Plan for Online Tax Filing
With over 200,000 new COVID-19 cases per day, high levels of hospitalizations and limited ICU capacity, many states have published new lockdown orders. While there are now two approved COVID-19 vaccines, the initial doses are being allocated to government officials, healthcare workers and first responders. Officials with the Centers for Disease Control and Prevention estimate it will be April or May before the majority of Americans will receive vaccinations. As a result, it will be important for taxpayers to understand online options during the tax–filing season.
The IRS urges taxpayers to stay home and stay safe by using the online tools on IRS.gov.
If you have earned income of $72,000 or less in 2020, the IRS Free File program is available. You can use a tax preparation software package without cost. You must enter information for your income, deductions, credits and exemptions. The Free File software program will prepare your tax return and enable you to file electronically. Some of the Free File programs also offer a free state tax return.
Even if you have a larger earned income, you may use the Free File Fillable Forms. These are available on IRS.gov. They require more work and effort, but can be used by any taxpayer to file online.
If you would like to work with a professional tax preparer, a great resource on IRS.gov is the "Choosing a Tax Professional" tool. It enables you to use the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This guide may help you find a qualified tax preparer in your area.
A popular helpful tool on IRS.gov is the Interactive Tax Assistant. It answers many different tax questions. For example, you may want to learn if you qualify for the Child Tax Credit or the Child and Dependent Care Credit. You can ask the assistant if you also may qualify for a deduction or credit for higher education costs for yourself, your spouse or a dependent. If you have low to moderate income, the Interactive Tax Assistant can explain the Earned Income Tax Credit. The IRS plans to release an enhanced version of the Interactive Tax Assistant in January 2021.
After you file, you can benefit from the "Where's My Refund?" tool. This will usually be available about 24 hours after you have filed your return. It updates each day at midnight.
The IRS urges you to have your tax refund direct deposited into your bank or other financial account. There is additional information about online filing in Publication 5348, Get Ready to File.
Editor's Note: With the COVID-19 lockdowns, you may want to use a tax preparer and meet virtually. Many tax preparers are planning to use webcams, conference calls or other online methods for meeting with clients.
COVID $900 Billion Relief Bill In Process
Senate Majority Leader Mitch McConnell (R-KY) and Speaker of the House Nancy Pelosi (D-CA) spent the weekend in intense negotiations over the final provisions of a $900 billion COVID-19 relief bill.
The COVID relief bill is anticipated to have several important benefits. Unemployment benefits would be extended and there is a federal contribution of $300 per week. Additional Paycheck Protection Program (PPP) Loans will be available to small businesses who have been impacted by the pandemic. Small businesses with a substantial reduction in revenue may qualify for a second loan, even if they received a loan under the prior program. The expenses covered by PPP Loans will be deductible.
The March COVID bill included a round of $1,200 per person stimulus checks. The new COVID–19 stimulus plan will have the IRS distribute a check for approximately $600 per person. In the final bill, these payments will again be subject to income limits.
There were two controversial issues that have been deferred to a potential 2021 COVID bill. There will be no provision on liability protection for employers or funding for state and local governments.
On Friday, several members of Congress introduced a new provision that would reduce the emergency lending program administered by the Federal Reserve under the CARES Act. Democratic leaders strongly objected to the addition of this provision. Negotiations were continuing as the two parties sought to resolve this issue.
Leader McConnell stated, "I am even more optimistic now than I was last night that a bipartisan, bicameral framework for a major rescue package is close at hand. Like I have said, the Senate will be right here until an agreement is passed, whenever that may be."
Speaker Pelosi and Leader McConnell plan to combine a $900 billion COVID–19 relief bill with a government funding bill of $1.4 trillion.
Editor's Note: The combined bill with $1.4 trillion in appropriations and $900 billion in new stimulus money is a massive endeavor. Both Leader McConnell and Speaker Pelosi pledged to work all weekend on the bill. While it is not finalized at publication time, the expectation of members of Congress is that the final bill will pass early in the week.
PPP Deduction and Simplified Reporting
The COVID-19 relief bill includes a PPP deduction provision welcomed by businesses and business associations. While negotiations continue between Leader McConnell and Speaker Pelosi, the expectation is that the final bill will be enacted soon.
Many COVID-19 bill provisions are the result of advocacy by a bipartisan group of Senate and House lawmakers. Senators Joe Manchin III (D–WV) and Susan Collins (R–ME) lead the moderate bipartisan group. They introduced the Emergency Coronavirus Relief Act of 2020. This bill includes a provision that allows businesses to deduct expenses that are paid for with Paycheck Protection Program (PPP) Loan funding.
The deductibility of business expenses covered by PPP Loans was initially passed in the CARES Act, but Treasury Secretary Steven Mnuchin determined that under the tax benefit rules, expenses covered by PPP loans would not be deductible. Following the issuance of IRS Notice 2020-32, Sen. John Cornyn (R–TX) promptly introduced a bill to restore deductibility of these business expenses.
The National Federation of Independent Business (NFIB) strongly supported the deduction language in the new COVID bill. NFIB President Brad Close stated, "Efforts to keep this surprise tax increase in place is misguided and harmful to the small business economy that employs nearly half of all private sector workers."
The COVID-19 bill also includes a simplified process for the application for loan relief. If the PPP Loan is $150,000 or less, "The covered loan amount shall be forgiven under this section if the eligible recipient submits to the lender a one–page online or paper form, to be established by the Administrator not later than 7 days after the date of enactment of the Continuing the Paycheck Protection Program Act, that attests that the eligible recipient complied with the requirements under Section 7(a)(36) of the Small Business Act."
If the covered loan is between $150,000 and $2 million, there also is a simplified process that does not require completing all of the documentation and justification for loans over $2 million. For loans between $150,000 and $2 million, the business must retain "(aa) all employment records relevant to the application for loan forgiveness for the 4–year period following submission of the application; and, (bb) all other supporting documentation relevant to the application for loan forgiveness for the 3-year period following submission of the application".
Editor's Note: The business community and tax preparers are hopeful that this PPP deduction provision will be in the final legislation for the new COVID bill. Many small businesses with substantial challenges due to the pandemic will be able to continue to employ their staff. The increased employment hopefully will assist in the 2021 recovery.
Applicable Federal Rate of 0.6% for January -- Rev. Rul. 2021-1; 2021-2 IRB 1 (16 December 2020)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2021. The AFR under Section 7520 for the month of January is 0.6%. The rates for December of 0.6% or November of 0.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.