May 2020

How Covid-19 Tax Relief & Aid Legislation Impacts Traders (Updates)

May 31, 2020 | By: Robert A. Green, CPA | Read it on

Tax tips for the July 15 deadline, extensions, 475 elections, NOL carrybacks, CARES relief, and more.

Update June 29: “IRS today announced the tax filing and payment deadline of July 15 will not be postponed. Individual taxpayers unable to meet the July 15 due date can request an automatic extension of time to file until Oct. 15 – it is not an extension to pay any taxes due. For people facing hardships, including those affected by COVID-19, who cannot pay in full, the IRS has several options available to help.” (See Taxpayers should file by July 15 tax deadline; automatic extension to Oct. 15 available.)

Watch our Webinar or recording Last-Minute Tax Tips & Extensions For Traders.

Original post

Congress postponed the tax filing and payment deadline from April 15 to July 15, 2020, for 2019 individual tax returns, extensions, and 2020 elections (i.e., Section 475). That’s good news for sole proprietor traders.

The July 15 deadline also applies to calendar-year 2019 C-Corps, U.S. residents abroad, estates, trusts, gift tax returns, information returns, IRA, and HSA contributions originally due April 1, or later.

Partnerships and S-Corps
Calendar-year 2019 partnership and S-Corp tax returns and 2020 Section 475 elections for partnerships and S-Corps were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for the July 15 postponement deadline because the March 16 deadline was before April 1. IRS virus relief guidance mentions pass-through entities, but that’s for a fiscal-year partnership or S-Corp tax return due on or after April 1, 2020.

Traders have calendar-year partnerships and S-Corps, so their entities are not eligible for the July 15 postponement relief. Some asked our firm if their existing partnership or S-Corp could take advantage of the postponed deadline for making a 2020 Section 475 MTM election. The answer is no.

Extensions for individual taxpayers
If you need more time to file your 2019 individual income tax return, file an automatic extension (Form 4868) for three additional months until October 15, 2020.

If you cannot pay the taxes you owe for 2019, then it’s essential to file the one-page extension to avoid IRS late-filing penalties of 5% per month for up to five months. The IRS charges this penalty based on the tax balance due. On Form 4868, enter your estimate of total tax liability for 2019, total 2019 payments, including overpayment credits, balance due, and the amount you’re paying. “If your return is more than 60 days late, the minimum penalty is $330 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller.” Even if you cannot pay any amount due, filing the extension on time avoids the late-filing penalty.

The IRS also charges late-payment penalties if the taxpayer does not pay at least 90% of their 2019 tax liability by the postponed deadline of July 15, 2020. The late-payment penalty is 0.5% per month, for up to five months, for a maximum of 2.5%. It’s ten times less than the late-filing penalty. For example, if the taxpayer owes $50,000 by July 15 but doesn’t pay it until October 15, 2020, the total penalty is $750 (three months of 0.5% equals 1.5% times $50,000).

The IRS allows the taxpayer to request abatement of late-payment and late-filing penalties based on a “reasonable cause.” Contracting coronavirus in your family or being negatively impacted by the virus might constitute a reasonable cause. “Attach a statement to your return, fully explaining the reason. Don’t attach the statement to Form 4868.”

The IRS calculates penalties and interest based on the tax payment paid after July 15.

The current interest rate on late payments is 4.5%, and the IRS does not forgive interest charges.

2020 estimated taxes
Treasury also postponed Q1 and Q2 quarterly estimated tax payments for 2020 until July 15, 2020. The original due dates were April 15 for Q1 and June 15 for Q2. Third and fourth quarters keep their original due dates of September 15, 2020, and January 15, 2021, respectively.

Mark your payment memo “2020 Form 1040-ES,” so the IRS does not confuse it with 2019 tax payments. Consider overpaying the 2019 extension, planning for an overpayment credit to apply to 2020 estimated taxes.

States also postponed the deadline
All states with a personal income tax have extended their April 15 due dates. See AICPA state filing conformity chart that they update.

Check if your state is decoupling from CARES, such as for NOL carrybacks. That’s happened in prior stimulus legislation.

Consider a section 475 election by July 15
If you have 2020 YTD trading losses and are eligible for trader tax status (TTS) as a sole proprietor, consider a 475 election on securities and or commodities due by July 15, 2020, the postponed tax deadline. Many traders have massive trading losses in 2020, and they desperately need a 475 election for ordinary loss treatment to unlock NOL carryback refunds.

