The IRS has moved into the third phase of distribution for the Economic Impact Payments (EIP). Over 140 million payments totaling over $239 billion have been distributed through direct deposits and paper checks.

Prepaid debit cards are now being sent out by the IRS to the remaining four million taxpayers who have not yet received EIPs. The debit cards may be used in store, online, for cash withdrawals at ATMs and to transfer funds to checking or savings accounts. Individuals are able to check their debit card balance online or by a phone call.

Treasury Secretary Steven T. Mnuchin stated, “Treasury and the IRS have been working with unprecedented speed to issue Economic Impact Payments to American families. Prepaid debit cards are secure, easy to use, and allow us to deliver money quickly to Americans. Recipients can immediately activate and use the cards safely.”

The IRS also published an updated "Fact Sheet" on EIPs. It answers many of the questions about the amount and distribution of the stimulus checks.

Who qualifies for an EIP?

Any U.S. citizen, permanent resident or qualifying resident alien may receive up to $1,200 for an individual or $2,400 for a married couple. There also will be an additional amount of $500 per qualifying child. The full amounts are available for single filers with incomes up to $75,000 and married couples with incomes up to $150,000. The recipient must have a Social Security Number (SSN) and may not be claimed as a dependent on another return. An individual with an individual taxpayer identification number (ITIN) will generally not receive a payment. An exception to the ITIN rule is a couple with one member serving in the U.S. Armed Forces who has a Social Security Number.

Who is a qualifying child?

The child must be under the age of 17 at the end of the applicable tax year, must not provide half or more of his or her support and must be a U.S. citizen, permanent resident or qualifying resident alien. A child, stepchild, foster child, sibling, grandchild, niece or nephew may qualify. The child must have a valid SSN or adoption taxpayer identification number (ATIN).

What are the income limits?

The payments are authorized for individuals with incomes up to $75,000 and couples with incomes up to $150,000. For incomes over that level, the payments will be reduced by 5% of the excess amount. Generally, the payments are reduced to zero for individuals with incomes of $99,000 and married couples with incomes of $198,000. The phaseout amounts increase by $10,000 for each qualifying child.

How is the payment phaseout calculated?

The phaseout amount is 5% of the excess over a given threshold. For example, a married couple with adjusted gross income (AGI) of $175,000 is $25,000 above the threshold. The payment is reduced by $25,000 multiplied by 5%, which equals a reduction of $1,250. If the couple has three qualifying children, their unreduced payment would be $2,400 for the couple plus $1,500 for the children for a total of $3,900, but because their income is over the $150,000 limit, this amount is reduced by $1,250 to $2,650.

What if my payment amount is wrong?

Approximately two weeks after a payment is issued, the Treasury will send a letter that explains your Economic Impact Payment. If you did not receive payment for a qualified child or there is some other problem and the amount is incorrect, you may apply for the balance when you file your 2020 income tax return. You will receive a credit on your tax return for the balance due on your EIP.

SBA Publishes PPP Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (SBA) published the PPP Loan Forgiveness Application (Application). The Application stated, “To apply for forgiveness of your Paycheck Protection Program (PPP) Loan, you (the Borrower) must complete this application as directed in these instructions, and submit it to your Lender (or the Lender that is servicing your loan). Borrowers may also complete this Application electronically through their Lender.”

The American Institute of CPAs (AICPA) welcomed the release of the Application. However, Erik Asgeirsson, President of CPA.com, the AICPA's Business and Technology arm, noted that there still are questions. He stated, "It is clear the application form and instructions provided yesterday are not enough. Some of the most pressing issues are not addressed and, in other areas, it appears new questions have arisen.”

There are multiple steps to calculate the correct amount of loan forgiveness.

1. Select Payroll Period

A favorable provision of the Loan Forgiveness Application is that a business may elect to use the eight-week period starting on the first day of the first pay period after the PPP Loan disbursement. If the loan was disbursed on April 20 and the first day of the next pay period was April 26, then the calculation may be from April 26 to June 20, 2020. Alternatively, the Borrower may choose to use the eight-week period commencing with the loan disbursement date.

2. Determine Payroll Costs

For the selected eight-week period, determine the applicable salary (limited to $100,000 annually per employee), wages, payment for leave, allowance for separation, housing allowance, group health care benefits, retirement benefits and state and local taxes on employee compensation. All of these items are permitted payroll costs for the applicable eight-week period.

