Friday October 30, 2020
$267 Billion in Economic Impact Payments
IRS Commissioner Chuck Rettig stated, “IRS employees worked around the clock to deliver the Economic Impact Payments and new tools to help taxpayers in record time. Even with these unprecedented steps, there remain people eligible for these payments who need to take action. Registering to receive the payments is easy and millions of non–filers have already taken this step. We urge everyone to share this information widely to help more people receive these payments."
The $267 billion included 120 million payments sent through direct deposit, 35 million payments with a paper check and four million through a prepaid debit card. Many of the payments went to individuals who do not file federal income tax returns, but receive retirement, survivor or disability benefits. These individuals receive benefits from the Social Security Administration, the Department of Veterans Affairs or the Railroad Retirement Board. Many of these individuals used the Get My Payment tool on IRS.gov.
For individuals who do not file tax returns, the IRS has a tool for non-filers. The people who do not file often have incomes below $24,400 for married couples, or $12,200 for individuals. People may qualify for the Economic Impact Payments even if they do not have other earned income. The payments typically are $1,200 for individuals or $2,400 for a couple, with qualifying dependent children entitled to an additional $500 payment. The IRS notes that if you filed a 2018 or 2019 tax return, you do not qualify to use the non–filers tool.
This tool will remain available until October of 2020. The IRS urges all individuals who have not filed to enter their information and receive a payment. The last date to complete your data entry on the non–filers tool is October 15, 2020.
Editor's Note: The IRS will work with various partner groups to try to reach individuals who are homeless, individuals with limited English skills, seniors in long-term care facilities and other persons who have not yet applied for their Economic Impact Payment. There is a partner page on IRS.gov. Nonprofits who are active in the social service area should assist their donor friends in using the non–filers tool. Many individuals still qualify to receive an Economic Impact Payment.
Flexible PPP Loan Rules Enacted
On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law. The bipartisan act expands options for forgiveness of PPP Loans.
The Small Business Administration (SBA) approved over $510 billion in PPP Loans. The loans were intended to cover small business payroll and facility costs for eight weeks. With nearly 40 million Americans unemployed during April and May of this year, the SBA approved PPP Loans to over four million small businesses. The PPP Loans were designed to enable small businesses to pay employees during the COVID–19 crisis and restart in June.
PPP Loans were authorized for 2.5 times the business's average monthly payroll. After eight weeks, the small businesses could apply for loan forgiveness. In May and June, the SBA published an FAQ and also a loan forgiveness application on SBA.gov.
PPPFA expands the loan forgiveness rules in five areas. It reduces the payroll percentage, extends the time period for payroll expenses, allows more time to rehire workers, expands exceptions for rehired workers and extends the repayment term for loan amounts that are not forgiven.
1. Payroll Percentage Reduced to 60%
The PPP loans had a requirement for payroll to be at least 75% of the forgiven amount. The other 25% of the loan could be used for facility costs. PPPFA changes the formula to at least 60% for payroll and 40% for facility costs. The definitions of payroll and facility costs do not change.
2. Payroll Forgiveness Time Extended from Eight to Twenty Weeks
The PPP Loans were intended to cover eight weeks of payroll. Because many businesses were closed during April and May and need startup funds after eight weeks, PPPFA permits the loan forgiveness period to be up to 24 weeks of payroll. This change should enable most businesses to receive full PPP Loan forgiveness. A business may still apply for forgiveness after eight weeks. The $100,000 limit on maximum compensation is not changed. Therefore, the maximum per-employee forgiven amount remains $15,385.
3. June 30 Rehire Date now December 31
Because many businesses are in a slow restart mode, they may not be able to hire back their staff by June 30. PPPFA permits the rehire date to be the end of the 24-week period or as late as December 31, 2020. Under this provision, employees that are hired during the second half of 2020 may qualify for the loan forgiveness provisions.
4. Rehire Exceptions for Employees
A previous option existed for employers to count those employees who rejected good faith offers of reemployment. That option is still available. Before PPPFA, PPP Loan forgiveness was dependent upon rehiring employees by June 30. PPPFA permits loan forgiveness if the owner can demonstrate he or she could not rehire “similarly qualified employees” or could not restore a business to “previous levels of business activity” before December 31, 2020.