Section 475 ordinary losses offset all types of income, which navigates around the $3,000 capital loss limitation. Section 475 securities trades are also exempt from wash-sale loss adjustments, which can create phantom income and capital gains taxes. I call Section 475, “tax loss insurance.” I generally recommend 475 for securities only to retain lower 60/40 capital gains rates on commodities (Section 1256 contracts). Section 475 does not apply to segregated investment positions so that you can enjoy deferral and long-term capital gains treatment, too.

There’s also a 20% QBI deduction on 475 income, net of TTS expenses. QBI excludes capital gains and portfolio income. Trading is a “specified service activity,” so you must be under the taxable income threshold of $326,600/$163,300 (married/other taxpayers) for 2020 to be eligible for the QBI tax deduction on TTS/475 income.

Be careful to follow the election rules properly. Attach a 2020 Section 475 election statement to your 2019 individual income tax return or extension filed by July 15, 2020.

E-filing an extension is convenient, but taxpayers cannot attach an election statement to an e-filed extension. Print the extension, attach the election, and mail or fax them together to the IRS.

If you are ready to file your tax return by July 15, there might be a problem: Most tax preparation software programs for consumers don’t include 475 elections. Either mail the 2019 tax return with 2020 Section 475 election statement attached, or e-file the tax return and send the election to the IRS separately by July 15. (See an example election statement and information about Form 3115 in Green’s 2020 Trader Tax Guide, chapter 2.)

CARES allows five-year NOL carrybacks
Starting with the 2018 tax year, TCJA repealed two-year NOL carrybacks and only allowed NOL carryforwards limited to 80% of the subsequent year’s taxable income. TCJA introduced the “excess business loss” (EBL) limitation, where aggregate business losses over an EBL threshold ($500,000 for married and $250,000 for other taxpayers for 2018) were considered an NOL carryforward. TCJA deferred losses into the future.

CARES suspended TCJA’s EBL limitation for 2018, 2019, and 2020. It also allows five-year NOL carrybacks for 2018, 2019, and 2020 and/or 100% application of NOL carryforwards.

Business owners should consider amending 2018 and 2019 tax returns to remove EBL limitations and consider five-year NOL carryback refund claims. It’s too late to elect 475 ordinary loss treatment for 2018 and 2019; a 2019 Section 475 election was due April 15, 2019. 2020 NOL carrybacks must wait until 2021 unless Congress speeds up that process with more virus legislation.

Businesses have until June 30, 2020, to file a 2018 Form 1045 (quickie refund) for a 2018 NOL carryback. They should get moving on these NOL carrybacks ASAP. Otherwise, they need Form 1040-X, which allows the IRS more time to process the refund.

TTS traders with Section 475 ordinary losses and those without 475 but who have significant NOLs from expenses (i.e., borrow fees on short-selling) should consider NOL carrybacks. If Congress changes the rules again (see below), your refund claim should be respected by the IRS as you filed based on current law in effect at the time.

The House passed new virus legislation
The House recently passed new virus legislation, backtracking on CARES business loss relief. However, the Senate rejected taking up this new House legislation. The House law restricts taxpayers to carry back NOLs from 2019 and 2020 only to tax years beginning on or after January 1, 2018.

The House legislation retains EBL limitations for 2018, 2019, and 2020 and it lifts the SALT limitation for 2020 and 2021. Proponents of the House bill argued that CARES business loss relief mostly benefits the wealthy. Proponents of CARES claim small businesses, plenty of which are not wealthy, need NOL carryback refunds to replenish their capital to remain in business — a goal for virus relief. Opponents of the House bill say lifting SALT helps mostly upper-income taxpayers. Pundits expect Congress to enact more virus legislation, so stay tuned.

CARES tax relief and economic aid
CARES offered tax relief and economic aid to employees, independent contractors, sole proprietors, and other types of small businesses. However, traders don’t fit into usual categories, so there are issues in applying for some CARES tax relief and aid.

Traders generate “unearned income,” and the CARES Act focuses on “earned income” (jobs). Traders eligible for trader tax status (TTS) operating in an S-Corp might be able to receive state and federal unemployment benefits if they close their trading business due to the negative impact of the pandemic.

TTS traders don’t qualify for a loan under the SBA Paycheck Protection Program (PPP), or any other SBA loan because trading is considered a “speculative business,” which the SBA bars from its lending programs.

TTS traders might be eligible for NOL carrybacks, relaxed retirement plan distributions, and recovery rebates.

Taxpayers negatively impacted by Covid-19 can take a withdrawal from an IRA or qualified retirement plan of up to a maximum of $100,000 in 2020 and be exempt from the 10% excise tax on “early withdrawals.” The taxpayer has the option of returning (rolling over) the funds within three years or paying income taxes on the 2020 distribution over three years. CARES also suspended required minimum distributions for 2020.

