Tax News & Views Do the Paperwork Roundup

SBA Issues Guidance and Forgiveness Applications to Conform with PPP Flexibility Act - Kristine Tidgren, Ag Docket:

Note that the new EZ application is available for borrowers who:

• Are self-employed and have no employees; OR

• Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR 

• Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

The (Not Quite) Definitive Guide To Paycheck Protection Program Loan Forgiveness - Tony Nitti, Forbes. "Piecemeal as the guidance has been, with the issuance of the revised application, enough information is available for borrowers to build a solid understanding of how the SBA intends to merge the rules found in the original CARES Act, subsequent SBA regulations, and the recently-enacted Paycheck Protection Program Flexibility Act of 2020 into one final authoritative package."

Government Streamlines Process for Some PPP Loan Forgiveness - Eric Yauch, Tax Notes ($). "The Form 3508EZ and instructions released June 17 allow borrowers that meet criteria to take advantage of the simplified forgiveness application process, which is a good start, Amal U. Dave of Arent Fox LLP said. The simplified version is helpful because it doesn’t require the complicated forgiveness reduction calculations that were previously required, he added."

SBA Issues New Short Form for Forgiveness and Revises Long Form to Take Into Account PPPFA Changes - Ed Zollars, Current Federal Tax Developments. "Some advisors had continued to argue that it wasn’t clear previously that “owner-employees” covered corporate shareholders, but the employee benefits instructions for payroll costs for both forms indirectly make it clear that at least S corporation shareholders are covered by this limit."

We Hear You on Disaster Loss Uncertainty, IRS Says - Eric Yauch, Tax Notes ($). "Casualty loss deductions are generally claimed in the year of the loss. However, losses in a federally declared disaster area may be deducted on the taxpayer’s prior-year return under section 165(i). The statute provides taxpayers that suffered a loss and need cash the opportunity to monetize those losses more quickly and reinvest in their business by reducing prior-year taxes."

After U.S. Declares Impasse on Digital Taxes, Europe Continues Push - Sam Schechner, Wall Street Journal ($). "French Finance Minister Bruno Le Maire said Thursday that France will resume collecting a 3% tax on revenue from digital services if countries from around the world can’t agree on a system for reallocating tax revenues from tech giants by the end of 2020."

States Should Conform to These Four CARES Act Provisions to Enhance Business Liquidity - Katherine Loughead, Tax Policy Blog. The four provisions? NOL carrybacks, business interest deductions, PPP loan forgiveness exclusion, and the "retail glitch" fix, allowing shorter depreciation lives for building improvements.

If you stay long enough, it's not a hotel. An Iowa Declaratory Order holds that PSA Airlines, the operator of American Eagle, doesn't have to pay Iowa's hotel-motel tax when it rents rooms for crews for over 31 consecutive days. "Even though different employees may sleep in the rented rooms on a night-to-night basis, the same employee need not occupy the hotel rooms for the entire thirty-one consecutive days in order to qualify for the tax exemption because PSA Airlines is the 'person' renting the hotel room."

Former Ayrshire city clerk charged with theft - Radio Iowa. Charges stem from an investigation by the office of State Auditor Rob Sand:

Sand says the audit also found money spent on a Christmas party for her and her husband and city council members. He says there was less than $1,000 spent on the Christmas party and around $9,900  in improper disbursement to the former the city clerk...

He says city officials did not implement control recommendations made by the CPA firm that issued a report after examining Ayrshire’s financial transactions in December 2018. 

Small municipal governments can be easy prey for embezzlers, sometimes spectacularly.

Related: How to Prevent Fraud in Your Government - Jason Olson, Eide Bailly.

Tax Issues Associated With Options In Wills and Trusts - Roger McEowen, Agricultural Law and Taxation Blog. "Options can play an important role in transitioning a farming or ranching business to the next generation.  Not only must thought be given to the financial ability of the optionee to exercise the option, the income tax issues triggered upon exercise of the option and, when applicable, the subsequent sale of the property acquired by exercising the option must also be considered."

Could infrastructure week actually be happening? - Kay Bell, Don't Mess With Taxes. "Most of the Highway Trust Fund's revenue — 84 percent — comes from the federal excise taxes on gasoline and diesel fuels. The remaining money for the fund is from a sales tax on tractors and heavy trucks, an excise tax on tires for heavy vehicles and an annual use tax on those vehicles."

