The IRS has added more clarification in the final Form 1120S instructions[1] about how expenses paid with PPP loan funds that lead to debt forgiveness should be treated in the computation of the accumulated adjustments account (AAA) and the other adjustments account (OAA).

On January 3, 2022, the IRS released draft instructions that first indicated that expenses paid with PPP loan proceeds should be treated as expenses related to tax exempt income under IRC §1368(e)(1)(A) and excluded from the calculation of AAA. However, some advisers weren’t sure how exactly this should be reported on Schedule M-2.

In final versions of instructions to Forms 1120S[1] and Form 1065,[2] the IRS has provided additional guidance on reporting PPP loan forgiveness on those forms using the methods outlined in Revenue Procedure 2021-48.

When the IRS released the final regulations updating the required minimum distribution and other life expectancy tables, the agency noted that it would be releasing additional guidance to deal with the impact on substantially equal payments. In Notice 2022-06[1] the IRS has now released that guidance.

A number of tax professional organizations, including the AICPA and NAEA, have sent a joint letter to the IRS calling for the agency to take actions to reduce the burden on taxpayers from the agency’s extreme backlog in processing tax returns and dealing with correspondence.[1]

The organizations signing the letter are:

• American Institute of CPAs (AICPA)

• Latino Tax Pro

• National Association of Black Accountants, Inc. (NABA)

• National Association of Enrolled Agents (NAEA)

• National Association of Tax Professionals (NATP)

• National Conference of CPA Practitioners (NCCPAP)

• National Society of Accountants (NSA)

• National Society of Black Certified Public Accountants, Inc. (NSBCPA)

• National Society of Tax Professionals (NSTP)

• Padgett Business Services

• Prosperity Now

The individual tax filing season will open on January 24 when the IRS begins accepting returns the agency announced in News Release IR-2022-08.[1] The release also discusses a number of other issues related to the upcoming filing season.

The IRS updated the 2020 unemployment compensation exclusion FAQ to allow certain taxpayers to keep an erroneous reduction of their federal taxes when the IRS corrected their 2020 Form 1040 to compute the excludable unemployment compensation following changes made in the American Rescue Plan Act.[1] The issue affects certain married taxpayers filing joint returns in non-community property states who received unemployment compensation in 2020.

Most advisers are aware the IRS faced a number of challenges beginning in 2020 that carried into 2021. The enactment of the American Rescue Plan Act which made certain retroactive changes to the law that applied to 2020 didn’t help, especially not coming just over two months after Congress made a number of late year changes to 2020 tax law at the very end of 2020.

The IRS has now disclosed one particular error the agency made trying to deal with the American Rescue Plan Act’s changes to the taxation of unemployment compensation. The error resulted in the IRS computing an erroneously low total federal tax for certain taxpayers on their 2020 income tax return. The agency has now announced those taxpayers will not be required to amend their 2020 tax return or pay the additional tax that they should have paid.

A potential problem for S corporations that received PPP loan forgiveness who had accumulated earnings and profits involved the proper classification of the expenses paid with the PPP loan proceeds in the computation of the accumulated adjustments account (AAA). A post by Dan Chodan, CPA on Twitter on January 3, 2022 pointed out that the IRS had now given guidance on this issue.[1]

The issue arose after Congress, in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act signed into law on December 27, 2020, provided that expenses paid that led to the forgiveness of the PPP loan would be deductible for federal tax purposes, overriding IRS Notice 2020-32 that provided such expenses would not be deductible for federal tax purposes.

Determining the fair market value for a closely-held business for various tax purposes depends upon valuations assuming a willing buyer and willing seller aware of all relevant facts. In CCA 202152018[1] the IRS finds that the valuation used by a taxpayer in attempting to set up a grantor retained annuity trust (GRAT) did not consider the fact that there was a high likelihood the entity being valued would be likely involved in a lucrative merger in the near future.

The Eleventh Circuit Court of Appeals has ruled invalid a portion of regulations adopted in 1986 related to contributions of conservation easements in the case of Hewitt v. Commissioner.[1] The issue involved the Tax Court’s finding, which the appellate panel overruled, that the easement failed to satisfy the “protected-in-perpetuity” requirement found at IRC §170(h)(5), as it violated the judicial extinguishment formula found at Reg. §1.170A-14(g)(6)(ii). The panel found that Treasury had violated the Administrative Procedures Act by failing to address comments provided on this issue as part of issuing the regulations in final form.

