The Internal Revenue Service (IRS) recently issued Revenue Ruling 2020-27 which provides that expenses paid with Paycheck Protection Program (PPP) loan proceeds are not deductible in the tax year paid or incurred, if at the end of the tax year the taxpayer has a “reasonable expectation of forgiveness.” As a result, many calendar-year taxpayers that received a PPP loan will have additional income to report on their 2020 tax return if they wish to be in accord with IRS guidance. The IRS states in Rev. Rul. 2020-27 that a taxpayer has a reasonable expectation of forgiveness if he/she intends to apply for loan forgiveness. Therefore, unless a taxpayer has decided not to file for loan forgiveness, the taxpayer is presumed to have a reasonable expectation of forgiveness. Subsequent to the IRS’s ruling, several members of Congress have expressed concern with the IRS’s position and have made it clear that the congressional intent in the CARES Act was to ensure that PPP loan recipients whose loans are forgiven are not required to treat the proceeds as taxable income. Thus, they are strongly encouraging the IRS to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most. In addition, there may be state income tax implications as many states have not conformed to the federal government’s tax treatment of PPP loans or related forgiveness. Although there is a possibility that congressional action could reverse the IRS position, its likelihood remains uncertain. Given the potential of penalties for underpayment of estimated tax because of the disallowance of the related expenses, our firm believes impacted taxpayers should take proactive action. In order to avoid underpayment of estimated tax penalties, taxpayers should increase their withholding or estimated tax payments to satisfy the prior-year tax safe harbor rules (100% / 110% of 2019). If you have applied, intend to apply, or are undecided as to whether to apply for PPP loan forgiveness, then, absent further guidance, you should consider the following options for the filing of your 2020 federal income tax return: 1. Extend your tax return to allow additional time for congressional action in opposition to the IRS position. 2. File your tax return based on Notice 2020-32 and Revenue Ruling 2020-27 guidance by NOT deducting expenses paid with forgiven PPP loan proceeds. If the current IRS position is reversed, you can file an amended return to claim these deductions. 3. File your tax return taking a deduction for expenses but disclose (i.e., file IRS Form 8275) a position that is contrary to current IRS guidance. Disclosure helps to avoid the imposition of penalties if the IRS ultimately disagrees with the position but likely increases the taxing authority’s scrutiny of your return. 4. Choose not to apply for the PPP loan forgiveness and deduct the expenses as usual. Immediate Action Required Given the uncertainty that exists with the conflict between the current tax guidance as promulgated by the IRS […]

Scope This  is to alert Vertical Advisors’ clients about Expansion and extension of Employee Retention Credit (ERC) provided by the Consolidated Appropriations Act, 2021 (CAA, 2021) which was signed on December 27, 2020. This credit is also available for the period March 12, 2020 to January 1, 2021 based on the prior bill called Families First Coronavirus Response Act. However, if a business received a PPP related to the prior period, generally the credit will not apply. Under the CARES Act, the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before Jan. 1, 2021. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the ERC provided by the CARES Act until June 30, 2021 (Sec. 207). This credit will generally benefit businesses that have employees that did not receive PPP money. However, if a business has received PPP money, the ERC could still be applied related to wages not included in the PPP covered period. Highlights ERC Calculation: As noted above, the credit applies to wages paid in both 2020 and 2021. For wages paid prior to 12/31/2020, the credit amount is 50% of qualified wages, up to $10,000 in total per employee. Thus, the maximum Retention Credit in total amount is $5,000 per employee. The Retention Credit applies to: The employer’s share of Social Security tax under IRC Section 3111(a) (6.2% of wages) The portion of the employer’s and employee representative’s share of RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due. If the Retention Credit exceeds the employer’s Social Security or RRTA tax liability for the quarter, the excess may be refunded to the employer. The credit will need to be claimed on IRS Form 941 (Quarterly Payroll form).  Please see Item D of this section for details on how to claim and report the credit. For wages paid after 12/31/2020, the credit amount is 70% of qualified wages, up to $10,000 per quarter (up from $10,000 total) of qualified wages paid to an employee. Thus, the maximum ERC amount available for 2021 is $14,000 per employee ($7,000 per quarter).  This would apply to Q1 and Q2, 2020 payroll form 941.  If you have already filed the forms, it can be amended. CAA also allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year (Sec. 207(e)(1)). Qualified Wages: CARES Act section 2301 created the ERC for wages paid from March 13, 2020 to December 31, 2020, by employers that are subject to closure or significant economic downturn due to COVID-19. The CAA extends the ERC to include wages paid before July 1, 2021 (from January 1, 2021). Qualifying wages are based on the average number of a business’s […]