Authored by Paul Dillon and Mike Schiavo It comes as no surprise that the unprecedented economic downturn caused by the COVID-19 pandemic is prompting many commercial tenants to seek rent relief. Cash-strapped businesses may be negotiating with their landlords for all kinds of concessions, in the hopes of surviving the coming weeks and months until economic activity picks up again. While modifying leases may be commonplace in the current economy, failing to factor in the tax considerations can lead to unintended consequences. At inception, generally all leases must be tested under IRC section 467. This section was enacted in 1984 primarily as an anti-abuse provision to stop tax-shelter-type transactions that were intended to take advantage of income and deduction timing differences between accrual and cash basis taxpayers. When such situations arise, section 467 may apply to eliminate timing differences and put both the landlord and tenant on the same terms for recognizing income and deductions. Generally, most standard commercial leases will not be subject to any complex calculations at inception.  However, many lease modifications in the current economy may inadvertently run afoul of these rules and result in significant tax modifications. Anytime there is a substantial modification to a lease, it must be retested under section 467, and that is when things could get tricky. The section 467 rules control the timing of rental income and expense for tax purposes in certain situations where there is significant deferred or prepaid rent and/or stepped rents. Depending on the magnitude of the changes, section 467 may require the landlord and tenant to use the accrual method to recognize rental income and expense regardless of their regular accounting method. Further, if the renegotiated lease has significant deferred (or prepaid) rent within the meaning of section 467, the regulations could deem that a loan exists between the parties, forcing them to recognize interest income and expense as well. In other words, the tax results may be much different than the business deal due to these complicated rules. By way of a brief illustration: Assume a tenant has a 10-year lease in place for $100,000 per month. They ask to defer 24 months of rent, which will be payable in the final year of the lease. In total, $2.4 million has been deferred, $1.2 million for 2019 and $1.2 million for 2020. This modification causes the lease to have deferred rent under section 467 and may require the parties to recognize rental income and expense under the proportional rental accrual approach. Assume the amount recognized as rent for 2019 under the proportional rental accrual method is $1 million. This means the landlord would recognize $1 million of gross rents in the current year and be deemed to make a loan back to the tenant in a like amount. Consequently, the tenant would receive a corresponding rental deduction. The $200,000 difference is treated as imputed interest that would be recognized by the parties over the term of the deemed loan. The regulations state that a lease modification is “substantial” if the legal rights and obligations that are altered and the degree to which they are altered is “economically substantial” based on all the facts and circumstances. There are some safe harbors for changes in lease terms due to lessor refinancing, CPI adjustments, expense pass-throughs and de minimis adjustments to fixed rent. But given the severity of the current economic situation, rent holidays, deferrals and/or restructured payment schedules may be significant enough to cross the substantial modification threshold. If this is the case, the modified lease is treated as a new lease as of the effective date of the changes and must be analyzed under section 467. A section 467 rental agreement is an agreement for the use of tangible property, that has total payments greater than $250,000, and that has prepaid rent, deferred rent and/or increasing or decreasing rent (“stepped rent”). Certain “disqualified” sale-leasebacks and long-term leases may also fall under section 467 if there is a tax avoidance motive behind the transaction. A few key concepts are likely to be relevant in the current round of commercial lease renegotiations. A lease “specifically allocates” fixed rent if it unambiguously specifies, for periods no longer than a year, the fixed amount of rent for which the lessee becomes liable, and the total amount of fixed rent specified equals the total amount of fixed rent payable under the lease for the same period. There is an important nuance here. If a disconnect exists between how rent is allocated under the lease and when it is due and payable, that could cause section 467 issues, including deferred rent. “Deferred rent” is a technical term of art in the section 467 world: If the cumulative rent allocated by the lease at the end of a calendar year is greater than the cumulative rent payable at the end of the following year, a lease has section 467 deferred rent. Unless the lease has adequate stated interest (110% of the applicable federal rate), rental income and expense, and interest income and expense must be recognized using present value calculations. This likely will come as an unpleasant surprise to landlord and tenant. The section 467 rules are complex, full of defined terms and may be unfamiliar to many landlords and tenants. Whenever you renegotiate lease terms, no matter how small the changes, it is important to consult your Baker Tilly advisor to make sure you do not trigger unintended tax consequences. -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. 

The FASB issued guidance to help struggling businesses and their landlords treat rent concessions as if no changes to the lease contract were made, but they still have to consider section 467 rules for tax purposes.

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Authored by Patrick Balthazor It should come as no surprise that the year 2020 will be a tough one for many taxpayers. A large number of businesses are struggling, particularly in certain sectors. The restaurant and hospitality industries have been particularly hard hit, and they are not alone. Many will show tax losses for 2020. While the losses are not favorable, they may provide somewhat of a lifeline to struggling entities. The ability to use these losses against taxable income from prior years or to offset income in future years may provide businesses with much-needed cash.  The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted in March 2020, provided stimulus measures to aid businesses that generate net operating losses. These losses may then be utilized to produce tax refunds via carrybacks of the losses to earlier tax years or to offset income in later tax years. Some of the more significant provisions in the CARES Act that can assist in creating refunds include: The temporary increase under section 163(j) in the percentage limitation on business interest deductions to 50% of adjusted taxable income (ATI) from 30% of ATI. This provision is discussed in more detail in this letter. The effective date for the provision that caps business losses for noncorporate taxpayers to $250,000 annually ($500,000 for joint filers) has been pushed back to taxable years beginning in 2021. This allows taxpayers to utilize the loss in the current year without the cap or to increase a net operating loss that may be carried back to prior tax years. For taxable years beginning before Jan. 1, 2021, the provision under the Tax Cuts and Jobs Act that limited the use of net operating losses to 80% of taxable income is not applicable. Thus, losses incurred and used in tax years before 2021 can offset 100% of taxable income. In addition, net operating losses for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021, are allowed to be carried back to each of the five preceding taxable years. An election may be made to carry the losses forward. The prospect of carrying back the loss may seem attractive for taxpayers that have net operating losses in tax years 2018 through 2020. The taxpayer will likely receive the refund quicker if the loss is carried back as opposed to carrying it forward to future tax years. Some taxpayers (especially corporations) may have been in a higher tax bracket in prior years. However, the decision to carry the loss back versus electing to carry it forward should be based on a careful modeling of the consequences. Many factors, including the alternative minimum tax for individuals, repatriation income under section 965 and foreign tax credits must be considered. The application of these factors may result in a carryback refund at a much lower effective tax rate than if an election were made to carry the loss forward. As many practitioners have said: model, model, model. A lack of modeling may result in an inefficient use of the net operating loss. It should be noted that many states may not conform to the federal changes in the CARES Act. In some cases, federal conformity is automatic, but many states may require action by the legislature. Given the pandemic, some legislative bodies may not be in session. This complicates the situation for state purposes when taxpayers do not know if the state will allow some of the favorable changes made by the CARES Act. Modeling becomes much more difficult when it is uncertain how the states will react. Form 4466 Corporate taxpayers may also want to consider filing Form 4466 to obtain a refund of overpayments. This form can provide a quick refund of estimated taxes when a corporation has overpaid its tax. It may only be used by corporations that have an overpayment of at least 10% of their liability and at least $500. The form is filed after the end of the tax year and before the due date of the return (including extensions). While the filing of Form 4466 is not necessarily limited to corporations that have net operating losses, it is most often used in these situations. In many cases, corporations do not file their returns until many months following the end of their tax year. They may have made estimated payments during the year, but now they are finding they overpaid for the year. Filing Form 4466 before filing the federal income tax return will accelerate the tax refund as the IRS is required to act on the Form 4466 within 45 days after its filing. -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Significant provisions in the CARES Act can assist in creating refunds for struggling businesses.

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Will refunds from losses become a lifeline for struggling businesses?

