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Special Edtion Tax Newsletter - August Newsletter

Recent Updates:

As of August 4, 2020
PAYCHECK PROTECTION PROGRAM -
Frequently Asked Questions (FAQs) on PPP Loan Forgiveness

The Small Business Administration (SBA), in consultation with the Department of the Treasury, is providing this guidance to address borrower and lender questions concerning forgiveness of Paycheck Protection Program (PPP) loans, as provided for under section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Paycheck Protection Program Flexibility Act (Flexibility Act).

Borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation, in consultation with the Department of the Treasury, of the CARES Act, the Flexibility Act, and the Paycheck Protection Program Interim Final Rules (“PPP Interim Final Rules”) https://home.treasury.gov/poli...

General Loan Forgiveness FAQs

1. Question:
Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete?

Answer:
Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to use the Loan Forgiveness Application Form 3508EZ or lender equivalent and should complete that application.

2. Question:
Can PPP lenders use scanned copies of documents, E-signatures, or Econsents for loan forgiveness applications and loan forgiveness documentation?

Answer:
Yes. All PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and certifications required by SBA Form 3508, 3508EZ, or lender equivalent. Lenders may accept any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229).

If electronic signatures are not feasible, then when obtaining a wet ink signature without in-person contact, lenders should take appropriate steps to ensure the proper party has executed the document. This guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.

3. Question: If a borrower submits a timely loan forgiveness application, does the borrower have to make any payments on its loan prior to SBA remitting the forgiveness amount, if any?

Answer:
As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period1 (as defined below), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness)
and the date on which the borrower’s first payment is due, if applicable.

Loan Forgiveness Payroll Costs FAQs

1. Question: Are payroll costs that were incurred during the Covered Period1 or the Alternative Payroll Covered Period1 or Alternative Payroll Covered Period2 but paid after the Covered Period or the Alternative Payroll Covered Period eligible for loan forgiveness?

Answer: Yes, if the payroll costs are paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period.

Example: A borrower received its loan before June 5, 2020, and elects to use a 24-week Covered Period. The borrower’s Covered Period runs from Monday, April 20 through Sunday, October 4. The borrower has a biweekly payroll cycle, with a pay period ending on Sunday, October 4. However, the borrower will not make the corresponding payroll payment until the next regular payroll date of Friday, October 9. Under these circumstances, the borrower incurred payroll costs during the Covered Period and may seek loan forgiveness for the payroll costs paid on October 9 because the cost was incurred during the Covered Period and payment was made on the first regular payroll date after the Covered Period.

2. Question: Are payroll costs that were incurred before the Covered Period but paid during the Covered Period eligible for loan forgiveness?

Answer: Yes.

1
The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. For example, if the borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020. 2 Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020, at the election of the borrower, the eight-week (56-day) period) that begins on the first day of their first pay period following their PPP loan disbursement date (i.e., the “Alternative Covered Period”). For example, if the borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10. In no event may the Alternative Payroll Covered Period extend beyond December 31, 2020.

Example: A borrower uses a biweekly payroll cycle. The borrower’s 24-week Covered Period begins on Monday, June 1, and ends on Sunday, November 15. The first day of the borrower’s first payroll cycle that starts in the Covered Period is June 7. The borrower may elect an Alternative Payroll Covered Period that starts on June 7 and ends on November 21 (167 days later). Payroll costs incurred (i.e., the pay was earned on that day) during this Alternative Payroll Covered Period are eligible for loan forgiveness if the last payment is made on or before the first regular payroll date after November 21.

3. Question: Are borrowers required to calculate payroll costs for partial pay periods?

Answer: If the borrower uses a biweekly or more frequent (e.g., weekly) payroll cycle, the borrower may elect to calculate eligible payroll costs using the eight-week (for borrowers that received their loans before June 5, 2020, and elect this Covered Period length) or 24-week period that begins on the first day of the first payroll cycle following the PPP Loan Disbursement Date (referred to as the Alternative Payroll Covered Period). However, if a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods. The Covered Period or Alternative Covered Period for any borrower will end no later than December 31, 2020.

Example: A borrower uses a biweekly payroll cycle. The borrower’s 24-week Covered Period begins on Monday, June 1, and ends on Sunday, November 15. The first day of the borrower’s first payroll cycle that starts in the Covered Period is June 7. The borrower may elect an Alternative Payroll Covered Period that starts on June 7 and ends on November 21 (167 days later). Payroll costs incurred (i.e., the pay was earned on that day) during this Alternative Payroll Covered Period are eligible for loan forgiveness if the last payment is made on or before the first regular payroll date after November 21.

