On October 13, 2020, the IRS acknowledged that it was still struggling with the unopened mail backlog. Due to the COVID–19 pandemic lockdown, approximately 10 million pieces of mail had accumulated. While most of the IRS staff has returned, they are continuing to try to open the envelopes and process the paperwork.
The IRS noted, "The Internal Revenue Service reminds taxpayers and tax professionals to use electronic options to support social distancing and speed processing of tax returns, refunds and payments."
The IRS offices are open, but many services are limited. There are practical limits on the number of IRS staff who can speak on the telephone and the IRS has limited ability to process paper tax returns. The IRS offers multiple recommendations for taxpayers that will enhance the ability of an individual to obtain services from the IRS.
- File Electronic Returns or Forms — All of the various returns filed with the IRS will be more rapidly processed if they are filed electronically. Most tax preparers, tax software providers and the IRS Free File programs all permit electronic filing. If the paper returns have been filed, the IRS will attempt to process those in the order received. Taxpayers should not file a second tax return or contact the IRS about a previously–filed paper return.
- Use IRS.gov — The best source for answers about tax law questions, checking up on your refund status or your Economic Impact Payment is the IRS website. There are many sections for assisting taxpayers. In addition, the Where's My Refund? section, the Get Transcript service, the Direct Pay option, the Online Payment plan and the Interactive Tax Assistant may be helpful to taxpayers.
- IRS Telephone Support — There are many available IRS automated phone lines to handle most taxpayer calls. If you need to speak with an IRS customer service representative, you should expect a long wait because there is limited staffing.
- Taxpayer Assistance Centers — The IRS has opened some of the Taxpayer Assistance Centers. If you need assistance, you must call 844–545–5640 to make an appointment.
- Temporary eSignature Approval — The IRS will permit digital signatures on some documents that cannot be filed electronically. This procedure will reduce the risk to taxpayers during the COVID–19 pandemic. The IRS will continue to review future options for digital signatures.
- Delayed Check Cashing — Because there still are millions of envelopes that have not been opened and many contain taxpayer checks, the IRS has created new procedures. It will not assess penalties due to bad or dishonored checks if the tax payment is not timely. This relief from payment penalties due to delayed processing will extend until December 31, 2020. Taxpayers should note that they still may be subject to interest and other types of penalties. The IRS recommends that you do not call to discuss your unprocessed paper payments. You also should not cancel your check because it has not yet been cashed.
- No Balance Due Notices — Because the IRS staff is limited, many taxpayers who have a balance due may not receive a notice. The IRS stated, "This temporary adjustment to processing is intended to lessen any possible confusion that might be associated with delays and processing correspondence received from taxpayers."
- Applications for Nonprofit Status — The IRS is continuing to work on the applications for tax exemption for new nonprofits. However, "Due to processing center reduced capacities, although applications for tax exemption and filed information returns (e.g., Form 990 series) are being worked, they are not currently being uploaded to be made available for viewing on the Tax Exempt Organization Search tool on IRS.gov."
Charitable Gifts Do Not Reduce Section 199A Deductions
Tax preparers have been concerned because the 2019 explanation from the IRS on Form 8995, "Qualified Business Income Deduction Simplified Computation," indicated that charitable contributions would reduce Qualified Business Income (QBI).
The 2020 draft instructions for Form 8995 indicate that charitable contributions will not be deducted from QBI.
Section 199A creates a 20% deduction on passthrough income (other than wage income) for business owners and sole proprietors. The QBI deduction is generally available for individuals up to specified limits. The 2019 tax year limit for an individual is $160,700, and the married couple filing jointly limit is $321,400.
Above those limits, the Section 199A benefit is phased out. There are specified levels for certain upper income persons who do not qualify for the deduction. There also are limits based on wages paid and property basis for the deduction. Generally, upper–income individuals in law, healthcare, and accounting are excluded from reporting the deduction.