Authored by Mark Smith 2020 has been an interesting year for many reasons. As we approach year-end, we recommend doing a number of things from an estate and gift tax-planning standpoint. Those ideas are discussed below. However, with 2020 being a presidential election year, a significant planning opportunity might exist this year that otherwise may not occur again.  Background For 2020, the estate, gift and generation-skipping-tax exemption is set at $11.58 million per person and is scheduled to increase each year by a cost-of-living factor. However, that level of exemption is due to sunset after 2025, when it would return to half that amount. The $5 million level of exemption (adjusted annually by a cost-of-living adjustment or COLA) came into the law in 2011. Prior to then, the exemption level had reached $3.5 million. The estate tax law also allows an adjustment in basis to the date of death fair market value when one passes away. We normally think of this as a step-up in basis, since, most of the time, assets have increased in value from the time of purchase. This has been the law for many years. In this presidential election year, Democratic presidential nominee Joe Biden proposes, among other things, to “return the exemption levels to historic norms” and “eliminate the step-up in basis for inherited assets.” Whether historic exemption levels mean the $5 million level referred to above or the pre-2011 $3.5 million level is unclear.  Of course, the changes that Biden proposes would be possible only if he wins the presidency, and the Democrats take the Senate and retain majority in the House. In January 2021, new legislation could be introduced to effect these changes. New law could possibly be effective retroactively to Jan. 1, 2020. The next few months may be the last time individuals will have an exemption of $11.58 million. If it is used to shelter gifts in 2020, the use would likely be grandfathered even if the exemption level is reduced in the future. In this scenario, the use is the “excess” of the current level over what it might be reduced to, to be considered “used.” For example, gifts of $9 million in 2020 will use $4 of the “excess” over the $5 million level if the law is changed to reduce the exemption to $5 million. If gifts of only $5 million are made in 2020 and the exemption level is reduced to $5 million, the opportunity to use the “excess” will have been lost.  Use the “excess” exemption the current law provides Clients with the wealth to take advantage of this historically high exemption level have many ways to make gifts in 2020. While this article will not be able to discuss all the options in detail, there are ways to make gifts that are straightforward. Of course, there are also more complicated techniques requiring time and planning — and time is quickly running out to do so before year-end. The following strategies should be discussed with your estate planning advisors. Gifts of business interests in S corporations, partnerships or limited liability companies (LLCs) could take advantage of discounts when transferring minority interests in nonvoting stock, limited partnership interests or LLC membership interests. Use of discounts allows more value to be included in the gift.
–  This shifting of business ownership might already be part of succession planning for your business and now could be a good time to make this type of transfer. For those clients apprehensive about giving up the cash flow from assets gifted away, there are various techniques to address this, such as the spousal limited access trust (SLAT). The SLAT is an irrevocable trust which has the benefit of removing assets via gift from the estate, but allowing the spouse and other beneficiaries to have access to the assets and their income.
– The SLAT features of the trust can then be combined with longer trust terms, so the trust assets can benefit multiple generations. Finally, those trusts can be created as “grantor” trusts so the trust creator/settlor continues to pay the income taxes on the income generated by the trust assets. This allows the trust assets to grow, without the need to pay taxes, and the settlor’s taxable estate to be reduced further. 
– With a grantor SLAT, gifts can be made to the trust and assets can be sold to the trust, without recognition of gain on the sale. The sale is usually accomplished by the SLAT issuing a promissory note to the seller. 
– If the transfer is via a sale right now, that promissory note could be forgiven by Dec. 31, 2020, if there is a change in Washington that might threaten the exemption level. If the president is re-elected, the decision of what to do with the promissory note could be delayed until 2025.  Gifts by one spouse to a lifetime trust for the benefit of the other spouse is another planning option. However, this does not remove the assets from both spouses’ taxable estates like the SLAT does. Gifts to trusts for the benefit of the settlor’s children and future generations — not benefitting the settlor’s spouse. This trust could be generation skipping and could also be taxed to the grantor. Gifts to any of these types of trusts do not have to be with business assets. The gifts could be of investment assets, cash or any other type of transferable asset. Unfortunately, IRAs, annuities and other like assets cannot be transferred by gift during one’s lifetime.  Gifts into trusts for the benefit of the trust beneficiaries also provides asset protection for those beneficiaries and that should not be overlooked.  Finally, taxpayers who have already engaged in significant transfer planning in recent years (in response to earlier tax law changes) may have significant promissory notes still outstanding from earlier sales to grantor trusts. Those promissory notes, or some portion of them, can be forgiven by Dec. 31, 2020, to use the excess exemption.  Other estate-planning moves that should be considered before year-end Annual exclusion gifts: the limit for 2020 is $15,000 Medical bills of family members: pay directly to the medical provider, not to your family member for their use in paying their bill Tuition of a child or grandchild: pay directly to the educational institution Grantor retained annuity trust (GRAT): fund with an asset with a value that has been depressed by the current situation, but which has the potential to return to historic values; GRATs work well when the transferred assets grow at a rate greater than the current section 7520 rate (0.4% in October) Depressed value assets: make an outright gift to your children Personally owned life insurance policies: transfer into irrevocable trusts to remove the value of the policy from the taxable estate Higher interest rate notes: refinance those notes that have been created from prior transactions; current AFR rates for October 2020 are 0.14% for the short term (three years or less); 0.38% for midterm (four to nine years); and 1.12% for long term (more than nine years) Intrafamily loans: consider making new loans or refinancing existing loans to take advantage of the low AFR rates; this is not a transfer technique, but it is designed to slow the growth of assets in your estate if you loan money and take back a note with these low interest rates  Comparing the current income tax rates to estate and gift tax rates, the income tax basis of the assets used to make gifts is now more important than before. Gifting higher basis assets is more beneficial than lower basis assets because of the current step-up in basis that can occur on death with lower basis assets included in the estate. Basis needs to be considered in any gift strategy. However, transactions with grantor trusts may continue to give the donor flexibility to address this issue. In addition, if business assets are used in a succession planning situation, consider whether that asset will be sold in future generations when discussing the impact of basis. Finally, the possible elimination of the step-up in basis rules would change our thinking again on all transfers. Please consult your estate tax advisor before deciding which assets to gift.  Finally, there are states with their own estate tax regimes and those states usually do not have the same federal exemption level of $11.58 million. Only one state has a gift tax for lifetime gifts. Planning needs to also factor in the impact of lifetime giving in excess of those state exemptions. As long as the state does not require you to include those prior gifts in the state’s taxable estate calculation, you can move more asset value to heirs during lifetime with gifts than if you wait until death to transfer those assets. Again, consult your estate tax advisor.  -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Estate and gift tax-planning is significant during 2020 presidential election.

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Time running out for year-end estate planning

