Some people are required to return Economic Impact Payments that were sent erroneously

The IRS and the U.S. Treasury had disbursed 160.4 million Economic Impact Payments (EIPs) as of May 31, 2020, according to a new report. These are the payments being sent to eligible individuals in response to the economic threats caused by COVID-19. The U.S. Government Accountability Office (GAO) reports that $269.3 billion of EIPs have already been sent through a combination of electronic transfers to bank accounts, paper checks and prepaid debit cards.

Eligible individuals receive $1,200 or $2,400 for a married couple filing a joint return. Individuals may also receive up to an additional $500 for each qualifying child. Those with adjusted gross income over a threshold receive a reduced amount.

Deceased individuals

However, the IRS says some payments were sent erroneously and should be returned. For example, the tax agency says an EIP made to someone who died before receipt of the payment should be returned. Instructions for returning the payment can be found here: https://bit.ly/31ioZ8W

The entire EIP should be returned unless it was made to joint filers and one spouse hadn’t died before receipt. In that case, you only need to return the EIP portion made to the decedent. This amount is $1,200 unless your adjusted gross income exceeded $150,000. If you cannot deposit the payment because it was issued to both spouses and one spouse is deceased, return the check as described in the link above. Once the IRS receives and processes your returned payment, an EIP will be reissued.

The GAO report states that almost 1.1 million payments totaling nearly $1.4 billion had been sent to deceased individuals, as of April 30, 2020. However, these figures don’t “reflect returned checks or rejected direct deposits, the amount of which IRS and the Treasury are still determining.”

In addition, the IRS states that EIPs sent to incarcerated individuals should be returned.

Payments that don’t have to be returned

The IRS notes on its website that some people receiving an erroneous payment don’t have to return it. For example, if a child’s parents who aren’t married to each other both get an additional $500 for the same qualifying child, one of them isn’t required to pay it back.

But each parent should keep Notice 1444, which the IRS will mail to them within 15 days after the EIP is made, with their 2020 tax records.

Some individuals still waiting

Be aware that the government is still sending out EIPs. If you believe you’re eligible for one but haven’t received it, you will be able to claim your payment when you file your 2020 tax return.

If you need the payment sooner, you can call the IRS EIP line at 800-919-9835 but the Treasury Department notes that “call volumes are high, so call times may be longer than anticipated.”

© 2020

Attachment

What qualifies as a “coronavirus-related distribution” from a retirement plan?

As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10% early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10% tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses

New exception

Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10% additional tax that otherwise generally applies to distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:

  • Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
    • Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
    • Be unable to work due to a lack of childcare because of COVID-19;
    • Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours;
    • Have pay or self-employment income reduced because of COVID-19; or
    • Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance.

© 2020

If you’re selling your home, don’t forget about taxes

Traditionally, spring and summer are popular times for selling a home. Unfortunately, the COVID-19 crisis has resulted in a slowdown in sales. The National Association of Realtors (NAR) reports that existing home sales in April decreased year-over-year, 17.2% from a year ago. One bit of good news is that home prices are up. The median existing-home price in April was $286,800, up 7.4% from April 2019, according to the NAR.

If you’re planning to sell your home this year, it’s a good time to review the tax considerations.

Some gain is excluded

If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax.

To be eligible for the exclusion, you must meet these tests:

  • The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.
  • The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Larger gains

What if you have more than $250,000/$500,000 of profit when selling your home? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are two other tax considerations when selling a home:

  1. Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
  2. Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for your business, the loss attributable to that part may be deductible.

If you’re selling a second home (for example, a beach house), it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

For many people, their homes are their most valuable asset. So before selling yours, make sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have about your home sale.

© 2020

Think Twice Before Accepting an Economic Impact Disaster Loan (EIDL)

Many of our clients have applied for and received the EIDL (“Economic Impact Disaster Loan”). These loans were presented to the public as a low interest, long-term note, designed to bridge the economic hardship presented by the COVID Virus. In truth, there are several restrictions on these loans that most borrowers would violate without even realizing it. Because of these terms, our firm strongly discourages businesses from taking these loans.

Troubling Terms and Analysis

  1. Borrower authorizes SBA to make or cause to be made, at Borrower’s expense and in such a manner and at such times as SBA may require:
    • Inspections and audits of any books, records and paper in the custody or control of Borrower or others relating to the Borrower’s financial or business conditions, including the making of copies thereof and extracts therefrom
    • Inspections and appraisals of any of Borrower’s assets

**To understand these terms alone, you need to understand the costs associated with financial audits and appraisals. The cost of a financial audit will easily exceed $10,000. Commercial appraisals are expensive as well. Considering these can be required at any time the SBA wishes and they are done at the borrower’s expense, an honest analysis of the cost of the loan skyrockets. These loans are limited to $150,000 yet the SBA can impose substantial requirements on the borrower running up significant costs

  1. Borrower will furnish to SBA, no later than 3 months following the expiration of Borrower’s fiscal year and in such form as SBA may require, Borrower’s financial statements.

