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 […]
Read morePaycheck 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
Read morePreparing 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.
Read moreUPDATE: Loan Assistance EIDL
SBA has stopped accepting EIDL applications based on Lapse in Appropriations. Seems like SBA ran out of funding. You can read about it at https://lnkd.in/d92qPPW We feel each affected individual should contact their Congress person and request they approve additional funding without non-coronavirus items. There are discussions of additional funding, but we understand that there are political issues that include trying to add in non-coronavirus items which is slowing down the relief. IRS provides resources to check for your economic assistance check at: https://lnkd.in/eGznizg
Read moreCOVID-19: IRS announces more relief and details
In the midst of the coronavirus (COVID-19) pandemic, Americans are focusing on their health and financial well-being. To help with the impact facing many people, the government has provided a range of relief. Here are some new announcements made by the IRS. More deadlines extended As you probably know, the IRS postponed the due dates for certain federal income tax payments — but not all of them. New guidance now expands on the filing and payment relief for individuals, estates, corporations and others. Under IRS Notice 2020-23, nearly all tax payments and filings that would otherwise be due between April 1 and July 15, 2020, are now postponed to July 15, 2020. Most importantly, this would include any fiscal year tax returns due between those dates and any estimated tax payments due between those dates, such as the June 15 estimated tax payment deadline for individual taxpayers. Economic Impact Payments for nonfilers You have also likely heard about the cash payments the federal government is making to individuals under certain income thresholds. The Coronavirus Aid, Relief, and Economic Security (CARES) Act will provide an eligible individual with a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI). On its Twitter account, the IRS announced that it deposited the first Economic Impact Payments into taxpayers’ bank accounts on April 11. “We know many people are anxious to get their payments; we’ll continue issuing them as fast as we can,” the tax agency added. The IRS has announced additional details about these payments: “Eligible taxpayers who filed tax returns for 2019 or 2018 will receive the payments automatically,” the IRS stated. Automatic payments will also go out to those people receiving Social Security retirement, survivors or disability benefits and Railroad Retirement benefits. There’s a new online tool on the IRS website for people who didn’t file a 2018 or 2019 federal tax return because they didn’t have enough income or otherwise weren’t required to file. These people can provide the IRS with basic information (Social Security number, name, address and dependents) so they can receive their payments. You can access the tool here: https://bit.ly/2JXBOvM This only describes new details in a couple of the COVID-19 assistance provisions. Members of Congress are discussing another relief package so additional help may be on the way. We’ll keep you updated. Contact us if you have tax or financial questions during this challenging time.
Read moreThe IRS announces new COVID-19-related assistance for taxpayers
The IRS and the U.S. Department of Treasury have announced new relief for federal taxpayers affected by the coronavirus (COVID-19) pandemic. The IRS had already extended certain deadlines to file and pay federal income taxes and estimated tax payments due April 15, 2020, without incurring late filing penalties, late payment penalties or interest. The additional relief, outlined in Notice 2020-23, applies to a wider variety of tax filers. The IRS also has announced new tools for taxpayers expecting Economic Impact Payments (also known as “recovery rebates”). The extensions in a nutshell The extensions apply to taxpayers, including Americans living and working abroad, with filing or payment deadlines on or after April 1, 2020, and before July 15, 2020. Covered tax forms and payments include: Individual income tax payments and returns, Calendar-year or fiscal-year corporate income tax payments and returns, Calendar-year or fiscal-year partnership return filings, Estate and trust income tax payments and returns, Gift and generation-skipping transfer tax payments and returns, and Tax-exempt organizations’ payments and returns. The due dates for these payments and returns are automatically postponed to July 15, 2020. Taxpayers don’t need to contact the IRS, file any extension forms, or send letters or other documents to take advantage of the extensions. The accrual of interest, penalties and additions to tax for failure to file or pay will be suspended from April 1, 2020, to July 15, 2020, resuming on July 16, 2020. The IRS is also extending the earlier relief regarding quarterly estimated tax payments. As of now, the payments ordinarily due on both April 15 and June 15 aren’t due until July 15. This applies to individual and businesses that must make estimated tax payments. Extensions for other time-sensitive actions Notably, the IRS is giving taxpayers extra time to perform specified other time-sensitive actions originally due to be performed on or after April 1, 2020, and before July 15, 2020. Those include filing petitions with the U.S. Tax Court or seeking review of a Tax Court decision, filing claims for tax credits or refunds, and filing a lawsuit based on a tax credit or refund claim. Taxpayers generally have three years to claim refunds, so the deadline for 2016 refunds otherwise would be April 15, 2020 (three years after the April 2017 filing date for 2016 tax returns). Unfortunately for some taxpayers, the notice also provides the IRS with additional time to perform certain time-sensitive acts. It allows a 30-day postponement if the last date for performance of an action is on or after April 6, 2020, and before July 15, 2020. This extension could affect taxpayers who are currently under IRS examination, whose cases are with the Independent Office Appeals or who file amended returns or submit payments for a tax for which the assessment period would expire in that time period. Economic Impact Payment tools On April 10, 2020, the day after announcing the deadline extensions, the IRS launched a new online tool allowing quick registration for Economic Impact Payments for individuals who […]
