Temporary tax law changes should be EASY!

We are in tough times! The pandemic is in it's second year and the March 13, 2020 disaster declaration is still in effect. The American Rescue Plan Act of 2021 signed into law on March 11, 2021 is the 5th major piece of COVID-19 relief enacted since mid-March 2020. The tax changes in these laws are numerous and complex in terms of new definitions, special rules, confusing interaction with other rules, and being effective before IRS can get adequate guidance released.

The IRS could not even open the 2021 filing season until February 12 - later than usual. The IRS is still processing paper filed 2019 returns.

Practitioner groups (AICPA letters of 2/23 and 3/4 and 3/24), members of Congress (2/18) and others, asked the IRS to extend the April 15 due date for 2020 returns. After all, the Rescue Plan Act also made changes to 2020 returns including to those already filed (exclusion of up to $10,200 of unemployment compensation and exception to having to pay back any excess advance Premium Tax Credit). The IRS needed to update 2020 return processing to allow for these changes and to let individuals who had already filed and those who had not yet filed, know how to reflect these changes on their 2020 return or amended return. And these 2020 changes are complex! For example, the unemployment one also affects 8 other rules where modified AGI must be measured. This is time consuming for the IRS to create new instructions and reprogram its computers and for tax prep software companies to update their 2020 products.

On March 17 the IRS issued a news release saying that for individuals, the filing and payment deadline for 2020 Forms 1040 would be extended to May 17. This only applies to individuals and does not apply to the first quarter 2021 estimated tax payment due April 15. There were later calls by many for a broader and longer extension.

On March 29, the IRS issued another press release and Notice 2021-21 to clarify what it said on March 17. For example, the May 17 date is also the last day to make a contribution to an IRA or HSA and deduct it on the 2020 return. But, still no extension for entity returns due April 15 or the 1st quarter 2021 estimate due April 15. And no mention of the 1040 extension also extending the due date for gift tax returns even though they are the same as for Form 1040 (it seems the gift tax return date of 4/15 is not extended).

I think a lot of practitioner time was wasted and will continue to be wasted explaining this to clients and letting many clients know that much of the 2020 return needs to be completed to get a good estimate for the first quarter 2021 tax payment still due April 15.

So, wouldn't it have been easier for the IRS to just say: If the due date for a return or payment is April 15, it is extended to May 17, 2021?  Yes!

We need to encourage decisions, particularly those that don't involve a loss of revenue, to be implemented as simply as possible in order to reduce confusion and wasted time for taxpayers and their tax advisers (and not diminish respect for our tax system).

The IRS has authority under IRC Section 7508A to extend all items due April 15 to May 17 (or later).

What do you think?

Ideas for States for Pandemic Tax and Budget Policies

My latest Moving Forward? article for Tax Notes State is: Suggestions for Pandemic State Tax Policy Endurance (12/17/20). I include a variety of suggestions to help individuals, businesses and state and local governments. I hope you'll take a look - here.

Examples:

• Federally-declared disasters such as the COVID-19 pandemic allow the IRS to extend due datesfor tax returns and tax payments. Last year, the result was a July 15 due date rather than April 15. Most states followed suit. But a big deal for states is that their fiscal years end June 30. The shift of payments to the next fiscal year likely resulted in greater borrowing and costs for the states. However, many high income taxpayers were quite capable of paying taxes normally due on April 15 and June 15. The better message (and true for any future disaster) is to include a plea that if you can pay at the normal time, please do so to reduce costs to the state.
  
  
• COVID-19 legislation included lots of new complexities. This, coupled with state and local rules for paid sick and medical leave, new tax credits and grants, etc. is often too much for many small businesses to deal with. A result is that some may have not claimed benefits they were eligible for or mandated to provide. State and local governments should have systems in place to provide help getting through all of the rules including some online tools. They should also seek assistance from the federal government on this as the benefits and mandates come from all levels of government. There are many retired finance and accountng experts who can help provide these services.
  
  
• Some struggling businesses with tax obligations might prefer to give up unused assets than have outstanding bills that pile up interest and penalties or use cash that is needed for other purposes. A system to take non-cash payments such as buildings and equipment no longer needed, should be in place.
  
