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Tax News

Contractors with no W-9 or TIN/SSN

James Quezada & Simona Quezada, CA-5, No 19-51000, December 11, 2020

Mr. Quezada did not get the TIN/SSN for contractors he paid. He either prepared a 1099 without the TIN/SSN or did not even prepare one at all over a period of 4 years of 2005-2008.

The IRS has the following in the IRS code. BACKUP WITHHOLDING – IRC Section 3405(a) addresses the backup withholding requirements by stating a taxpayer must withhold at the 4th individual tax rate (currently 24%) in any of four events.  The first event listed (Section 3405(a)(1)(A)) is “the payee fails to furnish his TIN to the payer in the manner required.”

Mr. Quezada was required to do backup withholding and file Form 945 to show the backup withholding and turn the money over to the IRS. He did not do any of it. The Court of Appeals agreed Mr. Quezada was responsible to backup withhold.

In 2014, the IRS assessed the backup withholding against Mr. Quezada for about $1.2 million plus penalties and interest. Mr. Quezada argued the time frame (statute of limitations) had run out and the IRS could not charge that amount for backup withholding. Mr. Quezada won that point. The Court of Appeals stated the IRS was past the statue of limitations when the IRS did the initial assessment in 2014. The IRS has stated it will not acquiesce this position. In other words, IRS will not follow the Court’s position.

This is a warning to taxpayers who do not have the recipient’s TIN/SSN at the time payment is to be made, that the taxpayers should backup withhold (24%) and subsequently file Form 945 to turn the funds over to IRS.

In summary, GET THE W-9 FULLY COMPLETED and IN HAND PRIOR to making a payment to any contractor.

PPP Loan Forgiveness Required Disclosure

During December 2021 IRS released Revenue Procedures 2021-48 dealing with the timing options for treating a PPP loan forgiveness as income.

Revenue Procedure 2021-48, Section 3.01 which says a taxpayer can treat the PPP loan as forgiven –

1) When the expenses are paid/incurred,

2) When the application for PPP loan forgiveness is filed, or

3) When the PPP loan forgiveness actually takes place.

The Revenue Procedure also requires ALL taxpayers to attach a disclosure statement to the tax return for the year the PPP loan forgiveness is being reported as income (even though nontaxable).

 The statement is required to have (for each PPP loan):

1) “RP2021-48” at the top of the statement

2) The taxpayer’s name, address, and EIN/SSN.

3) Which of the above dates is being used (Section 3.01(1), (2), or (3)).

4) The year the taxpayer is treating this as forgiven.

5) The amount of the tax-exempt income.

6) Whether forgiveness of the PPP loan has been granted prior to the date the tax return is filed.

SAMPLE when treating a $10,000 loan as forgiven when it actually takes place (#3 above).





ANY TOWN, USA  00000



PPP Loan Forgiveness Basis Issue

A cash basis taxpayer reports income as received and expenses as paid.  An accrual basis taxpayer reports income as earned and expenses as incurred.  Naturally this means the forgiveness of a PPP loan is forgiveness income (nontaxable per law) at the time it is forgiven based on the taxpayer’s method of accounting.

IRS Notice 2020-32, released in late April 2020 (a year and a half ago) said the expenses related to PPP loan proceeds were NOT deductible when paid/incurred because they “would result in the forgiveness” and owners’ bases in entities was NOT increased by the nontaxable PPP debt forgiveness.  Both of these were changed on December 27, 2020, when the Consolidated Appropriations Act, 2021 was signed by President Trump.  These expenses became retroactively deductible and partners and S corporation shareholders were retroactively allowed to increase their basis by the forgiven PPP loan.

Because of the original denial of expenses, many taxpayers paid/incurred additional expenses to help keep their income down.  As a result of the retroactive deductibility of the expenses paid with the PPP loan proceeds, many of these taxpayers had losses for the year.  In the case of partnership and S corporations, in many cases the losses exceeded the owner’s basis.

There have been questions on whether the forgiveness could be considered to have happen earlier, such as when the PPP qualifying expenses are paid/incurred.

