The Small Business Administration has issued information on tax reporting for payments made under §1112 of the CARES Act.[1] That provision provided that the government, via the SBA, would pay principal and interest for loans covered by §7(a) of the Small Business Act for a period of six months.[2]

Although the Act did not provide any explicit guidance governing whether such payments were to be treated as income by the recipient, Congress did not specifically provide that the amounts were not to be treated as taxable income, unlike the explicit provision treating forgiveness of PPP debt as not being subject to tax.[3]

IRC §61 broadly defines gross income as “all income from whatever source derived, including (but not limited to)” a long list of items, including “[i]ncome from the discharge of indebtedness…”[4] Thus, from the very beginning, it appeared that these payments would represent taxable income to the businesses who had a portion of their debts paid.

The SBA has released an updated version of its Paycheck Protection Program Frequently Asked Questions,[1] adding new question 53 that addresses the Forms 3509 and 3510 being sent to certain borrowers.

The new form, initially reported about on October 30, 2020, is being sent to borrowers who face scrutiny regarding whether their certification that their loan request was necessary given the current economic uncertainty was made in good faith. For those who had a loan of less than $2 million, the SBA had previously stated that their certifications will be deemed to have been made in good faith,[2] so those with loans of $2 million or more are the ones facing scrutiny of their certification.

On November 18, 2020 we noted reports of the IRS Commissioner’s statement that more COVID-related penalty relief was “not going to happen” when speaking to the AICPA National Conference on Federal Taxes, as well as the reaction from the AICPA’s Chief Tax Officer Ed Karl, stating rather pointed disagreement with this decision.[1]

Now the AICPA, along with six other tax groups, has issued a new letter again requesting relief, this time addressed to both Commissioner Rettig and Treasury Assistant Secretary (Tax Policy) (and former interim Commissioner) David Kautter.[2] In addition to the AICPA, which had previously written a letter to which Commissioner Rettig was responding to at the conference, the following groups signed onto this letter:

• alliantgroup, LP

• National Association of Enrolled Agents (NAEA)

• National Association of Tax Professionals (NATP)

• National Conference of CPA Practitioners (NCCPAP)

• National Society of Tax Professionals (NSTP) and

• Padgett Business Services.

The IRS in a news release issued as part of IRS National Tax Security Awareness Week touted the benefits of multi-factor authentication (MFA) for use by taxpayers and tax professionals.[1] Multi-factor authentication (also often referred to as two-factor authentication) is being recommended for use in protecting online accounts, especially those containing sensitive information, due to some of the often-seen issues with traditional username/password log-ins to online systems.

The IRS describes the process as follows:

Designed to protect both taxpayers and tax professionals, multi-factor authentication means the returning user must enter two pieces of data to securely access an account or application. For example, taxpayers must enter their credentials (username and password) plus a numerical code sent as a text to their mobile phone.[2]

As part of the National Tax Security Awareness Week, the IRS announced that the Identity Protection PIN (IP PIN) opt-in program will be expanded to taxpayers nationwide in 2021.[1]

The IP PIN program is one that the IRS began offering a number of years ago to certain taxpayers who had encountered tax-related identity theft, later expanding it to taxpayers who elected to opt into the program in certain states that had more significant levels of tax related identity theft. The IRS had expanded the opt-in program to additional states since then, and in the Taxpayer First Act of 2019 Congress had directed the agency to expand the opt-in program nationwide.

The IRS has issued a frequently asked question page[1] to describe relief for vehicles used in a van pool that may fail to meet the 80% mileage test to be considered a “commuter highway vehicle” due to the COVID-19 pandemic.

The IRS seeks to answer the following question:

For the 2020 calendar year, under what conditions is a vehicle used in a van pool considered a “commuter highway vehicle” for purposes of the qualified transportation fringe benefit requirements under section 132(f) of the Internal Revenue Code (Code) if, during the COVID-19 public health emergency, 80 percent of the vehicle’s mileage for the year is not attributable to trips during which the number of employees transported from their residence to their place of employment is at least 50 percent of the adult seating capacity of the vehicle (not including the driver)?[2]

After the Third Circuit Court of Appeals remanded the case of Bedrosian v. United States[1] to the United States District Court for the Eastern District of Pennsylvania, the District Court concluded that, although the court had originally found Mr. Bedrosian had not willfully failed to report one of his Swiss bank accounts on his FBAR form, when applying the objective standard the appeals panel concluded was the proper standard, that Mr. Bedrosian’s conduct did amount to a willful failure to file the FBAR report.[2]

The difference was significant—if Mr. Bedrosian had willfully failed to report the account, the penalty due would increase from just under $9,800 to just over $1,007,000. In the original case[3] the District Court had concluded that, based on an analysis of Mr. Bedrosian’s subjective intent, the failure to report the account was not willful.