Here’s an example
My client, Josh, was recently laid off due to Covid-19. He is collecting state unemployment insurance plus federal pandemic relief of $600 per week. Josh is eligible for the $100,000 early withdrawal from his employer 401(k), and he can pay taxes or roll it over during the following three years, depending on how things work out. Josh plans to use a 401(k) early withdrawal of $50,000 to finance a new TTS sole proprietorship.

Josh’s TTS Schedule C does not conflict with his unemployment insurance benefits because he is buying and selling capital assets and not collecting a salary. Josh plans to submit a Section 475 election on securities only for 2020, due by July 15, 2020. He wants tax loss insurance and to be eligible for a 20% QBI deduction.

Next year, after Josh’s unemployment insurance ends, he might form a TTS S-Corp to have a salary in December to unlock health-insurance and retirement-plan deductions. S-Corp salary would conflict with unemployment insurance. (It’s always best to check with your state.) The financial markets are highly volatile in 2020, so there’s an opportunity for traders, especially with zero commissions. Josh operates his trading business from home, where he is safer from the pandemic. Brokers have reported strong growth in new trading accounts.

See blog posts:
April 15 Tax Deadline Moved To July 15 (Live Updates)
Massive Market Losses? Elect 475 For Enormous Tax Savings
How Traders Should Mine the CARES Act For Tax Relief & Aid
Tax Extensions: 12 Tips To Save You Money
IRS Coronavirus Tax Relief

Darren Neuschwander CPA contributed to this blog post.

 


Traders Elect 475 For Enormous Tax Savings (Live Updates)

May 20, 2020 | By: Robert A. Green, CPA | Read it on

Updates

May 20: 2019 calendar-year partnership and S-Corp tax returns, and 2020 Section 475 elections for partnerships and S-Corps, were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for virus tax relief with the July 15, 2020 postponement deadline. Postponement relief is limited to 2019 tax returns due April 1, 2020, or after, and the March 16 deadline was before April 1. However, fiscal-year partnership or S-Corp tax returns due on April 1, 2020, or later are eligible for the July 15 deadline.

Traders have calendar-year partnerships and S-Corps, so these entities are not eligible for the July 15 postponement date. Most traders filed 2019 partnership or S-Corp extensions by March 16, some along with 2020 Section 475 elections for the entity. Some of these traders asked our firm if their entity could take advantage of the postponed deadline for making a Section 475 MTM election. The answer is no. Individual traders (sole proprietors) are eligible for July 15 relief for filing 2019 individual tax returns, extensions, and 2020 individual Section 475 elections.

April 9: IRS Notice 2020-23, dated April 9, states on page 7: “Finally, elections that are made or required to be made on a timely filed Specified Form (or attachment to a Specified Form) shall be timely made if filed on such Specified Form or attachment, as appropriate, on or before July 15, 2020.”

Good news: TTS traders as sole proprietor individuals now have to July 15, 2020, to elect Section 475(f) for 2020, as the 475 MTM election is an attachment to a specified form, either F1040 or F4868. Previously, we recommended TTS traders elect 475 by April 15, 2020, to play it safe.

March 28: On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This bill includes significant economic aid and tax relief provisions. Some tax relief applies retroactively to 2018, 2019, and 2020. See how TTS traders carryback NOLs five tax years for 2018, 2019 and 2020 in our blog post CARES Act Allows 5-Year NOL Carrybacks For Immediate Tax Refunds. If you have massive trading losses in 2020, a timely-filed 475 election is essential for TTS traders this year!

March 25: Our Darren Neuschwander, CPA, communicated with the IRS Chief Counsel’s office for Section 475(f) MTM elections. Mr. Neuschwander asked whether the tax deadline for submitting a 2020 Section 475 election is April 15 or July 15, considering that the IRS delayed the tax-filing deadline to July 15. In our email to the IRS, we gave our rationale for why it should be July 15 (see March 24 update below).

The IRS official told us to watch for an IRS FAQ, which they might add to answer our question, although she gave us no assurances or a timeline.

In the meantime, she highly recommends that those who want to elect 475 MTM for 2020 to file the election statement by attachment to a 2019 tax extension (Form 4868) mailed to the IRS by April 15. That’s what Rev Proc 99-17 requires. The IRS tracks 475 elections with extensions or tax return filings, but not if the taxpayer sends a separate letter with the election. It’s okay if the taxpayer files another extension Form 4868 on July 15 to pay 2019 taxes owed. She reminded us that the IRS does not grant tax relief for late-filed 475 elections.