Cautionary Notes from CBO on the Effects of Federal Investment - Scott Hodge, Tax Policy Blog. "The CBO reviewed the academic literature on the economic returns to public investments and found that they are relatively modest and about half the returns to private investments."

Paperwork, paperwork, paperwork. The tax law has long has three hurdles for deducting losses from partnerships and S corporations:

1. You have to have basis in your investment to deduct the loss.

2. The basis has to be "at-risk."

3. The losses have to be "non-passive." 

A Salt Lake City CPA tripped over the first and third hurdles in Tax Court this week when the judge found the CPA's paperwork wanting. From the Tax Court opinion:

A partner's basis in a partnership fluctuates because of various events. A partner's outside basis is increased in part by the partner's distributive share of income and the partner's contributions to the partnership.10 Any increase in a partner's share of liabilities or assumption of partnership liabilities also increases the partner's outside basis. A partner's basis is decreased by the partner's distributive share of partnership losses, nondeductible expenses, and distributions...

To establish his basis in King's Dominion, Petitioner submitted a promissory note and the business loan agreement. The agreement states that Mandy Investments lent over $2 million to King's Dominion with Petitioner and Deep Creek as guarantors. Neither contract is fully executed even though Petitioner is the only person who may sign for all four parties. Even if the loan were fully executed, King's Dominion would have incurred the liability on June 1, 2005, 7-1/2 years before 2013. We have no evidence that this loan was outstanding in 2013 and 2014.

It's understandable why a taxpayer might be casual about paperwork for transactions between his own entities. You don't think of documents when you move cash from one pants pocket to another. But if you want to deduct your tax losses, you can't skimp on the paperwork.

The CPA also failed to document his material participation, which is normally based on time spent with the business. Many business operators don't keep a detailed calendar to support their time spent in a business - but if you might be cutting it close, you probably should. The CPA didn't keep a calendar.

Failure to log your time isn't fatal to claiming material participation, as Tax Court Judge Buch explains:

A taxpayer may establish participation “by any reasonable means.” “Reasonable means * * * may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.” Although “reasonable means” may be interpreted broadly, “a post-event ballpark guesstimate” will not suffice. Furthermore, the Court is not “bound to accept the unverified, undocumented testimony of taxpayers.”

The judge found the taxpayer came up short in documenting time spent on a boat dealership:

But Petitioner offered little documentary evidence to corroborate testimony. Petitioner claimed he spent 39 hours in 2013 on the phone but produced no phone records. He claimed that he spent 236 hours in 2013 on inventory, but did not provide any inventory records. Many of the activities the Petitioners testified to performing (inventory, DMV titling, bank account review, vendor orders, trade-in review, boat demos, and hauling boats post-boat show) depended on how many boats SS Marine sold each year, but Petitioner did not provide any sales invoices or other records for either year at issue. And, as previously noted, witnesses could not agree on how many boats were sold...

A large portion of the Petitioners' claimed hours stems from boat conferences. However, Petitioner submitted no credit card records, plane tickets, hotel reservations, brochures from the conferences, correspondence with conference holders, or schedule of events to demonstrate a timeframe for these conferences.

The IRS won this one, but the case can help the rest of us know how to document material participation:

1. A time log or daily calendar with hours is best.

2. A calendar or organizer supported by other documents can work, as long as the documents are timely and overall show that the taxpayer is spending time on the activity.

The Moral? Basis is important, and if you are using related-party transactions to provide basis, you need to do the paperwork. And if you have another job, as our CPA did, you need to keep good records to convince the IRS that you are participating in a side job.

Cite: T.C. Memo. 2020-84

The most famous speech hardly anyone heard. 80 years ago today, an obscure French brigadier general gave a speech from London:

The June 18th speech is seen as a turning point in French national history. The ‘appel’ of ‘Moi, General de Gaulle, à Londres’ was the starting point for la France libre, Free France, a France which did not have to feel dishonour at the course of the war. It was the hope that the Liberation of Paris on August 25th, 1944, was to fulfil. 

The first step of a long journey home.