4. Question: For purposes of calculating cash compensation, should borrowers use the gross amount before deductions for taxes, employee benefits payments, and similar payments, or the net amount paid to employees?

Answer: The gross amount should be used when calculating cash compensation.

5. Question: Are only salaries or wages covered by loan forgiveness, or can a borrower pay lost tips, lost commissions, bonuses, or other forms of incentive pay and have such costs qualify for loan forgiveness?

Answer: Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. Note that forgivable cash
compensation per employee is limited to $100,000 on an annualized basis.

6. Question: What expenses for group health care benefits will be considered payroll costs that are eligible for loan forgiveness?

Answer: Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period or the Alternative Payroll Covered Period are payroll costs eligible for loan forgiveness. However, payroll costs do not As of August 4, 2020, include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after-tax, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period or Alternative Payroll Covered Period.

If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs,” as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. As noted, only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period or Alternative Payroll Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period. Loan Forgiveness Payroll Costs FAQ 8 outlines the rules that apply to owner health insurance.

7. Question: What contributions for retirement benefits will be considered payroll costs that are eligible for loan forgiveness?

Answer:
Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period or Alternative Payroll Covered Period qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period. Loan Forgiveness Payroll Costs FAQ 8 outlines the treatment of retirement benefits for owners, which are different from this general approach.

8. Question: How is the amount of owner compensation that is eligible for loan forgiveness determined?

Answer
: The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020, and elect to use an eight-week Covered Period, this cap is $15,385. If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The examples below are for a borrower using a 24-week Covered Period.

C Corporations: The employee cash compensation of a C-corporation owner-employee, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other As of August 4, 2020 employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.

S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for borrowers using that form, and do not count toward the $20,833 cap per individual.

Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34) (or for new businesses, the estimated 2020 Schedule C (or Schedule F) referenced in question 10 of “Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type”3 ). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or F) to the Lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.

General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235.4
Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.

3https://www.sba.gov/sites/defa...

LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.

Loan Forgiveness Nonpayroll Costs FAQs

1. Question: Are nonpayroll costs incurred prior to the Covered Period, but paid during the Covered Period, eligible for loan forgiveness?

Answer:
Yes, eligible business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness.

Example: A borrower’s 24-week Covered Period runs from April 20 through October 4. On May 4, the borrower receives its electricity bill for April. The borrower pays its April electricity bill on May 8. Although a portion of the electricity costs were incurred before the Covered Period, these electricity costs are eligible for loan forgiveness because they were paid during the Covered Period.

2. Question: Are nonpayroll costs incurred during the Covered Period, but paid after the Covered Period, eligible for loan forgiveness?

Answer:
Nonpayroll costs are eligible for loan forgiveness if they were incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

Example:
A borrower's 24-week Covered Period runs from April 20 through October 4. On October 6, the borrower receives its electricity bill for September. The borrower pays its September electricity bill on October 16. These electricity costs are eligible for loan forgiveness because they were incurred during the Covered Period and paid on or before the next regular billing date (November 6).

3. Question: If a borrower elects to use the Alternative Payroll Covered Period for payroll costs, does the Alternative Payroll Covered Period apply to nonpayroll costs?

4 This treatment follows the computation of self-employment tax from IRS Form 1040 Schedule SE Section A line 4 and removes the “employer” share of self-employment tax, consistent with how payroll costs for employees in the partnership are determined.

Answer: No. The Alternative Payroll Covered Period applies only to payroll costs, not to nonpayroll costs. The Covered Period always starts on the date the lender makes a disbursement of the PPP loan. Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness. For payroll costs only, the borrower may elect to use the Alternative Payroll Covered Period to align with its biweekly or more frequent payroll schedule.

4. Question:
Is interest on unsecured credit eligible for loan forgiveness?

Answer:
No. Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020, is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

5. Question:
Are payments made on recently renewed leases or interest payments on refinanced mortgage loans eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020?

Answer:
Yes. If a lease that existed prior to February 15, 2020, expires on or after February 15, 2020, and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness. Similarly, if a mortgage loan on real or personal property that existed prior to February 15, 2020, is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the Covered Period are eligible for loan forgiveness.
Example: A borrower entered into a five-year lease for its retail space in March 2015. The lease was renewed in March 2020. For purposes of determining forgiveness of the borrower’s PPP loan, the March 2020 renewed lease is deemed to be an extension of the original lease, which was in force before February 15, 2020. As a result, the lease payments made under the renewed lease during the Covered Period are eligible for loan forgiveness.

