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Sunday June 13, 2021

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IRS FAQ on Economic Impact Payments

As millions of direct deposits, paper checks and debit cards are being issued to individuals, the IRS published frequently asked questions (FAQs) on The second round of Economic Impact Payments will distribute $600 to individuals or $1,200 to married couples. There also will be an additional $600 per qualifying child. The stimulus payments are phased out for individuals with incomes over $75,000 and married couples with incomes over $150,000.

The FAQs are very helpful because they answer common questions that millions of Americans have about the second round of stimulus payments.

1. Do you receive a letter or notice? Yes, the IRS will send a letter or notice to each recipient. Your Notice 1444–B should be retained with your tax records.

2. Will "Get My Payment" be available? Yes, the IRS will soon launch a new version of Get My Payment. You will be able to check the date of your payment and the method. Mailed payments will take more time.

3. What is the Recovery Rebate Credit? When you file your 2020 tax return, you may need to use the Recovery Rebate Credit to receive your stimulus payment. The payment is a partial credit against your taxes. If you have not received the full amount of your Economic Impact Payment, you will be able to report the remaining amount as a Recovery Rebate Credit on your 2020 tax return.

4. Are some individuals not eligible? There are several categories of individuals who may not be eligible. Individuals cannot receive a stimulus payment if they were claimed as a dependent on a taxpayer's 2019 return, do not have a valid Social Security Number issued before the 2019 tax return due date, died before 2020 or are a nonresident alien.

5. What happens with deceased individuals? A payment will be issued to anyone who was still living on January 1, 2020. The standard payment for individuals (and potentially for qualifying children) will be made.

6. What if an individual is incarcerated? Those individuals who are incarcerated and have filed a 2019 tax return or used the Non–Filers: Enter Payment Info Here tool prior to November 22, 2020 will receive an Economic Impact Payment.

7. What if my spouse does not have a Social Security Number (SSN)? If a couple files jointly and one spouse has a valid SSN, they may receive the $600 payment and $600 for each qualifying child. If one spouse is an active member of the U.S. Armed Forces, only one spouse must have a valid SSN for the couple to receive $1,200.

8. Are there rules for a qualifying child? The child must be a son, daughter, sibling or descendent of one of these individuals and under age 17 on December 31, 2019. He or she must be claimed as a dependent on your 2019 tax return or in the Non–Filers: Enter Payment Info Here tool. The child must have lived with you for over half of the year, must not have provided over half of his or her own support and must be a U.S. citizen, U.S. national or U.S. resident alien.

9. Do I need to take action? Payments will be issued automatically by the IRS to most individuals with no further action. If you do not receive a payment, you may claim the Recovery Rebate Credit on your 2020 tax return.

10. Are there any payment reductions? Even if you owe a federal or state tax debt, past–due child support or other obligation, the full stimulus payment will still be issued.

11. Payments on debit cards? The Treasury Department reports that it will be sending approximately eight million Economic Impact Payments through prepaid debit cards. The cards are sponsored by the Bureau of the Fiscal Service and will be similar to other debit cards. Each card will have the amount of the stimulus payment based on filing status and number of qualified children.

Deductibility of PPP Expenses

In Rev. Rul. 2021–2, the IRS confirmed that the expenses covered by Paycheck Protection Program loans will remain deductible.

The original Paycheck Protection Program provisions enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) intended to permit a deduction for expenses covered by the loans. The loan forgiveness provision was changed by Rev. Rul. 2020–27 and Notice 2020–32. Based upon the tax benefit rule and the fact that PPP loan amounts are not taxable, the Treasury Department determined that the covered expenses would not be deductible.

The Consolidated Appropriations Act of 2021 amended the prior IRS determination. It provided "that no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in Section 7A(b) of the SBA." This provision of the appropriations bill enabled businesses to receive a PPP Loan, use the funds for payroll and other covered expenses and still take the ordinary and necessary business deductions. This amendment applies to taxable years ending after March 27, 2020, the date the CARES Act was enacted.

The IRS therefore declares that Notice 2020–32 and Rev. Rul. 2020–27 are obsolete.

