Kathleen Hargrove, Author at Whalen & Company, CPAs

Tax implications of working from home and collecting unemployment

Kathleen Hargrove on September 15, 2020

COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations.

Working from home:

Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses.

Unfortunately, employee home office expenses aren’t currently deductible, even if your employer requires you to work from home. Employee business expense deductions (including the expenses an employee incurs to maintain a home office) are miscellaneous itemized deductions and are disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act.

However, if you’re self-employed and work out of an office in your home, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules.

Collecting unemployment:

Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. Some of these people don’t know that these benefits are taxable and must be reported on their federal income tax returns for the tax year they were received. Taxable benefits include the special unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

In order to avoid a surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can have taxes withheld from their benefits now. Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. (Don’t send it to the IRS.)

We can help

We can assist you with advice about whether you qualify for home office deductions, and how much of these expenses you can deduct. We can also answer any questions you have about the taxation of unemployment benefits as well as any other tax issues that you encounter as a result of COVID-19.

PPP Forgiveness for Related Party Rent

Kathleen Hargrove on September 2, 2020

The SBA and Treasury released an interim final rule last week that in part addressed forgiveness of payments of rent paid to relate parties.

This rule is first mention in the guidance that related party rent will have limited forgiveness. It effectively limits forgiveness of related party rent to the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business. In the case of an owner that owns the leased property free of debt, there will be no forgiveness.

Here is the full text from the rule:

Eligibility of Certain Nonpayroll Costs for Loan Forgiveness

Question b: Are rent payments to a related party eligible for loan forgiveness?

Yes, as long as (1) the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and (2) the lease and the mortgage were entered into prior to February 15, 2020.

Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness. PPP loans are intended to help businesses cover certain non-payroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured. This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.

U.S. Chamber of Commerce Says Many Members Won’t Defer Payroll Taxes

Kathleen Hargrove on August 21, 2020

The U.S. Chamber of Commerce has submitted a coalition letter to House Speaker Pelosi, Senate Majority Leader McConnell, and Treasury Secretary Mnuchin regarding concerns with President Trump’s recent memorandum deferring payroll tax obligations.

On August 8, 2020, President Trump signed a memorandum that defers the obligations of employers for the employee’s portion of Social Security tax for many employees from September 1, 2020 through December 31, 2020. The memorandum orders Secretary Mnuchin to provide implementation guidance for the deferral and is intended to provide additional economic relief in response to the coronavirus (COVID-19) pandemic.

However, there are questions regarding the payroll tax deferral. Specifically, if an employer defers the employee’s portion of Social Security tax for the time period indicated, will employees need to repay those taxes in 2021?

The Chamber of Commerce’s letter explains that under the current law, the memorandum will create “a substantial tax liability for employees at the end of the deferral period.” The letter notes that: “Without Congressional action to forgive this liability, it threatens to impose serious hardships on employees who will face a large tax bill as a result of deferral.”

A suspension of the employee’s portion of Social Security tax, so that employees would not need to repay the tax at a later date, “would be less challenging,” the letter adds.

The letter continues by saying many of its members see the temporary deferral as unfair to employees and furthermore “unworkable” regarding putting a system in place for employees to make such a decision.

The letter concludes by saying many of its members will likely decline to implement the payroll tax deferral and will instead continue to withhold and remit the employee’s portion of Social Security tax as required by law.

In addition to the U.S. Chamber of Commerce, the letter was signed by several businesses and associations.

At this point, the Treasury has not issued any guidance on the payroll tax deferral memorandum.

SOURCE: Thomson Reuters

Ohio Sales Tax Holiday

Kathleen Hargrove on July 24, 2020

Ohio will have a sales tax holiday from Friday, August 7, 2020 at 12:00 a.m. to Sunday, August 9, 2020 at 11:59 p.m.

During the holiday, the following items are exempt from sales and use tax:

An item of clothing priced at $75 or less;
An item of school supplies priced at $20 or less; and
An item of school instructional material priced at $20 or less.

Items used in a trade or business are not exempt under the sales tax holiday.

Qualified items sold to consumers by mail, telephone, e-mail, or Internet shall qualify for the sales tax exemption if the consumer orders and pays for the item and the retailer accepts the order during the exemption period for immediate shipment, even if delivery is made after the exemption period.

For more information regarding the sales tax holiday, please refer to the Sales Tax Holiday Frequently Asked Questions.

SOURCE: Ohio Department of Taxation

Get Ready For the New Form 1099-NEC

Kathleen Hargrove on July 14, 2020

There’s a new IRS form for business taxpayers that pay or receive non-employee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Non-employee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as non-employee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the 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. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of non-employee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
The operation of the filer was affected by fire, casualty or natural disaster.
The filer was “in the first year of establishment.”
The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

Author: Kathleen Hargrove

News & Tech Tips

Tax implications of working from home and collecting unemployment

PPP Forgiveness for Related Party Rent

U.S. Chamber of Commerce Says Many Members Won’t Defer Payroll Taxes

Ohio Sales Tax Holiday

Get Ready For the New Form 1099-NEC