Example:
A borrower entered into a five-year lease for its retail space in March 2015. The lease was renewed in March 2020. For purposes of determining forgiveness of the borrower’s PPP loan, the March 2020 renewed lease is deemed to be an extension of the original lease, which was in force before February 15, 2020. As a result, the lease payments made under the renewed lease during the Covered Period are eligible for loan forgiveness.

6. Question: Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of . . . transportation” under the CARES Act. What expenses does this category include?

Answer:
A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness5.

7. Question: Are electricity supply charges eligible for loan forgiveness if they are charged separately from electricity distribution charges?

5
For more information on transportation utility fees, see https://www.fhwa.dot.gov/ipd/v...

Answer: Yes. The entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distribution charges, and other charges such as gross receipts taxes.

Loan Forgiveness Reductions FAQs

1. Question:
Will a borrower be subject to a reduction to its forgiveness amount due to a reduction in FTE employees during the Covered Period if the borrower offered to rehire one or more laid-off employees but the employees declined?

Answer:
In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the
following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020, and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.

2. Question:
If a seasonal employer elects to use a 12-week period between May 1, 2019, and September 15, 2019, to calculate its maximum PPP loan amount, what period in 2019 should be used as the reference period for calculating any reductions in the loan forgiveness amount?

Answer:
A seasonal employer that elects to use a 12-week period between May 1, 2019, and September 15, 2019, to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.

3. Question: When calculating the FTE Reduction Exceptions in Table 1 of the PPP Schedule A Worksheet on the Loan Forgiveness Application (SBA Form 3508 or lender equivalent), do borrowers include employees who made more than $100,000 in 2019 (those listed in Table 2 of the PPP Schedule A Worksheet)?

Answer:
Yes. The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Borrowers should, therefore, include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.

4. Question:
How do borrowers calculate the reduction in their loan forgiveness amount arising from reductions in employee salary or hourly wage?
As of August 4, 2020.

Answer:
Certain pay reductions during the Covered Period or the Alternative Payroll Covered Period may reduce the amount of loan forgiveness a borrower will receive. If the salary or hourly wage of a covered employee6 is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, the portion in excess of 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor (as described in the Loan Forgiveness Application (SBA Form 3508 or lender equivalent)). The examples below assume that each employee is a “covered employee.”

Example 1: A borrower received its PPP loan before June 5, 2020, and elected to use an eight-week covered period. Its full-time salaried employee’s pay was reduced during the Covered Period from $52,000 per year to $36,400 per year on April 23, 2020, and not restored by December 31, 2020. The employee continued to work on a full-time basis with a full-time equivalency (FTE) of 1.0. The borrower should refer to the “Salary/Hourly Wage Reduction” section under the “Instructions for PPP Schedule A Worksheet” in the PPP Loan Forgiveness Application Instructions. In Step 1, the borrower enters the figures in 1.a, 1.b, and 1.c, and because annual salary was reduced by more than 25%, the borrower proceeds to Step 2. Under Step 2, because the salary reduction was not remedied by December 31, 2020, the Salary/Hourly Wage Reduction Safe Harbor is not met, and the borrower is required to proceed to Step 3. Under Step 3.a., $39,000 (75% of $52,000) is the minimum salary that must be maintained to avoid a penalty. Salary was reduced to $36,400, and the excess reduction of $2,600 is entered in Step 3.b. Because this employee is salaried, in Step 3.e., the borrower would multiply the excess reduction of $2,600 by 8 (if it had instead selected a 24-week Covered Period, it would multiply by 24) and divide by 52 to arrive at a loan forgiveness reduction amount of $400. The borrower would enter on the PPP Schedule A Worksheet, Table 1, $400 as the salary/hourly wage reduction in the column above box 3 for that employee.

Example 2: A borrower received its PPP loan before June 5, 2020, and elected to use a 24-week Covered Period. An hourly employee’s hourly wage was reduced from $20 per hour to $15 per hour during the Covered Period. The employee worked 10 hours per week between January 1, 2020, and March 31, 2020. The borrower should refer to the “Salary/Hourly Wage Reduction” section under the “Instructions for PPP Schedule A Worksheet” in the PPP Loan Forgiveness Application Instructions. Because the employee’s hourly wage was reduced by exactly 25% (from $20 per hour to $15 per hour), the wage reduction does not reduce the eligible forgiveness amount. The amount on line 1.c would be 0.75 or more, so the borrower would enter $0 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1.