Alexander Scott is a senior manager for S Corporations/Partnerships for the American Institute of CPAs. He was pleased with the new Treasury guidance. Scott stated, "The guidance from Treasury confirms the treatment of PPP expense deductibility provided for in the Consolidated Appropriations bill. However, we are still expecting further guidance from Treasury and IRS on certain quirks that can occur regarding loan forgiveness and basis implications for partnerships and S corporations."

Deconstructed Home Deduction Denied

On appeal from the United States District Court for Maryland, in Lawrence P. Mann et ux. v. United States; No. 19-1793 (4th Cir. 2021) the court affirmed the decision and denied a charitable deduction for a deconstructed home gift. The Fourth Circuit determined the gift failed the Section 170 partial interest test and did not have a valid appraisal.

In Lawrence P. Mann et ux. v. United States; No. 8:17-cv-00200 (30 Jan 2019), the U.S. District Court denied a deduction for a charitable gift of a home. The home was transferred to a nonprofit that planned to "deconstruct" it and sell the salvaged items.

In 2011, taxpayers Lawrence and Linda Mann purchased a home in Bethesda, Maryland. The Manns decided the home should be demolished and a new home built on the lot. They contacted Second Chance, a Sec. 501(c)(3) nonprofit, which employs disadvantaged individuals to deconstruct buildings and sell salvaged materials. The deconstruction process often causes damage to the building or its component parts. Second Chance also requested a cash contribution to cover some of the deconstruction costs.

The Manns conveyed the home and its contents to Second Chance on December 1, 2011. Second Chance promised to provide a list of the salvaged materials and recommended they be valued by a qualified appraiser. Second Chance believed that the salvage value could equal or exceed $150,000.

The Manns gave Second Chance cash gifts of $10,000 in 2011 and $1,500 in 2012. Prior to deconstruction, they obtained an appraisal which indicated a lot value of $1.2 million and a home value of $675,000. A second appraisal was done to determine the estimated deconstructed value of the building. This appraiser determined that the materials would be worth $313,353.

The contents were valued at a replacement cost of $372,000, with a current market value of $24,206. On their 2010 tax return, the Manns deducted $675,000 for the building value, $24,206 for the contents and $10,000 for the cash gift. They deducted the $1,500 cash gift in 2012. The Service denied all deductions and assessed taxes, penalties and interest.

At trial, the Manns claimed that under Maryland law it was permissible to separate the building and land into two legal property interests. However, Maryland law required both severance of the building and a recorded transaction to separate these property interests. Because the Manns did not record the conveyance, there was no separation. The building gift is a nondeductible partial interest under Sec. 170(f)(3)(B)(ii) because it was not an undivided interest under Maryland law.

The taxpayers reduced the claimed deduction from the initial $675,000 to $313,353. The taxpayers claimed that this number was a proper valuation of all of the components of the home, and that there was a "constructive severance" of the house from the land. The IRS claimed that the gift failed the partial interest rules and the appraisal did not cover the gifted property.

Homeowner Linda Mann had signed a donation agreement, but retained the recorded ownership of the house. Under Maryland law, the improvements are part of the real property. The homeowner therefore still was the recorded owner of the home.

The "constructive severance" claim by the homeowner was rejected. While the gift agreement indicated that Second Chance employees "deconstructed" the home, the gift of appliances, countertops, flooring, and other items fails the Section 170(f)(3)(B)(ii) partial interest test.

In addition, the claimed deduction for all of the components of the house was not consistent with the items salvaged by Second Chance. Some items were salvaged, some were discarded, and some were destroyed by the contractor in order to build a new residence. Therefore, the appraisal was not qualified under Section 170(f)(11)(C).

The appraisal also failed to describe the methodology for determining value. The building components were valued at 83% of the new value, without explanation by the appraiser. Therefore, the deduction was denied.

Editor's Note: Deductions for severed personal property are permitted if the correct steps are taken. The donor must sever the property, transfer it to charity by appropriate conveyance method under state law and have the property valued by a qualified appraiser. If possible, the appraisal should be done prior to delivery.

Applicable Federal Rate of 0.6% for January -- Rev. Rul. 2021-1; 2021-2 IRB 1 (16 December 2020)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2021. The AFR under Section 7520 for the month of January is 0.6%. The rates for December of 0.6% or November 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published January 8, 2021
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