Case Study: Tax Research
Read Time: 12 minutes
I see a ton of people say that because they did accounting for a while or they took a semester of accounting in college they don’t need any tax help.
However, tax preparation and the tax industry is more than just accounting. It is a mix of accounting and legal and it is not for the faint of heart.
I am not making this post to say you can’t do your own taxes (though I highly advise against it), I am making this post to bring light to how challenging it can be and hopefully demonstrate how much work goes into being a tax professional doing tax research, doing tax preparation work, and all of that jazz.
Note: The tax industry & tax research is not for the faint of heart.
I also want to discuss what real tax research looks like and what the process can look like when you’re trying to find an answer to your tax-related question.
While some situations are fairly common and have an answer available on the IRS’s website, this is not always the case. There are many things that are new, changing, or challenging that require digging in a bit more than what the IRS’s website offers. The IRS’s website doesn’t talk about all of the details, exceptions, or discuss court cases involving every nuance or topic of research and it isn’t always the most up-to-date, especially when new regulation comes out.
I know most people are aware of the tax code changes that occurred in 2017, 2020, and 2021, but that’s not the only time the tax code changes. The tax code actually changes, updates, amends, and deletes each year. As a tax professional, we have to keep on top of the code and the many changes that occur. We do this by taking continuting education and also by knowing how to do really great tax research on a wide variety of topics.
I invite you to read more to follow a tax research journey I recently took.
Due to all of the changes that have occurred regarding the 2020 and 2021 tax year, I have had many clients with quite a few questions on how these new laws impact them and their business. There have been multiple questions that turn into quite a bit of research on my end to help them (and myself) understand.
I wanted to take one of the questions I received from a client and share with you all the process I went through to find the answer!
Step #1: Background
One of the things that frustrates most taxpayers is that the tax code is based so much on individual situations. When a taxpayer has a tax-related question, they are often met with “it depends”.
I know it is frustrating! I get frustrated with how much “it depends” too! However, the facts of the situation can change the answer to their question. In many cases, the answer can be the complete opposite of the “general rule” just because of the circumstances behind the taxpayer’s specific situation.
When you start digging into a tax research question, the first thing you have to do is gather as many facts as you can about the situation in question. All kinds of questions can come into play and those questions vary depending on the question. A few common questions relate to business entity, location, business’s industry, ownership structure, and transaction details. Then you have to include additional questions relating to the specific tax situation being discussed.
With this case study, I am looking at ONE client’s situation and how the tax code applies to them. It might not be relevant to you and your situation. Please make sure you consult with your tax professional to make sure that you understand how the tax law applies to your specific situation.
Client’s Situation Background
I was helping a client make sure she was accounting for various grant and loan transactions appropriately.
The offset to many of the transactions was an other income account, in which I encouraged her to label them as nontaxable or taxable. While many of us are aware of the tax treatment for the new regulations; such as the PPP loan forgiveness is generally nontaxable, it makes it easier to label it as such and hopefully reduce errors when it’s time to file taxes.
She had an outstanding SBA loan prior to the Pandemic. Due to the relief programs, the SBA ended up making payments directly towards the SBA loan that she had. This left her with a decrease in the loan principal and no transactions that would have normally occurred, such as a cash payment from her bank account.
The SBA made payments directly on my SBA loan through the CARES act for 6 months. How would I enter that into Quickbooks?
Why is this a question?
I want to clarify the reason this is tax research even though it originates as a QuickBooks question.
I knew that there would be a journal entry that reduced the SBA loan by the amount of payments and was likely offset to an “other income” account in QuickBooks.
The conversation I was having with my client was to figure out what various “other income” transactions were labeled as taxable or nontaxable. The determination of taxable vs nontaxable is a tax question, thus results in tax research.
Step #2: Discover & Document Information
After you understand the background situation, you start the research process. With the base topic in mind, you start digging around to find appropriate resources to provide insight into these situations.
Many tax professionals have fancy tax research software that can help with this process to make it a bit easier, but sometimes we do the same as you – start with Google, as I did in our case study today.
Note: When typing in your Google search, include “IRS” in the search bar to bring in more reliable resources.
An important step is to make sure you save all documentation that you find that relates to the research. I save everything I come across then delete the documents that aren’t as relevant as I thought or do not provide additional insight into the issue. It’s better to have too much documentation and delete some than to not have enough and struggle to support your analysis.
Initial Starting Place
I admit, I started this research with a Google search, just like anyone else might be pulled to do. The tax code is massive and it is impossible to know what section things are under or what could possibly touch on your question.
On top of that, this is all really new regulations that may or may not have solid tax code involved. I do have tax research software that I use occasionally, but given how new this code was, I took to Google instead.
I ended up stumbling on my starting point by using the search term “Loan forgiveness IRS, SBA loans”. Now, don’t get me wrong, I tried multiple Google searches that didn’t give me any good results. Most were pulling in information about the PPP loan with a few EIDL discussions thrown in for good measure which didn’t help with the question I was researching.
Image shows a Google search with the search term: LOAN FORGIVENESS IRS, SBA LOANS and the search result used for further research.
However, I did find one article that was discussing some information that wasn’t really relevant, but it did provide some source information that I could to dig in deeper. Click this link to check out that article, opens in new window.
From this article, I found an IRS notice that was linked and I read some interesting information all within the first paragraph. The notice talked about how certain filing requirements were waived relating to amounts excluded from gross income. It then went on to list some section numbers of various Acts that discussed the situations where the amounts would be excluded. Click this link to read the IRS notice, opens in a new window.
Note: The Journal of Accountancy is a reputable source which is a main reason as to why I chose this article.
