The coming month will be a critical time for tax accountants as they face problems on many different fronts. According to observers, old laws, new laws, stimulus payments, and paycheck protection issues will make matters difficult for creators and taxpayers alike – not to mention the late start of the tax season.
The filing season itself will be “one for the ages,” said Mark Steber, senior vice president and chief tax officer at Jackson Hewitt.
“There are so many issues to watch out for – far more this year than any other year in the past decade. There are changes in the tax year, changes in life as a result of the COVID pandemic and changes in life only as part of life (marriage, divorce, wishing to have children, buying a house, etc.), ”said Steber.
“We’re still picking up things from the Tax Cuts and Jobs Act, and we’re now looking at the CARES Act and the SECURE Act and the new Economic Act,” he continued. “People have questions about the economic impact payments they have received and the new payments they will receive [currently receiving]. There are changes to retirement plan borrowing, a look back at the recovery of part of the Earned Income Tax Credit and Child Tax Credit, while a new round of PPP applications are being adopted. There is a lot to do in the first month. “
In addition to these changes, there are unemployment-related issues, Steber noted. “At its peak, unemployment was close to 60 million,” he said. “This has an impact on 60 million tax returns. Many taxpayers will have received unemployment benefits for the first time. Unemployment benefit is counted as income. There can be different types of unemployment and some taxpayers may have chosen to apply withholding tax to their taxable benefits. But many have not, or may feel that the benefits are not taxable. “
There are other effects of unemployment, Steber said. “Unemployment benefits do not count as income for Earned Income Credit or Child Tax Credit purposes,” he said. “And some states tax unemployment benefits, others don’t.”
For many taxpayers who have been affected by reduced working hours or dismissals due to the COVID economy, self-employment has become a viable option. “But now you are facing another set of tax considerations, with new ways to report different types of income and different types of deductions,” noted Steber.
Despite the increasing number of employees working from home during the pandemic, the home office deduction can only be claimed by self-employed.
“In a Jackson Hewitt survey, 80 percent of taxpayers said they believed they would get some kind of tax break by working from home, but the deduction can only be made by the self-employed,” said Steber. “Because of the pandemic, a lot more people have a home office, but a lot more people don’t necessarily get the home office tax deduction.”
The tax ramifications of any federal tax changes will also be very confusing, Steber predicted. “All states that have an income tax have to deal with whether they will follow federal changes or have their own rules. It will be the start of a complicated and confusing filing season and will require an effort by everyone. “
A late start
Mark Luscombe, Principal Analyst at Wolters Kluwer Tax & Accounting, agreed that unemployment will be a major issue this tax season. “It’s not a change in tax law, but it’s worth noting that the number of people receiving unemployment benefits has been enormous,” he said. “Stimulus payments are not taxable, but unemployment benefits are taxable, which will confuse many taxpayers.”
In theory, taxpayers have had the option of removing withholding tax when filing for unemployment, Luscombe explained: “However, we don’t know how many actually understood what this means. Also, states were not prepared for the $ 600 additional unemployment benefit and may not have designed their systems to remove withholding tax. So there could be people who asked for withholding tax but did not receive it. “
Those who looked for other sources of cash during the pandemic could also face tax issues, Luscombe stressed. “If a taxpayer has withdrawn money from their retirement account because of coronavirus problems and doesn’t intend to repay it within three years, they should pay a third of the tax on their 2020 tax return,” he said. “And students who have withdrawn money from a 529 plan and education savings accounts for tuition and tuition and are in a situation where their university has lowered fees have 60 days to return the money to the fund for penalties avoid.”
The Internal Revenue Service announced on January 15, 2021 that the filing season would begin on February 12, 2021. There has been some thought that an earlier proposed date would be postponed, according to Luscombe, as the IRS continues to process stimulus payments and people need to know if they received their payments via a direct deposit or debit card before filing their return.
In its announcement, the IRS stated that the additional time will allow it to do additional programming and testing of IRS systems following changes to the Tax Act of December 27, 2020 that allowed for a second round of payments for economic impact and other benefits .
“Anyone who received a stimulus payment should receive Notice 1444 for the first round of payments and Notice 1444-B and give them to their preparer,” Luscombe said. “If they didn’t get the credit they were entitled to in the form of a prepayment, they can get it in the form of a refundable balance on return in 2021.”
From the return to the loan
According to Barbara Weltman, tax attorney and author of Small Business Taxes 2021, the biggest problem in the first month of the filing season may not be filing a tax return but helping clients process the second round of the PPP program.
The US Small Business Administration, in consultation with the Treasury Department, reopened the PPP loan portal on January 15, 2021 for PPP-eligible lenders with assets of no more than $ 1 billion for applications for first and second drawing. The portal was fully opened on January 19, 2021 for all participating lenders to submit loan applications to the SBA for the first and second drawing.
With tax pros this close to the start of tax season, they may be torn between the PPP and their usual filing. “Practitioners are encouraged to help companies get the money they need while also juggling tax returns,” Weltman said. “The main challenge will be finding time to devote to advising on PPP loans when preparing tax returns.”
According to Weltman, a problem for practitioners, especially in the first month, will be the conversations they will have to have with customers.
“These can be time consuming so it is best if they are dealt with at the beginning of the filing season,” she said. “For example, the self-employed could choose to defer the employee’s share of social security taxes for part of 2020. When it’s time to get your 1040 ready, they’ll have to decide whether or not to postpone this year, “she said.” There’s a new Part III of Schedule SE that will determine the maximum shift If you choose to postpone it, you have to pay half of it by the end of 2021 and the other half by the end of 2022. “
Another conversation practitioners need to have with their customers is about net operating losses, Weltman added.
“This one could be difficult,” she said. “NOLs emerging in 2020 have a five year redemption, but a taxpayer may waive the redemption. Given the potential for higher tax rates, it can be more valuable to carry a loss forward – it depends on the individual taxpayer’s situation. There is no single ‘right’ answer. “
And what is important to the practitioner, a discussion of fees might be appropriate.
“Much of the work is automated and practitioners will rely on their software, but with all the legislative changes and uncertainties, they will still work longer and harder,” Weltman said. “And they have to be compensated for their work.”
A new environment for some
During the first month, many of the clients seeing practitioners will be those submitted earlier last year, commented Roger Harris, president of Padgett Business Services.
“We had already ended their return before the pandemic so it will be a new way for many of them to do business with us,” he said. “It will vary where you are, but most of us will try to avoid personal contact as much as possible. Where this needs to be done, we will practice social distancing and masking and ensure that we create an environment that is both comfortable and safe for our customers to do. “
“During the first month of the sign-up season, we will be raising additional PPP loans for our corporate customers,” said Harris. “And we need to look back to see which of the first PPP loans were eligible for the Loan Loan. The CARES Act added the ERC, a refundable tax credit equal to 50 percent of qualifying wages of $ 10,000 per year per employee. But under the CARES Act, you couldn’t use the ERC if you had a PPP loan. “
The Consolidated Appropriations Act of 2021 makes the ERC available as long as credit is not requested for wages paid with the proceeds of an issued PPP loan.
“You can’t use the same wages to make credit and get the credit,” he said. “Now we have to go back and see which of our customers might be eligible for the ERC.”