Authored by Kathleen Meade On July 29, 2020, the IRS and Treasury Department released proposed regulations to implement the small business taxpayer simplified accounting method provisions enacted under the Tax Cuts and Jobs Act (TCJA) for tax years beginning after Dec. 31, 2017. The proposed regulations clarify the gross receipts test requirements and provide guidance for implementing the small business taxpayer simplified method provisions. However, positions taken on the treatment of syndicates and the inventory accounting exception are likely to be less favorably received and may create additional uncertainty, complexity and administrative burden for affected taxpayers. Although these regulations are not yet effective, taxpayers may rely on them for taxable years beginning after Dec. 31, 2017, provided they consistently implement all the applicable rules for each adopted provision. Background  The TCJA favorably amended certain small business taxpayer methods of accounting to increase the gross receipts test threshold to $25 million, index it for inflation and eliminate the requirement that the test be met for all prior tax years. These changes enable more taxpayers to use the cash method of accounting and can exempt them from the often costly and onerous uniform capitalization (UNICAP) requirements, comply with the percentage-of-completion method (PCM) rules and accounting for inventories. However, under the TCJA small business taxpayer provisions, tax shelters (including syndicates) remain ineligible for the small business taxpayer simplified methods regardless of their gross receipts levels. For purposes of this rule, a syndicate is defined as a partnership or other entity (other than a C corporation) which allocates more than 35% of the entity’s losses for the taxable year to limited partners or limited entrepreneurs.  UNICAP exception The proposed regulations, which are generally taxpayer favorable, remove the now obsolete small reseller exemption and replace it with the UNICAP small business taxpayer exception enacted under the TCJA.  The 2017 tax reform increased the gross receipts threshold to $25 million from $10 million and extended the UNICAP exception to producers as well as resellers. However, unlike the small reseller definition that generally included only receipts from sales of goods and services, the small business taxpayer test includes income from other sources such as interest, dividends, rents and royalties. This has implications for other simplifying conventions under the UNICAP rules. For example, the addition of receipts from other sources may cause a taxpayer to exceed the threshold and require an accounting method change. There are also special rules for farm trades or businesses. Cash method of accounting The proposed rules reflect amendments made by the TCJA to the gross receipts test for taxable years beginning after Dec. 31, 2017. As noted, the TCJA increased and indexed the gross receipts test threshold but left other cash method provisions unchanged, such as the short year and aggregation rules and the exclusion of tax shelters from using the cash method. Unfortunately, the proposed rules also contain unfavorable provisions that may significantly limit use of the cash method in certain circumstances. Syndicates  Consistent with pre-TCJA rules, syndicates are classified as tax shelters ineligible to use the cash method. Syndicate status will only apply for a year in which the entity has a loss and not in a year the entity is profitable and meets the gross receipts test. Thus, a syndicate’s eligibility for the small business taxpayer methods may change yearly and, further, may not be determinable until after year-end, which can significantly complicate tax planning and delay tax reporting for these entities.  Syndicates, or tax shelters, are defined much more broadly than one would anticipate. A “tax shelter” for this purpose is an entity, other than a C corporation, if more than 35% of the losses during the taxable year are allocated to limited partners or limited entrepreneurs. A “limited entrepreneur” is a person who has an interest in an entity (other than a limited partnership interest) and who does not actively participate in the management of the entity. The proposed regulations may actually increase the likelihood of an entity becoming a syndicate because the section 163(j) business interest limitation does not apply to small business taxpayers. Although intended to simplify the process of determining an entity’s syndicate status, this rule may also create a trap for the unwary if the entity is profitable after taking into account the interest limitation, but has a loss and is a syndicate under the 35% loss rule because the interest deduction is not limited for this purpose.  Affected entities may need to evaluate the trade-offs of implementing strategies to avoid a tax loss (e.g., election to opt out of bonus) versus losing eligibility for the favorable small business taxpayer simplified methods of accounting. To allow adequate time for planning, the proposed regulations provide an election that permits a taxpayer to apply the 35% loss rule by electing to use the allocated taxable income or loss of the immediately preceding taxable year, rather than the current-year amounts.  Taxpayers should carefully consider whether the election is beneficial because it applies for all purposes for which status as a tax shelter is relevant (e.g., section 163(j) interest deduction limitation) and is irrevocable unless the taxpayer obtains IRS permission.  In summary, the proposed rules related to syndicates are generally unfavorable and have implications beyond the small business taxpayer simplified methods (e.g., section 163(j) small business taxpayer provisions). Additionally, entities that move in and out of syndicate status may be prevented from making frequent changes back to the cash method in years they cease to be a syndicate. Consequently, entities treated as syndicates may derive limited or no benefit from the favorable small taxpayer provisions if the proposed rules are finalized in their current form. The Treasury Department and the IRS continue to study the definition of a tax shelter, which may indicate that changes to these rules could be forthcoming. Inventory exception The TCJA provided welcome simplification by permitting eligible small business taxpayers to either treat inventory as non-incidental materials and supplies or, alternatively, to follow the inventory method of accounting used in its applicable financial statements (AFS) or, if the taxpayer does not have an AFS, in the books and records prepared in accordance with the taxpayer's accounting procedures. The proposed regulations provide guidance for implementing this inventory accounting exception for small business taxpayers. However, several proposed provisions limit book/tax conformity, potentially resulting in added complexity and administrative burden and undermining the legislative intent to simplify inventory accounting for small business taxpayers.  For example, the proposed regulations allow small business taxpayers to treat non-incidental materials and supplies as “used or consumed” in the later of the year the taxpayer provides the item to the customer or the year the items are paid for (cash method) or incurred (accrual method). The regulations also permit taxpayers to use most inventory accounting methods to identify these non-incidental materials and supplies, with the exception of the last in, first out (LIFO) and lower of cost or market (LCM) valuation methods. Finally, guidance is provided on the definition of AFS, the types and amounts of costs that can be recovered for tax purposes, and when such costs may be taken into account. Some of the additional requirements and restrictions are surprising and contrary to the simplification purpose expressed by the Treasury Department and the IRS. If finalized in their current form, these provisions could require significant taxpayer resources to analyze and reconcile differences between book and tax inventory and accounting records, which may effectively reduce or eliminate the benefit of using the small business simplified inventory method for many. Long-term contract exceptions The proposed regulations incorporate amendments made by the TCJA that modify the small construction contract PCM exception and homebuilder UNICAP exemption to increase the gross receipts threshold and revise the PCM lookback rules to reflect the repeal of corporate alternative minimum tax (AMT) and the enactment of base erosion and anti-abuse tax (BEAT). Notably, the modified lookback rules apply to both small and large taxpayers. Additionally, the proposed rules clarify when and how a taxpayer adopts a method of accounting for a long-term contract and provide guidance for determining the classification of long-term contracts when a taxpayer becomes a small business taxpayer or ceases to qualify as a small business taxpayer.  Accounting method changes   The proposed regulations provide no method change procedures and generally direct taxpayers to use existing guidance to implement changes to and from the small business taxpayer simplified methods.  In August 2018, the IRS issued procedures for eligible small business taxpayers to obtain automatic IRS consent to change to the small business taxpayer simplified methods, generally effective for tax years beginning after Dec. 31, 2017.  Under these procedures, the rule prohibiting the filing of an automatic method change if the same item was changed within the past five tax years (including the year of change) is temporarily waived for changes filed for a taxpayer’s first, second or third taxable year ending on or after Dec. 31, 2017. Thereafter, a taxpayer requesting a change within the five-year waiting period is required to apply under the more onerous and costly advance consent procedures. Although the TCJA favorably modified the gross receipts test so taxpayers could requalify for the small business taxpayer simplified methods, the proposed rules unfortunately appear to limit a taxpayer’s ability to make such changes on a frequent basis.  -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS and Treasury Department released proposed regulations to implement the small business taxpayer simplified accounting method provisions enacted under the Tax Cuts and Jobs Act (TCJA)

Accounting Methods

Proposed regulations issued to implement TCJA small business taxpayer simplified accounting methods

Authored by Michael Wronsky The Small Business Administration (SBA) recently released a procedural notice that outlines the requirements Paycheck Protection Program (PPP) loan borrowers must follow when closing a change of ownership transaction. The notice defines a change in ownership for these purposes, stipulates when a transaction requires SBA approval, clarifies that the borrower remains responsible for all obligations under the loan and the related compliance requirements, and provides procedures to follow when both parties to a transaction have outstanding PPP loans.  Change in ownership defined A change in ownership is deemed to occur when a PPP borrower:  Sells or transfers 20% or more of its common stock or other ownership interest, including to an affiliate or existing owner (all transactions post-PPP loan approval must be measured in the aggregate in determining whether the 20% threshold has been met),   Sells or transfers 50% or more of its assets, measured by fair market value (as above, all post-loan approval transactions must be measured in the aggregate), or  Merges with or into another entity. General requirements and SBA approval procedures Before closing on any of the above-described transactions, the PPP borrower must notify its lender in writing and provide a copy of the proposed agreements and any other related documentation. The subsequent approval process varies, depending on the circumstances of the borrower and the proposed transaction. Neither the lender nor the SBA will place any restrictions on the transaction if prior to closing, the borrower repaid the loan in full, or the forgiveness process has been completed and the lender has received funds from the SBA, accordingly (or additionally from the borrower in the case of partial forgiveness). If the PPP loan has not been settled, the lender can approve the transaction without approval from the SBA in the following instances: If the transaction is a sale or transfer of common stock or other ownership interest, or as a merger:
– If the sale or transfer is of 50% ownership or less, or
– The borrower completes a forgiveness application and remits it along with the supporting documentation, and an interest-bearing escrow   account is established with the lender in the amount of any unpaid proceeds.  If the transaction is an asset sale, the borrower must similarly complete a forgiveness application and establish an escrow account as described above.  Any change of ownership transaction not described above must be approved by the SBA before it can be effected. The lender must submit the approval request along with certain information, including the reason the borrower cannot satisfy the loan or establish an escrow account, a copy of the executed PPP note and the details of the transaction. The SBA will approve or deny the transaction within 60 calendar days from when it receives the request.  Continued responsibilities of the borrower After a change of ownership transaction closes, the PPP loan borrower remains responsible for:  The performance of all loan obligations, The certifications made pursuant to the loan application, Obtaining, preparing and retaining all required PPP loan forms and supporting documentation, and remitting to the lender or SBA upon request, and Compliance with all other applicable PPP requirements.  When both parties have outstanding PPP loans Broadly, in such instances, each party is responsible for segregating and delineating funds and expenses attributable to their respective PPP loans and must submit documentation to demonstrate compliance with the program as otherwise required. In the case of a merger, the successor entity bears these responsibilities. It is unclear whether the activities of one entity would impair the ability of the other to have its loan forgiven, or have a bearing on the deductibility of the associated expenses.  We encourage you to reach out to your Baker Tilly advisors with questions on how any of the above may affect your situation.   
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Paycheck Protection Program loan borrowers have new requirements when they make a change in ownership transaction thanks to a new procedural notice issued by the Small Business Administration.

Paycheck Protection Program (PPP) Solutions

SBA provides guidance on M&A transactions and PPP loan compliance 

Authored by Michael Wronsky Late last week, the Department of Treasury (Treasury) and Small Business Administration (SBA) jointly announced that borrowers of Paycheck Protection Program (PPP) loans of $50,000 or less (to include self-employed borrowers) are eligible for a streamlined loan forgiveness application process. Pursuant to an interim final rule, such borrowers can apply using a new pared-down SBA Form 3508S and will not need to reduce their forgiveness amount for any reductions in employee headcounts or salaries.  The application still requires the borrower make certain certifications to the accuracy of the information reported and submit documentation to support the use of the loan proceeds was for eligible costs. Borrowers who together with their affiliates (as determined under SBA rules) received loans of $2 million or more are ineligible to use the streamlined application. For example, if an entity has a loan of $50,000 and its parent corporation has a loan of $1.95 million, the former would not be able to use Form 3508S to apply for loan forgiveness. Treasury and the SBA cited the need to relieve the compliance burden on both borrowers and lenders by affording them the use of this comparatively straightforward process for determining forgiveness of “de minimis” loans.  Form 3508S and its accompanying instructions are posted on the SBA’s website.  Please contact your Baker Tilly advisor regarding how the above may affect your situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The Treasury Department and the Small Business Administration introduced a streamlined loan forgiveness application process for borrowers of Paycheck Protection Program loans of $50,000 or less.

