The weeks that bookend Independence Day are often quieter times in the CPA world, but not this year. Minnesota announced conformity to federal tax treatment on various pandemic programs, and the IRS reported historic call volume and a current backlog of 35 million tax filings waiting to be processed.
We shared in the frustration felt by many this filing season regarding the uncertainty of a multitude of tax issues. We hope that you find our commentary below a helpful resource as you enjoy the summer months. (note: this memo contains state tax rules unique to Minnesota, where the majority of our clients reside).
Paycheck Protection Program (“PPP”) Loans – Business and individual clients that received forgiveness of a PPP loan in 2020 likely reported MN state tax income on the debt forgiveness (if the 2020 tax return has been filed). If so, Minnesota will refund this money automatically in most cases (timing of the refund TBD). If you received (or plan to receive) PPP forgiveness in 2021 on either a first and/or second draw, we can now say with certainty that there will be no federal or state tax impact as a result of a forgiven PPP loan!
Unemployment Compensation – Taxpayers that reported adjusted gross income of less than $150,000 in 2020 will not be subject to Minnesota state taxes on the first $10,200 of unemployment benefits (per person, if filing jointly). If you already filed your 2020 taxes and reported unemployment compensation as income, this money will be automatically refunded to you (timing of the refund TBD).
EIDL Advance Grant – Businesses and independent contractors/sole proprietors that received an Economic Injury Disaster Loan Advance Grant (NOT the EIDL loan) in 2020 will not be subject to Minnesota state taxes on the grant proceeds. Again, if the grant was reported as income on a 2020 tax return, refunds will be sent automatically in most cases (timing of the refund TBD). These grants were typically made to businesses in an amount equal to $1,000 per employee, capped at $10,000 (i.e. 10 employees).
Note for 2021: the Minnesota state tax impact for EIDL Advance Grants or Target Advances received in 2021 is not yet determined. However, proceeds will be tax free at the federal level per the IRS.
SBA Debt Relief Payments – businesses with certain SBA loans (7a, 504 and microloans) received a benefit of up to six months of principal and interest payments made on their behalf by the SBA in 2020. These debt relief payments in 2020 are not taxable by MN and any taxpayers who already paid state tax on this debt forgiveness will be refunded the associated tax paid (timing of the refund TBD).
Note for 2021: the Minnesota state tax impact for debt relief payments made by the SBA on behalf of certain government loan holders in 2021 is not yet determined. However, these debt relief payments will be tax free at the federal level per the IRS.
Retirement Plan Distributions – Taxpayers that took emergency distributions from a qualified retirement account (i.e. 401k or IRA) in 2020 are now allowed to spread the Minnesota state tax impact associated with the distribution evenly over a 3-year period to align with the federal treatment. Please note that a return of these distributions to the qualified account before the 3-year period ends will allow the taxpayer to recoup any tax liability paid.
IRS Processing Delays – Taxpayers receiving IRS notices in the mail or anxiously awaiting 2020 tax refunds are not alone. The IRS is reporting a current backlog four times greater than normal. The reported processing delays are due to tax law changes relating to the pandemic, requiring manual/additional review of more filings. It is expected that the delays may last into the fall, holding up refunds and creating errant notices longer than ever before.
If you are waiting for a refund, or have received a written notice from the IRS regarding an issue with your taxes, there is not necessarily an immediate cause for concern. Congress is well aware of the current issues at the IRS and has expressed intent to mandate flexibility and reasonableness regarding delays and filing issues stemming from the pandemic. Additionally, you can check the status of a refund using the IRS website tool “Where’s My Refund” by visiting www.irs.gov/refunds.