Taxpayers may face delays in getting their refunds this season, a Treasury watchdog warned, because the Internal Revenue Service is still dealing with last year's backlog and faces difficulties hiring enough workers to process old and incoming returns.

"Of particular concern is the continued challenges in hiring sufficient staff needed to both continue to work backlog inventory and process Tax Year 2020 tax returns at the same time," the Treasury Inspector General for Tax Administration wrote in a report released on Wednesday. "This could further affect taxpayers awaiting refunds and additional Recovery Rebate Credits associated with these Tax Year 2020 returns."

At the end of 2020, the IRS had a backlog of more than 11.7 million paper returns, both individual and business, that needed to be processed. Some taxpayers with unprocessed returns may have trouble contacting the understaffed IRS, further delaying those returns. Additionally, the IRS may need to divert resources for the backlog to the ongoing distribution of the third round of stimulus checks.

"The backlog of returns, correspondence, and other types of work resulting from the pandemic has and will continue to have a significant impact on the associated taxpayers," the report said.

While the IRS increased their hiring goals for the 2021 fiscal year, they "have been unable to hire as many new employees as they expected," the report found. Too few applicants and problems processing applications delayed hiring.

The IRS is slower processing individual tax returns versus last year. As of March 12, the IRS had processed 88.5% of the total tax returns it received, while last year at this time the agency had processed 96.5% of total received returns, according to agency data. Overall, the IRS has processed 15 million fewer returns this year compared with the same time last year.

This year, the filing season opened on February 12, a delayed start compared with previous years, leaving Americans with less time to prepare their returns. The initial April 15 deadline for personal tax returns also has been pushed to May 17.

Taxpayers can claim the first and second round of stimulus checks on their 2020 taxes as a Recovery Rebate Credit if they didn't receive a stimulus payment or received the wrong amount.

Additionally, the IRS recently announced that jobless workers who already filed their taxes and are eligible for the newly-implemented tax break on the first $10,200 of unemployment benefits do not need to amend their return if they filed already. Instead, the agency will send a second refund automatically for the difference.

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  • Timothy E. Brown, CPA

Updated: Nov 23, 2020

Shareholder tax brackets and effective tax rate are important. An effective tax rate is the actual rate a taxpayer pays, calculated by dividing total tax by taxable income. A marginal tax rate is the rate at which the next dollar of income is taxed. I wouldn’t consider the marginal tax rate. The top tax rate is important. While the top tax rate is a flat 21 percent for C corporations and personal service corporations, the top rate for shareholders of an S corporation is 37 percent, but it is a graduated rate, so I believe the effective tax rate must be considered.

Another issue that must be considered for this analysis is that it appears most likely that we will have a new presidential administration next year, and some of the benefits of any entity type may very well disappear. That complicates tax-planning matters, but not entirely.

There are issues related to the recognition of income, the deduction of expenses and tax credits that should be considered, but many of these are the same for every business type. Note that I did not include the tax provisions of the CARES Act and the Families First Coronavirus Relief Act below because many of those issues are temporary. The tax credits in each, and the deferral of payroll taxes, apply to all entities.

Some advantages of an S corp are:

1. Shareholders are not subject to double taxation on income in retained earnings. 2. The income and loss of the S corp are allocated pro rata on a daily basis to each shareholder based on their ownership of all the shares of an S corp. 3. Capital losses are also allocated to the shareholders based on their daily pro rata share of total shares in the S corp. 4. An S corp is not subject to Social Security and Medicare taxes on pass-through income because it is not “self-employment income.” 5. An S corp can pay its shareholders a reasonable salary and only be taxed for Social Security and Medicare purposes on that salary, and not on the distributive allocation. The best source of information to determine the reasonable salary is the government’s own Bureau of Labor Statistics, but the IRS doesn’t normally get concerned about this unless the compensation is zero or very little. 6. The corporation can have an unlimited life and shares can be transferred easily to other people or entities. 7. Shareholders get the maximum protection for their personal assets if they keep their business affairs completely separate from their personal affairs. The courts can pierce the veil of a corporate entity if business affairs are not kept separate from personal affairs. 8. S corps are not subject to the Net Investment Income tax. 9. Fringe benefits for employees and owners of 2 percent or less of the S corp are not considered income for the shareholder or employee. They are also deductible by the S corp. 10. A greater than 2 percent owner of an S corp can deduct 100 percent of health care premiums paid by the corporation under a plan established by the corporation. 11. An S corp is eligible for the 20 percent Section 199A deduction on qualified business income, except as disallowed by law generally for certain service corporations. 12. A shareholder has basis in certain debts of the S corp to the shareholder, to be adjusted over time. 13. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, the people who are in control (as defined in section 368(c)) of the corporation. Section 368(c) defines control to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. Other property received, called boot, is taxable in the transaction. 14. A shareholder can include loans the shareholder made to the S corp in basis, but not liabilities to outside persons or entities.