Therefore, we have been advising clients to make 2020 Section 475 MTM elections on securities and/or commodities by April 15. You can prepare the 2019 tax extension with the 2020 election statement attachment, but wait to file it until the April 15 deadline. Meanwhile, monitor the IRS FAQs and our blog to see if the IRS postpones that deadline as well.

What’s the fuss?
A Section 475 election could be a savior this year with extreme volatility and massive trading losses. Instead of having a capital loss limitation of $3,000, you’ll have unlimited ordinary losses and perhaps a net operating loss (NOL) carryback refund.

Pending stimulus legislation suspends the TCJA business loss limitations, including reauthorizing NOL five-year carrybacks for 2018, 2019, and 2020, and repealing the excess business loss (EBL) restriction. TTS traders with 475 elections would get immediate tax relief. That can replenish your trading account and keep you in business!

March 24: The IRS published FAQs to support Notice 2020-18 for the April 15 tax-deadline postponement to July 15: Filing and Payment Deadlines Questions and Answers. CPA industry groups will likely ask for another round of FAQs to address unanswered questions. It’s important to note that FAQs are not yet “substantial authority,” as tax notices are, and the IRS often changes FAQs at a future date like it recently did with cryptocurrency.

  • Elections: The FAQs don’t mention the word “elections,” including the Section 475 election for TTS traders. The Section 475 MTM election wording comes directly from Rev Proc 99-17, which states:

    “The (election) statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that  return or, if applicable, to a request for an extension of time to file that return.”

    In the Notice 2020-18, the IRS moved the due date for 2019 individual tax returns to July 15. The above Q12 allows an automatic extension request on July 15 for more time to file. It seems logical to conclude that a 2020 Section 475 election is due July 15. If the IRS does not explicitly address this question, then a TTS trader with a massive 2020 YTD trading loss might want to file a protective extension request with a 475 election statement attachment by April 15 to play it safe.

March 20: It’s not yet certain if the IRS will accept a 2020 Section 475 election submitted by July 15 in conformity with the postponed tax filing deadline. It would afford traders 90 days of additional hindsight. The IRS promised FAQs soon, which might address “elections.” The original CARES Act bill included moving election deadlines, too. (Update March 23: However, the latest version of the CARES Act bill removed that entire section, perhaps because Treasury already moved the tax deadline to July 15.) If you have a significant Q1 2020 trading loss as a trader eligible for trader tax status (TTS), and you are counting on 475 ordinary loss treatment, then it’s currently safer to file an extension by April 15 and attach a 2020 Section 475 election statement. Stay tuned to our blog posts about the election issue. (See April 15 Tax Deadline Moved To July 15.)

Original blog post, dated Feb. 29, 2020:

With heightened market volatility in Q1 2020, many traders incurred massive losses. TTS traders should consider a 2020 Section 475 election to turn capital losses into ordinary losses. Don’t get stuck with a $3,000 capital loss limitation for 2020 and a considerable capital loss carryover to 2021; unlock immediate tax savings with ordinary-loss deductions against wages and other income this year.

Election procedures: Existing TTS partnerships and S-Corps should attach a 475 election statement to their 2019 entity tax return or extension due March 16, 2020. TTS sole proprietors (individuals) should attach a 475 election statement to their 2019 income tax return or extension due April 15, 2020. The second step is to file a 2020 Form 3115 (Application for Change in Accounting Method) with your 2020 tax return. There are other benefits: 475 trades are exempt from dreaded wash sale loss adjustments, and profitable 475/TTS traders are eligible for the 20% QBI deduction if they are under the QBI taxable income thresholds.

Example 1: A TTS securities trader incurred a capital loss of $103,000 in Q1 2020. He elects Section 475 on securities only by April 15, converting the Q1 capital loss into an ordinary loss on Form 4797 Part II. He also plans to deduct $12,000 of trading business expenses on a Schedule C. He intends to offset the entire trading business loss of $115,000 against a wage income of $175,000 for a gross income of $60,000. Without a 475 election, this trader would have a $3,000 capital loss limitation on Schedule D, a $12,000 ordinary loss on Schedule C, and a gross income of $160,000. He would also have a capital loss carryover to 2021 of $100,000. By deducting the entire $100,000 in 2020 with a 475 election, the trader generates a considerable tax refund.

More about 475
Traders eligible for TTS have the option to make a timely election for the Section 475 accounting method on securities and/or commodities. Section 475 is mark-to-market (MTM) accounting with ordinary gain or loss treatment. MTM imputes sales of open positions at the year-end at market prices. Without MTM, securities traders use the realization (cash) method with capital gains and loss treatment, including wash sale loss adjustments and the annual $3,000 capital loss limitation.

