Keeping up with changes has been difficult, with the 2020 tax season lasting so (impossibly) long. And then, throughout the extra-long tax season, the Paycheck Protection Program (PPP) loans consumed our time and energy. With these urgent distractions, we didn’t have much time to keep up with news from the IRS. Here are a few items of interest for you and your clients.
1. Economic Impact Payment Notice. Remind your clients to keep Notice 1444, “Your Economic Impact Payment.” Your clients may not know this is an important document. They will need the Notice if they qualify for a larger Impact Payment when they file their 2020 tax return. The client may be entitled to a bit more rebate if they have a baby in 2020 or less income (after all, a lot of people are unemployed because of the pandemic).
2. Early Bird RMDs. Did your client take their RMD early in the year, not knowing that CARES would waive the 2020 RMD? The IRS has a solution. The taxpayer can redeposit the withdrawal by August 31, 2020. Most taxpayers were allowed to redeposit an early RMD by July 15. Notice 2020-51 gives the “early birds” more time to gather up funds to put the RMD back. The Notice provides that this repayment is not subject to the one rollover per 12-month period limitation or the restriction on rollovers for inherited IRAs. Read Notice 2020-51 at https://www.irs.gov/pub/irs-drop/n-20-51.pdf.
Planning. Because of the economy, many clients may want/need to keep the money they withdrew from their IRA or retirement account for themselves or their kids. The client has an option to return the money to their retirement account.
3. COVID-19 IRA and Retirement Plan Withdrawals. Notice 2020-50 was released to help retirement plan participants affected by COVID-19 take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. This includes expanding the categories of individuals eligible for these types of distributions and loans (referred to as “qualified individuals”). Read Notice 2020-50 at https://www.irs.gov/pub/irs-drop/n-20-50.pdf.
A qualified individual is one who:
- is diagnosed, or whose spouse or dependent is diagnosed, with COVID-19 by a test approved by the CDC or FDA, or
- experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (someone who shares the principal residence):
- being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19,
- being unable to work due to lack of childcare due to COVID-19,
- closing or reducing hours of a business they own or operate due to COVID-19,
- having pay reduced, including self-employment income, due to COVID-19, or
- having a job offer rescinded or start date for a job delayed due to COVID-19.
The Notice also provides guidance and examples on how qualified individuals will reflect the tax treatment of these distributions and loans on their federal tax return. For details on the Coronavirus-related relief for retirement plans and IRAs, read the IRS FAQs at https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers.
IRA — Money may be short for many of our small business clients, and they may be tempted to pull money from their IRAs. Remind your client that if a “qualified individual” takes an early IRA distribution, the distribution is still taxable—ratable over three years unless the taxpayer elects to include all of the distribution in 2020. Only the 10% penalty is waived.
Pension Loan — If the client chooses to borrow from his or her 401(k) account instead, the loan must be paid back. Eighty percent of borrowers who lose or leave their job, do not (cannot) repay the loan and have a resulting taxable event.
4. Qualified Opportunity Fund Investment Delay. Notice 2020-39 allows additional time to taxpayers who sold a property for an eligible gain and who would have had 180 days to invest in a Qualified Opportunity Fund (QOF) to defer that gain. The Notice provides that if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020, to invest that gain into a QOF. (The 180th day for some of these taxpayers was already postponed through July 15, 2020, under Notice 2020-23.) Also, the Notice provides the period between April 1, 2020, and December 31, 2020, is suspended for purposes of the 30 months during which property may be substantially improved. Other relief on the 90% asset test and the working capital safe harbor is provided in the Notice. Read more about Notice 2020-39 at https://www.irs.gov/newsroom/irs-provides-answers-about-coronavirus-related-tax-relief-for-qualified-opportunity-funds-and-investors. Read the updated IRS FAQs regarding Opportunity Zones and QOFs at https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions#qof.
Planning. If your client defers gain into a QOF, a Form 8897, Initial and Annual Statement of Qualified Opportunity Fund Investments, is required. View Form 8897 at