  
• Despite tough times, consider clawbacks and safety requirements when grants and tax breaks are misused. For example, any tax break to help with the pandemic should have had the caveat that the business had procedures in place to reduce the spread of the virus. For example, a 1/18/21 Washington Post article reports that at least 5 anti-vaccine groups received PPP funds.
  
  
• While many struggle in the pandemic, some individuals and businesses were doing fine or perhaps even with increased revenues. There is a need for ways to easily enable those doing well do help get supplies and other assets to those in need.  Platforms where people can match resources and needs can help, with governments providing some of the pick up and distribution outlets to help ensure safety of such a system.  My picture above of the oranges in the yard waste garbage is a good example of waste. There were many people who would have been thankful to have had these oranges someone with too many treated as garbage and likely did not have a good way to get them to someone who needed them.

There are more suggestions and perhaps the article will lead you to identify more relief ideas for now and going forward.

What do you think?

Does a Work From Home Tax Make Sense?

On November 10, 2020, Deutsche Bank (DB) released a report, Konzept #19: What we must do to rebuild. Per DB, the report presents "ideas for how economies, businesses, and societies should rebuild from the pandemic. From changing the way we stimulate labour markets, to implementing digital currencies, and even taxing those who work from home, this Konzept is designed to spark the most important of debates. Some of our ideas may seem radical, but we hope they will inspire decision makers as we rebuild from this bracing and tragic period." Topics include climate change, connectivity, fate of shopping malls, and more.

DB also suggests the need and appropriateness for a tax on employees who work from home after the pandemic, to be paid by the employer. Per DB, the pandemic has resulted in about 5 to 7 times more people working from home and many will continue to (and about 50% will want to) continue to do this.

Why a tax? DB suggests what can be described as some negative externalities of working from home. Per DB (pages 32 to 34): 

"The sudden shift to WFH means that, for the first time in history, a big chunk of people have disconnected themselves from the face-to-face world yet are still leading a full economic life. That means remote workers are contributing less to the infrastructure of the economy whilst still receiving its benefits." 

DB also notes the savings WFH employees gain such as commuting costs and costs to acquire and maintain clothing. They also save the time for commuting. 

But what about counterarguments including the provision of positive externalities, such as:

• WFH employees might still go out to lunch and support the local economy.
• WFH employees may still need to use child care services in their community.
• Traffic in many cities, such as Los Angeles and San Jose, partly exists because there is insufficient infrastructure. So, aren't WFH employees savings dollars by reducing the need for more highways and maintenance of roads?
• WFH employees are driving less so contributing less to greenhouse gas emissions that create climate change.
• WFH employees might find it easier to contribute time to local community needs such as helping at the public school and cleaning parks.

The concept though of measuring income by economic considerations includes the benefits of growing your own food and living in a home you own. Recent OMB tax expenditure reports list the fact that our federal income tax does not tax the net imputed rental income of owner-occupied housing as the second largest tax expenditure (#60 in the report). There is no specified exclusion in the Internal Revenue Code for this item, such as there is for the largest tax expenditure - the exclusion for employer-provided health care. To help understand the new imputed rental income item, the OMB provides:

"Under the baseline tax system, the taxable income of a taxpayer who is an owner-occupant would include the implicit value of gross rental income on housing services earned on the investment in owner-occupied housing and would allow a deduction for expenses, such as interest, depreciation, property taxes, and other costs, associated with earning such rental income. In contrast, the Tax Code allows an exclusion from taxable income for the implicit gross rental income on housing services, while in certain circumstances allows a deduction for some costs associated with such income, such as for mortgage interest and property taxes."

The Joint Committee on Taxation doesn't include this in their list of tax expenditures. Per the JCT, the "measurement of imputed income for income tax purposes presents administrative problems and its exclusion from taxable income may be regarded as an administrative necessity." JCT also notes (page 5) that if this imputed income were allowed, then all mortgage interest and taxes on the home, as well as repairs would be deductible. Of course, providing lots of tax breaks for owner-occupied housing including the gain exclusion, without any offset for not including the imputed value in income is not accurate, but as the JCT notes, administratively sound as measuring the value of the income would be challenging.