Caution: Sole proprietor (individual) TTS traders who missed the Section 475 MTM election date (April 15, 2019, for 2019) can’t use ordinary-loss treatment for 2019 and are stuck with capital gains and losses and perhaps capital-loss carryovers to 2020. Carefully consider a 475 election for 2020, as you need capital gains to use up capital loss carryovers, and 475 is ordinary income.

A new entity set up after April 15 could deliver Section 475 MTM for the rest of 2020 on trading losses generated in the entity account if it filed an internal Section 475 MTM election within 75 days of inception.

Ordinary losses offset all types of income (wages, portfolio income, and capital gains) on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and ordinary trading losses comprise a net operating loss (NOL) carry forward.

By making a 475 election on securities only, TTS traders retain lower 60/40 capital gains rates on Section 1256 contracts (futures), and they can segregate investment positions for long-term capital gains.

TCJA introduced an excess business loss (EBL) limitation starting in 2018. For 2019, the inflation-adjusted EBL limitation is $510,000/married and $255,000/other taxpayers. The EBL applies to Section 475 ordinary losses and trading expenses. Add an EBL to an NOL carryforward. For example, a single taxpayer with a $300,000 ordinary loss from 475 and trading costs, and no other wage or business income, might have an EBL of $45,000.

TCJA offers a 20% qualified business income (QBI) tax deduction for pass-through businesses, including sole proprietors. TTS trading is a specified service activity. QBI includes 475 ordinary income but excludes capital gains/losses, portfolio income, and forex. TTS expenses are negative QBI. A profitable TTS/475 trader is eligible for the QBI deduction providing their taxable income is not over the QBI thresholds.

Don’t miss the 475 election deadline
Applying for 9100 relief within six months of the 475 election due date by private letter ruling is an expensive process, and it’s likely to fail. Only one trader won this type of relief — Mr. Vines displayed no hindsight and good faith, and he had a perfect set of factors. In PLR 202009013 dated Nov. 15, 2019, the IRS ruled, “Taxpayers are not entitled to § 301.9100 relief to make a late § 475(f)(1) election because Taxpayers did not act reasonably and in good faith and granting relief would prejudice the interests of the Government.”

For more information and a sample 475 election statement, see Green’s 2020 Trader Tax Guide, Chapter 2, on Section 475 MTM.

Darren Neuschwander, CPA, contributed to this blog post.


April 15 Tax Deadline Moved To July 15 (Live Updates)

| By: Robert A. Green, CPA | Read it on

Updates

May 20: 2019 calendar-year partnership and S-Corp tax returns, and 2020 Section 475 elections for partnerships and S-Corps, were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for virus tax relief with the July 15, 2020 postponement deadline. Postponement relief is limited to 2019 tax returns due April 1, 2020, or after, and the March 16 deadline was before April 1. However, fiscal-year partnership or S-Corp tax returns due on April 1, 2020, or later are eligible for the July 15 deadline.

Traders have calendar-year partnerships and S-Corps, so these entities are not eligible for the July 15 postponement date. Most traders filed 2019 partnership or S-Corp extensions by March 16, some along with 2020 Section 475 elections for the entity. Some of these traders asked our firm if their entity could take advantage of the postponed deadline for making a Section 475 MTM election. The answer is no. Individual traders (sole proprietors) are eligible for July 15 relief for filing 2019 individual tax returns, extensions, and 2020 individual Section 475 elections.

April 10: All states with a personal income tax have extended their April 15 due dates. (See AICPA state filing conformity chart that they update.)

April 9: IRS Notice 2020-23, dated April 9, states on page 7: “Finally, elections that are made or required to be made on a timely filed Specified Form (or attachment to a Specified Form) shall be timely made if filed on such Specified Form or attachment, as appropriate, on or before July 15, 2020.”

Good news: TTS traders as sole proprietor individuals now have to July 15, 2020, to elect Section 475(f) for 2020, as the 475 MTM election is an attachment to a specified form, either F1040 or F4868. Previously, we recommended TTS traders elect 475 by April 15, 2020, to play it safe.

The June 15, 2020 deadlines for U.S. residents abroad and also Q2 2020 estimated tax vouchers are also moved to July 15, 2020. (See IR-2020-66, April 9, 2020). The July 15 deadline now also applies to trusts and estates: “Today’s notice expands this relief to additional returns, tax payments and other actions. As a result, the extensions generally now apply to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Individuals, trusts, estates, corporations and other non-corporate tax filers qualify for the extra time. This means that anyone, including Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.”

