Tag Archives: covid-19

Tax Strategies to Repay Debt and/or Build Up Cash

Many businesses have struggled financially during the COVID-19 pandemic. Some businesses have benefited from the PPP and SBA EIDL programs. We expect most businesses to receive loan forgiveness for their PPP loan, but if you received an EIDL loan, you might be concerned on how you are going to pay it back. Generally, if a business had to receive a loan during 2020, it means they incurred more expenses than revenue, and thus needed a loan. This should mean the company or business will have a loss for the 2020 tax year. If you expect your business to have a loss, then there may be an opportunity to take that business loss and turn it into cash. The CARES Act changed the tax laws related to net operating loss (NOLs) options, in which the CARES Act allows NOLs to be carried back up to five (5) years if the loss was incurred in tax years 2018, 2019 and/or 2020. If you incurred a NOL then you might be able to carry it back up to 5 years and receive a cash refund based on taxes paid in those years. If you incurred a loss, and generated a NOL, speak with your tax advisor before the end of the year to determine if you can benefit from the NOL carry back.

Contact Vertical Advisors, LLP if we can be of assistance.

IRS CARES Act Update

Guidance Released for Plan Distributions and Loans for COVID-19 Victims:

The IRS has provided guidance relating to section 2202 of the CARES Act, which allows qualified individuals to receive favorable tax treatment with respect to distributions from eligible retirement plans that are coronavirus-related distributions. A coronavirus-related distribution of up to $100,000 is not subject to the 10% additional tax under IRC Sec. 72(t) and generally is includible in income over a three-year period. However, qualified individuals have three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution. The CARES Act also increases the allowable plan loan amount under IRC Sec. 72(p) and permits a suspension of loan repayments due from 3/27/20 through 12/31/20 that are made to qualified individuals. The guidance expands the definition of who is a qualified individual and is intended to assist employers, plan administrators, trustees, and custodians by providing guidance on how plans may report coronavirus-related distributions and how taxpayers may report these distributions on their individual federal income tax returns. Notice 2020-50 and News Release IR 2020-124.

Please contact us at 949-756-8080 if we can be of assistance.

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.

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 to calculate FTE employees and salary or wage reductions.

Eligible amounts

The May 22 guidance clarifies that payroll costs paid or incurred during the covered period are eligible for forgiveness. Nonpayroll costs are eligible for forgiveness if paid during the covered period or incurred during that period and paid on or before the next regular billing date, even if the billing date is after the covered period.

According to the guidance, payroll costs include bonuses and hazard pay, as well as salary, wages and commission payments to furloughed employees (as long as they don’t exceed an annual salary of $100,000, as prorated for the covered period). They’re considered paid on the day paychecks are distributed.

Payroll costs are deemed to be incurred on the day the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period in the covered period are eligible for forgiveness if paid on or before the next regular payroll date. An eligible nonpayroll cost must be paid during the covered period or incurred during the period and paid on or before the next regular billing date, even if the billing date is after the covered period.

The guidance makes clear that costs related to personal property (for example, office equipment) are eligible nonpayroll costs. Mortgage interest payments for real or personal property are included, as well as rent or lease payments for real or personal property. Advance payments on mortgage interest, however, aren’t eligible for forgiveness. Utility payments include payments for electricity, gas, water, transportation, telephone or internet access.

The FTE reduction

The May 22 guidance spells out that when determining whether an adjustment in the forgiveness amount is necessary due to an FTE reduction, the number of FTE employees is calculated using a 40-hour workweek. For each employee, the average number of hours paid (not worked) per week is divided by 40. The maximum for each employee is capped at 1.0 FTE employee.

For employees who were paid for less than 40 hours per week, borrowers can calculate the average number of hours the employee was paid per week during the covered period. The guidance also provides a simplified method, under which employees who work 40 hours or more per week are assigned a 1.0, and those who work less are assigned a 0.5. Borrowers must select one of these two approaches and apply it consistently to all part-time employees.