**Many of our clients are not in a position to issue accurate financial statements in this narrow of a delivery window. Additionally, they specify “in such form as SBA may require”. What does that mean? It certainly provides broad latitude to the SBA.

  1. Upon written request of SBA, Borrower will accompany such statements with an ‘Accountant’s Review Report’ prepared by an independent public accountant at Borrower’s expense.

**The cost of having a financial review is slightly less expensive than a financial audit but it too will likely cost $8,000 – $10,000. These types of terms radically change the cost of these loans. While the interest rate itself seems attractive, consider that the length of time you have the note increases your exposure to these additional costs. Borrower’s beware – you could be stuck with significant expenses due to having these loans.

  1. Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company.

**Well, let’s break down what this really says.

  • Cash is an asset. So, owners cannot take distributions from their company. Many of our clients have pass-through entities such as partnerships or S corporations. Partner and shareholder distributions are not allowed if you are a borrower of this loan.
  • Borrowers cannot give employee advances, employee bonuses, employee gifts, etc. This is true with all affiliated companies or any other company controlled by the Borrower.

Final Thought

So, what happens if you violate these terms? The loan document only references that the loan would be considered in default and immediately payable. However, there is additional language used within the terms of the note that indicates violating any terms could be considered loan fraud. See below:

MISUSE OF LOAN FUNDS: Anyone who wrongfully misapplies any proceeds of the loan will be civilly liable to SBA for one and one- half times the proceeds disbursed, in addition to other remedies allowed by law.

CIVIL AND CRIMINAL PENALTIES: Whoever wrongfully misapplies the proceeds of an SBA disaster loan shall be civilly liable to the Administrator in an amount equal to one-and-one half times the original principal amount of the loan under 15 U.S.C. 636(b).In addition, any false statement or misrepresentation to SBA may result in criminal, civil or administrative sanctions including, but not limited to: 1) fines, imprisonment or both, under 15 U.S.C. 645, 18 U.S.C. 1001, 18U.S.C. 1014, 18 U.S.C. 1040, 18 U.S.C. 3571, and any other applicable laws; 2) treble damages and civil penalties under the False Claims Act, 31 U.S.C. 3729; 3) double damages and civil penalties under the Program Fraud Civil Remedies Act, 31 U.S.C. 3802; and 4) suspension and/or debarment from all Federal procurement and non-procurement transactions. Statutory fines may increase if amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

Good records are the key to tax deductions and trouble-free IRS audits

If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.

Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility.

It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

That being said, many taxpayers don’t make the grade when it comes to recordkeeping. Here are three court cases to illustrate some of the issues.

 

 

Case 1: Without records, the IRS can reconstruct your income

If a taxpayer is audited and doesn’t have good records, the IRS can perform a “bank-deposits analysis” to reconstruct income. It assumes that all money deposited in accounts during a given period is taxable income. That’s what happened in the case of the business owner of a coin shop and precious metals business. The owner didn’t agree with the amount of income the IRS attributed to him after it conducted a bank-deposits analysis.

But the U.S. Tax Court noted that if the taxpayer kept adequate records, “he could have avoided the bank-deposits analysis altogether.” Because he didn’t, the court found the bank analysis was appropriate and the owner underreported his business income for the year. (TC Memo 2020-4)

Case 2: Expenses must be business related

In another case, an independent insurance agent’s claims for a variety of business deductions were largely denied. The Tax Court found that he had documentation in the form of cancelled checks and credit card statements that showed expenses were paid. But there was no proof of a business purpose.

For example, he made utility payments for natural gas, electricity, water and sewer, but the records didn’t show whether the services were for his business or his home. (TC Memo 2020-25)

Case number 3: No records could mean no deductions

In this case, married taxpayers were partners in a travel agency and owners of a marketing company. The IRS denied their deductions involving auto expenses, gifts, meals and travel because of insufficient documentation. The couple produced no evidence about the business purpose of gifts they had given. In addition, their credit card statements and other information didn’t detail the time, place, and business relationship for meal expenses or indicate that travel was conducted for business purposes.

“The disallowed deductions in this case are directly attributable to (the taxpayer’s) failure to maintain adequate records,“ the court stated. (TC Memo 2020-7)

We can help

Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach to how you keep records can protect your deductions and help make an audit much less painful.

 

 

© 2020