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Coronavirus – Related Tax Relief for Qualified Opportunity Funds and Investors

The IRS has provided tax relief to Qualified Opportunity Funds (QOFs) and their investors in response to the ongoing COVID-19 pandemic. Specifically, if a taxpayer’s 180th day to invest in a QOF would have fallen on or after 4/1/20 and before 12/31/20, the taxpayer now has until 12/31/20 to invest eligible gain in a QOF. Also, the period between 4/1/20 and 12/31/20 is suspended for purposes of the 30-month period during which property may be substantially improved. The IRS also has announced that, due to COVID-19, a QOF’s failure to hold less than 90% of its assets in Qualified Opportunity Zone Property on any semiannual testing date from 4/1/20 through 12/31/20 is due to reasonable cause under IRC Sec. 1400Z-2(f)(3) and such failure does not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment. Notice 2020-39 and News Release IR 2020-114.

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PPP borrowers get concessions, additional guidance on forgiveness

  The U.S. Senate has passed the bipartisan Paycheck Protection Program Flexibility Act of 2020, which loosens several of the Paycheck Protection Program’s (PPP’s) more onerous restrictions regarding loan forgiveness. President Trump has signed the bill into law. The new law follows the May 22, 2020, release of an interim final rule from the U.S. Department of Treasury and the Small Business Administration (SBA) on PPP loan forgiveness requirements. Among other areas, that guidance addresses the calculation of full-time employees and total salary or wages for purposes of loan forgiveness reductions.     The PPP in a nutshell The Coronavirus Aid, Relief and Economic Security Act (CARES Act) established the PPP to help employers cover payroll during the ongoing COVID-19 pandemic. The program is open to U.S. businesses with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. The loans may be used to cover payroll, certain employee health care benefits, mortgage interest, rent, utilities and interest on any other existing debt for the “covered period.” Under the CARES Act and subsequent guidance, the covered period ran for eight weeks after loan origination. The PPP Flexibility Act extends that period to the earlier of 24 weeks after the origination date or December 31, 2020. PPP loan proceeds applied to cover payroll, mortgage interest, rent and utilities are subject to 100% forgiveness if certain criteria are met. Earlier Treasury Department regulations indicated that eligible nonpayroll costs couldn’t exceed 25% of the total forgiveness amount, but the PPP Flexibility Act raises the threshold to 40%. At least 60% of the loan must be spent on payroll costs to qualify for any forgiveness. For unforgiven costs, the new law extends the repayment period from two years to five years. However, employers are still required to maintain their staff headcount and payroll to qualify for full forgiveness. Loan forgiveness may be reduced if: The average weekly number of full-time equivalent (FTE) employees is reduced, or Salaries and wages are cut by more than 25% for any employee who made less than $100,000 annualized in 2019. Borrowers originally had until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020, and avoid reductions in the forgiveness amount. The PPP Flexibility Act extends that deadline to December 31, 2020. The covered period Although the CARES Act provides that the covered period runs for eight weeks from the date of origination, the May 22 guidance lays out an alternative covered period. Borrowers with a biweekly, or more frequent, payroll schedule can elect to base their calculations on the eight-week period beginning on the first day of their first pay period following the disbursement date. Note that the alternative covered period is available only for calculating payroll costs; it doesn’t apply to calculating mortgage interest, rent or utilities. And, if a borrower does use the alternative period to compute payroll costs, it also must use that alternative period […]

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Tax Updates related for revisions to the Paycheck Protection Plan (PPP) H.R. 7010

