What Is the IRS Taxpayer Relief Initiative?

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Millions of American taxpayers have tax-related debt. The IRS has introduced a new initiative to help these debtors find relief in the wake of COVID-19.

Key takeaways

  • Millions of Americans still owe billions in tax debt to the IRS
  • The Taxpayer Relief Initiative expands allowances and assistance to many taxpayers
  • More Americans may be eligible for an offer in compromise or installment agreement
  • Taxpayers may be able to benefit from collections delays, lower tax bills, and relief from penalties

Many American taxpayers are still struggling with the effects of the COVID-19 pandemic. Existing debt or financial troubles have worsened during the economic recession, and many individuals have difficulty managing what they owe. 

Over the last year, the IRS has delayed tax filing deadlines and other requirements. And there have also been delayed refunds and other challenges faced by the agency itself.

Over 11 million American taxpayers owe money to the IRS, whether in back taxes, penalties, or interest, and they owe an estimated $125 billion in tax-related debt. As the pandemic has caused record unemployment, business closures, and layoffs, many taxpayers are challenged to make ends meet, much less cover their tax debt bill.

The government is seeking to provide assistance with the recent Taxpayer Relief Initiative. Here’s what you need to know about this program and how it helps many taxpayers get through the recession.

What is the Taxpayer Relief Initiative?

In March 2020, the IRS introduced the People First Initiative, which provided relief to American taxpayers facing financial hardships. This program offered temporary relief, such as suspended payments and postponed debt-collection actions, but it ended in July 2020. 

In November, the IRS introduced the Taxpayer Relief Initiative to further help individuals struggling with the economic downturn caused by COVID-19. This initiative focused on helping people who owed taxes or related debt to the IRS, expanding upon current tools to help people pay off what they owe.

Benefits of the Taxpayer Relief Initiative

Qualifying taxpayers will receive the following benefits related to installment agreements and payment plans:

  • If a taxpayer qualified for a short-term payment plan, they now have a maximum of 180 days to resolve liabilities, up from the 120-day limit.
  • More flexibility is provided for taxpayers who can’t meet the terms of an offer in compromise.
  • For companies and individual business owners who have gone out of business because of the pandemic, new tax balances will be added to existing installment agreements.
  • Qualifying taxpayers who owe less than $250,000 to the IRS can set up installment agreements without a financial statement, as long as they propose a sufficient monthly payment proposal.
  • If a taxpayer only owes money for 2019 and owes less than $250,000 to the IRS, they may be able to set up an installment agreement without an IRS-filed notice of federal tax lien.
  • Those who already have an installment agreement may be able to use the Online Payment Agreement system to change monthly payment amounts and due dates.

In addition to these agreement-related relief initiatives, taxpayers also may be able to temporarily delay collections from the IRS, settle their bill at a lesser amount with an offer in compromise, or receive relief from penalties.

These benefits will help Americans find at least some relief as they manage other forms of debt, make mortgage or rent payments, or pay their other monthly expenses.

How to qualify for the Taxpayer Relief Initiative

Some taxpayers may be able to suspend collections by the IRS if they can exhibit a financial “hardship.” This means that if the taxpayer were to pay the IRS what is owed, they would not be able to cover other reasonable living expenses. If the proof is sufficient, the IRS would then classify the taxpayer’s account as CNC, or “currently not collectible.”

To qualify for an offer in compromise, taxpayers need to file an application that outlines their current financial situation. Whereas the IRS might usually cancel an offer in compromise if a taxpayer fails to make their payments, the agency may show much more flexibility.

The installment agreements also have requirements that must be met. Typically, individuals must owe less than $50,000 in taxes, penalties, and interest, or $25,000 for business taxpayers, to qualify for these agreements. 

But the Taxpayer Relief Initiative expanded this requirement so that taxpayers owning between $50,000 and $250,000 may be able to receive a non-streamlined installment agreement, which stipulates that debts must be paid within the 10-year statute of limitations. This is an option if a taxpayer’s case has yet to be assigned to an IRS officer.

This overview covers the basics of the Taxpayer Relief Initiative. But there are more aspects to this program, and a tax professional can help you understand how it could impact you. 

Assistance taking advantage of every new initiative

If you have questions about your tax debt or the IRS’s Taxpayer Relief Initiative, it’s beneficial to work with a tax expert who can walk you through all of the requirements and steps. The 2020 tax year is unlike any other, given government relief programs and often drastic changes to incomes because of the pandemic.

The team of experienced tax professionals at Provident CPA & Business Advisors can help. Contact us today to learn more. 

How Do PPP Loans Impact Business Taxes?

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Can businesses claim tax deductions for business expenses under the Payment Protection Program (PPP)? Is a PPP loan considered taxable income? Here are your tax questions, answered.

