Wednesday, December 2, 2020


The general welfare exclusion or GWE, a little known administrative exception, exempts from a recipient’s taxable income most payments from government agencies under legislatively-provided social programs that promote general welfare, like the recently issued Economic Impact Payments of 2020 that were issued under the Coronavirus Aid, Relief and Economic Security (CARES) Act1..

To qualify under this exception, an exempt payment must (1) be made from a government fund, (2) be made for the promotion of general welfare (ie. generally based upon individual or family needs), and (3) not represent compensation for any services rendered.

Regarding similar payments made to businesses, like grants or the payments provided under the Cares Act’s (SBA) Paycheck Protection Program, it has been stated that these payments  generally do not qualify for the general welfare exclusion, because they are not based upon individual or family needs. Payments issued under the SBA's PPP program, for example, have been earmarked as loans, giving the recipient the ability to request loan forgiveness under SBA and IRS strict procedures.

In April, 2020, the IRS issued Notice 2020-32 and ruled that forgiven PPP loans may be excluded from gross income by an eligible recipient by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  However, it stated that any expenses associated with this tax-free income (eg. the forgiven loans) would not be deductible. In May, to assist in clarifying its position, the IRS issued Notice 2020-32, providing 2 examples stating that a taxpayer that receives a loan through the PPP is not permitted to deduct expenses that are normally deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act. This expense treatment is consistent with historic guidance regarding non-taxable income and any related expenses. In essence, it has the net effect of essentially reversing the tax-free benefit of the exclusion on any loan forgiveness.

And based upon the SBA's loan forgiveness application process, it could be well into 2021 until a borrower knows how much of their loan is forgiven. The question then becomes whether the forgiveness of the loan increases taxable income in 2020 when the proceeds are received and expenses are incurred or in 2021, when the borrower receives confirmation their loan is forgiven. There’s was also the question of whether the ultimate tax treatment of these income and expense items will match a business's financial statements prepared under generally accepted accounting principles (GAAP).  All of the answers to these questions appear to have been clarified in Notice 2020-32. 

It is not clear whether or not the SBA loans will be taxable for state tax purposes.  And to further complicate matters, "state-sponsored" program grants issued during the pandemic that are generally taxable for federal income tax purposes may or may not be taxable for state tax purposes. You will need to check with your state revenue agencies to get an answer to that question.

Note 1 - Because the individual is getting what amounts to a refundable tax credit in advance in the form of a stimulus payment, rather than waiting to get the money from the credit provided in 2021 (for 2020) when he or she actually files a 2020 tax return, he or she, in effect, is getting an advanced refundable tax credit.  If, for some reason, that individual doesn’t get any stimulus payment this year, but he or she is owed one, he or she can request it when filing a 2020 tax return. If they don't get the full amount that they were entitled to this year — say, they weren't able to get the $500 payment for an eligible child under 17 — they  should be able to request it once they file a 2020 tax return in early 2021. What if it turns out that the stimulus payment was more than that allowed? For example, suppose the IRS based a stimulus payment on a 2018 or 2019 tax return, when the income reported was lower, but the actual income is much higher for 2020? “If someone has income in 2020 that is higher than the tax return to calculate the advance rebate, they will not have to pay the credit back,” says Garrett Watson, senior tax policy analyst for the Tax Foundation, an independent, nonprofit tax policy organization. “In other words, any adjustments to a taxpayer's rebate on 2020 tax returns will be in the taxpayer's favor."

Thursday, July 23, 2020

Tennessee—Multiple Taxes: Relief Announced for Taxpayers Affected by April Tornadoes and Severe Storms

Following the IRS decision to extend federal deadlines for individuals and businesses located in Bradley County or Hamilton County, Tennessee has extended the franchise and excise tax and Hall income tax filing and payment deadlines to October 15, 2020, for taxpayers located in those counties.

The relief postpones the franchise and excise tax and income tax filing and payment deadlines that fall between April 12, 2020, and October 15, 2020. Affected businesses and individuals will have until October 15, 2020, to file returns and make any payments. This includes estimated tax payments for the first two quarters of 2020 that were due on July 15, and the third quarter estimated tax payment normally due on September 15. The extension will be automatically applied to franchise, excise, and income tax accounts of taxpayers having a primary address in Bradley County or Hamilton County. (Extracted from Paychex State Tracker News)

Friday, May 8, 2020

Shipping Charges Taxable in Tennessee

According to the Tennessee Department of Revenue, Delivery charges are considered part of the sales price of an item if the seller charges the customer for the delivery. The state says that it doesn’t matter if the delivery charges are stated separately on the invoice, are included in the lump sum total, or what the terms of the shipping are.