Streamlined forgiveness application for PPP loans up to $50,000

Authored by Paul Dillon, Michelle Hobbs and Michael Wronsky The Small Business Administration (SBA) released an interim final rule covering Paycheck Protection Program (PPP) loan forgiveness attributable to owner-employee compensation and certain nonpayroll costs. Specifically, the guidance provides a 5% threshold for determining C and S corporation employee ownership and adds potentially significant limitations on amounts eligible for forgiveness relating to rent and lease arrangements.  Key takeaways C and S corporation owner-employees Compensation paid to employees with less than a 5% ownership stake in a C or S corporation will not be subject to the more stringent forgiveness limitations. Since Congress did not intend windfalls to owners applying for PPP loans, previous guidance placed additional limits on business owner pay. The SBA explains this new 5% exception is to prevent the more strict limitations from applying to compensation of “owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.”  Whether this exception also applies to noncash compensation paid to such owner-employees is unknown. Pursuant to a previous interim rule, payments for noncash compensation are not forgivable if included in the owner-employee’s wages (as a matter of general tax principles). For example, health insurance premiums paid on behalf of an S corporation employee would be included in their wages if their ownership stake in the business was greater than 2% and, thus, these premiums would not be eligible for forgiveness. We expect further guidance to explain whether the exception applies solely to cash compensation. Nonpayroll costs attributable to borrower’s tenant or subtenant not forgivable PPP loan forgiveness applications cannot include costs attributable to tenants or subtenants of the borrower. To illustrate, the rule uses an example: a PPP borrower rents office space for $10,000 per month and subleases a portion to another business for $2,500 per month. In this instance, forgiveness for the borrower’s rent expense is limited to $7,500. This limitation would also apply to any mortgage interest or utilities expense attributable to the subtenant. Finally, loan forgiveness may not include household expenses associated with home-based businesses. Rent and mortgage interest payments to a related party Rent or lease payments to a related-party landlord can be forgiven. However, eligible amounts cannot exceed the amount of mortgage interest owed on the property attributable to the rented space during the covered period. This can be particularly problematic as some businesses rent from related-party owners that do not have a mortgage on the property.  For these purposes, the rule considers any common ownership between the business and the property owner as constituting a related party, with no de minimis exception. Conversely, mortgage interest paid to a related party is not eligible for forgiveness. The SBA rationalizes that the PPP is intended to cover certain nonpayroll-related payments owed to third parties and should not apply to payments that arise merely due to how the business is structured. This appears to be the case whether the common ownership is 1% or 100%, although it is not certain this is the intended result. We are hopeful clarifying guidance on this, as well as the owner-employee noncash compensation issue, will be is forthcoming ahead of when 24-week covered periods will begin expiring in September.  Expenses funded by forgiven loan proceeds remain nondeductible As a reminder, while Congress continues to consider the issue, expenses related to any loan forgiveness remain nondeductible for federal tax purposes. It is unclear whether this will be addressed when lawmakers return from their August recess.  We encourage you to reach out to your Baker Tilly tax advisor to discuss how the above may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The Small Business Administration released guidance related to the Paycheck Protection Program’s loan forgiveness limitations for owner-employees and nonpayroll costs.

New PPP guidance addresses owner-employee compensation, nonpayroll costs

Authored by Paul Dillon, Michelle Hobbs and Michael Wronsky On Aug. 8, 2020, the president declared a payroll tax holiday via a presidential memorandum. The memorandum directs the Department of Treasury (Treasury) to exercise its authority to temporarily suspend the withholding, deposit and payment of some employees’ share of the payroll tax. The suspension is effective for taxes due on wages paid between Sept. 1, 2020, and Dec. 31, 2020.  Critical details surrounding the holiday remain outstanding, and guidance from Treasury is needed. However, in the interim, this tax alert highlights the minimal information available and the significant questions and issues that must be addressed.  This payroll tax holiday is essentially a loan that will need to be repaid (likely through additional withholdings from employee paychecks in 2021), unless Congress acts. It is not a full relief of the payroll tax as was enacted in 2009 following the financial crisis. To date, neither chamber of Congress seems inclined to enact similar legislation. Accordingly, we strongly recommend against acting to utilize this deferral in the absence of guidance and clarification from Treasury.  Key takeaways Employer participation is optional. Treasury Secretary Steven Mnuchin informally remarked on Aug. 12 that employers would not be required to suspend withholding from employee salaries and can continue to withhold and remit payroll taxes as usual. It is unclear whether employers will have the authority to allow individual employees to opt in or out of any payroll tax holiday. Not all employees qualify. The memorandum provides the deferral for employees whose wages or compensation “payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis,” which equates to a $104,000 annual pre-tax salary. Employers must continue to withhold for employees earning above this threshold.  The taxes are still owed. The memorandum strictly defers payment; the payroll taxes must be paid after Jan. 1, 2021. This could create hardships for employers in ensuring they can sufficiently withhold in the next year. Further, repayment of four months’ worth of deferred taxes could create significant economic hardships for lower-income taxpayers, materially reducing or eliminating paychecks likely beginning in January (depending on the employee’s compensation level and amount deferred). Outright forgiveness of these liabilities would require action by Congress, but a payroll tax holiday has been spurned by lawmakers on both sides of the aisle during recent economic stimulus negotiations. Program creates potential compliance issues. It is unclear whether an employer would still be responsible for remitting an employee’s deferred taxes in the event the employee leaves employment before they become due. Further, if that employee takes a new job, their new employer may not have the necessary documentation or information to determine whether the employee is still eligible for deferral.  Memorandum constitutionality is questionable. It does not appear that the president has the authority under Article I, Section 8 of the Constitution to defer, implement or set tax rates. In addition, existing IRS regulations appear to prohibit any deferral of payroll taxes, which may preclude Treasury from unilaterally allowing a payroll tax holiday.  We anticipate Treasury will release guidance on the presidential memorandum prior to or shortly after the Sept. 1, 2020, effective date. In the meantime, expect this to be an evolving issue and look for additional updates from Baker Tilly as warranted. Please contact your Baker Tilly tax advisor with questions on how the above affects your tax situation. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

A presidential memorandum declaring a payroll tax holiday is raising many questions, including if it’s even constitutional, but if it is, employers could stop withholding employee payroll taxes starting Sept. 1, 2020. 

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Authored by Timothy Kosiek and Christopher DeMarco The small business owner's guide to the CARES Act For borrowers with a straightforward PPP loan compliance environment, we have developed a self-service, Excel-based loan forgiveness calculator. But if your situation is more complex, or you have limited staffing available to support the loan requirements, we can provide an automated approach to forecasting eligible spend, monitoring specific payroll exceptions, and managing compliance with final documentation requirements.
Business owners have been strongly affected by COVID-19 and are left with many questions. The programs and initiatives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress are intended to assist them in overcoming the current challenges. Baker Tilly developed the below FAQs to guide business owners as well as certain not-for-profits and other employers during this uncertain time.  NOTICE: Baker Tilly is providing updated information as it becomes available. Due to the nature of the emerging and rapidly evolving information from government and non-government relief programs, some requirements and offerings may change before they are listed here. Please consult with your loan officer for the most current details. Paycheck Protection Program (PPP) loans The program provides cash-flow assistance through 100% federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans are forgiven up to the full principal amount of qualifying loans guaranteed under the PPP, which would help your workers remain employed, as well as help your small businesses and our economy to snap back quicker after the crisis.  PPP has a host of attractive features, such as forgiveness of up to eight weeks of payroll based on employee retention and salary levels, no SBA fees and at least six months of deferral with maximum deferrals of up to a year. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between Feb. 15, 2020, and June 30, 2020. This program would be retroactive to Feb. 15, 2020, to help bring workers who may have already been laid off back onto payrolls.  View the PPP application Expand the section(s) below to view the FAQ.
Baker Tilly COVID-19 support During this uncertain time, Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Coronavirus Aid, Relief, and Economic Security Act – Baker Tilly specialists answer all your questions.

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Video Watch our complimentary on-demand webinar for a discussion and Q&A with special guest Anirban Basu, chairman & CEO of Sage Policy Group, Inc. and Monica Modi Dalwadi, Baker Tilly’s managing partner of the D.C. metro region. In this entertaining and informative webinar, these two leaders discussed the current economic circumstances and the post-recovery outlook. Anirban answered pressing questions and gave his thoughts on economic hot topics.  Questions discussed:  What does it take for the economy to recover to January 2020 levels, by when will that occur, and what shaped recovery do you predict? What do you see as the single-most-important thing that businesses can/should do to help get the economy restarted? What are some things we shouldn’t be doing for the next 12-24 months? Why do you think the stock market doing better than might be expected at this time? Where is the inflation?  Can you comment on the intersection of the timing of economic reopening and political climate of an election year? If there is a change in the White House how do you see it affecting the markets? What is the economic impact of the dramatic decline in live sports? How do you see the US economy handling the backtracking of the easing of COVID-19 restrictions? Do you think the downward unemployment trend will reverse as cases spike? Do you foresee a complete change in the landscape for cities with the potential emptying of office space and possible flow of people to suburbs? What potential repurposing can be done for high rises that are emptying? SPEAKERS: Monica Modi Dalwadi, Managing Partner, Baker Tilly Anirban Basu, Chairman & CEO, Sage Policy Group, Inc.