Key takeaways

  • Business expenses associated with PPP loan forgiveness are deductible
  • Forgiven PPP loans are not considered taxable income
  • Payroll taxes can be deferred, even after PPP loans are forgiven
  • Employers can take advantage of the Employee Retention Tax Credit and PPP loans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was introduced in March 2020 to assist American businesses and individuals struggling financially. 

Part of the CARES Act was the creation of the Paycheck Protection Program (PPP), which provided businesses with loans that would be forgiven if they complied with all requirements, including using the loans for qualified business expenses. PPP loans are just one form of relief for businesses impacted by the pandemic, which has caused record closures, layoffs, and unemployment claims over the last year.

Since March 2020, there have been many questions circulating about PPP loans and what they mean for business expense deductions and taxes in general. As a new relief bill was passed at the end of 2020—the Consolidated Appropriations Act of 2021—some of these questions were answered, and common issues were clarified. 

Let’s walk through what you need to know about business expenses and whether they’re deductible, whether a forgiven PPP loan is considered taxable income, payroll taxes and PPP, and other important information about the program.

Business expense deductions

The CARES Act did not directly address whether business expenses covered as part of the loan-forgiveness process would be deductible. But in April 2020, the IRS said that no deduction would be allowable for expenditures that were otherwise deductible if the expense payment results in PPP loan forgiveness. 

In November, the IRS also said that a taxpayer calculating taxable income could not deduct eligible expenses in 2020 if they had reason to expect reimbursement in the form of loan forgiveness based on qualified business expenses paid during the period.

However, the second relief bill passed in late December 2020 clarified that deductions are allowable for the otherwise deductible business expenses paid with a forgiven PPP loan. It also explained that the tax basis and other attributes of the borrower’s assets would not be reduced because of loan forgiveness.

Another piece of good news is that this new clarifying provision is effective dating back to when the CARES Act was first enacted. The second round of PPP loans, which the new relief bill also authorized, will be treated similarly.

Not all business expenses are included as part of PPP loan forgiveness. Note that the PPP loan funds cannot be used to pay business taxes, for example. Eligible expenses include: 

  • Payroll costs
  • Rent 
  • Mortgage interest
  • Utilities payments
  • PPE and worker protection expenses
  • Business software and other operational expenses
  • Certain property damage costs
  • Supplier expenses

As long as at least 60% of the PPP loan was used for payroll expenses and the remaining 40% was used for these other qualified expenses, the loan will be eligible for complete forgiveness. 

PPP loan as taxable income

The CARES Act excluded PPP loan forgiveness from a borrower’s gross income, meaning that businesses didn’t have to pay taxes on the funds received. Lawmakers did not want to add an additional tax burden for companies that were already struggling.

The December 2020 bill reestablished that a forgiven PPP loan is not taxable income and is completely tax-exempt. 

Payroll taxes and PPP

Another vital thing to know is that employers can defer payroll taxes even after the PPP loan is forgiven. But half of the deferred payroll taxes from 2020 must be paid by the end of 2021, and half must be paid by the end of 2022.

The PPP Flexibility Act clarified these rules in June of 2020, in addition to changing the maturity period of the loans to a minimum of five years and extending other PPP-related deadlines.

Other PPP tax implications

The second relief bill included a provision that businesses taking out a PPP loan can also obtain the Employee Retention Tax Credit (ERTC) for both 2020 and 2021 tax years. So, a company can apply the ERTC for 2020 taxes. However, note that the ERTC and PPP loan cannot cover the same payroll expenses.

The ERTC is available to businesses with under 500 employees that either had to suspend or partially suspend operations because of a COVID-19-related court order or had a 20% decline in gross receipts when compared with the same period the year before.

The tax credit was 50% of up to $10,000 in wages for 2020, but the new bill expanded the ERTC from a maximum of $5,000 per employee to $14,000 per employee beginning January 1, 2021, and through June 30, 2021. 

Receiving a PPP loan also does not get in the way of the business receiving family and sick leave tax credits under the Families First Coronavirus Response Act (FFCRA). Companies cannot use the loan funds to pay for the sick and family leave wages, however, if they expect to get the tax credit.

Work with a tax expert for additional assistance

If you still have questions about how PPP loans could impact your taxes this year, contact a tax professional who can help you make sense of the changing laws and regulations. You never want to make a mistake on your tax return or leave money on the table. The professionals at Provident CPA & Business Advisors specialize in tax minimization, and we work with a variety of individuals and business owners.

Contact Provident to meet with an expert about PPP loan implications and how best to prepare your taxes.

What Tax Provisions Expired in 2020?