5. Loan Repayments Term of Five Years
Even with the new expanded rules, some small business owners will not receive full PPP Loan forgiveness. The balance of a PPP Loan may be repaid over five years, rather than the previous two years.
Deduction Denied Due to Deficient Appraisal
In Brannan Sand & Gravel Co. LLC et al. v. Commissioner; No. 27474-16; T.C. Memo. 2020-76 (“Brannan”), a Colorado rock, sand and gravel company owned property used for mineral extraction. After the minerals were removed, the property would be available with a slurry cell lining for water storage. Bromley District Water Providers, LLC (“Bromley”) is a Colorado company that distributes water. Silver Peaks Metropolitan Dist. No. 1 (“District”) is a political entity that qualifies for charitable deductions.
Brannan planned to continue to extract sand and gravel from its property. However, it entered into an agreement to transfer property to Bromley for the use of water storage, subject to a retained easement. As part of the agreement, Brannan pledged to give 20% of a certain water storage easement to the District.
In October or November 2010, Brannan granted the District the right to store 50 acre-feet of water on a property.
In 2011, Brannan filed IRS Form 8283 with its tax return and claimed a charitable deduction of $200,000 for the gift to the District. The valuation was 50 acre feet of water times $4,000 per acre–foot or $200,000. The IRS Form 8283 did not include page one and had two copies of page two. Brannan also included a letter from attorney Timothy J. Flanagan that supported the valuation. The IRS audited Brannan and denied the deduction.
The IRS denial was based on seven grounds. There were no qualified comparable properties. Flanagan stated, "I am not a licensed real estate appraiser under either Colorado or federal law. I hold no real estate nor appraisal designations, but am familiar with many gravel mines that have been converted into water storage vessels because of my representations of a number of companies in the aggregate industry."
There was no method of valuation, no specific basis for determining the fair market value, no explanation of comparable examples, no specific justification for the claimed $4,000 per acre-foot value and no reliable evidence.
The court noted that a charitable contribution deduction with value in excess of $5,000 requires a qualified appraisal and an appraisal summary. The IRS has created Form 8283 as the required documentation and substantiation for a charitable deduction.
There are at least 11 requirements for a proper IRS Form 8283. The property must be described in sufficient detail, there must be a description of the physical condition for tangible property, the date of the contribution must be listed, there needs to be an outline of any terms related to the use, sale or other disposition of the property, the name, address and identifying number of the appraiser must be listed, the qualifications and background (including education and professional appraisal association designations) must be described, the appraisal must be stated to have been done for income tax purposes, the date of the appraisal must be listed, the appraised fair market value must be stated, the method of valuation must be described, and the specific basis for the valuation must be explained.
The Flanagan letter was “not reliable because of the many omitted pieces of information required in a qualified appraisal.”
The IRS notes that Form 8283 page 1 was omitted and page 2 was incomplete. A proper Form 8283 includes "(1) a description of the donated property; (2) the date acquired by the donor (month and year); (3), the donor’s cost or adjusted basis; (4) whether the charitable contribution was made by means of a bargain sale; (5) Part III, declaration of the appraiser; (6), the taxpayer identification number of the donee (employer identification number of the District); and (7) the donee representative, title, and the date signed."
The taxpayer claimed that there should still be a qualified deduction for $96,000 because there was a contract. The transfer to the District was not an outright gift, but should be classified as a bargain sale. The Tax Court noted that a bargain sale was not claimed on Form 8283. Therefore, this argument was rejected and the deduction was denied.
Editor's Note: This case is a thorough explanation of IRS Form 8283 and the requirements for a qualified appraiser. It is essential to obtain the services of a qualified appraiser who is familiar with the extensive and detailed requirements of IRS Form 8283.
Applicable Federal Rate of 0.6% for June -- Rev. Rul. 2020-12; 2020-24 IRB 1 (15 May 2020)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2020. The AFR under Section 7520 for the month of June is 0.6%. The rates for May of 0.8% or April of 1.2% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.