acquiring new members who were members of another consolidated group to waive all or part of the pre-acquisition portion of an extended carryback period under §172 for certain losses attributable to the acquired member. These sections will be finalized at a later date. [§§1502, 1503, 172]
Applicable Federal Rates (AFR) for November 2020 were released in Rev. Rul. 2020-22. [§§1274(d), 1288(b), 382(f), 42(b), 7520]
Rev. Proc. 2020-43 provides the maximum amount allowed to be newly made available to participants for the 2021 plan year for excepted benefit health reimbursement arrangements (HRAs) or other account-based group health plans is $1,800.
The corporate bond monthly yield curve, corresponding spot segment rates, and 24-month average segment rates are released in Notice 2020-77. [§§417(e)(3), 430(h)(2)]
Federal income tax withholding and Form 1099-R reporting is confirmed as required in Rev. Rul. 2020-24 with respect to payment from a qualified plan to a state unclaimed property fund. [§§3405, 6047]
Rev. Proc. 2020-46 adds “a distribution was made to a state unclaimed property fund” to the list of permissible reasons for a taxpayer to self-certify eligibility for a waiver of the 60-day rollover deadline under eligible retirement plans. A sample letter for self-certification for late rollover contributions is included in the Rev. Proc. [§§402,408]
FinCen confused FBAR filers with an incorrect message briefly posted on its e-filing website stating a new filing extension until December 31, 2020. This extended date is meant only for recent natural disaster victims. To make up for the confusion, FinCen will deem filers who file their 2019 calendar year FBAR by October 31, 2020 as timely filed.
Score for fantasy sports players in PLR 202042015 which confirms the amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a §165(d) wagering transaction, allowing a tax deduction for losses to the extent of wagering gains. See how this ruling affects the industry here.
The SBA confirmed in a new FAQ that despite PPP loan forgiveness applications showing an expiration date of 10/31/20 on the form, that is not the deadline for borrowers to apply. According to the FAQ, borrowers have until the maturity date of the loan to apply for forgiveness.
CASE OF THE MONDAYS
Tom-ay-to, tom-ah-to…the IRS calls some current year deductions off.
A leading tomato paste and diced tomato supplier was not allowed to include accrued costs into current year costs of goods sold “because: (1) the partnerships had not shown that all events had occurred to establish the liabilities and (2) economic performance had not occurred with respect to the liabilities to qualify for accrual for the years claimed.”
In order to avoid costly production downtime, the taxpayers are diligent in keeping equipment running and included costs to restore, rebuild, and retest their manufacturing facilities for the next production cycle in its production accrual reserve accounts it uses to account for such future costs. The accrued production costs were recurring, with related goods and services not provided or paid for until the next year – economic performance occurred in the next taxable year. The taxpayers argue their credit agreements and multiyear contracts to supply customers with products provide a requirement to maintain equipment and therefore created the obligation to incur the maintenance costs.
Accrual method taxpayers may generally deduct expenses for years in which they are incurred, as determined under the §461 all events test, regardless of the actual payment dates. A liability is incurred under the all events test if:
1) All events establishing the liability have occurred,
2) The amount is able to be determined with reasonable accuracy, and
3) Economic performance has occurred.
In general, a liability is established on the earlier of:
1) The event fixing the liability, such as the required performance, or
2) The date the payment is unconditionally due.
The IRS determined that the all-events test had not been satisfied to establish the accrued production liability costs, arguing that the accrued production costs included into COGS “were (1) not fixed and binding until the following tax year when the partnerships began economic performance and (2) more properly matched against income for the taxable year in which economic performance occurred under the section 461(h)(3) recurring items exception to the all events test.”
The Tax Court sided with the IRS, stating that while the taxpayer’s contracts with creditors and customers may create obligations that qualify as deductible liabilities for Federal income tax purposes, the taxpayer’s credit agreements and multiyear contracts did not specifically require the taxpayer’s actions other than generalized requirements to comply with all laws and keep equipment in good working condition. In addition, the recurring item exception under §461(h) was found not to apply because the liabilities for the production cost accrual were not fixed in the years claimed.
The Morning Star Packing Company, L.P. et al v. Commissioner, TC Memo 2020-142.
Information provided is for educational purposes only and not to be used as tax advice. Please consult your tax advisor to discuss your unique situation.