DB suggests a WFH tax of 5% of the employee's salary with the revenue used to help displaced workers. Another perspective on the tax is not only displaced workers but smaller business footprints by employers when more of their employees work from home. I suspect we'll see a lot of office vacancies after the pandemic with cities facing issues of abandoned buildings, less need for public transit and in some areas, less economic activity for local service businesses. Cities will need to find ways to adjust to this and of course are already facing these issues during the pandemic.

So, an interesting idea for a WFH tax and I think it also highlights, along with other topics in the DB report, the need to continually examine our tax systems to be sure they reflect the ways we live and do business today and to ensure they meet principles of good tax policy.

What do you think?

Business Loss Change by CARES Act - Track Changes and Policy

The CARES Act (P.L. 116-136; 3/27/20) or Phase 3 of COVID-19 relief includes several tax law changes for individuals and businesses. Most notable for many (but not all) individuals is the recovery rebate or what the IRS calls the economic impact payment. Generally, this provides many adults with an advance, refundable credit for 2020 - today, of $1,200 +$500 if they have a child under age 17.

A few notable ones for businesses include the ability to carryback net operating losses (NOLs) for 2018, 2019 and 2020 for 5 years even though the TCJA ended this for tax years beginning after 2017 and even though the carryback can go to years when tax rates were higher than today. Employers also have some payroll credits and deferrals that should help with cash flow and some financial relief.

In addition to a temporary NOL change, the CARES Act also temporary changes another TCJA item. The limitation on losses for non-corporate taxpayers (IRC Section 461(l)) is changed to go into effect for tax years beginning after 12/31/20 rather than after 12/31/17. The TCJA's expiration date of tax years beginning before 1/1/26 remains.

There are a few other changes to Section 461(l) including making the technical corrections from the TCJA that are needed. To help see what is changed, please see the track changes version of Section 461(l) I have posted here.

This loss limitation only applies to non-corporate taxpayers with income above $250,000 ($500,000 if married filing jointly). Thus, this is relevant to less than 5% of non-corporate taxpayers. It causes them to not be able to currently use a specified loss above these amounts; the excess is not lost, it carries forward. One of the technical corrections made is that in measuring the income the loss can offset, wages are not included. This means it is more likely for some individuals to have a loss and for others who already have a loss and wages, the amount to carryforward will be higher. But, this loss limitation rule now doesn't go into effect until tax years beginning after 12/31.20.  Those who applied it on 2018 returns will need to amend.

So, what this an appropriate change to provide financial relief for COVID-19 economic problems? I don't think so as the small group that benefits are already high income taxpayers (in the top 5%) and there were other business relief measures provided that benefit employees and self-employed that could have been larger without the Section 461(l) change.

It's a costly change: The Joint Committee on Taxation estimates that the 461(l) change will cost $170 billion over 10 years. In contrast, the NOL change will cost $26 billion. The employer retention credit will cost $55 billion. The recovery payments for individuals will cost $292 billion. Given how few benefit from the 461(l) change and that they are individuals who are well off, seems like an odd use of limited funds and poorly targeted. Senators Whitehouse and Doggett use JCT data to state that 4 our of 5 filers that benefit from the change make $1 million or more per year and for a few, the average benefit is $1.6 million.

The change also creates some complexity due to the need to amend 2018 returns for affected taxpayers. Also, some states might not conform to this CARES Act change.

This change is not a complete giveaway though because most of these taxpayer would most likely eventually be able to use the carried forward loss. This just delays the impact of this TCJA temporary provision and provides a refund opportunity for 2018 and the ability to use more losses for 2019 and 2020. There are other changes that would have benefited far more taxpayers. I have several in prior blog posts (3/13/20 + 4/4/20) although most of them have already been enacted.

When the TCJA was enacted and when California conformed to Section 461(l), I was surprised to see that the revenue raised was so large (such as the $170 billion cited above just for removing the limitation for 2018, 2019 and 2020).  It's a reminder that some taxpayers have large business losses. Many are likely in the real estate industry where depreciation and interest expense can easily create large losses. But, if they have income high enough to be subject to this loss limitation, they are in the top 3 - 5% of individuals and arguably not suffering or wondering how they will pay rent or mortgage payments and utility bills during the pandemic shutdown.

Why did Congress make the change? Did they not have the data on how few would benefit and that they are high income taxpayers? Too rushed? Something else?