The Tax Court ruled that a taxpayer’s attempt to make a deposit rather than a payment of taxes failed when the tax had been assessed prior to the date the attempted deposit was made in the case of Ahmed v. Commissioner, TC Memo 2021-142.[1]

The IRS in News Release IR-2021-256 reminded taxpayers who deferred paying employer FICA for a portion of 2020 or a portion of their 2020 self-employment tax that a deadline is approaching on January 3 to pay a portion of the deferred taxes.[1]

The release explains the option provided to qualified taxpayers in 2020:

As part of the COVID relief provided during 2020, employers and self-employed people could choose to put off paying the employer’s share of their eligible Social Security tax liability, normally 6.2% of wages. Half of that deferral is now due on January 3, 2022, and the other half on January 3, 2023.[2]

The IRS has announced an additional extension of time for certain tax relief for all or part of six qualifying states related to Hurricane Ida.[1] Before this news release, affected taxpayers had until January 3, 2022 to file various tax returns and make various tax payments. The news release has moved that date to February 15, 2022.

While the IRS did not provide a reason for granting this extension, it seems likely that complaints that January 3, 2022 was during the IRS’s annual shutdown of both the individual and business electronic filing systems had a role in this relief. Those filing on the original January 3, 2022 extended relief date would have been required to file the returns in paper form rather than electronically.

In Chief Counsel Advice 202151005[1] the IRS discusses the lack of linkage between what is a rental for passive activity purposes under IRC §469(c)(2) and the exclusion of real estate rentals from self-employment income under IRC §1402(a)(1). The memorandum also discusses the application of the self-employment tax rules to two specific situations.

In News Release IR-2021-255[1] the IRS gave information on the letters that will be sent to taxpayers documenting the amounts of the Advance Child Tax Credit and third round of Economic Impact Payments that will provide information necessary to complete the taxpayers’ 2021 individual income tax returns.

The letters that taxpayers will receive are:

• Letter 6419, 2021 Advance CTC

• Letter 6475, Your Third Economic Impact Payment[2]

The release states “[t]he IRS urged people receiving these letters to make sure they hold onto them to assist them in preparing their 2021 federal tax returns in 2022.”[3]

The United States and Malta have entered into a Competent Authority Agreement (CAA)[1] on the meaning of a “pension fund” under the Malta-US income tax treaty. While that might seem like a matter of little consequence, the agreement is meant to quash what the IRS had identified in July as a 2021 “Dirty Dozen” scam that was being used to escape tax on the sale of appreciated property.[2]

The July 2021 IRS news release summarized the promoted program as follows:

Potentially abusive use of the US-Malta tax treaty

Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.[3]

In August of 2021, the Wall Street Journal published an article describing the structure in more detail.[4]

American Rescue Plan Act Section 9675 revised IRC §108(f)(5) to provide a temporary rule for the exclusion from income of certain discharges of student loan debt. In Notice 2021-01[1] the IRS provides that lenders are not to issue Forms 1099-C, Cancellation of Debt, for discharges that qualify for this relief.

The Notice describes the income exclusion as follows:

Under this special rule, gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of loans provided for postsecondary educational expenses, whether the loan was provided through the educational institution or directly to the borrower. Such loans must have been made, insured, or guaranteed by the United States, or an instrumentality or agency thereof, a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, or an eligible educational institution. Additionally, certain private education loans and loans made by certain educational organizations qualify for this special rule.[2]

The IRS has released the mileage rates for 2022 in Notice 2022-3.[1] A taxpayer using the standard mileage rates must comply with the requirements of Revenue Procedure 2019-46.[2]

The standard mileage rate for 2022 will be 58.5 cents per mile for business use.[3] The portion of this business mileage that is treated as depreciation is:

• 25 cents per mile for 2018,

• 26 cents per mile for 2019,

• 27 cents per mile for 2020,

• 26 cents per mile for 2021, and

• 26 cents per mile for 2022.[4]