March 25: 

475 elections: Our Darren Neuschwander CPA communicated with the IRS Chief Counsel’s office for making Section 475(f) MTM elections about whether to file a Section 475 MTM election by April 15 or July 15. (See the full update on our separate blog post Massive Market Losses? Elect 475 For Enormous Tax Savings.)

State taxes: AICPA State Tax Filing Relief Chart for Coronavirus: The AICPA has compiled this chart with the latest developments on state tax filings related to coronavirus, including states that conformed to the IRS postponement of the April 15 deadline to July 15. Not all states have conformed; for example, New Jersey had not as of March 25. 

AICPA Calls on Treasury, IRS to Provide Extensive Relief to Taxpayers. IRS Notice 2020-18 and related FAQs are helpful, but I agree with the AICPA that taxpayers need broader relief from Treasury. See the IRS Coronavirus Tax Relief page.

March 24: The IRS published FAQs to support Notice 2020-18 for the tax deadline postponement to July 15: Filing and Payment Deadlines Questions and Answers. CPA industry groups will likely ask for another round of FAQs to address unanswered questions. It’s important to note that FAQs are not yet “substantial authority,” as tax notices are, and the IRS often changes FAQs at a future date like it recently did with cryptocurrency.

Here’s what we know:

  • The IRS moved the IRA and HSA contribution deadlines from April 15 to July 15 (Q17 and Q21).
  • July 15 extensions: FAQ A12. “If you are an individual, you can request an automatic extension to file your Federal income tax return if you can’t file by the July 15 deadline. The easiest and fastest way to request a filing extension is to electronically file Form 4868 through your tax professional, tax software, or using the Free File link on IRS.gov. Businesses, including trusts, must file Form 7004. You must request the automatic extension by July 15, 2020. If you properly estimate your 2019 tax liability using the information available to you and file an extension form by July 15, 2020, your tax return will be due on Oct. 15, 2020. To avoid interest and penalties when filing your tax return after July 15, 2020, pay the tax you estimate as due with your extension request.”
  • Elections: The FAQs don’t mention the word “elections,” including the Section 475 election for TTS traders. The Section 475 MTM election wording comes directly from Rev Proc 99-17, which states:

    “The (election) statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that  return or, if applicable, to a request for an extension of time to file that return.”

    It seems logical to conclude that a 2020 Section 475 election is due July 15, but this has not been confirmed yet. If the IRS does not explicitly address this question, then a TTS trader with a massive 2020 YTD trading loss might want to file a protective extension request with 475 election statement attachment by April 15 to play it safe.

March 23: After Treasury moved the tax deadline to July 15, a newer version of the CARES Act bill removed the section about shifting the tax deadline “and elections” to July 15. The IRS has not yet addressed moving elections and IRA and HSA deadlines to July 15. The open question is: Can TTS traders submit a 475 election by July 15, 2020? The regular due date for a 475 election is April 15. Treasury and the IRS promised FAQs about the deadline postponement soon, and hopefully, it will answer open questions about elections, IRAs, and HSAs.

March 20: Treasury Secretary Steven Mnuchin announced President Trump’s directive to move the April 15 tax deadline to July 15, 2020, thereby postponing tax filings and tax payments for all taxpayers. The new rules in Notice 2020-18 remove the $1M cap on individuals included in the superseded Notice 2020-17, so all tax payments are penalty and interest-free until July 15. Mnuchin said the extension would give “all taxpayers and business this additional time” to file returns and make tax payments “without interest or penalties.” The Treasury Department promised FAQs soon. Hopefully, all states will follow suit with this federal change, so taxpayers don’t face conflicting rules.

Congress should proceed with new legislation like the Coronavirus Aid, Relief, and Economic Security Act to provide additional tax relief, beyond the Treasury Department moving tax deadline to July 15. Senate Majority Leader Mitch McConnell’s CARES Act bill temporarily suspends the Tax Cuts and Jobs Act business loss limitations, including reauthorizing NOL five-year carrybacks, repealing the excess business loss (EBL) limitation, and loosening the business interest expense limitation. That’s fantastic news, as businesses need tax relief for losses ASAP. Here are the related CARES Act provisions:

  • 2203: Section 172(b)(1) – “Net Operating loss carrybacks and carryovers” – Special Rule for losses arising in 2018, 2019 and 2020, such loss shall be a net operating loss carryback to each of the five taxable years preceding the taxable year of such loss.
  • 2203: Temporary repeal of 80% income limitation to deduct a 2018 and forward NOL for year beginning before 2021.
  • 2204: Repeal of 461(l) for 2018, 2019, and 2020 – excess business losses
  • 2206: 163(j) special rules for 2019 and 2020, increasing ATI percentage from 30% to 50% for limitation on business interest

CPA industry groups are also asking Congress to raise the $3,000 capital loss limitation, which they never indexed for inflation. Stay tuned.