Read moreMini Update – CARES Act
April 8, 2020 Dear Clients and Friends, The IRS and the Tax Foundation have released some facts, and Q&A regarding the CARES Act and Employee Retention Credits. Please note, we have provided some write ups about application of the CARES Act specific to our client base, but some of you may have additional questions. Please feel free to contact us at [email protected] and consider reviewing these sites. IRS FAQ: Employee Retention Credit under the CARES Act: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act Tax Foundation FAQ: The CARES Act: https://taxfoundation.org/federal-coronavirus-relief-bill-cares-act/ Warmest Regards, Peter DeGregori Managing Partner
Read moreTax rule changes for improvements to interior parts of nonresidential buildings
Dear Clients & Friends, This letter is to alert you to a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings (”qualified improvement property” or ”QIP”). You may recall that following the 2017 Tax Cuts and Jobs Act (”TCJA”), any QIP placed in service after Dec. 31, 2017 was not considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period instead of entirely in the year the QIP was placed in service. That result was due to an inadvertent drafting error by Congress. The 2020 Coronavirus Aid, Relief, and Economic Security Act (”CARES Act”) was signed into law on March 27, 2020. The CARES Act corrects the TCJA drafting error for QIP. Thus, most businesses are now allowed to claim 100% bonus depreciation for QIP, if certain other requirements are met. What also is helpful is that the correction is retroactive, and it reaches back to apply to any QIP placed in service after Dec. 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to be outside of the definition of QIP. In the current business climate, you may not be in a position to undertake new capital expenditures, even if needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you are ready to undertake qualifying improvements, the generous subsidy of 100% bonus depreciation will be available. And, the retroactive effect of the CARES Act presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided me to identify QIP expenditures. For not-yet-filed returns, we can simply reflect the favorable treatment for QIP on the return. If you’ve filed returns that didn’t claim 100% bonus depreciation for what may prove to be QIP, we can investigate based on available documentation as discussed above. If there is QIP that was in fact eligible for 100% bonus depreciation, note that IRS has, for past retroactive favorable depreciation changes, provided taxpayers with detailed guidance for how the benefit is claimed. That is, IRS clarified how much flexibility taxpayers have in choosing between a one-time downward adjustment to income on their current returns or an amendment to the return for the year the QIP was placed in service. If you had QIP in 2018, and you wish to amend the tax return to take the accelerated depreciation, we are waiting for guidance from the IRS to determine the method for the amendment. Typically bonus deprecation was required unless a taxpayer elected out. On the tax returns we prepared, we typically would have depreciated the QIP based on the law, which didn’t allow bonus deprecation and thus we typically wouldn’t have elected out of bonus depreciation. In addition, if you desire to amend, […]
Read moreSBA offering loans to small businesses hit hard by COVID-19
Every company has faced unprecedented challenges in adjusting to life following the widespread outbreak of the coronavirus (COVID-19). Small businesses face particular difficulties in that, by definition, their resources — human, capital and otherwise — are limited. If this describes your company, one place you can look to for some assistance is the Small Business Administration (SBA). New loan, relaxed criteria The agency has announced that it’s offering Economic Injury Disaster Loans under the Coronavirus Preparedness and Response Supplemental Appropriations Act, which was recently signed into law. Here’s how it works: The governor of a state or territory must first submit a request for Economic Injury Disaster Loan assistance to the SBA. The agency’s Office of Disaster Assistance then works with the governor to approve the request. Upon completion of this process, affected small businesses within the state gain access to information on how to apply for loan assistance. To speed the process, the SBA has relaxed its usual disaster-loan criteria. A state or territory now needs to certify that at least five small businesses have suffered substantial economic injury anywhere in the state. Previously, at least one of the companies had to be in each of the disaster-declared counties or parishes. Along similar lines, once the submission process is completed, Economic Injury Disaster Loans will be available across the state. Under previous criteria, only businesses in counties identified as disaster areas could obtain financial assistance. Given the expected widespread and economically drastic effect of the coronavirus, most states will have likely garnered approval by the time you read this. Amount, interest and terms Economic Injury Disaster Loans offer up to $2 million in financial assistance to help small businesses mitigate their revenue losses. You could use the money to pay overhead costs such as utilities and rent, keep up with accounts payable and cover payroll. For qualifying small businesses, the interest rate is 3.75%. Some nonprofits may also be eligible for this assistance. For them, the interest rate is 2.75%. The specific loan terms will vary according to each borrower’s ability to pay. The agency does say that it “offers loans with long-term repayments in order to keep payments affordable.” Mitigate and manage Bear in mind that these loans are just one form of assistance offered by the SBA. Your small business may qualify for other loans, and there might be training programs that benefit your company. Our firm can help you assess your financial situation in light of the coronavirus crisis and formulate a strategy for mitigating and managing your risks going forward. © 2020
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