If the same employee’s hourly wage had been reduced to $14 per hour, the reduction would be more than 25%, and the borrower would proceed to Step 2. If that reduction were not remedied as of December 31, 2020, the borrower would proceed to Step 3. This reduction in hourly wage in excess of 25% is $1 per hour. In Step 3, the borrower would multiply $1 per hour by 10 hours per week to determine the weekly salary reduction. The borrower would then multiply the weekly salary reduction by 24 (because the borrower is using a 24-week Covered Period). The borrower would enter $240 in the Salary/Hourly Wage Reduction column for that employee on the PPP

6 A “covered employee” is an individual who: (1) was employed by the borrower at any point during the Covered Period or Alternative Payroll Covered Period and whose principal place of residence is in the United States; and (2) received compensation from the borrower at an annualized rate less than or equal to $100,000 for all pay periods in 2019 or was not employed by the borrower at any point in 2019.

Schedule A Worksheet, Table 1. If the borrower applies for forgiveness before the end of the 24-week Covered Period, it must account for the salary reduction (the excess reduction over 25%, or $240) for the full 24-week Covered Period.

Example 3: An employee earned a wage of $20 per hour between January 1, 2020, and March 31, 2020, and worked 40 hours per week. During the Covered Period, the employee’s wage was not changed, but his or her hours were reduced to 25 hours per week. In this case, the salary/hourly wage reduction for that employee is zero, because the hourly wage was unchanged. As a result, the borrower would enter $0 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1. The employee’s reduction in hours would be taken into account in the borrower’s calculation of its FTE during the Covered Period, which is calculated separately and may result in a reduction of the borrower’s loan forgiveness amount.

5. Question:
For purposes of calculating the loan forgiveness reduction required for salary/hourly wage reductions in excess of 25% for certain employees, are all forms of compensation included or only salaries and wages?

Answer:
For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.

June 23, 2020 - IRS announces rollover relief for required minimum distributions from retirement accounts that were waived under the CARES Act

WASHINGTON – The Internal Revenue Service today announced that anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts now has the opportunity to roll those funds back into a retirement account following the CARES Act RMD waiver for 2020.

The 60-day rollover period for any RMDs already taken this year has been extended to Aug. 31, 2020, to give taxpayers time to take advantage of this opportunity.

The IRS described this change in Notice 2020-51, released today. The Notice also answers questions regarding the waiver of RMDs for 2020 under the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act.

The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans.

In addition to the rollover opportunity, an IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by Aug. 31, 2020. The notice provides that this repayment is not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.

The notice provides two sample amendments that employers may adopt to give plan participants and beneficiaries whose RMDs are waived a choice as to whether or not to receive the waived RMD.

Balance Due Notice Mailings: Due Dates Extended to Help Taxpayers

Due to the COVID-19 pandemic, the IRS was unable to mail some previously printed balance due notices as a result of office closures. As IRS operations continue to reopen, these notices will be delivered to taxpayers in the next few weeks. Given the time it would take to reprogram IRS systems, and generate updated notices, some of the notices taxpayers will receive have due dates that have already passed. However, each notice will include an insert confirming that the due dates printed on the notices have been extended.

Extended Payment Due Dates: The payment due dates printed on the notices have been extended, as described in the insert. The new payment due date will be either July 10, 2020, or July 15, 2020, depending upon the type of tax return and original due date. Taxpayers should be sure to read the insert included with the notice that explains the delay and provides the correct payment due dates.

New PPP Guidance Helps but Falls Short on Key Loan Forgiveness Rules - June 5, 2020

Almost weekly, Treasury, the IRS, and the SBA release guidance to help businesses understand and comply with the loan programs and tax changes enacted to mitigate economic damage from the COVID-19 pandemic. Recently, two interim final rules were released by the SBA to address some of the finer points of PPP loan forgiveness. The first set of rules covers payroll periods and other expenses during the 8-week measurement period, eligible compensation, interest, employees who refuse to work, and FTE calculations. The second rule explains SBA loan review procedures.

While the new rules pre-date the bill that was signed into law on Friday, June 5th, the clarifications are still useful.

Highlights of New Rules

The first set of Interim Final Rules amplifies guidance included with the forgiveness application (covered in a previous article.) The most important modifications regarding loan forgiveness eligibility are in the following areas:

Payroll Timing. Businesses with bi-weekly or more frequent pay cycles can elect an “alternative payroll covered period”, which is the eight-week period starting the first day of the first payroll cycle that begins after the loan funds are received. Under the original rule, the loan covered period began on the day the loan funds were disbursed, with no exceptions. Payroll costs that are incurred during the alternative period but paid after the end of the covered weeks are still eligible for forgiveness if they are paid no later than the first regular payroll date after the loan coverage period ends.