The Journal of Accountancy, along with The Tax Adviser, is connected to the American Institute of CPAs (AICPA) which is one of the main reputable organizations of the accounting industry. I see these as extremely reliable and reputable sources that can really help, especially when the IRS’s website hasn’t caught up or discussed the situation.
Start Diving Deeper
From the IRS Notice, it listed The Consolidated Appropriations Act, 2021, P.L. 116-260 as the Act they referred to in determining what loans are excluded from gross income. The Notice also went further and gave a section of the Act to use which was Division N, Title II, Subtitle B.
Once I knew the Act, I Google searched: “The Consolidated Appropriations Act, 2021, P.L. 116-260″ to find a document available that had the entire Act located on it. Thankfully, this is fairly simple to find as most (if not all) of the legislations are available for free online, just make sure you find a reputable source! The source I found was Congress.gov and if you click this link, which opens in a new window, you will be taken to a PDF of the Act.
Once here, I found the section of the Act referenced in the IRS notice which was Division N, Title II, Subtitle B. This section starts on page 783 in the PDF, but scroll to page 784 for the table of contents of this section to help us figure out where to go from here.
The table of contents shares that sections 276 through 278 all seem to deal with the forgiveness of loans, so I went ahead and found the first section within the document to read a bit more, found on page 798.
Note: To quickly find this, I hit CTRL + F (on PC) and typed “Sec. 276”
In The Thick Of It
Section (c) (1) states “any payment described in section 1112(c) of the CARES act shall not be included in gross income of the person whose behalf such payment is made”
Basically, this means that if you received loan forgiveness in a manner described in sec 1112(c) of the CARES Act, you don’t have to include it into your income for the year. BUT, that also leaves the question of “What payments are described in sec 1112(c) of the CARES Act?”
Back to Google Search! Now it’s time to search “CARES Act” to find a link that will take us to the Act for us to look at the above-mentioned section! Click this link to view the CARES Act PDF which will open in a new window.
Coming To An End!
Using my nifty Find (Ctrl + F) trick, I found Section 1112(c) on page 29 of the Cares Act PDF, which reads as follows.
(c) discussed the principal and interest payments made by the “administrator” to cover the principal, interest, and fees for a variety of situation in (A), (B), and (C)
I read the variety of situations listed in (A), (B), and (C) which basically said it met the specific qualifications to be eligible; which were loans made before COVID hit that were not on deferment, and the payment coverage period was six-months.
This makes sense, if the payments are made by the Administrator and meet the qualifications, then this is not included in gross income per Division N, Title II, Subtitle B, Sec. 276, Section (c) (1) of The Consolidated Appropriations Act.
Now, we’re almost done with our research, but not 100% there just yet!
What do they mean by Administrator?
In order to find this, I went to the very top of the Act, found the Title group that Section 1112 was located in (Title 1) and saw that the first section was labelled Definitions.
I went to page 6 where Section 1101 – Definitions was located and it described “Administration” and “Administrator” as the Small Business Administration or the SBA.
Note: Generally code sections have a “definitions” section that explains most terms!
Step #3: Sift & Analyze Information
In this case study that I’ve shared, I didn’t talk about all the information I found that was not relevant to the situation. I did mention it at the beginning as I did stumble upon a LOT of information that revolved around the PPP loan as that is the main topic of interest these days.
Before I started analyzing the information I found, I had to make sure the information I found was appropriate for the situation. If it wasn’t, then I didn’t keep it or dig into it any further. It is really important to make sure that the information is relevant to your situation and the facts surrounding your situation in this step.
From here, you want to make sure that the source is reliable (aka: not some random blog* or FB post). The information came from the IRS or an organization that is highly respected in the industry. Then you have to make sure that it is still current. The tax code changes constantly and you want to make sure you find information that is the most up-to-date available. Another reason why using blogs* are not the best – who knows when it was posted or updated?!
Once I’ve verified that the information is reliable, relevant, and up-to-date, I can move on to the analysis stage. I sort of do the analysis as I am digging through the information because I need to know what holes there are, what questions I still have, what clarification I still need, and more. But it is still an important step! Once I feel like I have the information and completed the analysis, I move on to the conclusion.
*No, the irony here does not escape me. I’m a random blog telling you not to assume random blogs are reliable.
Just keeping it real, folx!
Step #4: Conclusion!
Everything you do throughout this process will be dependent on the situation, background, and various facts of the issue.
When you are digging through and analyzing the information, you are doing so to come to a conclusion and determination on how to handle the tax question based on the given situation. The conclusion boils down to taking all of the information you have gathered and applying it to your specific situation after analyzing it so that you know how to treat the situation moving forward.
It’s important to note that when it comes to tax research and determining a tax treatment or conclusion, that your confidence level should have nothing to do with whether you’ll be audited or not. The confidence level and the determinant on if your conclusion is appropriate relies solely on how likely you would be able to win an argument against the IRS if you were to be audited.
Case Study Conclusion
Based on the data we have found, the payments that the SBA made towards my client’s loan will be marked as other income – nontaxable in Quickbooks.
The Consolidations Appropriations Act let us know that there is a group of loan forgiveness payments that are not included in taxable income.
The CARES Act clarified what those payments were and how to determine if your payment fell into this category.
Using this information gathered from reputable sources (Journal of Accountancy, Congress’s website) along with the client’s specific situation, we were able to make this determination.
Please note that this is not the answer for YOU, this is the answer for my client. While we found a solution, there must be certain criteria met in order for it to be applicable for you as well.
As I mentioned to start with, tax research is complex with lots of information you have to find, decipher, and then analyze to apply to your specific situation.
Use the box below to leave any questions, comments, or feedback you have!