Hello Vertical Advisors (VA) Clients & Friends: This morning listening to the news, I heard that the jobs report showed 3MM job added.  That is great!  In listening to the news but more importantly speaking with our clients, everyone seems ready to open and or get their business back to normal or bigger.  President Trump has stated he expects the US economy to bounce back strong.  A lot of our clients want to believe President Trumps statements about the economy getting back to normal, but we need to see the results to convince us.  The fact that the job report showed 3MM jobs added seems to be the beginning of support for the Presidents statements and supports what I’m hearing from our clients and business owners.  Please read this memo in conjunction with our memo dated April 2, 2020 that discusses the CARES Act. Today, President Trump signed H.R. 7010 which revised the PPP Act.  The revisions were small but should be helpful.  The revisions are focused on the loan forgiveness section and are as follows: Section 1106 of the CARES Act discusses PPP Loan Forgiveness: Change in Covered Period.  The covered period is the time one needs to spend the PPP funds: The original CARES act stated the covered period to use the PPP funds was 8 weeks. H.R. 7010 changes the covered period to the earlier of 24 weeks or December 31, 2020. Change in the requirements of the PPP funds spent on payroll costs: The CARES Act didn’t define a specific percentage needed to be spent on payroll and no payroll.  The SBA provided regulations which stated at least 75% needed to be spent on payroll costs.    H.R. 7010 states that 60% must be spent on qualified payroll and 40% on the non-payroll items. Reminders: Payroll costs include employees’ wages during the covered period which can’t exceed $100k / annual. Includes health insurance premiums Doesn’t include employer payroll taxes Other costs for the 40% (rent, interest on mortgage, utilities) Updates on rehiring: There are reductions in the loan forgiveness if head counts is reduce 25% or more.  If an employee quit or was fired, then the business had the option to replace that position with a new employee.  However, there were discussions regarding the company asking the employee to come back to work and the employee not accepting.  The updates allow additional flexibility regarding employee counts and availability.  A company head count will not be hurt if the company can show support and documentation that they were unable to rehire an employee AND unable to hire a similar qualified employee for an unfilled position on or before December 31, 2020. COVID-19 Safety Standards: Requires the business to follow requirements established or guidance issued by the Secretary of Health and Human Services for the period March 1, 2020 and ending on December 31, 2020 to maintain standards of sanitation, social distancing and other related safety requirements related to COVID-19.  Our firm has used the OSHA guidelines at https://www.osha.gov/Publications/OSHA3990.pdf, […]

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PPP Loan Forgiveness Update

If you received a PPP loan, please make sure you read the PPP Loan Forgiveness rules, and contact if you need assistance.  We felt the US Chamber of Commerce Guide was well written.  You can view it at https://www.uschamber.com/report/guide-ppp-loan-forgiveness If you have questions, or need assistance with preparing for the loan forgiveness application, please contact us for assistance.

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Haven’t received your stimulus payment? What can you do…

If you haven’t received your CARES Act taxpayer stimulus payment go to “Get My Payment” website at https://www.irs.gov/coronavirus/get-my-payment and enter your direct deposit information to order to receive an electronic economic impact payment.  This is needed by noon on Wednesday, May 13, 2020. As a reminder, individuals could receive up to $1,200 and married couples could receive up to $2,400.  Parents could also receive $500 for qualifying children.  For more information, you can read IR-2020-92 at https://www.irs.gov/newsroom/act-by-wednesday-for-chance-to-get-quicker-economic-impact-payment-timeline-for-payments-continues-to-accelerate  

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The IRS clarifies the deductibility of PPP-funded expenses