Example based on an 8 week loan period: A borrower has a bi-weekly payroll schedule. The borrower’s regular covered period begins on June 1 and ends on July 26. The borrower’s first payroll cycle that starts in the covered period begins on June 7. The borrower may elect an alternative payroll covered period that starts on June 7 and ends 8-weeks later, on August 1. Payroll costs paid during this alternative payroll period are eligible for forgiveness, as are payroll costs incurred during this period but paid no later than the first regular payroll date occurring after August 1.

Note that payroll both paid and accrued during the covered period is eligible for forgiveness, and a business may have a greater chance of getting an additional payroll run included in the covered period if the alternative payroll period is not used. For example, if a business receives funds on May 1st, and the next payroll period starts on May 5th, the previous payroll would likely be paid sometime between May 1st and 5th. The funds paid for that payroll period would count towards forgiveness, as well as the payroll for wages earned during the 8 weeks beginning May 1st.

The interim rule also clarifies that payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day the employee’s pay is earned (the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the work schedule established by the borrower.

Interest Payments. Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020, qualifies toward loan forgiveness. Presumably, this means that the debt had to be in place before February 15, 2020. The final rules make clear that prepayments of interest and payments of principal do not qualify as costs eligible for loan forgiveness.

The interim rule is silent on payments between related parties. There does not appear to be any prohibition against adjusting the interest rate payable on debt that existed before February 15, 2020, to a fair market value interest rate. (Please note there are other tax implications to consider when visiting interest rate adjustments).

Non-Payroll Expenses. The interim rule explains when non-payroll costs must be paid or incurred to qualify for loan forgiveness. These costs either must be paid during the loan coverage period or incurred during the period and paid by the next billing cycle that occurs after the loan coverage period.

Example-Based on an Eight Week Coverage Period: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills because they were paid during the covered period. The borrower also may get loan forgiveness for the portion of its July bill from July 1-July 26 because it was incurred during the covered period and paid on the next regular billing date.

The final rules do not specifically address prepaying rent for future months or paying rent in arrears during the covered period, but rather points to the overall limitation of non-payroll costs. This suggests that as long as rent is PAID during the covered period, and is not in excess of ceiling percentage of the forgiveness amount (when combined with all non-payroll costs), rent paid would be eligible for forgiveness. Similar to interest expense guidance, there is no mention of related party limitations, so adjustments of rent expense paid to related parties to fair market value may beneficial.  

Bonuses, Hazard Pay, and Furloughed Employees. The interim rule clarifies that bonuses, hazard pay, and compensation of furloughed employees are eligible for loan forgiveness. However, the employee’s total compensation including bonuses and hazard pay may not exceed $100,000 as prorated for the covered period.
Payments to Owner-Employees and the Self-Employed. The interim final rule provides a limitation on the amount of compensation paid to owner-employees and self-employed individuals that can be forgiven. The amount forgiven per individual cannot exceed the lesser of:

8/52 of 2019 compensation
or
$15,385

For owner-employees, 2019 compensation includes retirement and health insurance contributions. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on their 2019 net profit. General partners are capped by the amount of 2019 net earnings from self-employment (with certain reductions) multiplied by 92.35%.

The rule states that the limitation applies across all businesses of the individual, so an individual must aggregate compensation from all businesses owned when applying the cap. The effect of this rule is that only $15,385 of owner compensation can be forgiven from ALL businesses owned.
This new rule clarification may have a negative impact on businesses taxed as S Corps, C Corps, or partnerships where the owners may not have taken a full year of compensation or had limited earnings in 2019.

No Double Penalty for Reducing Hours. If an employer reduces its employees’ salaries or wages in excess of 25%, the law requires a reduction in the loan forgiveness amount. For purposes of determining the limitation on loan forgiveness, the rule clarifies that a reduction in compensation related to a reduction in hours will not be counted as a reduction in compensation, eliminating the potential to be penalized twice on both the FTE calculation and the reduced salary calculation.

FTE Calculations and Special Rules
Borrowers seeking forgiveness must document their average number of employees during the covered period and a reference period to determine if they have maintained payroll at the required level. The interim rule defines full-time equivalent (FTE) as 40 hours of work and includes two methods for calculating FTEs for employees who do not work full time. For method one, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average, the employee could be considered an FTE employee of 0.75. Under the second method, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.

