Tax News & Views Forgiveness and Cliffs Roundup

June 17, 2020

New PPP Rule Clarifies Payroll Costs Eligible for Forgiveness - Eric Yauch, Tax Notes ($). The SBA has updated Paycheck Protection Program rules to reflect legislation modifying the program rules. From the article:

The interim final rule released June 16 says companies can spend up to $46,154 per individual on payroll costs over the extended 24-week covered period to qualify for loan forgiveness. Payroll costs also include covered benefits for employees, but not owners, including healthcare expenses and retirement contributions.

The rule also has good news for gig economy workers:

The Administrator, in consultation with the Secretary, has determined that it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C or F to either eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period per owner in total across all businesses.

For Schedule C filers without separate rent, utility or payroll costs, this means the whole loan will be forgivable.

SBA Finally Clarifies PPP Loan Forgiveness Rules: Full Forgiveness For Self-Employed Borrowers - Brian Thompson, Forbes. "The unpublished version of the update ensures full forgiveness for self-employed, freelancers and independent contractors who took the maximum loan amount based on 2.5 times their 2019 monthly income."

Remember, there are still PPP funds available if you have Self-employment earnings and have yet to apply for a loan.

New 24 Week Limits Announced for Employee Payroll Costs and Owner Income Replacement for PPP Loan Forgiveness - Ed Zollars, Current Federal Tax Developments.


Weighing the Benefits of Permitting Business Credit Cashouts in Phase 4 Economic Relief - Garrett Watson, Tax Policy Blog. "As policymakers explore options for additional business tax relief in “Phase 4” of coronavirus relief legislation, one idea that has received renewed attention over the last week is allowing businesses to cash out business tax credits allowed under Section 38 of the Internal Revenue Code. This proposal would be strengthened by also permitting acceleration of firms’ accrued net operating loss (NOL) deductions and designing the proposal so that firms can quickly convert these tax assets into cash."


Stepping back from the ACA Cliff. A couple peered over the cliff in Tax Court yesterday, but a small deduction pulled them from the brink.

The "cliff" here was enacted with the Affordable Care Act tax credit for qualifying health insurance. The credit covers part or all of the cost of health insurance for taxpayers at certain levels. The credit goes away at higher income, but in a strange way: instead of being phased out gradually, at a percentage for each dollar of income, it is eliminated in steps. A household below 400% of the family poverty level may get a significant credit, but it disappears all at once once the 400% level is exceeded.

Under the ACA, taxpayers can get the credit in advance based on their estimated income. However, if their income is higher than estimated, they have to pay the credit back. This is determined on tax Form 8962.

The Taxpayers' "household income" on their return was 63,332. The 400% threshold was $62,920. That $412 of extra earnings would have disqualified them from a tax credit of $5831.20 - which had been taken in advance and would have been due on the taxpayers return.

BUT! The taxpayer had missed a deduction. The taxpayers had Schedule C income of $662. This allowed them to claim an above-the-line deduction for health insurance of $662 on their return. The Tax Court allowed the deduction, bringing their income just below the 400% cutoff and saving them $5,832.20.

The moral? Be careful when dealing with ACA credits - a little income can mean a lot of tax. And remember to take your self-employed health insurance deduction.

Cite: T.C. Memo. 2020-87

Related - CBO: Tangled Web of Welfare Programs Creates High Tax Rates on Participants


IRS alert: Economic Impact Payments belong to recipient, not nursing homes or care facilities - IRS. "The payments are intended for the recipients, even if a nursing home or other facility or provider receives the person's payment, either directly or indirectly by direct deposit or check. These payments do not count as a resource for purposes of determining eligibility for Medicaid and other federal programs for a period of 12 months from receipt. They also do not count as income in determining eligibility for these programs."


Minnesota Lawmakers Propose Tax Relief for Damaged Property - Carolina Vargas, Tax Notes ($). "Businesses damaged or destroyed by recent civil unrest in Minneapolis and St. Paul would receive tax breaks and financial resources under a proposal by Democratic-Farmer-Labor lawmakers in the Minnesota House."

Related: RELEASE: Rep. Lee applauds introduction of PROMISE Act for destroyed, damaged businesses


Commemorating the Second Anniversary of the Wayfair Decision - North Dakota Tax Commission Press Release. "To-date, the state of North Dakota has collected slightly over $43 million in sales and use taxes from remote sellers delivering products into the state. North Dakota cities and counties that impose local sales taxes have received nearly $15 million through the first half of 2020."

If you have sales in other states and haven't examined your exposure to their sales taxes, you may be racking up a big future tax bill.

Related: States Respond to SCOTUS Wayfair Decision.


Illinois Auditor Releases Scathing Report on EDGE Tax Credit - Aaron Davis, Tax Notes ($). "A sweeping audit of Illinois’s job creation tax credit revealed a large swath of missing records, a lack of basic information monitoring, and data that conflict with agency reports."

Link to audit here.

Rhode Island's happy and sad tax form signals - Kay Bell, Don't Mess With Taxes. "Yep, you get a frowny face on line 15c, which is where you enter the amount of tax due that you must send in with your Form RI-1040."


Interview: The Deal With Conservation Easements: A Traditionalist's View - Kristen Parillo, Tax Notes Opinions Blog. "The sole issue here is that these deals rely on grossly inflated appraisals to come up with a grossly inflated income tax deduction."


Maybe it was just good timing? "A Tax Court judge has ordered a Tennessee partnership to explain how it valued a conservation easement at $155.5 million when the property was apparently worth around $33 million just three days earlier," reports Kristen Parillo in Tax Notes ($). 

The report addresses a "designated order," a procedural ruling by Tax Court Judge Lauber. The order explains:

The property subject to the easement (Property) consisted of a 3,713-acre tract of land in Tennessee. In September 2013 Lindsay Land LLC transferred ownership of the Property to Coal Holdings. On October 14, 2013, LCV Fund XII acquired a 98.99% interest in Coal Holdings for $32.5 million. At that point, the Property appears to have been Coal Holdings' only significant asset. Three days later, on October 17, 2013, Coal Holdings conveyed a conservation easement over the Property to a land trust. On its Federal income tax return for 2013, Coal Holdings claimed for this donation a charitable contribution deduction of $155.5 million.

Conservation easements are a popular way to set aside land for preservation without development. They are encouraged by federal tax breaks and, in some states (including Iowa), tax credits. They are a legitimate and popular tool. Yet the tax breaks have led to a mini-industry of syndicated easement tax shelters, which have come under IRS scrutiny

The value of a conservation easement is the difference between the value of the property before the permanent development restrictions are put in place and the value of the property subject to the restrictions. 

Judge Lauber says the taxpayer in this case has some explaining to do to avoid a 40% gross valuation misstatement penalty: 

If the entire property was worth about $33 million on October 14, on what specific facts does petitioner rely to urge that the Property increased in value by at least $44.75 million during the ensuing three days?

The moral: There's nothing wrong with conservation easements as a tax planning tool. But if your deduction requires the property to multiply in value within days, that might not be... realistic.



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