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The pandemic caused the introduction of new provisions to help taxpayers stay afloat. Which ones were extended and which expired at the end of 2020?

Key takeaways

  • FFCRA and employer paid leave
  • Qualified tuition deduction
  • Payment Protection Program changes
  • Standard deduction increases
  • Provisions extended under the COVID-19 relief bill

Each year can bring a new set of tax rules to learn and factor into your strategy. 2020 was monumental in many ways, and the government introduced many new tax provisions to help Americans get through the COVID-19 pandemic. Many of these items, however, were set to end on December 31, 2020.

Another COVID-19 relief package was passed in late December and extended many of the tax provisions, however. For instance, the 7.5% medical expense deduction was extended, as were energy-efficiency deductions and the New Markets Tax Credit (NMTC).

However, several provisions did expire on December 31. Others were kept but changed drastically. Here’s a look at these tax provisions and what they could mean for your returns.

FFCRA and employer paid leave

The Families First Coronavirus Response Act (FFCRA) stipulated that employers with under 500 employees must provide employees with paid sick leave or expanded family and medical leave if employees could not work because of quarantine restrictions or the need to care for an individual in quarantine. 

The FFCRA also stated that employers must offer an extra 10 weeks of paid family and medical leave at two-thirds of the worker’s regular pay rate when they need to care for a child because of the pandemic.

The FFCRA was not extended by Congress, and it expired at the end of 2020. However, Congress is still encouraging employers to provide this type of leave by extending the tax credit to those eligible until March 31, 2021.

Qualified tuition deduction

A deduction of up to $4,000 in tuition and higher-education costs was previously available to parents of college students. The tax break was repealed in the latest COVID relief act in an attempt to help taxpayers make the transition to the lifetime learning credit, which we’ll discuss later.

Payment Protection Program changes

The late-2020 relief bill also extended and expanded the Payment Protection Program (PPP), but there are a few significant changes for the new year. Let’s walk through the key revisions to be aware of if you are considering a PPP loan:

  • Forgiven PPP loans are not included in gross income.
  • The tax basis will not be reduced because of loan forgiveness.
  • Tax deductions are allowed for deductible expenses paid with forgiven PPP loan funds.

First-time PPP loans are now available for:

  • Businesses with 500 or fewer employees
  • Sole proprietors, independent contractors, and self-employed individuals
  • Not-for-profits
  • Accommodation and food services operations with fewer than 500 employees per location
  • Business leagues
  • Some news organizations

Second-time PPP loans are only available to borrowers with 300 or fewer employees who will use their full first PPP loan before the second loan is dispersed. And they must have experienced a reduction in revenue of 25% or more in all or part of 2020 compared to all or part of 2019.

Publicly traded companies are no longer eligible for PPP loans. This is a significant change from 2020, likely sparked after huge companies obtaining the loans caused public outrage.

Standard deduction increases

The standard deduction will increase for 2021 taxes, with an additional $150 for single filers, heads of household, and married filing separately, and an extra $300 for joint-married filers. The new rates will be as follows:

  • Single: $12,550
  • Married filing jointly: $25,100
  • Head of household: $18,800
  • Married filing separately: $12,550

These are fairly normal annual increases to the standard deduction—after it was increased significantly in 2018 by the Tax Cuts and Jobs Act (from $6,500 to $12,000 for individual filers, and $13,000 to $24,000 for joint filers).

Provisions extended under the latest COVID-19 relief bill

Many tax provisions set to expire at the end of 2020 were extended until 2025 or permanently with the second COVID-19 relief bill in late December. 

Here are a few credits and deductions to be aware of that were extended, plus any changes starting in 2021:

  • The 7.5% medical expense deduction: This deduction is now a permanent provision.
  • The lifetime learning credit is expanded and available to higher-income taxpayers and worth up to $2,000 per return to offset undergraduate, graduate, and professional degree programs.
  • The tax break for homeowners with a forgiven mortgage balance due to a foreclosure or short sale: The amount of forgiven debt that taxpayers can exclude from gross income was reduced (up to $750,000 for joint filers and $350,000 for single filers). It is in effect through 2025.
  • The private mortgage insurance premiums deduction: For taxpayers who itemize, this deduction is available through 2021. Deductions on mortgage and home equity loans or lines of credit may apply to up to $750,000 in total qualified loans.
  • Employer student loan payments: The CARES Act provided a tax incentive for employers to help employees with student loan debt. Employers could deduct up to $5,250 and have that amount excluded from workers’ taxable income. This provision has been extended through 2025.

It’s nothing new for tax provisions to change in a given year. But because 2020 was so unprecedented, make sure you keep a close eye on revisions that may still be introduced by new legislation and additional relief bills in 2021.