Employees Who Refuse to be Rehired: Employers can exclude from loan forgiveness calculations employees who refuse to be rehired if the following requirements are met:

• the borrower made a good faith, written offer to rehire the employee or to restore reduced hours during the covered period or the alternative payroll covered period;
• the offer was for the same salary or wages and the same number of hours earned by the employee in the last pay period prior to the separation or reduction in hours;
• the offer was rejected by the employee;
• the borrower maintains records documenting the offer and its rejection; and
• the borrower informs the state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the rejection.

In addition, a borrower will not be penalized with FTE reductions for employees who are fired for cause, voluntarily resign, or voluntarily take a reduction in hours.  

Rehiring. Employers can restore loan forgiveness and avoid a reduction in FTEs if a borrower rehires employees and restores salary and wage levels. The deadline for rehiring was extended to December 31 as part of the Bill approved by congress on June 3rd, 2020. This rule offers borrowers an important opportunity to cure reductions in employees that occurred earlier and regain loan forgiveness.

Loan Review Procedures
The second interim final rule establishes loan review procedures and borrower-lender responsibilities. Some key points are these:

• The SBA says it will review any PPP loan, in its discretion. Borrowers should take this as a warning that all loans are subject to review, not just loans over $2 million.
• Lenders must issue a decision to SBA on loan forgiveness not later than 60 days after receipt of a complete loan forgiveness application from the borrower.
• The borrower must retain PPP documentation for six years after the loan is forgiven or paid in full.
• If the SBA determines the borrower is ineligible for the PPP loan, the lender must deny the loan forgiveness application and may seek repayment of the outstanding PPP loan balance. The borrower may appeal this determination. The SBA intends to issue a separate rule addressing the appeals process.

Conclusion
Treasury characterized its final interim rule on PPP loan forgiveness in this way. “By providing a high degree of certainty to PPP borrowers through this interim final rule, PPP borrowers will be able to take immediate steps to maximize their loan forgiveness amounts, for example, by either rehiring employees or not laying off employees during the covered period.” Given the many time limitations, borrowers need to understand their options regarding loan forgiveness.

Revised Form 941 for 2020 - Employer's Quarterly Federal Tax Return

As part of the FFRCA, and CARES Act, Congress has provided for various payroll tax credits and has revised Form 941.

Please see below for a copy of the draft form along with instructions for filling out the new form. Please note, an employer may NOT claim the employee retention credit, if the employer receives a Small Business Interruption Loan under the Paycheck Protection Program (PPP) that is authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“Paycheck Protection Loan”). An employer that receives a Paycheck Protection Loan should not claim an employee retention credit.

Instructions for Form 941: https://www.irs.gov/pub/irs-df...

Revised Form 941: https://www.irs.gov/pub/irs-df...

Changes to Section 125 cafeteria plans -

The IRS released guidance on May 12, 2020, to address unanticipated changes in expenses as a result of COVID-19. The guidance allows temporary changes to section 125 cafeteria plans to extend the claims period for health flexibility spending arrangements (FSAs) and dependent care assistance programs and allows taxpayers to make mid-year changes. An employer, in its discretion, may amend one or more of its cafeteria plans to allow the changes noted below.

Notice 2020-29 provides greater flexibility by -

  • Extending the claims period for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through December 31. 2020.
  • Expanding the ability of taxpayers to make mid-year elections during calendar year 2020 for health coverage, health FSAs, and dependent care assistance programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.
  • Applying earlier relief for high deductible health plans to cover expenses related to COVID-19, and a temporary exemption for telehealth services retroactively to January 1, 2020.

Notice 2020-33 increases the amount of funds that can carry over without penalty at the end of the year for FSAs from $500 to a maximum of $550, as adjusted annually for inflation.

Texas Franchise Tax Extended Due Date

The COVID-19 pandemic is disrupting life for people and businesses nationwide. To provide Texas franchise taxpayers some relief, the Texas Comptroller of Public Accounts is automatically extending the due date for 2020 Texas franchise tax reports to July 15, 2020, to be consistent with the Internal Revenue Service (IRS).
The due date extension applies to all franchise taxpayers. The extension is automatic, and franchise taxpayers do not need to file any additional forms.

Texas Franchise Tax Extended Due Date
- https://comptroller.texas.gov/taxes/franchise/filing-extensions.php

Tax Update on the Response to the COVID-19 Outbreak:

In Notice 2020-23 issued on April 9th, the IRS has extended more tax deadlines for individuals, trusts, estates, corporations, nonprofit organizations, and other non-corporate tax filers. This broad relief includes a variety of tax filings and payment obligations that are due between April 1, 2020, and July 15, 2020, and the relief is automatic, so taxpayers do not have to file extensions or submit other documentation to the IRS to obtain relief. The notice also suspends interest, additions to tax, and penalties for late filing or late payment until July 15th.

