The IRS is extending the Tax filing deadline. Returns and payments will be due May 17, 2021 for 2020 individual returns. There is no extension for Corporation, S. Corporation or Partnership returns got similar delays. There is no indication that Fiduciary returns got extended either.
“In a statement, the IRS said the extension would be automatic, with no need to file any forms and no penalties or interest on taxes due that are paid between April 15 and May 17.”
1st Quarter Estimated Taxes however are still due on April 15.
Maryland is extending their deadline to July 15. The extension applies to individual, pass-through, fiduciary and corporate income tax returns, including first and second quarter estimated payments. It’s brought on by the recent and pending legislation at the state and federal levels impacting 2020 tax filings during the pandemic.
Virginia has not weighed in with an extension, yet.
Short Sales, Stock Manipulation, and other stuff
Under the 2017 Tax Act Theft losses are no longer deductible. In Adkins v. United States the Court implicitly agreed that a loss from a pump and dump scheme was a theft loss. This means that as a Taxpayer you are stuck with a capital loss either short or long term if you are the victim of stock manipulation.
Lately, there has been some game playing (interestingly with GameStop). The Company appeared to be on the ropes due to COVID and having stores in brick and mortar malls. Some investors sold the stock short. There is a little known fact on Wall Street, stocks go down faster than they go up most of the time. So, you can make a lot of money if you bet correctly. Gamers and others decided it would be fun to play a trick on short sellers in GameStop. So, they started buying either the stock or call options on the stock. This had the effect of making the demand higher and the stock started going up. People who sold short (meaning they borrowed the shares), had to buy the stock to stop the bloodbath. People who wrote naked call options (meaning the wrote options thinking the stock would go down) had to buy options themselves to cover or buy the stock. This cause the stock to go up further.
A few handy lessons in this. (1) If you are going to sell short, protect yourself at the beginning by purchasing a call option. A call option gives you the right to buy the stock a specified price. That way, if the stock goes up, you have upper level protection against the loss. (2). Stock manipulation occurs all the time. We don’t see it as clearly as in this case. Sometimes its for fun or an academic exercise where people don’t actually buy the stock, just take some actions which have the effect of propping it up, or knocking it down. For example, remember the urine in the beer hoax about Corona Beer, that caused a market shift downward temporarily. Another example a college class had 10 people call five different brokers to ask what’s going on with a certain penny stock (but not to buy). Brokers being salesmen figured the calls were a flurry of interest. And started touting the stock to their customers. And the stock went up slightly. (3) Beware of high pressure salesmen who attempt to get you to buy a stock. Its possible that they or their bosses own a chunk of that stock and once it goes up, they will dump it (pump and dump) leaving you to hold the bag.
So, while stocks are a great investment tool, there is some fraud out there. So, be wise in your investment strategy and use reputable brokers that you know personally.
Cryptocurrency and 1099-K
People who trade cryptocurrency had a surprise in 2019.
Some cryptocurrency companies sent out (incorrectly in my view) 1099-K forms for cryptocurrency transactions. This led to the IRS looking for Schedule C income for taxpayers and assessing taxes for unreported income.
Some have said will start issuing 1099-MISC in 2020 which likewise may be incorrect. A 1099-MISC is not meant for:
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
At least $600 in:
Rents.
Prizes and awards.
Other income payments.
Medical and health care payments.
Crop insurance proceeds.
Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
Payments to an attorney.
Any fishing boat proceeds.
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
If you received a 1099-K in 2019 and didn’t report that income on your return what should you do. Amend your return with a schedule C showing the income and then backing out 100% of the income with a negative number (stating that the 1099 was issued erroneously). If you had trading profits or losses, you (and didn’t report them) you should amend schedule D to reflect those using the 1099-K number as gross proceeds.
If you receive a 1099-MISC in 2020, again, you may have to file a schedule C back out the number and then report the transactions on Schedule D.
In some respects, Cryptocurrency companies are stuck in the middle. Some people accept cryptocurrency in their businesses for payment, others trade the currency and these companies can not differentiate who is who.
The main lesson is don’t ignore the form, and be sure to include that income clearly on your return where the IRS will be looking which will be Schedule C.
Post COVID Surprises
What have we learned during the COVID crisis? People can telework (except me). When people stay home, restaurants that depend on lunch business, die. When restaurants can’t fill all their tables they die. What does this mean in general. All these businesses rent commercial space in commercial buildings. There will be a glut of commercial space starting in 2021. Empty buildings mean foreclosures. Foreclosures mean depressed values on commercial real and personal property. This means tax revenues for localities will be tight. Look for localities to get creative by raising licensing taxes and fees. Planning for these increases is difficult, because fees are random and license taxes are on gross receipts. So, businesses are advised to not book receipts until earned and establish escrow accounts for unearned money that may have to be returned to customers. For example if something has a one year money back guarantee, escrow the money until the year has passed and don’t book it as earned until guarantee period has expired.
Given that some states unemployment insurance funds were stretched to their limits during COVID, and that some states passed higher minimum wage laws (which will lead to layoffs), expect unemployment insurance premiums to rise in the coming months. Be prepared to contest claims for justified firings. Larger employers should consider hiring a UI cost control company to audit your practices. Consider retraining instead of laying off. Its very hard to move employees into a contractor status. So, look at IRS Form W-8 to see what the test looks like. So, that will not be a panacea.
2021 may not be as weird as 2020, but it will still have its shocks.
More Tax Planning Pre-Biden
If you make more than $400,000 (apparently in compensation) then there will be a 12.4% social security tax on top of your income tax which will go up to 39.5% Federal and who knows what will happen in high tax states who are losing payers by the day. So, if in fact the trigger is compensation, it might be time to look at those LLC’s and turn them into S Corporations starting 1/1/2021. That way you can limit compensation to reasonable compensation and the rest would be S Corp dividends. Given this was the method used by none other than Joe Biden to save medicare taxes on his $15 Million of book royalties, I don’t feel as bad about mentioning it. We’ll keep looking at this subject in days going forward.