the IRS clarifies that when a taxpayer satisfies all of the requirements (having qualified expenses during 2020) and expects to apply for forgiveness of the related PPP loan, those expenses aren't tax-deductible for 2020, even when the application for forgiveness isn't made until 2021.
Here are some of the most significant changes, with suggested year-end tax planning moves for 2020, assuming the proposals are enacted.
Most significantly, the final regulations are effective for required minimum distributions for tax years after 2021. Under the proposed regulations, the new rules would be effective for tax years after 2020.
Taxpayers located in California wildfire counties get tax return due date extension.
The requirement to reduce debt forgiveness for reductions of full-time equivalent employees or reductions in salaries or wages has been waived for these borrowers.
The SBA has issued PPP loan forgiveness guidelines for owner employees, home office expenses, subleased space and related party rent expenses
Normally distributions from IRAs that are required minimum distributions aren’t eligible to be rolled over. Required minimum distributions are amounts that are required to be distributed that are based on the life expectancy of the account owner once the account owner reaches age 70 ½ or usually based on the initial beneficiary’s life expectancy for an inherited IRA account.
As a relief measure, the CARES Act suspended required minimum distributions for 2020. The reason was the value of many IRAs had fallen and distributions would deplete the value of the account. The CARES Act was passed on March 27, 2020, so many IRA owners and beneficiaries had already taken distributions.
In addition to the prohibition from rolling over required minimum distributions, there are two other restriction blocking potential rollovers of the distributions. (1) Beneficiaries of inherited IRAs are prohibited from making rollovers and (2) Taxpayers are limited to one IRA rollover for a 12-month period.
The IRS provided additional relief from these requirements in Notice 2020-51. The IRS designates restoration of 2020 IRA required minimum distributions as “repayments.” As repayments, the restoration of the funds to an IRA is not a rollover. Since they are not rollovers, beneficiaries of inherited IRAs are permitted to make restorations and the limitation to one IRA rollover for a 12-month period doesn’t apply.
In order to qualify for this relief, a restoration must be completed by August 31, 2020.
If the deadline is missed, the only way to restore the funds will be as a rollover, subject to the once in a 12-month period limit and not available for inherited IRA accounts.
If you have a question about this matter, consult your tax advisor.
The U.S. Supreme Court has agreed to hear California v. Texas (U.S. Supreme Court Docket 19-840.) This case challenges the constitutionality of the Affordable Care Act, nicknamed Obamacare.
If the Supreme Court rules the Affordable Care Act to be unconstitutional, taxes and penalties enacted as part of the Act could be eliminated and taxpayers could apply for refunds of those taxes. These include an extra 0.9% Medicare tax and the 3.8% net investment income tax.
Consider sending a protective claim to the IRS by July 15, 2020 for the tax year 2016. Spidell Publishing has posted a suggested simple form for a claim. Here is a URL for the form. http://www.mmsend63.com/link.cfm?r=4MGaSk-8do9OSq5rWJozRA~~&pe=MLxUYHWRMJTah2hlVsRhufQV3c6p4SCiez5_l6NGi1-_VLwkya4_xaxcLOOmNGM5Qkg_z_cN4pc5N38k-Y3xTA~~&t=QIJYj7V5qtg-xGkCJ-dZlw~~
You might remember the Supreme Court previously upheld the Affordable Care Act as constitutional during 2012 in National Federation of Independent Businesses v. Sebelius, because the penalties enacted in that Act to enforce the Mandate that everyone have medical insurance were considered to be taxes and Congress has the power to levy taxes under the U.S. Constitution.
One of the provisions of the Tax Cuts and Jobs Act of 2017 was to change the penalty rate to zero.
The Fifth Circuit Court of Appeals ruled on December 18, 2019 that since the “tax” for the Mandate no longer applies, the Mandate is unconstitutional, and so is the Affordable Care Act.
California and other states are contesting the decision of the Fifth Circuit Circuit Court of Appeals.
This is a last-minute development. Personally, I question whether the U.S. Supreme Court would retroactively strike down the Affordable Care Act when they previously upheld it and the penalty “tax” applied before 2019. But I could be wrong. If you don’t file a protective claim and the U.S. Supreme Court rules Obamacare was unconstitutional during 2016, you won’t be able to recover the taxes for that year.
