May 3rd, 2021
The IRS has provided more guidance and a safe harbor for deducting expenses paid with tax-free PPP money. And they still don’t want us to amend returns. Are they trying to tell us something?
by Tom O’Saben, EA
Hello again, everybody. Tom O’Saben, Enrolled Agent, Assistant Director for Professional Education Outreach for the University of Illinois Tax School. I’m a Fall Tax School instructor and author and reviewer of the University of Illinois Federal Tax Workbook. I’m heavily involved in the webinars that we present throughout the year and also these weekly blogs. I’m also a tax practitioner with more than 31 years experience and I’ve been trying to provide these timely video blogs during this never ending tax season. So I can give you some snippets of information that are hopefully useful for you as we go through the remaining about 17 days of tax season (or 14 days since you’re listening to this on Monday, May 3rd). Let’s see what we want to talk about today.In particular, I’ve had this feeling that the IRS really doesn’t want us amending returns. And maybe we can think about some of that before we even get into the information I’m providing. I know that the IRS is sitting on several million returns from 2019. I’m sure you’ve had calls in your office as I have in mine, asking about refunds. I’m reading about delays in returns that were filed early in this tax season are still being delayed. So I’m guessing what the IRS is trying to do is avoid having a bunch of returns to be processed being sent to them now, based on all these changes we’ve had. In particular, we know — and this has been a really, really odd tax season hasn’t it? — that there’s been so many changes that have been made on the fly. I’ve never experienced anything like this in 31 years. Now, in the defense of the government, we’ve not been through (at least in my lifetime) a pandemic type situation and the economic fallout from that. But at the same time, we have so much legislation coming fast and furious. And then these changes are being applied and being made retroactive. I don’t have to tell you that I feel your pain. So say, for example, what I’m talking about in this blog is, for example, when we got the guidance on excluding $10,200 of unemployment benefits. This came out of the American Rescue Plan. If you want to know more about that, see some of my previous blogs. Just go to the University of Illinois website and click on read or listen to the weekly blog. It doesn’t cost you anything and you can go there and get that information. So what the IRS said when they came out with guidance was really twofold. It was about the middle of March, not really too long after the American Rescue Plan was passed. They said yes, we can go ahead and exclude up to $10,200 of unemployment benefits, or $20,400 for a married couple. You might recall that we also received guidance from IRS that they have interpreted the American Rescue Plan to say that the $150,000 cliff (as I had described in previous blogs, whereas if you’re above $150,000, there is no exclusion of unemployment benefits) is calculated without any inclusion of the unemployment benefits. So we had guidance there. Furthermore, what has IRS said? Do not amend returns to apply this new provision. We’ll do it for you. Now, granted, my understanding is they’re going to do this after the filing season ends, at least the non extended filing season, meaning May 17. And we’ll have to see what happens. So on that provision, the IRS said, don’t be amending returns. So I’m seeing a lot of postings on Facebook, a lot of issues that you have out there asking, should we go ahead and amend? There might be other reasons that you want to go ahead and amend. For example, I had a discussion just the other day with a client. When they first brought their information in, I had kind of an initial meeting early in February, we had unemployment benefits. And I said, for example, you’re not going to get stimulus. They didn’t get the first two rounds of stimulus; their income was too high. But now with this ability to exclude unemployment benefits, I just finished their return the other day. And I said, hey, guess what? It looks like you’re going to get some stimulus too. So I’m wondering if the IRS systems are going to be able to handle the changes that occur on the tax return because the adjusted gross income has been brought down. It’ll be interesting to see. And I know a lot of your clients are chomping at the bit, wanting you to go ahead and amend returns. Again, the guidance from the IRS is if you’re amending only to exclude the $10,200 of unemployment, then don’t amend. I’ll be curious to see, though, what comes out in May. Now, that being said, we just had guidance a couple of weeks ago (again, we have it in a blog) dealing with what I thought was one of the biggest provisions that came out of the American Rescue Plan –was that for 2020 tax returns, if anyone who purchased their health insurance on the marketplace owes back some of that advanced premium tax credit
…Again, IRS guidance came out, you can read about it in a previous blog, which said don’t amend. If we see that your client has, in fact, had to repay or it was calculated that they have to repay some of that advanced premium tax credit, we, the IRS, will fix it. And we’ll send the money back to the client.
Now, you might recall that I mentioned in a blog of a couple of weeks ago, that maybe this is a planning opportunity for 2020 returns. We did things, especially with self-employed people, maybe in terms of taking section 179 deduction, or bonus depreciation, to keep people below that 400% of the poverty line, that trip wire, as I call it, so they wouldn’t owe any advanced premium tax credit back. And now would it make sense to revisit those returns, and make decisions during this perceived extension season between May 17 and October 15, to maybe say, you know, what, I’m gonna go ahead and not take so much accelerated depreciation. Let’s go ahead and hit the tripwire. And well, we have advanced premium tax credit that’s supposed to go back. But since it’s the 2020 return, the American Rescue Plan says, Hey, you don’t owe it back. I don’t think the IRS fixing the returns that has advanced repayment due back… They’re not going do any planning on those returns. They’re just going to remove that additional tax. Maybe let them do that. But then you’ve got the opportunity to do some planning. The IRS says don’t amend in order to remove that advanced premium tax credit.
And one more point that I would like to make on this is (again, what I mentioned in the blog before): if you’re still working on returns, and your clients have that 1095A, put that information into the return. Because if the client would be entitled to more assistance, then they can have it. It’s just a circumstance where if in fact, the calculation would result in them owing some of that advanced premium tax credit back, they don’t. But they can have more.