On its website, the Tennessee DOR makes it clear that this statue supersedes the prior Sales and Use Tax Rule 1320-5-1-.71. That rule was replaced in 2008 when Tennessee became compliant with the Streamlined Sales and Use Tax Agreement, which makes shipping and delivery charges a part of the sales price.

Because the charges are considered part of the sale, retailers should always charge sales tax on delivery charges. 


The only exception to this rule is if the items sold are exempt from taxes — in that case, sellers should not charge sales tax on shipping

Thursday, April 16, 2020

Secure Act Passed in December 2019 ...a Recap

The Further Consolidated Appropriations Act, 2020 (P.L. 116-94), a government spending bill enacted on December 20, 2019, which funds the government through September 30, 2020, served as the legislative vehicle for several year-end tax measures. Notably, the Act included the bipartisan Setting Every Community Up for Retirement Enhancement Act, known popularly as the SECURE Act. The SECURE Act draws upon the identically named House bill (HR 1994) and Senate's bipartisan Retirement Enhancement and Savings Act (RESA) (S 972). The SECURE Act makes major substantive as well as administrative reforms to retirement security, many of which are already effective.


The SECURE Act is largely considered a "win" for employees as well as the financial services industry. However, many lawmakers, stakeholders and industry leaders are saying that although the reforms are a big step, more needs to be done. To that end, congressional tax writers on Capitol Hill appear unfinished in the realm of retirement security. Top bipartisan, bicameral tax writers have already expressed an appetite for moving forward this year on additional retirement security legislation.

The SECURE Act made reforms to retirement planning and security in a number of areas, including Individual Retirement Accounts (IRAs), 401(k) plans, plan administration, and employer funding.

IRA Changes

The new legislation includes major changes for IRAs, including:

·         Moving the start date for requirement required minimum distributions (RMDs) to the year the owner turns 72;
·         Ending the 701/2 age limit for contribute contributions to an IRA; and
·         Shortening the distribution period for nonspouse inherited IRAs to a 10-year maximum.

The 10-year window for distributions to a nonspouse beneficiary applies regardless of when the IRA owner dies. Thus, the change will severely limit the use of "stretch IRAs" as an effective planning tool. Limited exceptions are available.

401(k) Changes

Some of the most significant 401(k) changes include:

·         Requiring plans to offer participation to long-term, part-time employees;
·         Encouraging auto-enrollment by increasing the cap; and
·         Streamlining the safe harbor for non-elective contributions.

Employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional means to participate in the plan. The rule change would only affect 401(k) cash or deferral arrangements, and no other qualified plans.

Administrative Changes

The new law also provides several other administrative changes:

·         Permitting distributions of up to $5,000 for the birth or adoption of a child without incurring the early-withdrawal penalty;
·         Count taxable stipends and nontuition fellowships as compensation for making IRA contributions;
·         Counting nontaxable difficulty of care payments earned by home healthcare workers as compensation for purposes of retirement contributions;
·         Allowing direct trustee-to-trustee transfers between retirement plans of lifetime income investments or annuities; and
·         Providing a safe harbor for plan sponsors in the selection of an annuity provider.

Changes For Employers

Small employers are now able to more easily band together to participate in pooled multiple employer plans (MEPs). Additionally, employers are encouraged to steer employees towards lifetime annuities. Other changes include:

·         allowing plans administrative flexibility, including relief for "close" plans;
·         new annual disclosure requirements; and
·         providing a safe harbor for plan sponsors in the selection of an annuity provider.

Further, qualified defined contribution plans, 403(b) plans, and governmental 457(b) plans are now able to make direct trustee-to-trustee transfers to other employer-sponsored retirement plans or IRAs of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held under the plan. Participants are now able to preserve their lifetime income investments and avoid surrender charges or fees.

"There is still more that we can do to help more Americans save for their retirement," Sen. Rob Portman, R-Ohio said. "I believe that passage of the SECURE Act can help pave the way for bolder reforms in legislation I have introduced with Senator Cardin called the Retirement Security and Savings Act. I believe the Senate Finance Committee [(SFC)] should hold hearings and a markup on this legislation, and I will work closely with Senator Cardin to move it forward," Portman added.


A spokesperson for SFC Chairman Chuck Grassley, R-Iowa, told Wolters Kluwer on January 14 that "nothing is planned at the moment," when asked about the potential SFC markup.