IRS Releases Anticipated Guidance Regarding PPP Loans and Expense Deductibility

On November 18, the Internal Revenue Service (IRS) released Revenue Ruling 2020-27 and Revenue Procedure 2020-51. The two releases offer clarification regarding the non-deductibility of expenses that contribute to the forgiveness of loans from the Paycheck Protection Program (PPP).  Author Sally Schreiber breaks down the contents and significance of the two releases in an article from the Journal of Accountancy.

Background

The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the PPP program to support qualifying businesses through the coronavirus pandemic via forgivable loans. Loan recipients are permitted to use loan funds to cover a variety of expenses including payroll costs, payment of mortgage interest, rent, and utility payments. Section 1106(i) of the CARES Act excludes forgiven PPP loan amounts from gross income.

In a May 2020 follow-up notice, the IRS clarified that PPP loan recipients may not deduct expenses whose payments result in PPP loan forgiveness. This is an area not directly addressed by the CARES Act. The American Institute of Certified Public Accountants (AICPA) has voiced the opinion that the IRS clarification is counter to the intent of the CARES Act authors.

Revenue Ruling 2020-27

This ruling “addresses the issue of borrowers who pay expenses in 2020 but whose PPP loan is not forgiven until 2021.” It offers two scenarios to illustrate how the IRS expects loan recipients to handle PPP-eligible expenses, citing Sec. 265(a)(1). Both scenarios determine that the deduction of expenses is inappropriate. The tax bureau concludes that “the fact that the tax-exempt income may not have been accrued or received by the end of the taxable year does not change this result because the disallowance applies whether or not any amount of tax-exempt income in the form of covered loan forgiveness and to which the eligible expenses are allocable is received or accrued.”

Revenue Procedure 2020-51

This procedure “provides a safe harbor for PPP borrowers that have their loan forgiveness denied or who choose not to request loan forgiveness.” In the event that previously anticipated PPP loan forgiveness does not happen, this revenue procedure offers a path for taxpayers to retroactively deduct some or all of the expenses that they previously did not deduct because they expected to have their PPP loan forgiven. This procedure goes into effect with the 2020 tax year.

For further details, click here to read the article in full at the Journal of Accountancy.

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2020 Year End Tax Letter

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10 Tips for Better Budgeting…

If you already have a budget, it’s probably been difficult for you to stick with it for the last several months. Unless you provide products and/or services that have been in great demand since the COVID-19 pandemic took hold, you’ve had to adjust your budget significantly.

Better days are ahead, though, and now is a good time to start doing some planning for 2021. While there are still likely to be uncertainties next year, creating a budget will give you a starting point. A budget increases your awareness of all of your projected income and expenses, which may make it less likely that you’ll find yourself constantly running short on funds.

Here are some ways you can make your budgeting process more effective and realistic.

Use what you already know. Unless you’re starting a brand-new business, you already have the best resource possible: a record of your past income and expenses. Use this as the basis for your projections.

Be aware of your sales cycle. Even if you’re not a seasonal business, you’ve probably learned that some months or quarters are better than others. Budget conservatively for the slower months.

Distinguish between essential and non-essential expenses. Enter your budget items for the bills and other expenses that must be covered before you add optional categories.

Budgeting October 2020 1

You can use data from a previous year to create a new budget in QuickBooks Online.


Keep it simple. Don’t budget down to the last paper clip. You risk budget burnout, and your reports will be unwieldy.

Build in some backup funding. Just as you’re supposed to have an emergency fund in your personal life, try to create one for your business.

Make your employees part of the process. You shouldn’t be secretive about the expense element of your budget. Try to get input from staff in areas where they have knowledge.

Overestimate your expenses, a little. This can help prevent “borrowing” from one budget category to make up for a shortfall in another.

Consider using excess funds to pay down debt. Debt costs you money. The sooner you pay it off, the sooner you can use those payments for some non-essential items.

Look for areas where you can change vendors. As you’re creating your budget think carefully about each supplier of products and services. Can you find less costly alternatives?

Revisit your budget frequently. You should evaluate your progress at least once a month. In fact, you could even start by budgeting for only a couple of months at a time. You’ll learn a lot about your spending and sales patterns that you can use for future periods.

How QuickBooks Online Can Help

QuickBooks Online offers built-in tools to help you create a budget. Click the gear icon in the upper right corner and select Budgeting under Tools. Click Add budget. At the top of the screen, give your budget a Name and select the Fiscal Year it should cover from the drop-down list by that field. Choose an Interval (monthly, quarterly, or yearly) and indicate whether you want to Pre-fill data from an existing year.

Budgeting October 2020 2

QuickBooks Online supplies a budget template that already contains commonly used small business items.


The final field is labeled Subdivide by, which is optional. You can set up budgets that only include selected Customers or Classes, for example. Select the desired divider in that field, then choose who or what you want included in the next. Click Next or Create Budget in the lower right corner (depending on whether you used pre-filled data) to open your budget template. If you subdivided the budget, you’ll see a field marked View budget for. Click the down arrow and select from the options listed there.