March 19: Senator John Thune introduced a two-page bill Tax Filing Relief for America Act “To extend the due date for the return and payment of Federal income taxes to July 15, 2020, for taxable year 2019.” Treasury and the IRS recently issued guidance to delay certain tax payments for 90 days until July 15. Still, Treasury did not postpone the April 15 tax filing deadline, putting an undue burden on taxpayers and accountants. Thune’s legislation syncs tax filings with tax payments in a simple manner, whereas Treasury’s guidance is causing tremendous confusion. Leader McConnell just introduced the Coronavirus Aid, Relief, and Economic Security Act, which incorporates Thune’s bill. Thanks to the AICPA for pushing Congress and Treasury hard to get this critical April 15 tax relief. See the AICPA Coronavirus Resource Center. Stay tuned.

March 18: Treasury issued guidance in Notice 2020-17. It’s now official: As usual, individuals must file extensions on Form 4868 by April 15. Submitting this form with little tax information avoids excessive late-filing penalties, which are 5% per month up to 25% maximum on balance-due payments. The coronavirus relief only allows individuals to defer income tax payments up to $1M until July 15, without application of interest and “penalties,” and I think they mean late-payment penalties of 0.5% per month up to 5% maximum. Taxpayers can file a one-page extension Form 4868 without making tax payments until July 15. That should make quick work of the extension, which is essential as many taxpayers and accountants are overwhelmed with the impact of coronavirus. This Treasury guidance includes deferral for Q1 2020 estimated tax payments due by April 15, but not Q2 on June 15. (See IRS Notice 2020-17 with highlights.)

March 17: Treasury Secretary Mnuchin said if you owe a tax payment to the IRS, you can defer up to $1M as an individual and $10M as a C-corp. Tax payments will be interest and penalty-free if you file within 90 days of the April 15 deadline. “All you have to do is file your taxes,” he said. “You’ll automatically not get charged interest and penalties.” We need to see the fine print; there are many open questions. Mnuchin’s statement indicates taxpayers should still file an automatic extension on Form 4868 by April 15 to extend the tax return filing deadline six-months until Oct. 15. If a taxpayer cannot file an extension by April 15 due to the impact of coronavirus, then the IRS would be hard-pressed to deny reasonable cause for abatement of late-filing penalties.

— Per Bloomberg Tax, “Updates to make clear that taxpayers still must file by April 15 or seek an extension.” And, “The administration is also considering delaying the estimated quarterly tax payments that self-employed workers and businesses pay the IRS throughout the year, according to two people familiar with the matter. The first payment is typically due April 15.”

— Traders should file Section 475 elections by the April 15, 2020 deadline, since Treasury didn’t change the April 15 deadline; it is providing a 90-day extension for tax payments. I doubt Treasury wants to give traders 90 more days of hindsight on making 475 elections.

March 15: AICPA News: “Based upon our conversations, we anticipate that Treasury and the IRS will announce this week an extension of the April 15 deadline by as much as 90 days, and a waiver of penalties and interest for most taxpayers. Additionally, Treasury and the IRS are aware of the major deadline for businesses tomorrow, March 16, and the challenges facing taxpayers and tax preparers in meeting that deadline. They have indicated that they would be generous in determining reasonable cause abatement of any penalties for taxpayers and tax preparers unable to file in a timely manner.”

March 13 at 3 pm ET: Per Tax Talks, “President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the coronavirus. This declaration allows the Treasury Department and the IRS to extend the deadline for certain taxpayers and small businesses to pay taxes until December 31, 2020 as Treasury Secretary Steven Mnuchin suggested earlier this week.”

Per Bloomberg Law News (with this declaration), “The IRS can choose from a range of powers: abating penalties for failing to file or pay taxes, or postponing federal tax filing and payment deadlines without interest or penalties accruing, according to the agency’s Internal Revenue Manual posted on its website.”

March 13 at 1 pm ET: The president will probably use federal emergency powers today to direct the Treasury Department to provide tax filing and late payment relief. I hope the Treasury Department considers the AICPA proposals. (See the AICPA coronavirus resource center and the AICPA state filing conformity chart that they will update.)

The original blog post, dated March 12, 2020:

The Administration and Congressional leaders are negotiating stimulus measures to provide relief for the coronavirus pandemic, which might include loosening rules for the April 15 tax deadline.