The 2020 draft instructions are consistent with a letter sent on March 4, 2020 to the Treasury by the American Institute of CPAs (AICPA). In the letter, AICPA stated, "Specifically, charitable contributions to organizations described in Section 170(c) are not business expenses under Section 162, but rather, a deduction authorized under Section 170. Deductions allowed by Section 170 do not reduce QBI."
The AICPA letter explained that payments for a business purpose made to a Section 170(c) entity are deductible as Section 162 business expenses. These business-related payments may reduce QBI. However, charitable gifts to a Section 170(c) nonprofit are not related to the business operations and should not reduce QBI.
CPA Chris Hesse is one of the authors of the AICPA letter. He supported the concept under the 2020 IRS draft instructions. Hesse stated, "If charitable contributions are not allocated to any source of income, they would not be allocated to business income. I have said all along that charitable contributions under Section 170 cannot also be business deductions under Section 162."
Internal Revenue Code Section 199A(c)(3)(A) defines "qualified items of income, gain, deduction, and loss." These amounts are all directly connected to a trade or business. Because charitable contributions are not directly connected to a trade or business, they should not be deductions from QBI.
The new draft instructions for Form 8995 are favorable to passthrough entity owners who make charitable contributions. The business expenses deductible for QBI purposes are directly connected with the business purpose or operations and exclude charitable gifts.
Federal Register Final Regulations on Private University 1.4% Excise Tax
On October 14, 2020, the final regulations on the Sec. 4968(b) 1.4% excise tax were published in the Federal Register. Treasury previously had published final regulations (T.D. 9917)
on September 18, 2020. The 1.4% excise tax applies on net investment income of certain private colleges and universities. The final regulations are effective on October 14, 2020.
Section 4968(b)(1) states that an educational institution with at least 500 tuition–paying students, more than 50% of whom are located in the United States, that is not a state college or university, will be subject to the 1.4% tax if it has nonexempt assets with fair market value of $500,000 per student. The determination of 500 or more students is based on the daily average of full–time students and a conversion of part–time students into full time equivalents.
In June 2018, the IRS issued Notice 2018–55, 2018–26 I.R.B. 773 and provided interim guidance. On July 3, 2019, the IRS published REG–106877–18, 84 FR 31795 and issued proposed regulations. The final regulations are generally consistent with the proposed regulations, but there are several beneficial changes.
Net investment income under Section 4968 is specifically defined for purposes of the 1.4% excise tax. This definition is preferable to the proposed regulations method that imported the private foundation rules of Section 4940(c).
Gross investment income is defined as income from interest, dividends, rents, payments on securities loans and royalties. However, gross investment income does not include the amounts subject to unrelated business income tax.
There also are exclusions for interest income from loans that enable a student to attend a college or university. The rental income from student, faculty and staff housing and royalty income from patents, copyrights and other intellectual property are also excluded. The exclusion of interest from student loans and rental income was welcomed by colleges and universities. These items are essential to assisting students and faculty to attend or teach at a college or university.
Finally, the exempt assets of the institution are excluded. Exempt assets are defined as those that are used for the exempt educational purpose.
Charitable remainder trusts and charitable lead trusts are not considered related organizations. Other taxable trusts are also excluded from the definition of related organizations.
Colleges or universities that are near the 500 full-time equivalent standard will need to determine whether a student is tuition–paying and therefore counts toward the threshold. The scholarships awarded by a school are not tuition payments, but scholarships from third parties are considered to be tuition payments. The general principle is that tuition payments from students or third parties are treated the same.
The institution is permitted to exclude a reasonable cash balance. The proposed regulation's reasonable cash balance of 1.5% of exempt assets may be modified by a reasonable method, such as calculating an amount equal to three months of operating expenses.
Applicable Federal Rate of 0.4% for November -- Rev. Rul. 2020-22; 2020-44 IRB 1 (16 October 2020)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2020. The AFR under Section 7520 for the month of November is 0.4%. The rates for October of 0.4% or September of 0.4% 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.