Basis or bust. There isn't much time left in 2021, but there might be just enough time for S corporation owners to make sure to have enough basis in their stock to deduct their losses.
An S corporation owner needs to jump three hurdles to deduct losses passing through on the K-1.
There needs to be basis.
The basis needs to be “at-risk.”
The losses either need to be “non-passive,” or you need other “passive income” to enable you to deduct a passive loss.
Even if it clears all three hurdles, the loss may still be limited by the tax law's "excess business loss" limitations. These rules, enacted in 2017 and modified in 2020, limit business losses on 2021 1040s to $262,000 for single filers and $524,000 on joint returns. W-2 wages are not considered business income for this purpose.
A taxpayer’s initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses and expenses.
Your basis for taking losses is determined on the last day of the tax year, so if you are short right now, a capital contribution made by December 31 can get you where you need to be. So look at your S corporation income, losses and distributions for this year so far, and see if you need to put some more cash in the company before year-end. Most S corporation owners were required to disclose their stock basis on their 2020 tax returns, so that is a good place to start. If you own all of the company, that can be just a matter of writing a check. Don’t try to be cute and take the money back out on January 1, either.
If you have other owners, it gets more complicated. In that case, a loan to the S corporation might be the way to get you the basis you need. Consult your tax advisor.
Conservation Easement Regulation Is Invalid, Eleventh Circuit Says - Kristen Parillo, Tax Notes ($):
The panel’s opinion reverses and remands a June 2020 decision (T.C. Memo. 2020-89) by Tax Court Judge Joseph Robert Goeke that the appellants, David and Tammy Hewitt of Alabama, couldn’t claim carryover charitable contribution deductions of $2.7 million in 2013 and 2014 for donating an easement over their family farm to Atlantic Coast Conservancy Inc.
The appeals court agreed with the Hewitts that a comment letter from the New York Landmarks Conservancy, which specifically addressed the proposed rule on the treatment of donor improvements, was “significant” for APA purposes and thus should have been addressed by Treasury in the final regs.
The IRS has used this regulation to invalidate conservation easements in a number of cases. The Tax Court upheld the regulation Oakbrook Land Holdings LLC v. Commissioner, 154 T.C. 180 . Peter Reilly, who has covered conservation easement litigation extensively, notes "Oakbrook is representative of one IRS approach - denying deductions based on technical errors."
This might require the IRS to change its litigation approach by attacking valuation problems in conservation easements. Peter quotes Tax Court Judge Lauber:
On its Federal income tax return for 2008, Oakbrook claimed for this donation a charitable contribution deduction of $9,545,000. Oakbrook thus took the position that the land covered by the easement had appreciated in value by about 700% in a single year during the worst real estate crisis to hit the United States since the Great Depression.
Valuation disputes require expert witnesses battling over valuations. That's more difficult than identifying foot-faults in legal documents, but the IRS may need to do more of that.
Link to opinion: USCA11 Case: 20-13700.
Minnesota DOR Nearly Finished Processing Tax Relief Refunds - Carolina Vargas, Tax Notes ($):
The Minnesota Department of Revenue is wrapping up its adjustments to returns filed by taxpayers affected by tax relief in the state budget.
According to a December 29 release, the DOR has processed nearly 524,000 of the approximately 540,000 returns affected by changes to the tax law, which include modifications to the treatment of unemployment insurance compensation and forgiven Paycheck Protection Program loans, enacted in H.F. 9 as part of the state's fiscal 2022–2023 biennial budget.
Paycheck Protection Program (PPP) loan forgiveness - California Franchise Tax Board:
The American Rescue Plan Act (ARPA) (Public Law 117-2) was enacted on March 11, 2021. The ARPA expanded the PPP to include certain nonprofit entities and certain internet publishing organizations. California law does not conform to this expansion of PPP eligibility.