Some disadvantages of an S corp are:

1. It can only have 100 shareholders. A husband and wife are one shareholder but become two shareholders if they divorce. 2. It cannot have nonresident aliens as shareholders. 3. Shareholders must be individuals and certain trusts. 4. Partnerships, C corporations and multi-member LLCs cannot be shareholders. 5. It can generally only have one class of stock. 6. State tax law may not recognize an S corp. 7. A shareholder cannot include debt in their basis of the entity for debt to outside parties. 8. An S corp with more than 100 employees earning at least $5,000 in the prior year cannot claim the pension plan startup costs credit. 9. Shareholders in an S corp may be subject to the tax on income items related to their investments in the corporation. 10. There are restrictions on the ordinary income treatment on Section 1244 qualified small business stock. 11. Owner-employees who own more than 2 percent of the S corp stock may have to include fringe benefits in their gross income. 12. An S corp that is not a closely held corporation must use the “simplified look-back” method of accounting for long-term contracts if almost all of its income under a long term contract is from sources in the United States. 13. There are limitations on some deductions that are generally itemized deductions of shareholders and certain other expenses such as alimony. 14. Distributions to shareholders may be taxable if they exceed the AAA account first, earnings and profits second, and then the remaining basis in stock. 15. S corps must generally use a calendar year for reporting profits and losses, but may apply for a fiscal year from the IRS for business purposes, or it can elect a Section 444 tax year. 16. An S corp must make a proportionate allocation and distribution based on ownership interest. 17. A deduction for health insurance benefits is not allowed in excess of the earned income of the owner-employee from that business. 18. An S corp can have “built-in gains” if it does not become an S corp in its first year. Built-in gains are gains that are embedded in an S corp’s assets before it became an S corp. The gains on assets in this case are frozen and are then taxable to the S corp at the applicable corporate rate when they are sold. The gain or loss on “built-in gains or losses” is allocated to all shareholders on a pro rata basis, even when the property creating the “built-in gain or loss” was contributed by one shareholder, or several specific shareholders. 19. The “at-risk” rules apply to S corporations and this is applied at the shareholder level Shareholders cannot deduct losses unless they are at risk of losing property or paying a liability in the amount of the loss. Shareholders of an S corp cannot be liable for non-recourse debt. 20. The passive activity rules also apply at the shareholder level, but certain determinations related to a passive activity must be made at the corporate level. 21. An S corp can only claim a deduction for stock given to an employee for services in the amount and the year the employee includes the stock in income. This generally occurs when the stock vests in the employee and the amount of income is the difference between the amount the employee paid for the stock and its fair market value at the date the employee vests in the stock.

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  • Timothy E. Brown, CPA

Between the upcoming presidential election and the COVID-19 pandemic and its attendant stimulus packages, this year has seen more than its share of uncertainty around tax — which makes helping clients with year-end planning all the more crucial.

“Year-end tax planning is more important than ever this year,” said Renato Zanichelli, national managing partner of tax services at Grant Thornton, in a statement. “Businesses both large and small have been dealt a tough hand. Having the right tax strategy will help businesses navigate this time of historic disruption and put them on the right track as a new year begins.”

“Lawmakers dedicated trillions of dollars to keep families and businesses afloat, but those provisions may also require quick action, in many cases by the end of this year,” added Dustin Stamper, managing director in the firm’s Washington National Tax Office. “The government wants to get money in the hands of those who need it, and many of the most generous provisions are tax changes that provide welcome liquidity for businesses and timely relief for individuals.”

With that in mind, the Top Eight Firm has put together a list of 10 key tax considerations for year-end planning for both individuals and businesses.

FOR INDIVIDUALS: 1. Use above-the-line charitable deduction

Everyone is entitled to a charitable deduction this year. The Tax Cuts and Jobs Act doubled the standard deduction while repealing or limiting many itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions. Typically, there is no tax benefit for giving to charity unless you itemize deductions. However, the CARES Act created an above-the-line deduction of up to $300 for cash contributions from taxpayers who don’t itemize. To take advantage of this provision, taxpayers should make sure to donate before the end of the year.

2. Understand the impact of that stimulus check

The CARES Act directed the IRS to issue stimulus checks of up to $1,200 per taxpayer and $500 per qualified child dependent earlier this year. The payments were paid based on 2018 or 2019 return information, but are actually structured as advances of 2020 tax credits. The credits phase out for higher-income taxpayers, so taxpayers want to understand the implications if the check they received based on 2018 or 2019 won’t match the amount of credit they will calculate on the 2020 return. If the 2020 credit calculation is less than they received, there is no clawback. If they received less than the credit calculated for 2020, they can claim it as an additional refund.