Work with tax experts to understand the new rules

If you still have questions about which tax credits or deductions you qualify for or how your 2021 taxes will be impacted by recent legislation, talk to the experts at Provident CPA and Business Advisors. Our team will review your situation and help you meet your goals. 

Contact Provident to learn more about our services.

What the Special $300 Charitable Deduction Means for 2020 Taxes

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Here’s what you need to know about charitable deductions and the special CARES Act provision that allows anyone to deduct $300 in qualifying donations

Key takeaways

  • What is the $300 charitable deduction?
  • What charitable organizations qualify?
  • How does this interface with the standard deduction?

As you’re getting ready for tax season, it’s essential to tally all the deductions and credits you’re eligible for and figure out if you want to take the standard deduction or itemize. Tax laws change, and there may be new deductions or additional steps to take, especially in the wake of government relief and other changes wrought by the COVID-19 pandemic.

One area to consider is your contributions made to charitable organizations. Fortunately, a new provision from the IRS allows many taxpayers to deduct up to $300 in qualifying charitable donations whether or not they take the standard deduction.

Do your contributions qualify? Here’s an overview of what the new $300 charitable deduction entails and a look at which donations are considered charitable contributions. We’ll then briefly go over choosing the standard deduction versus itemizing.

What is the $300 charitable deduction?

Qualifying cash donations of up to $300 made before December 31, 2020, can be deducted by taxpayers this year. The provision was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in early 2020, and aimed to encourage Americans to support charities that may be struggling through the pandemic. One study showed that 91% of charitable organizations had experienced some negative impact from COVID-19. 

Other provisions included to help charities were higher contribution limits for corporations, individuals who itemize deductions, and businesses that donate food to charities.

One significant benefit of this new deduction is that taxpayers don’t have to itemize their deductions to claim it, as is usually the case. Instead, they can claim an “above-the-line” deduction, as the IRS terms it, of a maximum of $300 for charitable donations. This lowers the taxpayer’s adjusted gross income and taxable income.

Cash donations must have been made by check, credit card, or debit card. Excluded from eligible donations are securities, household items, and other property. You also cannot deduct time or services donated to an organization.

What are qualifying charitable organizations and donations?

Most donations made to charities will qualify, but there are some exceptions to be aware of. Note that contributions made to supporting organizations or donor-advised funds do not qualify for the $300 provision.

The IRS defines qualified charitable organizations as:

  • Community chests, corporations, trusts, funds, or foundations that operate solely for charitable, religious, scientific, literary, or educational purposes, or for the prevention of animal or child cruelty.
  • War veterans’ organizations.
  • Domestic fraternal societies, orders, and associations that operate under the lodge system.
  • Nonprofit cemetery companies or corporations.
  • Government bodies, whether federal, state, or local, if donations are used for charitable causes.

To qualify as a charity, an organization cannot give any of its earnings to private shareholders or individuals. Political contributions and homeowners’ association donations, for example, are not included. But those given to nonprofit schools, hospitals, and churches are eligible. Most donations to foreign organizations are excluded.

If you’re unsure whether an organization qualifies, you use the Tax Exempt Organization Search tool on the IRS website. It helps donors ensure that an entity is an IRS-registered 501(c)(3) organization and that a contribution qualifies for the deduction.

Remember to keep a record of the transaction when you donate. Most organizations provide a receipt or send an acknowledgment letter, so you have evidence of the amount you contributed.

How does it interface with the standard deduction?

Many taxpayers take the standard deduction, which means they don’t itemize each individual deduction for the year. Both options have their pros and cons and are appropriate for particular circumstances—you should itemize if your total deductions are more than the standard deduction. Itemized deductions break down into categories like medical costs, interest paid, charitable contributions, and more. 

For 2020, the standard deduction is $12,400 for single filers and $24,800 for married-filing-jointly taxpayers. For heads of household, the standard deduction is $18,650 for 2020 taxes. Everyone is entitled to the standard deduction, and it often saves taxpayers time when submitting their tax returns. But if you have many expenses to claim, the itemized route may help you pay less in tax. 

But remember, the special $300 charitable donation deduction helps taxpayers who take the standard deduction. They can now benefit from this 2020 contribution, in addition to those who already decide to itemize.

Working with the team at Provident CPA & Business Advisors

As the COVID-19 pandemic continues into 2021, there will likely be more special provisions to keep in mind when preparing your tax return. It’s always wise to talk to a tax professional to be sure you’re claiming everything you’re eligible for. 

When you’re ready to talk taxes, we’re ready to help. Our experts assist both individuals and businesses as they plan for the future, whether that’s long-term business growth or tax minimization. And we make sure you don’t leave money on the table when completing your return each year. 

If you’re ready to get started, contact Provident today.