Let’s face it—tax filings have been grueling the past several years. In the 2019 tax season, extensive and swift changes under the tax reform law known as the Tax Cuts and Jobs Act upended conventional planning and understandings. Then came 2020, when tax filers and preparers had to contend with the COVID-19 disruption, which brought about more tax law changes and threw a wrench into the ability of the IRS to process returns.
Businesses and tax preparers have both adjusted to the concepts of remote filing and signatures, but the 2022 tax season that officially opened on January 24 will have its share of other complications.
We put together a list of the top tax issues that you may encounter and want to plan for this tax season.
A Look at ERTC Deadlines
Unfortunately for employers impacted by COVID-19, Congress ended the Employee Retention Tax Credit (ERTC) a quarter early to help fund the Infrastructure Investment and Jobs Act (IIJA), which was signed into law in November 2021. The IIJA changed the final deadline of the ERTC from Dec. 31, 2021, to Sept. 30, 2021, for most businesses.
However, it’s important to note that employers eligible for the ERTC still have plenty of time to file ERTC refund claims. The ERTC generally applies for all of 2020 and the first three quarters of 2021. Because ERTC refund claims are made on amended payroll tax returns, the deadline is three years from when you originally filed your payroll tax return. So, for example, let’s say you have a third-quarter payroll tax return for 2021. The third quarter ended on Sept. 30, 2021, so your payroll tax return was due on Nov. 1, 2021. Therefore, you would have until Nov. 1, 2024 to file an amended payroll tax return for that quarter to make your ERTC refund claim.
Tax Adjustments Made for 280C
When you claim the ERTC, one of the stipulations is that you can’t double-dip on benefits by claiming a tax deduction and a tax credit for the same wages. Income tax adjustments under Internal Revenue Code Section 280C are therefore made to disallow income tax deductions for wages when the ERTC is claimed. The Section 280C adjustment to wage deductions is made on an income tax filing, whereas the ERTC is claimed on a payroll tax return.
The IRS has confirmed that the ERTC is earned at the same time the qualified wages are paid. Accordingly, the Section 280C adjustment must be made in the federal income tax return that corresponds to when the wages are paid. Many employers may have made 2021 ERTC claims without receiving their refund yet, but the disallowed wages must be reflected on the 2021 income tax return filing. You cannot wait until you file your 2022 income tax return to make that adjustment, even if the ERTC benefits are received in 2022. Unfortunately, for many businesses, that means paying increased income taxes now, and receiving your refund later.
PPP Details for S Corporations
If your business operates as an S corporation and it participated in the Paycheck Protection Program (PPP), you’ve likely been unsure about when you’re allowed to take PPP loan forgiveness income into account on your income tax return. Did your loan forgiveness occur when you paid the required expenses, when you submitted your loan forgiveness application, or when the government formally approved the loan forgiveness application? Recently, the IRS provided guidance on this debate, and taxpayers can choose any of these options. Therefore, you can pick which date makes the most sense for you.
In addition, Form 1120S instructions also state that PPP loan forgiveness income should not be reported as part of the Accumulated Adjustments Account (AAA), and should instead be included with the Other Adjustments Account (OAA). While this protocol hinders an S corporation’s ability to make non-dividend distributions, there is some good news, as well. The instructions specify that wage deductions associated with the loan forgiveness should also go into the OAA, rather than the AAA. While the AAA is not increased for tax-exempt loan forgiveness income, it is not decreased for the deductible wage expenses, so unrelated balances in the AAA continue to be available for non-dividend distributions.
Other Reminders for the 2022 Tax Season
A handful of other issues and planning strategies may impact 2021 returns filed during 2022, including:
Pass-Through Entities Can Accrue State Taxes Anew: A cash-basis pass-through entity (PTE) must pay specified income tax payments (SITPs) by the end of the tax year in order to make them deductible under Notice 2020-75. However, accrual basis PTEs can apply Notice 2020-75 to SITPs that are either paid or accrued, provided the entity made the appropriate election or adopted a board resolution to compel the election by the end of its tax year.
Tax Treatment of Meals and Entertainment Expenses: Business meals provided by restaurants generally will be 100% deductible during 2021 and 2022. After 2022, that number goes back down to being 50% deductible.
You Will Be Asked About Cryptocurrency: Be prepared to disclose whether you’ve engaged in any virtual currency transactions. The particular checkbox remains on page 1 of the 2021 Form 1040, just as it was in 2020.
IRS Enforcement of Partnership Audits: After a procedural training hiatus, the IRS is ramping up audits of partnerships. Partnerships should keep an eye out for possible communication from the IRS about an examination.
Patience is a Virtue
Numerous tax law changes, complications from COVID-19, and budgetary challenges are leaving the IRS backed up and experiencing issues processing returns. There is still a lot of time left to file 2021 tax returns—the season just opened on January 24 after all, but you need to be patient. For filers of certain returns (particularly paper returns), it could take anywhere from six to 10 months before you see a tax refund. We recommend getting the clock started as soon as possible by filing, particularly individual income tax returns, at your earliest convenience and by electronically filing your return when possible.
If you need help with any of the tax provisions listed above or have individual concerns, please contact us.
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