Economist reflects on the pandemic’s impact and getting back on track Companies that manage both their cash and their talent well are in the best position to bounce back strongly from the pandemic-affected economy, according to Anirban Basu, chairman and CEO of Sage Policy Group. Stock market The pandemic has driven some big winners on the stock market – Amazon, Apple, Walmart and Zoom – which in turn has driven the stock market higher. With interest rates so low, where else can investors put their money? With most professional and college sports closed, some think that the stock market has done so well because people can’t bet on sports. Plus, no one wants to miss out on the rally when the vaccine is announced.  Economic reopening and politics Since the initial pandemic outbreak was generally in cities in the North, generally controlled by Democrats, many states in the South saw this as a northern problem. When the first COVID related stimulus packages were being debated in March, there was some discussion along the lines of “Do we really want to bail out Illinois and New Jersey?” The Northern states then flattened their infection curve successfully and now cities in the South and Southwest have outbreaks. As some of these states consider rolling back their reopenings, the politics of the next stimulus package has changed.  Unemployment The labor participation rate has slumped in the last few months after being stable for several years even as baby boomers have started to retire. The economy had been so strong it was drawing people into the workforce. The recently employed who have become unemployed die to the pandemic may drop out the labor market altogether. Shifting immigration policy and a lower birth rate indicates not much labor growth in the future. In addition, productivity growth has dropped. This combination of lower labor force participation and lower productivity leads to a slower growing economy. Recession The chances of a double-dip recession are very high. Prior to the pandemic, there were vulnerabilities in the economy. Not all parts of the economy, such as agriculture, had participated in the expansion. Manufacturing had several months of recession in 2019, and the auto industry peaked in 2016. Add to that the ongoing trade wars. The biggest vulnerability, however, is preexisting indebtedness by corporations, households and the U.S. government. As the existing stimulus (such as one-time stimulus checks and extra unemployment benefits) run out, the preexisting vulnerabilities will rise up and cause a double-dip recession. Mortgages Mortgage delinquencies are high because people lost jobs and people are conserving cash. On the other hand, mortgage applications are quite strong, which can be attributed to the combination of people wanting to social distance, millennials coming of age, low mortgage rates and the need for a home office. Commercial real estate There is a commercial real estate crisis in the U.S.: empty office suites, abandoned storefronts, shuttered restaurants and the increasing awareness by many workers that they can work remotely and be productive. During the expansion, many businesses moved from Class B to Class A and A+ office space. This was partially to stroke the ego of the CEO showing off a nicer space, but also because businesses could afford the space and it was an effective recruitment tool for new talent. Now, with unemployment high and the economy uncertain, many companies may consider a move back to a Class B, suburban setting. National debt The national debt isn’t a crisis until the bond market says it is, and it isn’t saying that yet. Maybe the debt won’t be a crisis until 2026, when the Medicare trust fund is estimated to become insolvent. At that point, Congress may have to pass legislation to push closer to a balanced budget.  Getting back on track It will take a vaccine – or some type of efficacious treatment – to get the economy back on track. Behavior change, like mask wearing and social distancing, will not be enough. Even without a vaccine, the U.S. was on track for a V-shaped recovery, with May and June job growth accounting for about a third of the jobs lost in March and April. The recovery plateaued, however, as local economies opened up.   In the meantime, businesses have to conserve cash and hold onto their top talent. Economies grow when companies deploy cash aggressively and hire people aggressively. Because when the recovery starts, you will need that top talent to leverage fully the expansion to come. Good performance comes from great leadership, and great leaders working together. The hope is that the radical center can emerge and people can talk across the aisles, start to make some good policy and think of the role of the U.S. in the global economy and figure out how to train a 21st century workforce. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. 

Watch Baker Tilly’s complimentary on-demand webinar on the current economic circumstances and the post-recovery outlook with special guest Anirban Basu, chairman & CEO of Sage Policy Group.

EconTalk with Anirban Basu: a 30-minute economic fireside chat 

Wading through the tidal wave of information related to COVID-19 relief efforts to understand if and how your organization is eligible for these benefits can be overwhelming. Baker Tilly has developed three decision trees to help you determine eligibility for the following mandatory and optional relief efforts through the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid Relief and Economic Security (CARES) Act: FFCRA - This mandated federal relief must be made available by applicable employers from April 1, 2020 through Dec. 31, 2020. The decision tree can help you determine if you qualify and what benefits are owed your employees when you do. CARES Act: Employee Retention Credits – The decision tree can help you determine if you qualify for these employee retention credits available to employers of any size (including tax-exempt organizations) whose business is financially impacted by COVID-19. It applies to wages paid beginning March 13, 2020 and through Dec. 31, 2020. CARES Act: SBA Paycheck Protection Loan Program – In the final decision tree we concentrate on the low interest (and sometimes forgivable) loan dollars available that can be applied to expenses incurred between Feb. 15, 2020 and Dec. 31, 2020 and help you determine if you qualify and if you should expect your application to be challenged or forgivable amount adjusted.
For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

Determine if and how your organization can use certain relief efforts from the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act.

FFCRA and CARES Act Decision Tree

Authored by Paul Dillon and Michael Wronsky Before recessing for the Fourth of July break, Congress passed an extension of the Paycheck Protection Program (PPP) for small businesses, which was set to close down Tuesday, June 30, with more than $130 billion in funding left over.  The extension to Aug. 8, 2020, was introduced in the Senate, where it passed by unanimous consent on Tuesday. The House also passed it unanimously on Wednesday night.  The Small Business Administration stopped accepting new applications at 11:59 p.m. Tuesday. More than 4.8 million loans totaling $520.6 billion had been approved as of June 30. Any remaining program funds would have had to be returned to Treasury, unless repurposed by Congress.  Please reach out to your Baker Tilly tax advisor to discuss how this may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Both houses of Congress unanimously approved an extension of the Paycheck Protection Program (PPP) application deadline. Eligible small businesses now have until Aug. 8, 2020, to apply for a loan through the popular program. 

PPP application deadline extended by Congress

video The recently passed Paycheck Protection Program (PPP) Flexibility Act of 2020 amends the Coronavirus Aid, Relief, and Economic Security (CARES) Act and eases rules on how and when small businesses can use loans and still be eligible for forgiveness. With the program’s principal purpose being to help employers retain their employees on the payroll, these loans are designed to now cover payroll and related expenses paid or incurred during the 24-week period (recently updated from an eight-week period) that follows the date the loan proceeds are received, or from that date through Dec. 31, 2020, whichever is shorter. As a result, on June 17, the Small Business Administration (SBA) released two new versions of the application borrowers of a PPP loan must use to determine the amount of the loan that may be “forgiven” by their lender. There is a modified version of the full loan forgiveness application and a new, shorter “EZ” form that can be used by some borrowers.  Presenters Adam Goehring, Partner, Baker Tilly
Todd Bernhardt, Partner, Baker Tilly
Tim Kosiek, Partner, Baker Tilly Download the presentation Still have questions on PPP loans or need help with forgiveness calculations?  Connect with us for assistance. For more information on this topic, or to learn how Baker Tilly specialists can help,  contact our team.  

Join Baker Tilly for an overview of the new and modified PPP applications, as well as other key insights from the PPP Flexibility Act. 

PPP loan forgiveness update: changes from the Flexibility Act and new applications

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor and Michael Wronsky On June 17, 2020, the Small Business Administration (SBA) released an updated version of the Paycheck Protection Program (PPP) loan forgiveness application, reflecting changes made by the Paycheck Protection Program Flexibility Act of 2020 (the Flexibility Act) as well as previously issued interim final rules. In addition, a streamlined version of the application was released for use by borrowers meeting certain requirements.  Key takeaways The length of the alternative payroll covered period available to borrowers with a biweekly (or more frequent) payroll cycle was updated to 24 weeks. If used, this period would begin on the first day of the first pay cycle that follows the loan disbursement. Borrowers who received their loan prior to June 5, 2020, can elect to use the eight-week alternative payroll covered period available under previous guidance.  The limit on the amounts that can be forgiven for compensation paid to partners in a partnership or owner-employees (including self-employed individuals) was updated to the lesser of $20,833 or the 2 ½ month equivalent of their 2019 compensation across all businesses, for borrowers using a 24-week covered period. A formal definition of “owner-employee” for the above purpose is not provided, however, the revised application does refer to “owner-employees of an S-corporation.” Whether additional individuals would be included in this definition is uncertain.  The determination of the maximum forgiveness amount is updated to be the lesser of the following:
1. Total eligible costs paid or incurred during the covered period, less any reductions required for the borrowers’ reductions in employees’ salaries or full-time-equivalent (FTE) employees,
2. PPP loan amount, or
3. Eligible payroll costs paid or incurred during the covered period divided by 60% (was previously 75%). The FTE reduction safe harbor was updated to account for the exemption from a reduction in forgiveness added by the Flexibility Act. This exemption is available to borrowers who reduced their FTEs, but can document in good faith they were unable to operate at pre-COVID-19 levels (due to compliance with government health and safety guidelines). The shorter version of the application can be used by borrowers who did not have employees at the time they applied for their loan, or who did not reduce their FTEs or employees’ pay during the covered period. Borrowers who did reduce their FTEs, but can attest they were unable to operate at pre-COVID-19 levels (due to compliance with government health and safety guidelines, as described above) are also eligible to use the streamlined form. These borrowers would not be required to calculate any forgiveness reductions and their loan forgiveness would be calculated as the lesser of: 
1. Total eligible costs paid or incurred during the covered period,
2. PPP loan amount, or
3. Eligible payroll costs paid or incurred during the covered period divided by 60%. Questions remain despite the new guidance, including whether attribution rules apply or how related-party salaries are combined when calculating the limitation on owner-employee or self-employed individual compensation across all businesses. Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The Senate passed the Paycheck Protection Program Flexibility Act of 2020, with unanimous bipartisan support, to make the popular PPP loans easier for borrowers to receive and use. 

