Tax Archives - Page 24 of 48 - Whalen & Company, CPAs

PPP Loan…What Expenses Are Deductible?

Kathleen Hargrove on November 23, 2020

As previously communicated in Notice 2020-32, the IRS stated its position that business expenses paid with Paycheck Protection Program (PPP) funds that are forgiven cannot be deducted for federal tax purposes. However, it was unclear how the deduction limitation would be applied if a PPP loan was not forgiven until a subsequent tax year.

On Wednesday, the Treasury Department and IRS released guidance clarifying the tax treatment of expenses where a PPP loan has not been forgiven by the end of the year the loan was received.

In summary, IRS Revenue Ruling 2020-27 concludes:

A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

The ruling proves two scenarios as examples:

Scenario 1

A borrower pays expenses that qualify under the CARES Act as valid PPP expenditures. In that scenario, the borrower applies for forgiveness in November 2020 and satisfies all the requirements under the CARES Act to have the loan forgiven, but it doesn’t yet have an answer as to whether it will be forgiven.

Scenario 2

The borrower pays the same type of valid expenses with its PPP loan and satisfies the CARES Act requirements for the loan, but it has not submitted a forgiveness application before the end of 2020.

According to the ruling, the businesses in both scenarios can’t deduct expenses funded with PPP loans because they have a reasonable expectation of forgiveness.

In addition, Revenue Procedure 2020-51 was issued which provides a safe harbor for PPP borrowers whose loan forgiveness has been partially or fully denied and who wish to claim deductions for otherwise eligible payments on a return, amended return, or administrative adjustment request.

For more information on this, visit Treasury’s webs ite t hat has links to the full ruling and procedure.

The easiest way to survive an IRS audit is to get ready in advance

Kathleen Hargrove on October 9, 2020

IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is among those selected to be examined. But with proper preparation and planning, you should fare well.

In fiscal year 2019, the IRS audited approximately 0.4% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation — invoices, bills, cancelled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all your records in one place. And it helps to know what might catch the attention of the IRS.

Audit hot spots

Certain types of tax-return entries are known to the IRS to involve inaccuracies so they may lead to an audit. Here are a few examples:

Significant inconsistencies between tax returns filed in the past and your most current tax return,
Gross profit margin or expenses markedly different from those of other businesses in your industry, and
Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.

Responding to a letter

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our firm can help you:

Understand what the IRS is disputing (it’s not always clear),
Gather the specific documents and information needed, and
Respond to the auditor’s inquiries in the most expedient and effective manner.

The IRS normally has three years within which to conduct an audit, and often an audit doesn’t begin until a year or more after you file a return. Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.

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.

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

PPP Application Window Extended to August 8

Kathleen Hargrove on July 8, 2020

President Trump signed a bill Saturday re-opening the application window for the Paycheck Protection Program (PPP) until Aug. 8.

The five-week extension had been approved last week by both chambers of Congress. The U.S. House of Representatives and the Senate both passed the legislation by unanimous consent.

The House’s approval on July 1 came after the Senate passed the extension in a surprise move the night of June 30, just a few hours before the PPP application window was scheduled to close.

The extension keeps a source of funding open to struggling small businesses while Congress works on a second, more targeted funding program. The PPP, which has approximately $129 billion in funding remaining, was launched in early April as the COVID-19 pandemic battered the U.S. economy and forced many businesses to close. The program provides forgivable loans that small businesses and other qualifying entities can use to cover payroll and other select costs.

The U.S. Small Business Administration (SBA), which oversees the program with the Treasury Department, stopped accepting loan applications at midnight on June 30. The program had not yet officially re-opened as of Sunday evening, according to the SBA’s PPP home page.

As of June 30, the SBA had approved nearly 4.9 million loans for a total of more than $520 billion.

SOURCE: Journal of Accountancy

Category: Tax

News & Tech Tips

PPP Loan…What Expenses Are Deductible?

The easiest way to survive an IRS audit is to get ready in advance

Tax implications of working from home and collecting unemployment

Ohio Sales Tax Holiday

PPP Application Window Extended to August 8