Now IRS has released Revenue Procedures 2021-48, 2021-49, and 2021-50 dealing with this timing issue.  The question is:  When can a taxpayer treat the PPP loan as forgiven –

1) When the expenses are paid/incurred?

2) When the application for PPP loan forgiveness is filed?

3) When the PPP loan forgiveness actually takes place?

In Revenue Procedure 2021-48, IRS answers this question by saying, effectively, “YES”.  Actually, IRS said the taxpayer can choose any of the above as long as it is consistent with the tax-exempt income resulting from the forgiveness of a PPP Loan being treated as gross receipts under a particular Federal tax provision, including but not limited to IRC §§448(c) and 6033.  IN OTHER WORDS – CHOOSE WHICH OF THE THREE DATES THAT YOU WANT TO USE as long as it is shown as income on the books as of the same date.

The Revenue Procedure also states a partnership or S corporation (plus subsidiary members of consolidated groups) must make the decision of the timing of the PPP Loan forgiveness at the entity level.  If the decision is to treat the forgiveness as if it happened in a prior year, the entity will file an amended return for the prior year.  It appears this amended return can be filed at any time during the normal 3-year statute of limitations as long as the conditions above are met.  (See below if the entity is a partnership subject to the BBA provisions.)

Revenue Procedure 2021-49 addresses the allocation of the PPP Loan forgiveness among the owners of a partnership or S corporation.  Basically, the amount of forgiveness income to allocate to a partner or S corporation shareholder is tied to the PPP Loan related expenses that were allowed to that person.

Revenue Procedure 2021-50 addresses partnerships subject to the Bipartisan Budget Act of 2015 (BBA).  Under §6227, a BBA partnership (a partnership subject to the consolidated audit procedures) is limited in its ability to file an amended tax return.  BBA partnerships must generally file an Administrative Adjustment Request (AAR) under §6227 to make partnership adjustments AND is not allowed to amend its tax return after the due date of the return, UNLESS specifically provided by the Secretary of the Treasury or his/her delegate.

This Revenue Procedure exercises that authority to allow a BBA partnership to file an amended return and furnish Schedules K-1 for taxable years ending after March 27, 2020.  The BBA partnership should file Form 1065 with the “Amended Return” box checked, “FILED PURSUANT TO REV PROC 2021-50” at the top of the amended return, and issuing amended Schedules K-1 to each owner, with this same “FILED PURSUANT…”.  A partner that receives an amended Schedule K-1 must amend the partner’s return.  A BBA PARTNERSHIP’S AMENDED RETURN MUST BE FILED NO LATER THAN DECEMBER 31, 2021.  Otherwise, a BBA partnership is required to go through the AAR procedures, which can be used through the normal 3-year statute of limitations for the applicable tax year.

Tax Returns need Letter 6475 and Letter 6419

This years tax returns will need the IRS Letter 6475 stating how much you received in the stimulus payments March of 2021.  We must see this letter or have a copy of the bank statement showing the deposit.  We can not accept verbal information on this regard.

If you received Advanced Child Tax Credit payments monthly from the IRS, you will be receiving a Letter 6419 showing the amounts paid during 2019.  We MUST have this letter to prepare the return.  We can not accept verbal information on this part.  If you need to try to download the letter from the IRS, please contact our office for information.

Standard Mileage Rates Starting January 1 2022

Instead of using the business portion of the actual expenses of operating a vehicle, IRS permits taxpayers to use a standard mileage rate.  The rates for travel on or after January 1, 2022, are:

The business rate is 58.5 cents per mile (up from 56 for 2021).  The depreciation portion of this rate is 26 cents per mile (same as for 2021).

Charitable rate is 14 cents per mile (same as for 2021).

Medical and moving rate is 18 cents per mile (up from 16 for 2021).

Reminder – The standard mileage rate cannot be used for any vehicle where the taxpayer has:  a) claimed depreciation using a method other than straight-line for its estimated useful life, b) claimed a §179 deduction, c) claimed the additional first-year (aka “bonus”) depreciation, or d) used ACRS or MACRS.