The month ahead will be a critical time for tax preparers as they face issues on many different fronts. Old legislation, new legislation, stimulus payments and Paycheck Protection Program questions will complicate matters for preparers and taxpayers alike, according to observers — to say nothing of the delayed start to tax season.
The filing season itself will be “one for the ages,” said Mark Steber, senior vice president and chief tax officer at Jackson Hewitt.
“There are so many issues to keep front of mind — a lot more to manage this year than any year in the past decade. There are tax year changes, life changes as a result of the COVID pandemic, and life changes just as a part of life (marriage, divorce, having children, buying a home, etc.),” Steber said.
“We’re still absorbing things from the Tax Cuts and Jobs Act, and now dealing with the CARES Act and the SECURE Act, and the new stimulus act,” he continued. “People have questions about the Economic Impact Payments they received and the new ones they are [currently receiving]. There are changes to borrowing from retirement plans, a look back to recover some of the Earned Income Tax Credit and the Child Tax Credit, and at the same time a new round of PPP applications are being accepted. That’s a lot to tackle in the first month.”
On top of these changes are issues dealing with unemployment, Steber noted. “At its peak, unemployment was nearly 60 million,” he said. “This has implications for 60 million tax returns. Many taxpayers will have received unemployment benefits for the first time. Unemployment compensation is counted as income. There may be several types of unemployment, and some taxpayers may have chosen to have withholding apply to their taxable benefits. But many didn’t, or may be under the impression that the benefits are not taxable.”
There are further implications of unemployment, Steber indicated. “Unemployment compensation doesn’t count as income for purposes of the Earned Income Credit or the Child Tax Credit,” he said. “And some states tax unemployment compensation, but other states don’t.”
For many taxpayers hit with reduced hours or termination as a result of the COVID economy, self-employment became a viable option. “But now they’re faced with another suite of tax considerations, with new ways to report different types of income and a different set of deductions,” Steber noted.
Despite the proliferation of employees working from home during the pandemic, the home office deduction can only be claimed by the self-employed.
“In a Jackson Hewitt survey, 80 percent of taxpayers indicated that they believed they would get some sort of tax break by working from home, but the deduction can only be taken by the self-employed,” Steber said. “Because of the pandemic, a lot more people have a home office, but a lot more people do not necessarily get the tax deduction for a home office.”
The state tax consequences of all the changes in the federal tax will also be very confusing, Steber predicted. “All states that have an income tax will have to address whether they will follow the federal changes or have their own rules. It will be the start of a complicated and confusing filing season, and will require an effort on the part of everyone.”
A late start
Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, agreed that unemployment will be a major issue this tax season. “It’s not a change in tax law, but it’s worth mentioning that the amount of people getting unemployment benefits was huge,” he said. “Stimulus payments are not taxable but unemployment benefits are taxable, which will confuse many taxpayers.”
In theory, taxpayers had the option to have withholding taken out when they applied for unemployment, Luscombe explained, “but we don’t know how many actually understood what that meant. Also, the states were unprepared for the supplemental extra $600 in unemployment benefits and may not have had their systems geared up to take out withholding, so there could be people who asked for withholding but didn’t get it.”
Those who looked to other sources of cash during the pandemic may also face tax issues, Luscombe pointed out. “If a taxpayer pulled money out of their retirement account for coronavirus issues and don’t intend to repay within three years, they should start paying one-third of the tax on their 2020 returns,” he said. “And students who took money out of a 529 plan and educational savings accounts for tuition and fees, and are in a situation where their university reduced the fees, have 60 days to return the money to the fund to avoid penalties.”
The Internal Revenue Service announced on Jan. 15, 2021, that filing season would begin on Feb. 12, 2021. There was some thought that an earlier proposed date would be postponed, according to Luscombe, since the IRS is continuing to process stimulus payments, and people need to know if they received their payments through a direct deposit or a debit card before they file their return.
In its announcement, the IRS said that the added time will allow it to do additional programming and testing of IRS systems following the Dec. 27, 2020, tax law changes that provided a second round of Economic Impact Payments and other benefits.
“Everyone that got a stimulus payment was supposed to receive Notice 1444 for the first round of payments, and Notice 1444-B, and furnish these to their preparer,” said Luscombe. “If they didn’t get the credit they were entitled to in the form of an advance payment, they can get it in the form of a refundable credit on the 2021 return.”
From returns to loans
The biggest issue during the first month of filing season may not be filing a tax return, but helping clients to handle round two of the PPP program, according to Barbara Weltman, a tax attorney and author of “Small Business Taxes 2021.”
The U.S. Small Business Administration, in consultation with the Treasury Department, reopened the PPP loan portal to PPP-eligible lenders with $1 billion or less in assets for first- and second-draw applications on Jan. 15, 2021. The portal fully opened on Jan. 19, 2021, to all participating lenders to submit first- and second-draw loan applications to the SBA.
Coming so close to the start of tax season, tax pros may find themselves torn between the PPP and their usual filing work. “Practitioners will be called on to help businesses get the money they need while at the same time juggle the tax returns,” Weltman said. “The biggest challenge will be finding the time to devote to counseling on the PPP loans while preparing tax returns.”
An issue for practitioners, particularly during the first month, will be the conversations they need to have with clients, according to Weltman.
“These may be time-consuming, so it’s best they are addressed early in the filing season,” she said. “For example, self-employed individuals could opt to defer the employee portion of Social Security taxes for a portion of 2020. When it comes time to prepare their 1040, they will have to decide if they want to do a deferral this year or not,” she said. “There’s a new Part III of Schedule SE for figuring the maximum deferral. If they do opt to defer, they have to pay half by the end of 2021 and the other half by the end of 2022.”
Another conversation that practitioners will need to have with their clients concerns net operating losses, Weltman added.
“This one might be tricky,” she said. “NOLs that arise in 2020 have a five-year carryback, but a taxpayer can waive the carryback. With potentially higher tax rates ahead, it may be more valuable to carry a loss forward — it depends on the individual taxpayer’s situation. There’s no single ‘right’ answer.”
And importantly for the practitioner, a conversation about fees might be appropriate.
“A lot of the work is automated and practitioners will rely on their software, but they will still be working longer and harder as a result of all the law changes and uncertainties,” Weltman explained. “And they need to be compensated for their work.”
A new environment for some
During the first month, many of the clients practitioners see will be those that filed early last year, commented Roger Harris, president of Padgett Business Services.
“We had already finished their returns before the pandemic hit, so for many of them it will be a new way of doing business with us,” he explained. “It will vary where you are, but most of us will try to avoid in-person contact as best we can, and where it has to be done, we will practice social distancing and mask wearing, and make sure we create an environment that is both comfortable and safe for our clients.”
“During the first month of filing season, we’ll be going back for additional PPP loans for our business clients,” Harris said. “And we have to look back to see which of the initial PPP loans were eligible for the Employee Retention Credit. The CARES Act added the ERC, a refundable payroll tax credit equal to 50 percent of qualified wages at $10,000 per year per employee. But under the CARES Act, if you had a PPP loan you could not take advantage of the ERC.”
The Consolidated Appropriations Act of 2021 makes the ERC available so long as a credit is not claimed for wages paid with the proceeds of a PPP loan that have been forgiven.
“You can’t use the same wages to have loans forgiven and claim the credit,” he said. “Now we have to go back and see which of our clients may have been eligible for the ERC.”