Taxpayers who need additional time beyond July 15, 2020, have until July 15th to request an extension, but the extension date may not go beyond the original extension date (for calendar-year filers, this would be September 15th for partnerships and S corporations; October 15th for individuals and C corporations; and November 15th for Form 990 series filers).

The relief includes not only the filing of the specified forms, but also all schedules, returns, and other forms that are filed as attachments to these forms or are required to be filed by the due date of the specified forms (for example, Schedule H and Schedule SE, as well as Forms 3520, 5471, 5472, 8621, 8858, 8865, and 8938). Elections that are made or required to be made on a timely filed specified form will be timely made if filed on the specified form or attachment on or before July 15, 2020 (unless an extension is filed).

The relief also applies to time-sensitive acts listed in Regs. Secs. 301.7508A-1(c)(1)(iv) through (vi) and Rev. Proc. 2018-58.

Some common filings and payment obligations now added to the list of filings granted relief by this notice include:

Estimated tax payments due June 15, 2020 (including Forms 1040-ES, 1041-ES; 1120-W; and 990-W)

Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
Form 990, Return of Organization Exempt from Income Tax
Form 990-T, Exempt Organization Business Income Tax Return
Form 990-PF, Return of Private Foundation
Form 5500, Annual Return/Report of Employee Benefit Plan
Form 1120 (and other filings) for certain fiscal year taxpayers
Deadline for filing a 2016 return to claim a refund
Installment payments under IRC Section 965(h)

New CARES Act Provides Tax Relief

Key tax breaks in COVID-19 law

In response to the COVID-19 outbreak, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27. This new federal legislation includes relief for both individuals and businesses of all shapes and sizes. Following is a brief roundup of several key tax-related provisions affecting individuals and small business owners.

Individual Tax Relief:

Stimulus checks: The most publicized provision in the new law provides $1,200 cash payments to single filers and $2,400 to joint filers. Plus, you will receive $500 for each “child” as defined by the Child Tax Credit (CTC). Generally, the CTC is available for dependent children under age 17 living in your household.

But the checks phase out for higher-income taxpayers. The phase-out begins at $75,000 of adjusted gross income (AGI) for single filers and $150,000 of AGI for joint filers. The phase-out is complete for single filers with an AGI of $99,000 or more and $198,000 for joint filers.

The payments are technically advances of refundable credits. These amounts are generally based on your 2019 tax return, if you have already filed it, or your 2018 return. Nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, estates, and trusts are not eligible.

Required minimum distributions: Most qualified plan and IRA owners must begin taking “required minimum distributions” (RMDs) after attaining age 72 (recently increased from age 70½). But the CARES Act suspends all RMDs, from a defined contribution plan under Section 403(a) or 403(b), eligible governmental deferred compensation plans, and individual retirement accounts (IRAs), including inherited accounts, for 2020.

Charitable contributions: Due to changes in the Tax Cuts and Jobs Act (TCJA), many taxpayers who previously itemized now claim the standard deduction. Thus, they receive no current tax benefit from their charitable donations. The CARES Act allows you to deduct up to $300 in donations to qualified charities even if you do not itemize on your tax return and regardless of your AGI. In addition, the Act removes the adjusted gross income (AGI) limit for charitable contributions by individuals in 2020 for gifts to qualifying charities. For both provisions under the Act, only cash gifts qualify and gifts to donor-advised funds and 509(a)(3) supporting organizations are not eligible.

Early plan withdrawals: Generally, if you make a withdrawal from a qualified retirement plan or IRA before age 59½, you must pay a 10% penalty tax in addition to regular income tax. But the tax code includes a list of exceptions to the penalty. The new law adds another exception for coronavirus-related distributions of up to $100,000 in 2020. The withdrawal is still subject to income tax but may be spread over a three year period beginning with 2020. Taxpayers may also recontribute the withdrawn amount within three years in which case it is not taxable. In addition, the new law enhances the rules for loans from qualified plans.

Student loans: Employers may provide up to $5,250 this year in student loan repayment benefits on a tax-free basis. In other words, employers could assist with loan payments and employees would not be responsible for tax on those amounts, up to the stated limit. Borrowers can defer payments on qualified student loans without any penalty until September 30.