The Paycheck Protection Program Extension Act (PPPEA) (Public Law 117-6) was enacted on March 30, 2021, and extended the covered period of the PPP from March 31, 2021, through June 30, 2021. California law does not conform to this extension and does not allow an exclusion from income for PPP loans made after March 31, 2021.
Related: Here’s What You Need to Know about the Updated PPP Program.
Tax situations where Dec. 31 really matters - Kay Bell, Don't Mess With Taxes. "If you say 'I do' on 12/31, then the Internal Revenue Service considers you married for the whole year. That means when you file your tax return next year, it must be as married filing jointly or married filing separately."
A Look Back at Some Favorite Tax Stories in 2021 - Kelly Phillips Erb, Bloomberg. "It’s always fun for me to look back over the stories that resonated with readers. This year, you cared a lot about stimulus checks and the plan to report your bank information to the IRS. And in an era where TikTok tax advice wasn’t always—er—completely accurate, articles dispelling tax myths and explaining how job perks and fringe benefits actually worked were popular. And planning tips, including year-end moves to make in 2021 and what you needed to know about making charitable contributions, also appealed to readers. Those articles were among my most widely read and talked about of the year."
A Look Ahead: Mo’ BBA Audits, Mo’ Problems - Kristen Parillo, Tax Notes ($). "With the IRS expected to ramp up partnership audits in 2022, a slew of practical implementation questions could emerge as examiners and tax professionals delve deeper into the centralized audit regime."
Amounts Paid After Tax Assessed Were Not a Deposit, Taxpayer's Case Before the Tax Court Rendered Moot - Ed Zollars, Current Federal Tax Developments. "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."
2021 Year in Review – Administrative Matters Part 1 - Keith Fogg, Procedurally Taxing. "The IRS regularly sends out mail on a date other than the date on the correspondence. I don’t condone the practice, but it’s been going on for quite some time. In 2020, however, the IRS sent out millions of letters with the wrong dates and the wrong instructions, creating more confusion than necessary. You can find our posts on these notices here and here."
FBAR – Fifth Circuit, Non-Willful Penalty Multiplies “Per Account” in Bittner Case - Virginia La Torre Jeker, Virginia - US Tax Talk. "If you have FBAR issues, IRS has procedures in place and there may be a penalty-free way to regain compliance. The IRS is being very aggressive with its FBAR penalty position and the courts are not in agreement on the penalty cap. FBAR penalties can wipe out your overseas accounts, but worrying about it is simply not productive."
China Pressures Influencers To Disclose, Pay Taxes By Jan. 1 - Kevin Pinner, Law360 Tax Authority.
Celebrities and livestreamers who don't fully confess and pay taxes owed will be dealt with seriously under the country's laws and regulations, according to notices posted Wednesday by tax authorities in Beijing, Shanghai, Guangdong province, Jiangsu province and Zhejiang province. Each tax authority provided local contact information along with the same notice.
Sounds fun. The Washington Post has more:
Now, influencers who peddle products to fans online are targets in Xi’s “common prosperity” campaign, a wide-ranging crackdown that is bringing celebrities and Internet companies to heel in the name of addressing inequality.
Authorities in Hangzhou hit Internet celebrity Viya with an unprecedented $210 million fine last week for evading taxes. Commentators, state media and other government bodies soon piled on the criticism. The live-streaming industry is among the “most vivid examples of industries that suck blood from the real economy,” one commentator wrote.
Because nobody knows what the "real" economy is better than authorities in Hangzhou.
Tax Court Upholds IRS Levy on State Tax Refund - Caitlin Mullaney, Tax Notes ($). "An IRS Appeals officer didn’t abuse her discretion by upholding a $12 levy on a couple’s state tax refund to be applied to an IRS deficiency, the Tax Court held."
Fortunately, the taxpayers proceeded without an attorney. $12 won't get you much legal help anyway. The IRS, though, apparently needed four lawyers to protect the fisc here.
Link to opinion: T.C.Memo 2021-141.
Mmm... Today is National Bacon Day. But it will be delicious tomorrow too.