I would do the calculation. If it results in the taxpayer receiving more premium assistance, submit the 1095 and the 8962. If it results in them owing advanced premium tax credit back, take it out. But again, the planning part of this is not something IRS is going to get into. But once again, the IRS said, don’t hit us with all these returns. I think they mean, ‘we don’t know how we’re going to handle all this influx if you’re sending these to us.’
So we’ve got another one that just came out. We have Revenue Procedure 2021-20 that just came out in the last week or so. It addresses PPP loans. Now, the Consolidated Appropriations Act came out late in December of 2020. So I don’t know that this would necessarily apply, but I’m going to tell you about it anyway. What 2021-20 does is it provides a safe harbor. So for those taxpayers, who believed or felt that, since we had tax-free PPP money, they couldn’t take the expenses that were paid with tax-free money and deduct them. You remember that? In fact, there was guidance back in November of 2020, from IRS, which said exactly that. And that goes to our history of understanding tax law, that you typically can’t take deductions if you have tax-free money associated with it. But no, the Consolidated Appropriations Act said, Hey, even though you’ve got tax-free PPP money, you can go ahead and deduct the expenses anyway. This safe harbor is very interesting. It says once again, don’t go back and amend 2020 returns. You can but guess what? The safe harbor says that you can actually go ahead and take those expenses in 2021 that were left off the 2020 return. I don’t know what the best recommendation would be there. Would it be to put a block for example, on a Schedule C and say “2020 expenses paid with PPP previously not deducted. See Revenue Procedure 2021-20.” I’m not sure exactly how we would do that. But once again, the IRS is trying to be as kind and gentle as they can be. But 2021-20 tells us that if they didn’t take the expenses on a 2020 return, you don’t have to amend but could go ahead and take them in 2021. If you needed more planning…imagine that… which year is going to make more sense? You might be sitting on a block of expenses for a client and you were thinking about amending, maybe you don’t have to. We’ve got the web address, there for you 2021-20. If you want to go ahead and look at that yourself, again, it came out within, oh, just about the last week or so maybe 10 days. But that’s the newest revenue procedure where, once again, the IRS is saying, don’t amend. Just go ahead and file those with the 2021 return.
So I’m wondering, is the IRS trying to tell us something? Are they telling us that, “yeah, look at the time it’s taking to process amended returns.” Let me tell you, folks, I worked on several amended returns just this last weekend for a number of reasons. And I’ll tell you what I’m not trying to do… I’m not trying to do amended returns on paper. There were two of them for 2020 and one for 2019. It really was my first experience, to be honest with you, with preparing an amended return to be electronically filed on an individual. I’ve done them, like you have, for entities such as partnerships and corporations. We’ve been able to e-file those for quite a while. But I found it interesting and an interesting process to go through. Because I’ll tell you, I’m not mailing these things in. The IRS is so far behind on processing paper type returns. I’m going to say that it isn’t going to be months, it’s possibly going to be years that it’s going to take the IRS to get through this flood of paper. I appreciate their enthusiasm in telling us not to file amended returns, that they’re going to handle the process. So I’m assuming their computer systems must be to a point where they can handle these individual issues that have come out of new legislation. So I think they’re trying to tell us: don’t flood us with paper, we’re already drowning.
Are we going to possibly be duplicating efforts? That’s that goes back to a number of postings that I have seen on our Facebook page. By the way, I would suggest you become a member of the University of Illinois Facebook group. Again, it doesn’t cost anything. The link for it is included above. It’s a great place to share ideas, to get ideas, to get questions answered…You might have something very unusual that you’re dealing with and you could get some assistance from members. So I’m wondering about the duplication of efforts. There have been a lot of postings on that Facebook page saying, “well, my clients are getting tired of waiting for the money they’re going to get because the IRS is going to, for example, remove that $10,200 of unemployment benefits or the IRS is going to remove that advanced premium tax credit. When are we going to get our money?” Maybe the best thing would be to be patient and give the IRS time to do the processing. Because yes, we could have a circumstance of duplicated efforts, which you know, causes just a myriad of other issues. If in fact, we go ahead and submit an amended return and, say, several days later, a client gets a check in the mail… Well I’m telling you what they haven’t processed that amended return. So I guess my advice to you would be to hold on on these issues.
Then when I talk about planning with those amended returns… Let’s make this a summertime or early fall (before October 15) type of operation. Maybe go back and talk about those other things that I’ve mentioned in previous blogs, such as with the advanced premium tax credit, to go ahead and maybe elect out of Section 179 or less Section 179 or bonus with the feeling that tax rates in the future are going to be higher. And we don’t care about owing the advanced premium tax credit back because it doesn’t apply – only in 2020 though. Should that planning happen after the IRS does their part of mechanically removing the taxable unemployment or mechanically removing that advanced premium tax credit recovery. Or you’re making that decision and then also with planning, if you do have a client where you did not deduct the expenses paid with PPP money because the guidance wasn’t there, the safe harbor is allowing us to do that in 20 or 21.
So I think there’s some planning opportunities with amended returns in 2019 and 2020. As I know right now, those can be filed electronically. I’ve got to believe that’s the way to go. So a conclusion of this of this blog would be to be patient. Try to exercise patience and instill that in your clients to be patient after May 17. And that perhaps you will visit with them in the summer or early fall to look at if there is some planning we can do now since some income has been removed from the tax return? We’ve got those $1,400 per person stimulus items floating around based on 2021. So will that be some planning too, for example, dealing with this newest safe harbor?
So listen, like I’ve said before…two weeks left. We’re going to be there for you. We’ll be there for you after May 17. We encourage you to look look towards our Fall Tax School program and we’ll keep you updated with these blogs. So for all of us here at the University of Illinois Tax School… this is Tom O’Saben saying we’ll say goodbye for just a while.
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