Business Tax Relief:

Employee retention credit: The new law authorizes a credit for 2020 only against an employer’s 6.2% share of Social Security payroll taxes. This refundable credit is available to businesses that suspend or close operations due to COVID-19, or certain companies with reduced gross receipts, as long as they continue to pay their employees. For each eligible quarter, the credit is equal to 50% of the first $10,000 of qualified wages per employee, through the quarter ending on December 31, 2020.

Payroll tax delay: A qualified employer will be able to defer its share of the 6.2% Social Security tax that would otherwise be due through December 31, 2020. The new law permits 50% to be paid by the end of 2021 and 50% by the end of 2022. Similarly, a self-employed taxpayer may defer payment of 50% of self-employment tax, with 25% due at the end of 2021 and 25% due at the end of 2022.

Net operating losses: The TCJA changed the rules for net operating losses (NOLs). Briefly stated, it disallowed carrybacks relating to NOLs after 2017 and provided an indefinite carryforward period with a limit of 80% of taxable income. The CARES Act repeals these NOL changes and also temporarily eliminates a cap for net losses based on $250,000 of income for single filers and $500,000 for joint filers.

Business interest limit:
Under the TCJA, business interest expense deductions were limited to the sum of business interest income and 30% of “adjusted taxable income” (ATI). A provision in the CARES Act temporarily increases the ATI limit to 50% for 2019 and 2020.

Qualified improvement property: Initially, Congress had intended for qualified improvement property placed in service after 2017 to have a 15-year depreciation recovery period, which would make it eligible for special “bonus depreciation.” However, due to a drafting error in the TCJA, the 15-year recovery period for this type of property wasn’t reflected in the statute. Now the CARES Act fixes this problem retroactive to January 1, 2018.

Miscellaneous Provisions:
Eases the excess business loss rules under IRC Section 461(l) for 2018, 2019 and 2020
• Accelerates the ability of corporations to receive refunds of AMT credits to 2019, or 2018 if elected
• Increases the net income limitation for charitable contribution deductions for corporations from 10% to 25% for 2020

Finally, the CARES Act includes numerous provisions signed to help small businesses weather the storm, including hundreds of billions of dollars in emergency funds to cover immediate operating costs and loans through the Small Business Administration (SBA). Extensive improvements to unemployment benefits for individuals were also approved.

The CARES Act also provides significant federal funding for a range of non-tax measures to assist individuals and businesses impacted by the economic effects of COVID-19. While not the focus of this update on the tax relief included in the CARES Act, some of the key programs include:

  • Small Business Administration (SBA) paycheck protection loans of up to $10 million to eligible businesses and nonprofit organizations and partial loan forgiveness for payroll and other expenses if certain requirements are met.
  • Funding for other programs to provide loans to eligible businesses.
  • Emergency funding for hospitals and other healthcare and governmental entities.
  • Increased unemployment benefits for individuals who become unemployed, partially unemployed, or unable to work as a result of COVID-19.

We’ve attached a helpful reference sheet on the CARES Act related to tax relief associated with the recent stimulus package. You can download the reference sheet here.

Office Procedures:

Harper Pearson has taken measures to achieve our first priority of protecting the health and safety of our employees, clients, and the community at large. Our office will remain open for business, but access to our office will be modified as follows:

1. We encourage clients to send information electronically or via a delivery service.

2. Please contact us at info@harperpearson.com or call our office directly at 713.622.2310 if you need assistance.

3. There will be someone at our office from 8:00 am to 5:00 pm to meet with you if necessary.

4. On June 1st, we will begin a phased return of employees to our offices. While we encourage our clients to continue communicating by telephone, email, or delivery service, we will have the ability to meet clients in our office as needed. We are requiring all employees, vendors, and clients to acknowledge a statement regarding COVID-19 and to wear a mask to gain access to our offices. Once in our conference room, the mask may be removed with the practice of social distancing.

For those Harper Pearson clients practicing social distancing, or you do not feel comfortable coming to our office in person, these options are available to you:

• Email remains the most effective option for electronic communication.

• Electronic document sharing may be arranged using Harper Pearson’s secure portal. If you would like to be set up on the firm’s portal, please contact Shannon Allison at sallison@harperpearson.com or your Harper Pearson contact. An electronic signature of tax returns is available using RightSignature.

Your Harper Pearson contact can also set-up a virtual meeting, conference call, and video conferencing with you as an alternative to in-person meetings. You can also send documents via FedEx, UPS, USPS, or any courier service. Please coordinate this with your Harper Pearson contact. For more information, please contact us at info@harperpearson.com or call our office directly at 713.622.2310.