3. Determine Non–Payroll Costs

The non–payroll permitted costs include mortgage interest, rent or lease payments for real or personal property and utilities. The applicable expenses must be for a property that was in use prior to February 15, 2020.

4. Reduced Payroll by 25%

If any employees with annual incomes under $100,000 suffered a payroll reduction of over 25%, the loan forgiveness is reduced by the amount of the salary reduction that exceeds 25%.

5. Reduced Employee Numbers

A decline in full time equivalency (FTE) employees will potentially reduce the loan forgiveness. The business may elect to measure the full-time employees for February 15 through June 30, 2019 or for January 1 through February 29, 2020.

6. Determine the Applicable Percentages.

The payroll costs must be 75% or more of the loan forgiveness. The non–payroll costs may be up to 25% of the loan forgiveness.

Editor's Note: The AICPA has built an excellent calculator to assist in these accounting determinations. You may use a search engine to locate the “AICPA PPP Loan Forgiveness Calculator.” The AICPA-recommended procedure for the calculations includes a link to an Excel spreadsheet for their PPP Loan Forgiveness Calculator.

Impermissible Limit on Conservation Easement Deed

In Woodland Property Holdings LLC et al. v. Commissioner; No. 10588-16; T.C. Memo. 2020-55 (12 May 2020), the Tax Court held the conservation easement deed did not qualify for a charitable deduction. The deed did not include a proportionate value to the nonprofit in the event of a judicial extinguishment and failed the "protected in perpetuity" requirement.

Woodland Property Holdings, LLC (Woodland) acquired 980 acres of land in western South Carolina in 2012. It sold a 98.99% interest in the property to LCV Fund XIV, LLC (LCV) for $1,148,298.

LCV was organized "to provide tax benefits to investor members.” The private placement raised $1.92 million from investors through the sale of 192 membership units at $10,000 per unit. The investors expected to share the $8,704,000 charitable contribution deduction from the gift of a conservation easement. The investors were promised $4.53 of tax deductions for each $1 invested.

On December 26, 2012, Woodland deeded a conservation easement to Southeast Regional Land Conservancy (SERLC). SERLC is a qualified nonprofit organization.

The conservation easement deed recognized there may be future unforeseen circumstances that render the conservation purposes impossible to accomplish. If the easement is extinguished in a judicial proceeding, the deed created a vested property right for SERLC that "shall remain constant." The value transferred to the nonprofit was “determined as of the date of this Conservation Easement."

Woodland Filed IRS Form 1065 and reported a charitable contribution deduction of $8,703,000. This deduction was based on an appraisal by David R. Roberts. The appraisal used the "before and after" method and claimed the highest and best use of the property was for a "Residential/Recreational Facility.”

The IRS audited the partnership and disallowed the charitable deduction. Alternatively, the IRS claimed that the fair market value of $8,703,000 was not valid. The IRS assessed a 40% accuracy–related penalty under Sec. 6662(h).

The Court noted a conservation easement under Sec. 170(h)(5)(A) must involve property that is "protected in perpetuity."

Reg. 1.170A–14(g)(6) states a judicial extinguishment of a conservation easement must produce a property right for the nonprofit "that is at least equal to the proportionate value” that the easement bears to the property gift on the date of transfer. The deed created by Woodland did not meet this requirement. It fixed the value for a judicial extinguishment "as of the date of this Conservation Easement.”

The Court noted the nonprofit would "watch its proportion of potential extinguishment proceeds shrink over the years, if the underlying property appreciates.”

Because the nonprofit did not share in the appreciation, the deed failed the "protected in perpetuity” requirement. The Court continued, "If the donee's only right under the deed is to receive at least a deficient share, with a hope that there might be more, then the deed does not comply with the regulation.”

Woodland claimed a savings clause in the deed should protect the deduction. The clause stated, "If any provision of this Conservation Easement is found to be ambiguous, an interpretation consistent with its purposes that would render the provision valid should be favored over any interpretation that would render it invalid.”

However, the savings clause does not modify the defective provision in the deed. It does not vest SERLC with a proportionate share of the judicial extinguishment proceeds. Therefore, the deduction was denied.

Applicable Federal Rate of 0.6% for June -- Rev. Rul. 2020-12; 2020-24 IRB 1 (15 May 2020)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2020. The AFR under Section 7520 for the month of June is 0.6%. The rates for May of 0.8% or April of 1.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.