SBA releases updated PPP loan forgiveness application

To aid in your understanding and analysis of financial assistance and aid programs available to you or your business, Baker Tilly is maintaining a guide that outlines the COVID-19 stimulus package including CARES Act, Coronavirus Preparedness and Response Supplemental Appropriations Act, Families First Coronavirus Response Act, as well as state and local financial assistance programs.  Access the guide for an overview of COVID-19 federal, state and local financial assistance and aid programs, key deadlines and up-to-date information as programs evolve. Both documents are updated frequently. Refer back to this insight page for the latest information.  Last update on June 19, 2020 at 5:00 pm CST.

For more COVID-19-related insights, visit Baker Tilly’s Coronavirus Resource Center. For questions related to COVID-19 federal aid and financial assistance programs, contact our COVID-19 support team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Access Baker Tilly’s up-to-date guide for a summary of the COVID-19 stimulus package and to aid in your understanding and analysis of federal, state and local financial assistance programs available to your business. 

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Authored by Mark Heroux, Colin Walsh, Tom Bishop, Otis Damron and Manny Muriel COVID-19 has drastically changed how tax practitioners represent their clients in dealing with the IRS. Working remotely creates a host of challenges for resource-constrained IRS professionals. Moreover, the IRS released several initiatives and programs designed to provide relief to taxpayers. These programs include the People First Initiative, various revenue procedures and frequently asked questions (FAQ) on irs.gov. In light of these developments, we recommend that clients consider the following. 1. Consult with professionals before amending Form 1065 Partnerships subject to the centralized partnership audit regime (CPAR) generally must file an administrative adjustment request (AAR), rather than file an amended return. However, Rev. Proc. 2020-23 gives CPAR partnerships the option to file amended returns before Sept. 30, 2020. In most cases, CPAR partnerships should utilize this revenue procedure. AARs are complex and, perhaps most importantly, we have confirmed the IRS Office of Chief Counsel takes the position that AARs create nonrefundable credits. A nonrefundable credit could produce a disastrous result for clients, whereby some partners could lose the benefit from their share of the additional deductions. 2. Get ahead of the July 15, 2020, deadline Under the People First Initiative, the IRS stopped nearly all collection efforts. The IRS will currently not issue levies or liens, and will not send cases to third-party collection agencies. However, IRS revenue officers are still working. Taxpayers with large outstanding liabilities should view this as an opportunity to establish favorable installment agreements or offers in compromise. At a minimum, taxpayers should begin to gather the documentation (e.g., personal financial statements and supporting documentation) that IRS revenue officers will demand post-July 15. 3. Prepare for your PPP audit Coronavirus Aid, Relief, and Economic Security (CARES) Act Section 1100, the Paycheck Protection Program (PPP), provided $349 billion in relief in the form of forgivable loans to small businesses for job retention and certain other expenses. The PPP requires loan proceeds be used to pay payroll costs, interest on mortgages, rent and utilities. The PPP allows the potential for interest and principal to be fully forgiven if businesses spend the proceeds on these expenses within the earlier of 24 weeks from receipt or Dec. 31, 2020, and use at least 60% of the forgiven amount for payroll. This relief was intended for eligible borrowers with fewer than 500 employees; however, after the implementation of the PPP, it was revealed that many businesses had found loopholes in the law. Treasury Secretary Mnuchin stated the IRS and Small Business Administration will audit loans in excess of $2 million and will be prosecuting any instances of fraud. It is estimated there are 26,000 PPP loans in excess of $2 million. Upon request, companies will have to demonstrate the basis for its PPP loan eligibility certification. The Treasury Department is scheduled to issue guidance on the criteria the government will use to determine need for the loans.  4. IRS Criminal Investigations (IRS-CI) IRS-CI special agents continue to investigate allegations of criminal tax fraud and related financial crimes, which include PPP or Economic Impact Payment (EIP) related fraud. The IRS-CI, Federal Bureau of Investigation and other federal law enforcement agencies have already started pursuing those bad actors who have taken advantage of the PPP system. IRS special agents are still conducting limited field interviews and enforcement operations. If contacted for an interview or receive a subpoena, please reach out to Baker Tilly for assistance.  5. Anticipate delays in IRS examinations IRS revenue agents continue to conduct examinations. However, IRS revenue agents are unable to conduct in-person interviews. IRS revenue agents are also unable to receive physical documentation from taxpayers. Many responses to Information Document Requests are too voluminous to transmit via facsimile, and most IRS revenue agents cannot accept responses via email. We have seen delays in IRS examinations, resulting in requests for extensions of the assessment statute of limitations. 6. Solicit assistance from the Taxpayer Advocate Services (TAS) COVID-19 has caused significant delays at all levels of the IRS. These delays affect refund claims, EIN applications, processing of amended returns and many more submissions. TAS is an independent organization within the IRS that can help with procedural difficulties. We recommend filing Form 911 to solicit help from TAS for pressing matters, e.g., a corporation that faxed IRS Form 1139 to claim a quick refund. Nonetheless, Baker Tilly has been able to utilize its network of contacts within the IRS to overcome many of these obstacles.  7.  Contemplate where the IRS will focus its resources post-July 15 In speaking with high-level IRS professionals, we have some insight into what issues the IRS will focus on as activity returns to normal. For the IRS’ Small Business/Self-Employed Division, these issues include, but are not limited to, CPAR examinations, PPP audits, taxpayers that cannot afford to repay the employer’s deferred employment tax liability, examinations of carryback claims filed pursuant to the CARES Act, and taxpayers that file for bankruptcy. IRS-CI will look at PPP, EIP, bankruptcy and related fraud in addition to its 2020 investigative priorities. 8. Consider entering the IRS’ revised voluntary disclosure program On April 30, 2020, Bank Hapoalim, Israel’s largest bank, and Bank Hapoalim Ltd., its Swiss subsidiary, pleaded guilty to conspiring with U.S. taxpayers and others to hide more than $7.6 billion in over 5,500 secret Swiss and Israel accounts and the income generated from these accounts. The banks have agreed to pay more than $874 million to the U.S. Treasury. The IRS will now begin to examine the records from the thousands of accounts with an eye toward compliance with the Report of Foreign Bank and Financial Accounts (FBAR) and to ensure all income was reported. An uptick in civil examinations and investigations related to these accounts should be expected. Now may be the time for some taxpayers to avail themselves to the IRS’ revised voluntary disclosure program to avoid criminal prosecution if the failures to report were willful. 9. File submissions electronically whenever possible Much of the IRS’ workforce is working remotely and recently the agency recalled more than 10,000 employees to perform “mission-critical duties” such as processing paper tax returns, check payments, opening mail and operating taxpayer assistance services. As a result of the shutdown, the IRS was unable to process mail and was forced to divert much of the mail to storage trailers. Taxpayers can anticipate lengthy delays for any paper-filed submissions. As such, taxpayers should use electronic resources if possible. For instance, amended returns that can be electronically submitted should be used when they can. However, if paper filing is required, taxpayers are encouraged to send correspondence using the U.S. Postal Service’s certified mail with return receipt requested.  View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

While the IRS released several taxpayer-relief initiatives and programs, the agency is dealing with adapting its services for its employees who are working remotely, creating new challenges and lengthy delays.