The amount of loan forgiveness may be reduced if the average weekly FTE during the covered period is less than its average FTE in 1) the period of February 15, 2019, through June 30, 2019, 2) the period of January 1, 2020, through February 29, 2020, or 3) in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019, and September 15, 2019. The borrower can elect which period to use as its reference period. The good news is that the comparison isn’t made against the last full quarter worked, as some borrowers feared.

The May 22 guidance also includes exceptions for employees who:

  • Reject a good faith offer to return at the previous pay and hours (borrowers must maintain documentation of the offer and rejection and notify the state unemployment office of an employee’s rejected offer within 30 days of the rejection), and
  • During the covered period, were fired for cause, voluntarily resigned or voluntarily requested and received a reduction in hours.

Any FTE reductions due to these reasons won’t reduce the forgiveness amount.

The PPP Flexibility Act adds a new exemption based on employee availability. For the period from February 15, 2020, through December 31, 2020, the amount of loan forgiveness won’t be reduced due to a reduction in the number of FTE employees if a borrower 1) is unable to rehire an individual who was an employee on or before February 15, 2020, or 2) can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020.

The exemption also applies if the employer is unable to return to the same level of business activity it was operating at before February 15, 2020, due to governmental requirements or guidance issued from March 1, 2020, through December 31,2020, related to COVID-19 safety standards.

The salary/wage reduction

The CARES Act indicates that the forgiven loan amount may be reduced if the total salary or wages of any applicable employee is reduced more than 25% of the “total salary or wages” in the “the most recent full quarter during which the employee was employed before the covered period.” With the covered period running only eight weeks, borrowers fretted that the total wages in the covered period would almost certainly fall more than 25% compared to a full quarter.

The PPP Flexibility Act doesn’t address this concern, but the SBA’s loan forgiveness application does. In making the determination of whether salary or wages were reduced 25%, it compares “average annual salary or hourly wage” for the relevant periods — not total wages.

In addition, to ensure that borrowers aren’t doubly penalized, the May 22 guidance directs that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that isn’t attributable to the FTE reduction.

Delayed payment of payroll taxes

The PPP Flexibility Act also takes steps to ensure borrowers have full access to the CARES Act’s payroll tax deferment, which is intended to provide businesses with adequate capital to withstand the COVID-19 pandemic. The new law provides that the delayed payment of employer payroll taxes on top of the receipt of a PPP loan doesn’t constitute impermissible double dipping.

Fast and furious

The rules for the PPP — whether in legislative, regulatory or other forms — continue to emerge at a brisk pace, often updating previous guidance. We can help ensure you’re satisfying all of the requirements to obtain a loan and secure full forgiveness.

© 2020

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, and we suggest you speak with your HR or labor attorney.  Also as stated previously, OSHA may come and check your facility to follow regular requirements and COVID-19 in accordance with the CARES Act.  So, make sure you are prepared.  Make sure you have your posters up.

Loan Limit Changes:

Any of the PPP that isn’t forgiven is a loan.  The interest rate is 1% and the term seems to be changed from two (2) years to five years (5).    This area of the law needs to be explained more.

President Trump today again discussed a payroll tax holiday, so stay tuned.

Our firm is back working in the office.  Let’s all continue to get back to normal.  Please contact us if we can be of any assistance.  949-756-8080.

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.

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 pressure from the public, Congress and/or the administration and reverse its interpretation.

A juggling act

The tax consequences of obtaining PPP loan forgiveness and other federal relief options can prove complicated, especially with the IRS and the U.S. Treasury Department regularly releasing new regulations and guidance. We can help you keep up with the latest developments and tax strategies and what they mean for you.

© 2020

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 to make the most of the federal COVID-19 relief programs.

© 2020

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

Oracle, Intel Lead Tech Stock Rebound After Coronavirus Slump

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.

BAC Stock Price, Forecast & News (Bank of America)

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.

10 Things to Consider When Choosing HR Technology – Technology Signals

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.

COVID-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.