3. Supercharge investment with opportunity zones

Opportunity zones are one of the most powerful incentives ever offered by Congress for investing in specific geographic areas. In certain scenarios, not only can an investor potentially defer paying tax on gains invested in an opportunity zone until as late as 2026, but they only recognize 90 percent of the gain if they hold the investment for five years. Additionally, if they hold the investment for 10 years and satisfy the rules, they pay no tax on the appreciation of the opportunity zone investment itself. If they’re worried about capital gains rates going up under a new administration, this may provide an excellent tax-free investment. There are more than 8,000 opportunity zones throughout the United States, and many types of investment, development and business activities can qualify.

4. Make up a tax shortfall with increased withholding

COVID-19 created cash-flow problems for many individuals. Taxpayers should make sure their withholding and estimated taxes align with what they actually expect to pay while they have time to fix a problem. If they find themselves in danger of being penalized for underpaying taxes, they can make up the shortfall through increased withholding on their salary or bonuses. A larger estimated tax payment at the end of the year can still expose them to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save them in penalties.

5. Leverage low interest rates and generous exemptions before they’re gone

The historically low interest rates and lifetime gift and estate tax exemptions present a powerful estate-planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. In addition, the economic fallout of COVID-19 is depressing many asset values. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. The current gift and estate tax exemptions are set to expire in a few years, and a new administration in the White House could accelerate that timeline.

FOR BUSINESSES: 6. Accelerate AMT refunds When the Tax Cuts and Jobs Act repealed the corporate Alternative Minimum Tax, it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020 and 2021. The CARES Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several different options to file for quick refunds. The fastest method for many companies will be filing a tentative refund claim on Form 1139, but corporations must file by Dec. 31, 2020, to claim an AMT credit this way.

7. Use current losses for quick refunds

The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Companies should consider opportunities to accelerate deductions into a loss year to benefit from this rate arbitrage and obtain a larger refund. Accounting method changes are among the most powerful ways to accelerate deductions, but remember any non-automatic changes a company wants to make effective for the 2020 calendar year must be made by the end of the year. C corporations make NOL refund claims themselves, but passthrough businesses like partnerships and S corporations pass losses onto to owners, who will make claims. The fastest way to obtain a refund is generally by filing a tentative refund claim, but these must be filed by Dec. 31, 2020, for the 2019 calendar year. If losses will be in 2020, the business should start preparing to file early, because they cannot claim an NOL carryback refund until they file their tax return for the year.

8. Retroactive refund for bonus depreciation

The CARES Act fixed a technical problem with bonus depreciation, a generous provision that allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to a generous category of qualified improvement property. QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so businesses can fully deduct qualified improvements dating back to Jan. 1, 2018, which may offer relatively quick refunds. Taxpayers who filed 2018 and 2019 returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change, or amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.

9. Claim quick disaster loss refunds Tax rules allow businesses to claim certain losses attributable to a disaster on a prior-year tax return. This is meant to provide quicker refunds. President Donald Trump’s COVID-19 disaster declaration was unprecedented in scope, designating all 50 states, the District of Columbia and five territories as disaster areas. This means essentially every U.S. business is in the covered disaster area and may be eligible for refunds from certain types of losses. Under this provision, a business could claim a COVID-19 related disaster loss occurring in 2020 on a 2019 amended return for a quicker refund. The provision may potentially affect losses arising in a variety of circumstances, including the loss of inventory or supplies or the closure of offices, stores or plants. To qualify, the loss must actually be attributable to or caused by COVID-19 and satisfy several other requirements.

10. Consider the timing of payroll tax deduction The CARES Act allows employers to defer paying their 6.2 percent share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. This provides a great liquidity benefit, but taxpayers should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid. For most businesses, the value of deferring the actual payment is worth also deferring the deduction, but there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the rate arbitrage benefits discussed above. Some taxpayers using specific methods of accounting may also be able to pay the taxes as late as 8-½ months into 2021 and still claim the deduction for 2020.

BONUS: Re-evaluate the company’s tax function

Many tax departments at even the largest and most sophisticated companies still dedicate most of their time to basic number-crunching and repetitive processes. These kinds of inefficiencies make it hard to meet deadlines, present audit and tax risks, and cost businesses money — especially during unprecedented times like the COVID-19 pandemic where teams may be lean and struggling to keep up. Data analytics and automation can help mitigate these problems and enable a business’ tax function to focus more on strategic, value-added solutions — shifting away from a compliance-only role.

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