In his Oval Office speech on March 11, the president proposed tax-payment relief for “certain individuals and businesses.” That might be too narrow, and hopefully, this relief will apply to all taxpayers since the virus is spreading fast around the county and causing wide-spread economic harm. It would be challenging to identify “federally declared disaster areas” eligible for tax relief. Blanket across the board tax relief is warranted. Treasury Secretary Mnuchin said the delay would cover “virtually all Americans other than the super-rich.”

Under current law, individual taxpayers must file 2019 income tax returns or an automatic extension form 4868 by April 15, 2020. An extension filing delays this for six months (Oct. 15). However, the IRS and states want taxpayers to make 2019 tax payments on time by April 15, 2020. The IRS uses a complicated regime of penalties and interest charges to incentivize taxpayers to make tax payments by April 15.

If a taxpayer misses the April 15 deadline, the IRS charges them a “late-filing penalty” of 5% per month, up to a maximum of five months for a total penalty of 25%. It would be unconscionable for the IRS to charge a coronavirus victim such a hefty penalty because they couldn’t file a one-page extension on time. I expect that IRS relief should make this automatic extension genuinely “automatic” by doing away with a requirement to submit a form 4868.

The IRS “late-payment penalty” addresses when a taxpayer should make tax payments that are due. IRS coronavirus relief should loosen the late-penalty rules, too. Under current law, the IRS would charge a late-payment penalty if the taxpayer did not pay at least 90% of their tax liability by April 15. The late-payment penalty is 0.5% per month, up to five months for a maximum of 2.5%. The IRS allows the taxpayer to request abatement of late-payment and late-filing penalties based on a “reasonable cause.” Contracting coronavirus sounds like a reasonable cause. The IRS calculates penalties and interest based on the tax payment paid after April 15. The current interest rate on late payments is 4.5%.

Hopefully, states follow suit with the IRS and enact coordinated tax relief over the April 15 deadline. States might use a different payment percentage to avoid late-payment penalties.

Accounting industry group weighs in
The AICPA issued a press release AICPA Calls for Indiv. & Business Tax Relief Amid Coronavirus Pandemic, dated March 11, 2020. My partner Darren Neuschwander CPA serves on the AICPA Individual & Self-Employed Tax Technical Resource Panel and helped draft this AICPA letter. (Darren will be serving as the vice-chair of the panel effective May 21, 2020, for the 2020-2021 year.)

The AICPA letter recommended an automatic extension for all taxpayers, without having to submit form 4868. The AICPA also suggested reducing the 90% payment rule to 70%, figuring the IRS might then provide the relief to all taxpayers. The AICPA letter further recommends: “Waive interest through October 15, 2020; and waive underpayment penalties for 2020 estimated tax payments if paid by September 15, 2020.” See the letter for their other recommendations.

On CNBC this morning, Jim Cramer called for tax payment relief across the board for all taxpayers and businesses. It seems the public and media’s first impression of this story is that no tax payments will be due April 15 with an automatic extension and 100% relief for interest and all types of penalties. The fine print of the penalty regime has always been confusing to many. Let’s wait to see the final tax law changes if any.

Special issues for traders
A 2020 Section 475 election is due by April 15 for individual traders eligible for trader tax status (TTS). (It’s March 16 for existing partnerships and S-Corps.) The election procedure requires a taxpayer to attach a 2020 Section 475 election statement to their 2019 tax return or extension filing made by the April 15, 2020 deadline. The IRS might allow an automatic extension, or it could extend the filing date altogether. However, I don’t expect the IRS to address 475 elections specifically. Therefore, it’s safer to mail the IRS a Form 4868 automatic extension and staple the election statement to it by April 15, 2020, according to current law. Alternatively, file a complete 2019 tax return and include the 475 election by April 15. This year traders are counting on a 475 election to convert year-to-date capital losses into ordinary losses due to massive volatility in Q1 2020. (See Massive Market Losses? Elect 475 For Enormous Tax Savings.)

It’s worth noting that the late-payment penalty is small and sort of like a margin loan; a maximum amount of 2.5% isn’t that bad for six months’ use of money.

If you do choose to postpone tax payments, be careful not to risk your tax funds owed the IRS in the financial markets as that might compound your cash flow problems.

This tax relief is like interest forbearance where banks allow a delay in mortgage payments, which many financial institutions offered to do in this crisis. It’s time for the U.S. Treasury to provide tax-payment forbearance, too.

See our blog post on extensions from last year Tax Extensions: 12 Tips To Save You Money.

Please share this blog post with Administration and Congressional leaders.

Darren Neuschwander, CPA, contributed to this blog post.

 


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