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Working with the IRS during a pandemic

The states' conformity to follow the federal lead and extend the filing and tax payment deadlines to July 15, 2020, has affected states’ abilities to meet fiscal budgets. The true financial impact continues to unfold. According to the Center on Budget and Policy Priorities, the state budget shortfalls are estimated to be approximately 15% for fiscal 2020 and more than 25% for fiscal 2021. State legislative sessions either were suspended, ended or will end soon. Only a handful of states have sessions extending into fall. While states are learning to conduct business remotely, their ability to do so has been hindered due to unpreparedness and, in some instances, laws requiring in-person meetings. Therefore, at this time, states may have limited capability to operate, let alone legislate change. Times are certainly uncertain. What does this mean for state taxpayers?  Tax increases  The New York State Assembly and Senate introduced nearly identical bills to increase income tax rates imposed on individuals, with new tax brackets created for taxable income over $90,000. The bills target the wealthy to raise their rates above the current 3.4% for taxable income exceeding $500,000. The highest graduated rate increases to 10.32% on taxable income greater than $100 million. Both bills were referred to their respective committees for further consideration.  Illinois voters will have a question on their Nov. 3, 2020, ballot regarding a constitutional amendment to adopt graduated tax rates as opposed to the current flat tax rate of 4.95%. If voters approve the amendment, taxpayers with incomes above $250,000 can expect their tax rate to increase to 7.75%. Individual rates would cap at 7.95% for those with income greater than $1 million. C corporations could see their rate go up to 10.45% from 9.5%.   States’ responses to the CARES Act  Approximately 22 states including the District of Columbia have not yet adjourned their 2020 legislative sessions. Several legislative sessions were suspended and, as of May 31, 2020, two states will hold special sessions in June. As the states attempt to balance their budgets by cutting expenditures, it is possible more states will join New York and Illinois and attempt to raise tax rates or pass other legislative measures to combat their fiscal crises.   States with rolling conformity to the Internal Revenue Code (IRC) will automatically conform to the Coronavirus Aid, Relief, and Economic Security (CARES) Act unless the state decouples as New York did. Other jurisdictions with rolling conformity that have not decoupled from the CARES Act include Alabama, Colorado, District of Columbia, Illinois, Maryland, New Jersey, Pennsylvania and Tennessee (not an all-inclusive list). Any state with a conformity date prior to March 27, 2020, will need to either 1) adopt in full or in part, or 2) decouple in full or in part from the IRC. Wisconsin adopted only specific sections of the CARES Act and New York as noted above decoupled in full.  The CARES Act authorized loans through the Small Business Administration (SBA) for the Paycheck Protection Program (PPP). The funds received under these loans may be forgiven for federal income tax purposes if qualifications of the program are met. The states in the preceding paragraph including the District of Columbia also follow the federal treatment and forgive the income. These states should also follow federal treatment for expenses paid related to the program, which at the time of this writing, are not deductible. Additionally, Wisconsin adopted the PPP section of the CARES Act and, therefore, follows federal treatment of the loan proceeds and expenses. If states fail to pass legislation to conform to the CARES Act, those businesses receiving PPP funds potentially have taxable income unless another state law precludes taxation. However, the expenses paid with said funds should be deductible if used to pay business expenses, again, assuming the income is taxed in these states not otherwise conforming.  When it comes to net operating losses (NOLs), most states have their own laws, which means conformity to the CARES Act would likely have no bearing on the ability to carry back losses. Only a few states allow NOL carrybacks. While that is some good news, unfortunately, the carryback amounts can be limited and it will likely take the states some time to process the amended returns. Therefore, do not rely on these refunds for cash flow.   The federal technical amendment to claim bonus depreciation on qualified improvement property (QIP) and/or use of 15-year life on QIP is another aspect of the CARES Act to determine state treatment. If states adopted bonus under the Tax Cuts and Jobs Act of 2017 (TCJA), then the state would automatically conform to this amendment including use of 15-year life. States with rolling conformity that have adopted bonus include Alabama, Colorado, Illinois (100% bonus only), Missouri and Nebraska (not an all-inclusive list). States that do not allow bonus, including Ohio and Wisconsin, did adopt the technical amendment and will treat QIP as 15-year property using an allowable depreciation method other than bonus.   The majority of states adopted the business interest limitation provisions under the TCJA. However, as noted above, unless the state has rolling conformity, the new provisions under the CARES Act will not apply. Consequently, those states conforming to section 163(j) will need to follow TCJA provisions to determine allowed interest deduction.  Aggressive enforcement of nexus laws  Short of just raising tax rates, there is no better method of raising revenue than to pursue the payment of tax by nonresident, nonvoting taxpayers. Nexus matters continue to be important state issues for businesses and ignoring it is not an advisable strategy. Of the 46 jurisdictions imposing sales and use taxes, 44 have enacted economic nexus laws pertaining to sales and use tax as a result of the Wayfair decision. The remaining two have proposed laws. State coffers were relatively full pre-COVID-19, primarily due to a bustling U.S. economy, which translates into consumer spending and payment of sales taxes. Now, the coffers are empty.   Economic nexus laws affect companies beyond remote sellers. Physical presence nexus must still be analyzed. Companies need to know where they are both economically and physically present. Every state has a nexus or discovery unit, which actively seeks unregistered taxpayers. If discovered by a state, a company may face potential liability for tax, interest and penalty for all tax years in which nexus is deemed to exist — all without statute-of-limitation protection.  An additional nexus matter to consider is employees who are teleworking. Only a handful of states have indicated these employees will not create nexus in their state if only working there due to a state of emergency or stay-at-home orders. Without explicit guidance from states, teleworking employees could cause additional nexus for state taxes even during a pandemic.   Therefore, it is possible states reallocate resources to revenue-raising departments like a nexus or discovery unit. It costs very little for a state to issue a nexus inquiry letter. Knowing your nexus footprint and proactively managing this risk is an advisable strategy.  Increase in state audit activity State auditors are revenue raisers as well. Within the last several weeks, states learned how to work remotely and that includes the auditors. In fact, they probably know it best since most are in the field. Numerous states have auditors working from home when not auditing taxpayers.   While it is a bit more expensive and time-intensive to have a state audit a taxpayer, the end generally justifies the means. While audits in general are hard for the taxpayer, complying with data requests may be daunting if the company’s records are not available electronically.   Several states are known for their aggressive positions not only when it comes to determining nexus but in their audit practices as well. Taxpayers have the burden of proof to support positions taken on a return whether it be exempt sales filed on a sales/use tax return, calculation of apportionment factor or other expense taken on an income tax return. It is common to have an auditor challenge transaction(s) without seeking additional information and simply enter issue(s) as audit adjustment(s).   While states may not have the ability to hire new auditors, reallocation of current employees to this function may provide states with additional resources to audit more taxpayers. States may also increase auditors’ caseload requirements. If you find yourself in the unfortunate position of having received an audit letter, it is advisable to engage services of your Baker Tilly tax professional.  View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

States were flush with cash after the 2018 Wayfair decision, but the pandemic quickly depleted their reserves and now they are looking for ways to make up for that shortfall, including raising income taxes.

