Ref: CA budget deal 6/28/22.

The CA Governor and Legislature have reached a 2022-23 budget agreement containing refunds to return to taxpayers some of the current large budget surplus. The bills have not yet been voted on by the California General Assembly. IF PASSED, they will provide refunds to CA taxpayers. Qualifications:

1. Be a CA resident when the payment is issued and for at least six months during 2020;
2. Have filed the 2020 individual tax return by October 15, 2021;
3. And, not be claimed as a dependent on another taxpayer’s 2020 return.

The timing and method of payment are not yet determined.

A chart of the table for specific refund amounts is at:

www.caltax.com/files/2022/cataxrefunds.pdf

The IRS has expanded their online tool “Where’s My Refund” to allow access to information for two filing years. As of this writing that’s tax returns for 2020 and 2021.

The link to this tool is:

https://www.irs.gov/refunds

Source IR-2022-11

National Taxpayer Advocate Erin M Collins presented her annual report to Congress on January 12, 2022. This report highlighted 2021 as “the most challenging year taxpayers and tax professionals have ever experienced.” She highlighted the following executive summary items as well as reflecting that likely the 2022 season will see more of the same:

1. Backlog: As of late December 2021, the IRS backlog was 6million unprocessed original individual returns; 2.3 million unprocessed amended individual returns; 2 million unprocessed employer’s quarterly tax returns and 5 million pieces of taxpayer correspondence (responding to IRS notices).
2. Online “Where’s My Refund?” tool: Often was unable to answer that question… it had no data due to the backlogs.
3. Telephone service: 282 million phone calls received and IRS answered only 32 million = 11%.
4. IRS processing averages: The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them (up from 74 days in 2019).
5. The IRS is unable to find new employees to hire to meet the gap when existing employees retire or leave government service.

Our opinion: Starting 2022 with such a backlog will lead to similar issues this year and some refunds (especially amended returns) may take six to eight months to process.

Ref: IRS Newsroom Nov 19, 2021

According to a recent IRS news release, there are still significant return processing backlogs from the last filing season. For example:

-6.5 million individual returns

-2.6 million individual amended returns

-3 million payroll Form 941 returns

-412,000 amended payroll Form 941 returns

Additional delays:

-Clogged and unusable IRS phone lines

-Millions of backed up mail answers from taxpayers

At this point, there is no way that they can catch up by the start of the 2021 filing season, so the delays will “merge” into an even larger mess.

Source: Accounting Today / National Conference of CPA Practitioners

Erin Collins, IRS National Taxpayer Advocate, reported:

1. At this point there are 5.5 million Form 1040’s and over 4 million business returns that have been opened but not processed by the IRS.
2. The IRS goal is to process these by December 31, BUT
3. By October 15, 2021, they expect another 4 million paper returns… putting them further behind.
4. The IRS does not have enough employees to do the work.
5. The phone systems are jammed as there is not enough space in the system even to get in line for a multi-hour wait.
6. Even if they were able to hire the additional thousands or workers, there is a multi-month training lag.

DMDCPA’s opinion:

1. Likely the IRS will be working on 2020 timely-filed returns well into 2022.
2. The lack of IRS personnel to service taxpayers (especially in reply to notices) results in the IRS computer continuing to “age” the issues in the system. These then result in more correspondence.
3. Eventually, these work up to the highest levels… the Tax Court and Taxpayer Advocate Office. These replies often require taxpayers to incur additional professional fees in Appeals or Petitions for administrative issues which should have been handled at much lower levels.
4. In our opinion, Congress should pass legislation stalling collections until the IRS can reasonable reply to correspondence, but nothing is forthcoming from that arena.

Ref: CA Assembly Bill 150 (IRS approval via IRS Notice 2020-75)

IMPORTANT: THIS ONLY APPLIES TO CALIFORNIA INDIVIDUALS WHOSE BUSINESS IS USING A PASS-THROUGH ENTITY SUCH AS AN S CORPORATION, PARTNERSHIP OR LLC.

Executive summary:

1. State and local tax deduction (SALT) is limited to $10,000 on the federal return itemized deduction. This effectively means that the state income tax paid via the taxpayer’s W2 is not a federal deduction.
2. If the election is made on the entity return, the entity pays tax on behalf of the shareholder/owner/partner (s/h) equal to 9.3% of the net income from the entity.
3. The s/h reduces CA income tax withholding on his/her W2 by the same amount.
4. The federal net income on Form K-1 is reduced the the amount paid to the state, effectively providing a deduction.
5. The s/h receives a state credit on his/her individual return for the amount paid on his/her behalf. This credit is NOT REFUNDABLE, but can be carried forward five years.

When is the DUE DATE of the payment?

1. For 2021 calendar year entity: March 15, 2022.
2. For 2022 through 2025: Greater of $1,000 or 50% of the prior amount due 6/15 of the following year and remainder by the March 15 filing date. (If this date is missed, the entity cannot use this election for that year).

IMPORTANT: For cash-basis individual shareholders (and most are)… THE ABOVE DUE DATES IN ITEMS 1 & 2 ABOVE WOULD CHANGE TO DECEMBER 31, 2021 AND DECEMBER 31, 2022 RESPECTIVELY (not March 15).

Source: Consolidated Appropriations Act, 2021. PL 116-260.

100% business deduction for food from restaurant.

For 2021 and 2022, to help the restaurant industry, Congress has removed the 50% limitation for business meals from a restaurant. Restaurant is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.

Restaurants are not:

1. grocery, beer, wine or liquor store
2. vending machine or kiosk
3. an eating facility located on the employer’s business premises

THE ABOVE CONTINUE TO RECEIVE THE 50% DEDUCTION ‘HAIRCUT.’

In your accounting records for 2021/2022 it will be important that you specifically segregate business food that is not from a restaurant and continues to be subject to the 50% rule.

Source: National Taxpayer Advocate’s report to Congress June 2021

The IRS Finished the Filing Season with Over 35 Million Tax Returns Awaiting Manual Reviews

“Although most taxpayers successfully filed their returns and received their refunds, a historically high number did not. At the conclusion of the filing season, the IRS faced a backlog of over 35 million individual and business income tax returns that require manual processing – meaning that employee involvement is generally needed before a return can advance to the next stage in the processing pipeline.  The backlog includes about 16.8 million paper tax returns waiting to be processed; about 15.8 million returns suspended during processing that require further review; and about 2.7 million amended returns awaiting processing. The backlog resulted largely from the pandemic-related evacuation order that restricted employee access to IRS facilities.”

Other media reports indicate that processing slowness resulted from IRS personnel working on other Covid-related projects such as stimulus payments.

Ref: American Rescue Plan Act, March 2021

In March 2021, Congress made a one-year change to the child tax credit: Increased to $3,600 for children five and younger and to $3,000 for children six to seventeen. THIS CHANGE IS ONLY FOR 2021.

The IRS is also set to auto-pay half of the credit monthly based on your 2020 tax filing.

Caution:

1. If your 2021 modified adjusted gross income is above $75,000 for single; $150k for married-joint or $112,500 for head-of-household filers, you will not qualify for the full credit and may have to pay some back when you file the 2021 return.
2. If you get the credit pre-paid to you on a monthly basis, it won’t be there when filing the return for 2021.

If you want to OPT OUT of receiving prepayment of the credit, Google search the IRS’ web page for “Child Tax Credit Update Portal” and unenroll from advance payments.