Sunday, November 21, 2021
Last week, the IRS published guidance on two items of interest to many tax practitioners and clients. One item concerned clarification on the tax treatment of Paycheck Protection Program (PPP) loan forgiveness. The other item involved whether per diem meal reimbursements are 100 percent deductible or are limited to 50 percent. Also, the newly enacted “infrastructure” bill has a couple of tax provisions of relevance to many tax preparers and clients.
On another note, I will be teaching a two-hour tax ethics course on December 10.
IRS guidance, new law and tax ethics – it’s the topic of today’s post.
PPP Loan Forgiveness
In Rev. Proc. 2021-48, 2021-49 I.R.B., the IRS noted that while PPP loan forgiveness is excluded from gross income, as “tax-exempt” income it can be included in a taxpayer’s gross receipts for other purposes of the Code. For example, the IRS noted that “tax-exempt” income is included in the gross receipts test for purposes of determining whether a taxpayer qualifies to use cash accounting as a “small business taxpayer.” I.R.C. §448(c). The IRS also stated in the Notice that tax-exempt income is also counted for purposes of certain return filing requirement thresholds including that for tax-exempt organizations. See I.R.C. §6033.
The IRS also stated in Rev. Proc. 2021-48 that a taxpayer in receipt of PPP forgiveness can treat the income as received or accrued when the expenses that are eligible for forgiveness are paid or incurred, or an application for loan forgiveness is filed, or the loan forgiveness is granted. If the loan is only partially forgiven, the IRS stated that adjustments are to be made on an amended return, information return or as an administrative adjustment request.
Note: To the extent that PPP loan forgiveness is treated as gross receipts, the rules of Rev. Proc. 2021-48 apply for purposes of determining the timing and reporting those gross receipts.
Rev. Proc. 2021-48 is effective for any tax year that a taxpayer pays or incurs eligible expenses, as well as for any tax year that a taxpayer applies for or is granted PPP loan forgiveness.
The IRS also issued Rev. Proc. 2021-49, 2021-49 IRB, in which it provided guidance on the manner in which partners and partnerships allocate among partners in accordance with I.R.C. §704(b) each partner’s distributive share of loan forgiveness and associated deductions. Relatedly, the IRS noted how a partner’s basis adjustment in the partner’s interest is to occur under I.R.C. §705.
In Rev. Proc. 2021-50, 2021-50 I.R.B., the IRS provided guidance on the filing of amended returns by partnerships (Form 1065 and K-1) for tax years ending after March 27, 2020, which must be filed by the end of 2021 with the “Amended Return” box checked. An eligible partnership must have filed Form 1065 and issued K-1s for the partnership tax year ending after March 27, 2020, and before the IRS issued Rev. Procs. 2021-48 and 2021-49 (and satisfy certain other requirements).
Note: Only a partnership that is an “eligible BBA partnership” can utilize the provisions of Rev. Proc. 2021-50 for purposes of amending returns. Such a partnership is one that is subject to the Centralized Partnership Audit Regime that is effective for tax years beginning after 2017. The new audit process was created under the Bi-Partisan Budget Act (BBA) that was signed into law in late 2015. A partnership is subject to BBA unless it has 100 or fewer partners, all of whom are either individuals, C corporations, foreign entities that would be treated as a C corporation if it were domestic, S corporations or estates of deceased partners, partnership and makes an annual election out of the BBA on a timely filed Form 1065.
Under the Tax Cuts and Jobs Act (TCJA), business meal expenses are only fifty-percent deductible (with some limited exceptions) if they are not lavish or extravagant, are incurred when the taxpayer (or an employee of the taxpayer) is present and are for the taxpayer or business associate. Business meals include meals incurred during travel away from home, including meal per diem expenses. In addition, deductible meals include the cost of meals for a sole proprietor or business associate that are ordinary and necessary expenses paid or incurred in carrying on a trade or business.
Business meals or snacks provided in a restaurant or at the business premises would are 50 percent deductible under the TCJA. Likewise, food and beverage expenses provided on the business premises primarily for the convenience of the employer are typically 50 percent deductible. The same is true for meal expenses for employees or other attendees at a business meeting in a hotel, or when traveling away from home on business.
In late 2020, the Consolidated Appropriations Act (CAA) became law. The CAA included a provision making all business meals that a restaurant provides to be fully (100 percent) deductible. A restaurant is defined as having a primary business of preparing meals for consumption either on site or off. That definition eliminates grocery stores as well as convenience stores.
In Notice 2021-63, 2021-49 I.R.B., the IRS indicated that a business that reimburses employees for meals via per diem qualifies for the 100 percent meal deduction for 2021 and 2022. The employee need not show that the meal was from a restaurant.
Infrastructure Investment and Jobs Act (IIJA)
Cryptocurrency. In the recently enacted IIJA, an information reporting requirement for cryptocurrency was added. The bill amends I.R.C. §6045 by creating an information reporting requirement for “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” A “digital asset” is “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” These assets are now defined as “securities” that trigger the information reporting requirements of I.R.C. §6045 and a Form 1099-B. IIJA, Title V, §80603.
The information reporting applies to businesses receiving at least $10,000 in digital assets. How the information is to be acquired that needs to be reported is not certain. Presently, a group of Senators is working on additional legislation designed to provide greater clarity.
Employee Retention Credit (ERC). The IIJA repeals the ERC effective for the fourth quarter of 2021 – except for a “recovery startup business” - a business that began operations on or after February 15, 2020, and has average annual gross receipts of $1 million or less. IIJA, Title V, §80604.
The retroactive (at least partially) repeal of the ERC for the fourth quarter will impact employers that were anticipating receiving the ERC during the last quarter of 2021. Those employers likely reduced tax deposits and may have accounted for the ERC in their budget projections. Any underpaid payroll taxes and associated employment tax compliance issues will need to be determined. It remains to be seen whether the IRS will grant relief on this issue.
Tax Ethics Seminar/Webinar
On December 10, I will be teaching a 2-hour tax ethics course. The session will originate from the law school and there is limited seating available for in-person attendance. The class will also be available online. I will be focusing on the practical application of the ethical rules to tax practice – a scenario-based approach to looking at how the ethical rules apply to various client situations. If you are in need of two hours of ethics, I encourage you to attend – either in-person or online. You can learn more about the event and register here: https://www.washburnlaw.edu/employers/cle/taxethics.html.
The tax mill never seems to stop churning out more developments. If the Senate and House reach an agreement over the “porkulus” bill, there will be more “tax stuff” to write and talk about.