Tax return preparers are probably already occupied with finishing 2019 income tax returns and extensions for the July 15, 2020 deadline.
If you paid these taxes and can get through to your tax advisor, discuss this matter with her or him.
President Trump signed legislation (S.4116) on July 4, 2020 extending the application deadline for Paycheck Protection Program (PPP) loans from June 30, 2020 to August 8, 2020.
Paycheck Protection Program loans were enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act.)
Certain businesses can apply for up to $10 million. If certain requirements are met, the loan principal will be forgiven, tax free. At this time, expenses paid using the loan proceeds are not tax deductible.
At this time $130 billion of $660 billion allocated hasn’t been committed for loans, yet.
If you haven’t been approved for a PPP loan and would like to apply, see your banker.
The CARES Act eliminated required minimum distributions for 2020. (Distributions are still required for a defined benefit account, which is basically an employer-provided retirement annuity.)
As a general rule, you have to start taking distributions from a retirement account, like an IRA or a 401(k), when you reach age 72 (as amended by the SECURE Act.) The required minimum distribution is computed based on your life expectancy each year. This rule has been waived by the CARES Act for 2020.
If you don’t need the money for living expenses, it’s best not to take money out of a retirement account, so that it can continue to enjoy tax-deferred growth. (If you do need the money for living expenses, this discussion doesn’t apply to you. There’s no requirement to roll over what would otherwise be a required minimum distribution.)
Without this exception for 2020, distributions that are required minimum distributions wouldn’t be eligible for a rollover to an IRA or other qualified retirement account.
The elimination of required minimum distributions created a problem for some taxpayers. Taxpayers usually can only roll over one distribution in a 12-month period. Many retired persons take their distributions in monthly installments to make it easier for them to budget funding their expenditures.
In addition, rollovers usually must be completed within 60 days. The IRS previously extended the due date to complete a rollover for a distribution made during the period from February 1, 2020 to May 16, 2020 to July 15, 2020 with Notice 2020-23.
Now the IRS has announced more relief for retirement account distributions received during 2020 that would otherwise be required minimum distributions in Notice 2020-51. Here is a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-51.pdf
- The due date to complete a rollover of any distribution that would otherwise be a required minimum distribution during 2020 is extended to be not before August 31, 2020.
- Any distribution that would otherwise be a required minimum distribution paid during 2020 is not subject to the one rollover per 12-month period limitation. In other words, if multiple payments have been received that would otherwise be required minimum distributions, the total of all of the payments can be rolled over.
- The IRS clarified that a plan participant with a required beginning date of April 1, 2021 (became age 72 during 2020), is not required to take an initial distribution on that date. Unless there is a later tax law change, the plan participant will still have to receive a required minimum distribution for 2021 during 2021. Any distributions made during 2021 will first be applied as required minimum distributions and will ineligible for a rollover.
- Even though no distribution is required when the required beginning date is April 1, 2020 or April 1, 2021, those dates will still be the required beginning date for every other purpose, such as determining how distributions must be paid after the death of the participant.
IRAs don’t have to be amended in order to receive a rollover contribution of required minimum distributions. Employer-provided defined contribution retirement plans (like 401(k)s) do have to be amended to accept these rollover contributions. Notice 2020-51 includes a sample amendment for a defined contributions plan to accept these contributions.
Notice 2020-51 clarifies that payments that are part of a series of substantially equal periodic payments under the “RMD method” (commenced before age 59 1/2) aren’t considered “required minimum distributions” for the 2020 waiver. If the payments are stopped in 2020 (other than because of death or disability) prior to age 59 1/2 (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification so that ALL of the payments made under the series are subject to an early distribution recapture penalty tax.
If you already received what would normally be required minimum distributions during 2020, consider rolling them over by August 31, 2020.
If you haven’t received what would normally be a required minimum distribution but have one scheduled for later this year, consider notifying the plan administrator to cancel the distribution.
Also consider that Roth conversions aren’t limited to one per year. Considering the stock market has been soft, 2020 may be a good year to make one or more Roth conversions.
If you have questions about these matters or need help with your tax and financial planning, consult with your tax advisor and financial advisor. You can also write to me at firstname.lastname@example.org.