What do you think?

Observations on recent pandemic tax changes and a few more needed

I think the administrative and legislative changes to address health and financial problems of the global coronavirus pandemic has led tax practitioners to spend more time figuring it all out than was needed for tax reform change of the Tax Cuts and Jobs Act!  Of course, the timing of dealing with this right now is more significant than with the TCJA.

I won't go through all of the changes since there are many other sources, such as the following:

• IRS Coronavirus website and lots of links
• Treasury Department info for small businesses
• SBA loan information
• Dept. of Labor and required paid leave changes
• AICPA Coronavirus Resource Page
• AICPA State Tax Chart (very detailed and up-to-date)

A few observations:

• What will people do with their 2020 recovery rebates (referred to as economic impact payment by the IRS)? Most individuals will get $1,200 tax free. A married couple will get $2,400. Parents with children under age 17 will get $500 per child. There are phase-outs based on income (using either 2018 or 2019 tax return info generally). The Washington Post has a nice online calculator to help you determine your rebate amount.
• The folks at Money Done Right estimate that 43% of recipients will use their check to pay debt. See their website for the details.
• Recipients should also check if lenders will give them extensions without extra fees or interest expense if they have other needs as well, such as rent.
  
• Federal and most state income tax returns for 2019 that are normally due on April 15 have been extended to July 15.  Be sure to check for your state as a few are using a different date.
• Individual expecting a refund should file soon if they need the funds.
• Money Done Right also has data showing that less than 20% of individual expect to wait until July 15 to file for 2019. That makes sense since many individuals get a refund due to overwithholding during the year (often purposefully done as a savings plan).
• States use a fiscal year ending June 30. They will face challenges of having payments normally due April 15 and June 15 due July 15, yet, most, including California have done this.
• Recommendation: States should put out a plea to high-income individuals to make their payments for any tax due for 2019, as well as first quarter and second estimated tax payments for 2020 by June 15 or earlier. I think this will help states with their increased spending due to the pandemic and will reduce the need to borrow as much.
  
  
• Practitioners:
• Find some way to stay sane despite the overwhelming amount of changes particularly for practitioners helping small business clients.
• When relying on any FAQ, print it off because these are not binding but hopefully the IRS will follow them in the future, such as during an audit of a 2019 or 2020 return.
• A lot of the changes, such as for paid leave and SBA loans are not tax provisions so tread carefully in offering any interpretations. A challenge is that clients often don't have anyone else to turn to for financial assistance. Also, some of these items tie to tax rules. For example, HR 6201 (P.L. 116-127) and the required paid leave matches the amount of payroll credits employers get. So, an understanding of the leave rules coordinated by the Dept. of Labor is needed to help a client figure out their payroll tax obligations and timing. And of course, many practitioners have employees so need to know how these rules - tax and non-tax, apply to their own firm.
• Documentation: Remind clients (and yourselves) to get documentation now, such as why HR 6201 sick or family/medical leave was given to an employee for which payroll credits were claimed.  Likely better to get it now than later.
  
  
• More Ideas for Tax Law Changes to Help in Dealing with the Pandemic
• I offered several in a March 13 blog post (most of where were enacted).
• Relax the home office rules under Section 280A now that so many are working from home:
• Modify the requirement that the office has to be used exclusively for work. This also needs to be done to modernize this rule to reflect today's ways of working and living (as suggested last year by the AICPA).
• Relax the principal place of business rule for 2019 since many business owners are working at home.
• Make it clear that if employers reimburse employees for use of their home office, it is allowed without the need to prove that it was for the convenience of the employer.
• The TCJA disallows a deduction for parking and transit passes provided to employees. With employees working at home, employers are still paying these expenses, particularly the parking. Repeal this rule at Section 274(a)(4) at least for 2019 to help employers.
• Push the federal income tax estimated tax payment due June 15 (still) to July 15 or later. It is too confusing for the second payment to be due before the first payment. Also, June 15 is likely to early. For example, Virginia has a shelter-in-place order through June 10 and perhaps other states will as well.
• Additional filing and payment is needed. See the AICPA's April 2 letter to IRS and Treasury on this.

What do you think? What additional suggestions do you have?

Stay safe please.