The IRS has issued new guidance addressing a question that has lingered since the launch of the Paycheck Protection Program (PPP) — whether expenses paid for with forgiven, tax-free PPP loan proceeds are deductible business expenses under Section 162 of the Internal Revenue Code (IRC). The guidance in IRS Notice 2020-32 doesn’t provide the answer borrowers hoped for, but that may yet come. The root of the question The Coronavirus Aid, Relief and Economic Security (CARES) Act created the widely publicized PPP to help some employers cover their payrolls during the novel coronavirus (COVID-19) pandemic. PPP loans are subject to 100% forgiveness if certain criteria are met, and the amounts forgiven are excluded from the borrower’s gross income. This is notable because forgiven debt generally is taxed as cancellation of debt income. The program is open to U.S. businesses with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. The loans may be used to cover payroll, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on any other existing debt, for eight weeks after receipt of funds. Forgiveness is available for payments for payroll, mortgage interest, rent and utilities. While the CARES Act explicitly states that forgiven PPP loan amounts aren’t included in the borrower’s gross income, it doesn’t expressly state whether borrowers can claim business expense deductions for the expenditures the forgiven amounts cover. Notice 2020-32 comes in response to requests from the tax community for clarification on this point. The IRS’s position Unfortunately, the guidance states that no deduction is allowed for an expense that’s otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. It explains that, to prevent a double tax benefit, IRC Sec. 265 disallows a deduction for any amount otherwise allowable as a deduction that’s allocable to tax-exempt income (other than interest). The IRS asserts that forgiven PPP funds constitute such tax-exempt income. In other words, the IRS maintains that a business shouldn’t be allowed to avoid taxable cancellation of debt income on forgiven PPP loan amounts and also to deduct the payments made with those loan amounts. The result for borrowers essentially is an offset of the tax benefit — the forgiven amounts are excluded from gross income but the deduction(s) for those amounts are eliminated. The pushback The IRS may not have the last word on the deduction issue, though. Members of Congress are signaling that the expenses paid by forgiven PPP loan proceeds should indeed be tax deductible. For example, both Sen. Charles Grassley (R-IA), the chair of the Senate Finance Committee, and Rep. Richard Neal (D-Mass.), the chair of the House Ways and Means Committee, have indicated that the IRS interpretation runs contrary to the goal of the PPP. They’ve said they would like the discrepancy to be remedied legislatively in the near future. It’s also possible that a borrower will challenge the IRS stance in court. Or the IRS simply could succumb to […]

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SBA extends the PPP repayment deadline for self-certification

The Small Business Administration (SBA) has extended the repayment deadline for Payroll Protection Program (PPP) borrowers that wish to take advantage of the “good faith” self-certification of eligibility option. The deadline is now automatically extended from May 7, 2020, to May 14, 2020. Companies that repay their loans by that date preempt the possibility of criminal liability if they’re subsequently found ineligible for PPP loans. The loans are intended to help small businesses with fewer than 500 employees weather the novel coronavirus (COVID-19) pandemic, but some large companies have applied for and received funds. Extended safe harbor In April 2020, the U.S. Treasury and the SBA issued frequently asked questions (FAQs) on PPP loans. One question asks whether businesses owned by large companies with adequate sources of liquidity to support their ongoing operations qualify for PPP loans. The SBA explained that — in addition to reviewing applicable affiliation rules to determine eligibility — all borrowers must evaluate their economic need for a loan under the standards in effect at the time of the loan application. The standards are set by the Coronavirus Aid, Relief and Economic Security (CARES) Act, which established the PPP, as well as subsequent regulations. Among other things, borrowers must certify that their PPP loan request is necessary. Specifically, they must certify that “current economic uncertainty” makes the loan necessary to support ongoing operations. The certification must be made in good faith, taking into account the borrower’s current business activity and ability to access other sources of liquidity in a way that’s not “significantly detrimental” to the business. The FAQs originally provided that any borrower that applied for a loan prior to April 24, 2020, and repays the funds in full by May 7, 2020, would be deemed by the SBA to have made the certification in good faith. As of May 5, 2020, though, the FAQs have been revised to reflect an extension of this safe harbor to May 14, 2020. The extension will be automatically implemented, with no need for borrowers to apply for it. Potential criminal liability Companies that don’t take advantage of the safe harbor and are later found ineligible for the PPP could face criminal liability, according to Treasury Secretary Steven Mnuchin. The loan application notes that making a false statement to obtain a guaranteed loan from the SBA is punishable by imprisonment of up to five years and/or a fine of up to $250,000. A borrower that falsely self-certified also could be subject to criminal or civil liability under the False Claims Act (FCA). The FCA permits treble damages, or triple the amount of the government’s actual damages, as well as civil penalties, imprisonment up to five years and a fine up to $250,000 for criminal liability. A tangled web Be aware that, according to a recently revised IRS FAQ, companies must repay their PPP loans by May 7, 2020, to qualify for the employee retention credit. We can help you with business consulting and evaluate all of the potential strategies […]

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Paycheck Protection Program Loan (PPPL)