To create your budget, you simply enter numbers in the small boxes supplied. Columns are divided by months or quarters, depending on what you specified, and rows are labeled with budget items (Advertising, Gross Receipts, Legal & Professional Fees, etc.). You simply enter numbers in the boxes that apply. When you click in a box, a small arrow appears pointing right. Click on this, and your number will automatically appear in the rest of that row’s boxes. When you’re done, click Save in the lower right. You can edit your budget at any time.

QuickBooks Online provides two related reports. Budget Overview displays all of the data in your budget(s). Budget vs. Actuals shows you how you’re adhering to your budget.

We know creating a budget can be challenging, but it’s so important – especially right now. We’d be happy to look at your company’s financial situation and see how QuickBooks’ budgeting tools—and its other accounting features—can help you get a better understanding of your finances.

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Still Waiting for the IRS to Cash Your Check?

During the COVID-19 pandemic, the IRS has furloughed many of its employees or had them work from home to mitigate the spread of the virus. Many IRS offices remained shuttered for months, and a backlog of millions of pieces of unopened mail accumulated in trailers set up outside IRS facilities.

This includes unopened mail with payment checks, which creates a problem for many e-filed returns with tax due because the IRS computer shows a tax return filed but no payment made. Because the IRS utilizes a significant amount of automation, its computers began automatically spitting out tax-due notices, including to those who had mailed in payments. While most IRS facilities have reopened and IRS employees have returned to work, it will take them weeks, if not months, to get all of the backlogged mail opened and processed.

After receiving complaints from taxpayers and members of Congress, the IRS put information on its website about these outstanding payments: the payments will be posted as of the date when they were received by the IRS, not the date when the Service processes them. In most cases, this will eliminate or minimize penalties and interest for late payments. So, if you mailed a check to the IRS that has yet to clear your bank, with or without a return, the IRS says that you should not cancel or put a stop-payment on the check. However, you should be sure that you have adequate funds in the account from which the check was written, so that the check will clear when the IRS does process it.

Normally, the penalty for a dishonored payment (a bounced check) of over $1,250 is 2% of the amount of the check, money order, or electronic payment. If the amount is $1,250 or less, the penalty is the amount of the check, money order, or electronic payment, or $25, whichever is lower.

To provide fair and equitable treatment during the COVID-19 emergency, the IRS is providing relief from bad-check penalties. The dishonored payment penalty will be waived for dishonored checks that the Service received between March 1 and July 15 due to delays in IRS processing. However, interest and other penalties may still apply.

The IRS has also decided to suspend mailing certain tax-due notices to taxpayers temporarily until the unopened mail backlog is cleared up. If you have received a tax-due notice but know that you already paid the tax, the IRS asks that you wait to contact it about any unprocessed paper payments that are still pending.

So, for now, taxpayers who have uncashed payments need to be patient. There’s no reason to send additional correspondence to the IRS that would just be added to the mountains of unopened mail, and due to high call volumes, phoning the IRS will be of little use at this time.

If you have any further questions, please give our office a call.

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How to File Taxes After Moving to a New State

Moving to a new state can be an awesome new adventure. Whether you are moving for a new job, to be closer to family, to retire, or for some other reason.

No matter what takes you to your new residence, you can’t forget about taxes.

Here’s what you need to know about filing taxes in your new state as you settle into your new routine.

Be Sure to Establish Residency in Your New State

Even if you haven’t sold your home or severed all ties with your previous hometown, you will need to make as many connections with your new residence as possible.

  • Be sure to change your mailing address 
  • Get your driver’s license and voter registration in your new state 
  • Register children for school (if applicable) in your new state 
  • Move your personal belongings and family pets to your new home 

This will help to prove that you have fully moved from the original state and are no longer subject to taxes there as a resident.

Cut Ties with Your Previous Jurisdiction

If you have a second home in another state or you are still working or doing business in your previous state, you may still qualify as a resident in that state for tax purposes.

If you still have ties in your previous state, make sure you understand the residency qualifications so that you can avoid any unexpected surprises at tax time.

Determine What Kind of Tax Return Is Required

Unless you moved on January 1st of the calendar year, you are likely – at a minimum – a part-year resident of each state.

This typically means that you will allocate your income, deductions, credits, and other tax items based on the number of days you lived in each state. You would file a part-year tax return in each state, unless the state that you are moving from or moving to does not have a state income tax requirement.

Check Your Eligibility for Tax Credits and Other Tax Benefits That You May Be Eligible for in Your New State

The forms that each taxpayer may use are consistent when completing your federal tax return. However, no two states are exactly alike when it comes to filing a tax return. Credits and other benefits that you may be eligible for in one state may not apply in another state.

You may find that you now qualify for special credits or other incentives not previously available to you.

Get Help from a Local Tax Professional

When it comes to doing your taxes, it’s best not to go it alone if you’re unsure of the steps to take when completing your tax forms.

We have years of experience when it comes to filling out the forms you need, and we can help you with things like tax planning and identifying tax credits and deductions that you might not be aware of. Our practice can also help you to avoid mistakes when completing your tax return that can result in costly interest and penalties. Contact us for more information.

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