In PLR 202048009[1] a taxpayer asks the IRS to allow him to make a late election under §475(f)(1), a request the agency turned down.

Mark to Market Election

The mark to market election allows a trader to get around the $3,000 annual limit on net capital losses, treating the transactions as leading to ordinary income and loss. However, the taxpayer must agree to “mark to market” any securities held at year end, reporting a gain/loss based on their value at the end of the year, resetting their basis to that level at the beginning of the following year.

The IRS has released final regulations dealing with the revisions made to the unrelated business income tax (UBIT) by the Tax Cuts and Jobs Act (TCJA) in 2017.[1] TCJA added IRC §512(a)(6) which provides:

(6) Special rule for organization with more than 1 unrelated trade or business

In the case of any organization with more than 1 unrelated trade or business—

(A) unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business and without regard to subsection (b)(12),

(B) the unrelated business taxable income of such organization shall be the sum of the unrelated business taxable income so computed with respect to each such trade or business, less a specific deduction under subsection (b)(12), and

(C) for purposes of subparagraph (B), unrelated business taxable income with respect to any such trade or business shall not be less than zero.

The IRS had initially released Notice 2018-67 dealing with these issues in August of 2018, followed up by proposed regulations (REG-106864-18) that were issued in April 2020. These regulations are now being finalized with some modifications.

The key provisions are found in new Reg. §1.512(a)-6, with some modifications made to Reg. §§1.170A-9, 1.509(a)-3, 1.512(a)-1, 1.512(b)-1 and 1.513-1.

The Tax Cuts and Jobs Act limited like-kind exchanges under §1031 to exchanges of real property effective January 1, 2018. The IRS issued proposed regulations in June 2020 [1] to implement these revisions in §1031. In November 2020 the IRS finalized these regulations after making certain changes.[2]

In an earlier article we had discussed reports that the IRS was planning to issue guidance to block borrowers from claiming a deduction for expenses they expected to use for Paycheck Protection Program (PPP) loan forgiveness even if they had not yet applied for or received forgiveness.[1] Now that shoe has dropped with the issuance of Revenue Ruling 2020-27.[2]

The taxpayer in the case of Padda v. Commissioner, TC Memo 2020-154,[1] was able to show material participation in various restaurants by use of the significant participation activity test found in Reg. §1.469-5T(a)(4).

We did cover this case in another article for the separate issue of the taxpayer’s unsuccessful attempt to avoid a late filing penalty for the year under exam. But the taxpayer’s arguments for claiming material participation in the restaurant activities were found far more persuasive by the court, with the taxpayer prevailing on the issue.

IRS Commissioner Charles Rettig told an AICPA online conference on November 17 that blanket penalty relief from late-filing and late payment penalties is “not going to happen” per a report of the session published in Tax Notes Today Federal.[1]

The IRS has updated their FAQ on the Employee Retention Credit (ERC) added by the CARES Act in March to give guidance when an employer acquires stock or assets of another employer that received a Paycheck Protection Program (PPP) loan.[1]

Under the ERC, no credit may be claimed by an employer who received a PPP program loan, regardless of whether or not the employer sought forgiveness of some or all of the loan. This raises a question about what happens if an employer who did not obtain a PPP loan later acquires an employer who did obtain such a loan. Does that employer and related entities now lose access to the ERC due to having acquired a “tainted” entity?

The IRS has issued draft instructions[1] to go with the Draft Schedule K-1[2] issued in July and Draft Form 1120-S[3] issued in August. The draft instructions contain information on the new items G (related to stock ownership) and H (related to loans from shareholders) added to this year’s K-1, as well as a discussion of expenses paid with forgiven Paycheck Protection Program (PPP) loan proceeds.

The Tax Court found that a taxpayer did not reasonably rely on a CPA retained to timely file his tax return in the case of Padda v. Commissioner, TC Memo 2020-154.[1] This was true even though the CPA submitted the return seconds after the clock ticked past midnight on October 15, 2013.

A taxpayer attempted to argue that an LLC into which he had Chase distribute funds from his SEP-IRA was part of a “conduit agency arrangement” via which he had the funds invested in loans on behalf of the IRA in the case of Ball v. Commissioner, T.C. Memo 2020-152.[1] Unfortunately, the Tax Court found that he had full control of the funds at all times, making the entire $209,600 a taxable premature distribution to Mr. Ball.

An issue that has not yet been addressed directly by the IRS is the treatment of certain expenses paid after a taxpayer received a Paycheck Protection Program (PPP) loan when the taxpayer’s tax year end concludes prior to either the filing of an application for or a grant of forgiveness.

The PPP loan program, established by the CARES Act signed into law in March of 2020[1], provided loans to eligible small businesses. If the borrower used the loan proceeds to pay certain eligible expenses, an amount of the loan up to such eligible expenses would be forgiven under the law[2] and such forgiveness would not be treated as taxable income to the borrower.[3]