Proceeds that are forgiven will generate reduced income tax deductions. The IRS has just released IRS Notice 2020-32 that informed the public if a taxpayer requests and is approved some or all of the PPPL to be forgiven, then that amount that we used for expenses related to payroll, health care, rent, interest expense and other related qualified costs will not be deductible. This IRS notice is related to Internal Revenue Code Section 265, which stated in summary that expenses related to tax-exempt income are not tax deductible. Also, consider that GAAP will treat the accounting differently for loan forgiveness. “ASC 405-20 provides accounting guidance relevant to the extinguishment of liabilities. Under ASC 405,when a debtor is legally released from a liability, the debt is considered extinguished via “legal defeasance.” Based on the information available at this time, loan forgiveness under the Paycheck Protection Program appears to fit the characteristics of a legal defeasance and could therefore be accounted for as a debt extinguishment.” Please reach out to us if you have any specific questions. We have attached a link for you to read IRS Notice 2020-32 at https://www.irs.gov/pub/irs-drop/n-20-32.pdf

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Financial/Accounting/Income Tax Thoughts During This Period of COVID-19

During 2008/2009, the Great Recession, we learned some things. When the economy is hurt, there are some things we can do to be better prepared, and there are some actions we can take to benefit from the financial stress. During those times, the banks took steps to reduce or close lines of credit and end banking relationships. If you feel this might be an issue for you, and you would like to have more cash, then consider drawing down on your line of credit to hold the cash. This will generally give you the opportunity to get more cash in your bank before the bank would reduce your line of credit. Now, I have not heard from anyone that they banks are doing this yet, but we are going through some financially challenging times. Each individual should consider if this strategy is a good strategy for them and weigh the costs of the interest expenses. Perhaps after a couple of months you can repay the line of credit. Keep your accounting up to date, as the banks might want to check your financial statements to continue your leading relationship. Consider if you can benefit from any of the tax law updates, which we have written about. Did you have a net operating loss in 2018, and if so, contact us to discuss how you can get a refund. Were you limited in the amount of interest expense you could deduct in 2018? If so, contact us. One item in the CARES Act that we did not write about, which was brought up by a client of ours, is that for 2020, the charitable deduction limitation is removed. The law previously stated that a taxpayer cannot take a charitable deduction in 2020 if the deduction exceeded 60% of their adjusted gross income (AGI), but with the CARES Act, that limitation has been removed. However, the requirements in general are that the donation must be in cash and typically must go to a 501(c)(3) charity. If you are interested in more information about this, please contact us so we can discuss the whole law and see if this could benefit you. Some other items to consider: Due to the stock marketing value dropping, this might be an opportunity to do some estate and gift tax planning with reduced values of securities. Contact us to discuss if you are interested. If your business revenues have dropped, then most likely the value of your business has probably been reduced. This can provide an option to provide key employees with some equity participation at a reduced value if that will benefit the company. Again, each business is unique, so contact us to discuss. We are hoping that the economy will be opening back up soon throughout the entire country. We are here to help, so contact us if you need our assistance.

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Preparing for Loan Forgiveness Under the Paycheck Protection Program (PPP)

In preparing for receipt of any funds from the Paycheck Protection Program Loan (PPPL), one should consider setting up a separate bank account to deposit the PPPL funds in and then to pay out expenses that qualify for loan forgiveness. First, let’s review section 1106 Loan Forgiveness under the CARES Act. It states, Borrower shall be eligible for loan forgiveness equal to the amount spent by borrower during an 8-week period after the origination date of the loan on: payroll costs (wages up to $100,000 annually per employee, health insurance, and some state taxes) interest payment on mortgages incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020 and; payment on any utilities for which service began before February 15, 2020. Recent updates also stated that 75% or more of the loan forgiveness needs to be for payroll. So, our suggestion is to open a bank account specifically for the PPPL proceeds and qualified expenses listed above. They have the qualified expenses listed above paid out of that account, and hopefully this process will make is easier for banks to see the qualified expenses were paid using the PPPL proceeds and hopefully allow for an easy process for the loan forgiveness. This PPPL process has been challenging for more applicants, so perhaps this separate bank account will make it easier is requesting for loan forgiveness in the future. As long as the business sets up the bank account early and requests checks, then we would expect these qualified expenses can be paid out of this designated account. Please note this is not a full explanation of the CARES Act or the PPPL program.  For more information please review our previous posts and speak with your tax advisor. Please contact us if you have any questions.

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