Sales & Use Tax 

States’ reactions in a pandemic environment

Authored by Michelle Hobbs Paycheck Protection Program The law and rules governing the PPP have been updated since this article was originally published. Please see our two-part series, PPP revisited, based on current legislation and guidance.   A widely popular lifeline for many small businesses, the Paycheck Protection Program (PPP) was enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and replenished three weeks later in “Stimulus 3.5.” The recently passed Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) made additional changes to the program. With the principal purpose being to help employers retain their employees on the payroll, these loans are designed to now cover payroll and related expenses paid or incurred during a maximum 24-week period (recently updated from an eight-week period) that follows the date the loan proceeds are received, or from that date through Dec. 31, 2020, whichever period is shorter. Primarily, small business employers with 500 or fewer employees (affiliation rules apply) qualify for the loan program. Individuals qualifying as sole proprietors as well as independent contractors can also participate.  The PPP’s loan forgiveness component likely is the favorite feature of the program. If at least 60% of the loan proceeds are used to fund payroll expenses (with up to 40% going solely toward paying covered rent obligations, covered utility payments or interest on covered mortgage obligations), the borrower may be eligible for full forgiveness of the PPP loan. A prorated forgiveness formula is available for borrowers who do not meet the requirements for a full forgiveness of the PPP loan.  It is this forgiveness feature that raises numerous tax questions. In general, loan forgiveness results in taxable income. When loan forgiveness escapes taxation through one of a limited number of exceptions, the cost is a reduction of certain tax attributes (net operating losses, depreciable basis, etc.) belonging to the loan recipient. Regarding PPP loans, the CARES Act stipulates any PPP debt forgiveness is to be excluded from gross income. However, there is no requirement to reduce tax attributes.  Unfortunately, in a blow to taxpayers, the IRS recently released guidance indicating expenses paid using forgiven PPP loan proceeds would not be deductible. So, while the forgiven loan proceeds are not taxable, the expenses paid with those same proceeds are not deductible. Congress proposed bipartisan legislation in May to allow deductibility of permissible PPP expenses even when the associated loan proceeds are forgiven. Members of both the Senate and the House of Representatives have publicly said the current IRS guidance does not reflect congressional intent. To date, this legislation has not passed, though it may ultimately be attached to a larger stimulus or tax package.  In the meantime, the Small Business Administration (SBA) released, and subsequently updated for changes made by the Flexibility Act, the PPP loan forgiveness application along with instructions. While simple on its face — the entire package is only 12 pages — the application requires a lot of supporting data. For example, to substantiate eligible expenses, payroll records should include the number of full-time and part-time employees, payroll frequency (weekly, bi-weekly, semi-monthly, monthly, etc.), salary and leave benefits per person as well as healthcare and retirement benefits on a per-employee basis. Keep in mind, salary and wages are capped at $100,000 per employee on an annualized basis. In addition, copies of payroll tax returns, benefit plan payment invoices, and bank, mortgage interest, rent and utility statements should be retained for at least six years and made available to the lender when requested.  Recently, the SBA published a shorter version of the application, which can be used by borrowers who did not have employees at the time they applied for their loan, or did not reduce their employment levels or employees’ pay during the covered period.  Borrowers who did reduce their employment levels but can attest that they were unable to operate at pre-COVID-19 levels (due to compliance with government health and safety guidelines) are also eligible to use the streamlined form.   Self-employed individuals are eligible for PPP loan forgiveness using a formula taking either: 8/52 of line 31 of the individual’s 2019 Schedule C for an eight-week period, or Two and a half months of 2019 net profit (Schedule C, line 31), up to a maximum of $20,833, if using the 24-week forgiveness period. This limit applies in total across all of the individual’s businesses.  In other words, if an individual operates multiple businesses and files a separate Schedule C for each, the maximum loan forgiveness amount for the individual is $20,833.   For employers, the maximum amount of cash compensation eligible for forgiveness is generally limited to $46,154 per employee over the 24-week covered period in 2020 (note this maximum amount would be smaller for borrowers whose covered periods end on Dec. 31, 2020, short of 24 weeks). However, there is an additional limit on amounts paid to owner-employees or general partners, being the lesser of $20,833 or two and a half months of total 2019 compensation across all related businesses. This could further restrict the amount of owner compensation eligible for forgiveness for many taxpayers. Unfortunately, owner-employee is not formally defined, but the updated forgiveness application does refer to “owner employees of an S-corporation”. Finally, it is unclear whether other individuals would fall under this definition, if attribution rules apply, or how related-party salaries are combined when calculating the limitation.   Economic Injury Disaster Loans (EIDL) Program Separate and distinct from the PPP, the EIDL is a long-running program. Designed to help businesses, renters and homeowners located in federally declared disaster regions, the CARES Act expanded the EIDL to assist taxpayers during this COVID-19 pandemic. Taxpayers that have suffered an economic hardship due to the pandemic are eligible if they meet certain requirements: In existence on Jan. 31, 2020 Businesses with fewer than 500 employees Sole proprietors, independent contractors, most private not-for-profit organizations, cooperatives and tribal small businesses are included as businesses eligible to participate.   Due to funding limitations and the volume of submitted applications, the SBA initially restricted this program to U.S. agricultural businesses. Effective June 15, 2020, the EIDL loan program was expanded to allow more businesses and not-for-profit organizations to apply.  The CARES Act relaxed the normal EIDL rules, resulting in the following parameters:  The maximum EIDL is a $2 million working capital loan at a rate of 3.75% for businesses and 2.75% for not-for-profits with up to a 30-year term Payments on coronavirus EIDL loans are deferred for one year Up to $200,000 can be approved without a personal guarantee Approval can be based on a credit score and no first-year tax returns are required  Borrowers do not have to prove they could not get credit elsewhere No collateral is required for loans of $25,000 or less; for loans of more than $25,000, general security interest in business assets will be used for collateral instead of real estate The borrowers must allow the SBA to review its tax records  Businesses can apply for EIDL loans through Dec. 31, 2020 The CARES Act also authorized a $10,000 Emergency EIDL grant that can be used to pay sick leave, payroll, rent and mortgage payments. While the Emergency EIDL grant does not have to be repaid, it does reduce the amount of PPP loan forgiveness. Employee retention credit The employee retention credit (ERC) is a fully refundable tax credit equal to 50% of qualified wages. Applying to wages paid between March 13, 2020, and Dec. 31, 2020, eligible employers can receive up to a $5,000 maximum credit per employee (based on $10,000 of qualified wages, including qualified health plan expenses). Keep in mind, wages and related payroll taxes constituting the credit cannot also be deducted as compensation expense.  Further, the ERC is not available for wages for which the employer received a credit for paid sick or family leave under the Families First Coronavirus Response Act. In addition, wages paid to certain family members, including children, parents, aunts, uncles, among others, are not eligible for the credit. Eligible employers are those that have had business operations partially or completely shut down by government order. Otherwise known as the suspension test, qualified wages are those paid solely during the shutdown. In addition, employers can also qualify for the ERC if gross receipts for the calendar quarter in 2020 are less than 50% of gross receipts for the same calendar quarter in 2019 (gross receipts test). On the other hand, employers deemed essential, but still have a significant loss in revenue due to their customers being shut down or having to shelter in place could potentially qualify for the ERC if facts and circumstances fit the requirements.  Employers that have also borrowed using the PPP should not request advance payment of the ERC via Form 7200 (Advance Payment of Employer Credits Due to COVID-19). Currently, it is unclear whether employers can even use the ERC for periods prior to borrowing if participating in the PPP. As a result, we recommend affected employers file Form 7200 with their quarterly payroll return (Form 941). Finally, while the aggregation rules do apply to a controlled group of employers or to separate divisions, it is unclear how the suspension test would be applied if the group members operated different trades or businesses. For example, consider a brother-sister controlled group, one entity operates a restaurant and meets the suspension test while the other is a farming enterprise and does not. In this situation, it is unknown whether the entities would both be ineligible for the ERC or treated separately. We recommend each separate trade or business be evaluated individually to apply the suspension test. View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Several programs were created or expanded, including the Paycheck Protection Program, Economic Injury Disaster Loans and the employee retention credit, to help soften the economic blow of the pandemic.

Federal coronavirus rescue programs

Authored by Michael Wronsky The Coronavirus Aid, Relief, and Economic Security (CARES) Act sought to provide taxpayers liquidity by altering and/or deferring the application of some of the significant revenue raisers from the Tax Cuts and Jobs Act (TCJA). Many of these changes as well as the technical correction of the “retail glitch” affecting qualified improvement property are retroactive. While the relief is certainly welcome, the fact that many areas of the tax law changed with retroactive effect creates a host of complexities in terms of both how the altered provisions can interact and from a compliance standpoint.   Amending tax returns or filing for accounting method changes will be required not only to take advantage of these new rules, but also to correct positions taken on originally filed returns that are no longer valid. This can be problematic for partnership taxpayers subject to the centralized partnership audit regime (CPAR) as they are generally prohibited from filing amended returns. To accommodate for this, the IRS provided guidance allowing these partnerships to file amended returns for a limited time. Otherwise, their only option would have been to file an administrative adjustment request (AAR), a more cumbersome procedure that has the potential to produce disadvantageous results for the partners, depending on their respective tax situations.  Usually, taxpayers have the longer of either three years from the date an original return is filed or two years from the payment of the corresponding tax to amend for a refund. However, given the IRS has had to provide temporary clearance from certain procedural hurdles (such as the partnership issue described above), time-sensitive action is required of taxpayers in some instances. Below is a list of upcoming deadlines (excluding the July 15, 2020, deadline to comply with most federal filing and payment obligations discussed in our previous tax alert):   June 30, 2020 – the CARES Act allows a net operating loss (NOL) arising in the 2018, 2019 or 2020 tax years to be carried back to the five preceding tax years for a refund. Taxpayers who wish to carry back a 2018 calendar year NOL via Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund, must file these forms by June 30. July 27, 2020 – deadline for taxpayers with an NOL arising in a fiscal year that straddles Dec. 31, 2017, who do not waive the two-year carryback period to file Forms 1045 or 1139.  Sept. 29, 2020 – deadline for partnerships subject to CPAR to file amended returns and Schedules K-1 in lieu of AARs for tax years beginning in 2018 or 2019, pursuant to the relief described above.  In addition to the specific deadlines above, to claim bonus depreciation on QIP placed in service in 2018 via an amended 2018 return, the taxpayer must file the amended return prior to filing their 2019 return. Otherwise, an accounting method change will be required.   Lastly, the IRS recently announced that electronic filing will be available for 2019 individual amended tax returns starting this summer (mailed paper submissions were previously the only option for amended filings). Given the significant limitations the IRS faces in processing paper-filed returns in the wake of the pandemic, it is highly likely that an amended return filed electronically once the option is available will get processed sooner than one filed by paper today. As such, we recommend waiting until the e-filing option is available. View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The CARES Act made changes that were meant to help taxpayers, but it also created some filing complications since many changes are retroactive.

Upcoming compliance deadlines for reacting to CARES Act changes

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor and Michael Wronsky Congress passed the Paycheck Protection Program Flexibility Act of 2020 (the Act), which makes significant amendments to the Paycheck Protection Program (PPP). The changes provide borrowers with additional time to use loan proceeds and qualify for forgiveness, plus increase to 40% the limit on the amount of loan forgiveness that can be attributed to nonpayroll costs.  Key takeaways Borrowers now have until 24 weeks from receipt of the PPP loan or Dec. 31, 2020 (whichever is earlier) to use the proceeds and qualify for forgiveness. The 25% limit on the amount of loan forgiveness that can be attributable to expenditures for qualifying mortgage interest, rent and utilities would be increased to 40%. However, a possible drafting error in this amendment appears to create a “cliff effect,” meaning if more than 40% of a borrower’s PPP loan proceeds are used on nonpayroll costs, none of the loan would be eligible for forgiveness.  Borrowers whose loans are forgiven would be eligible for the deferral of the employer’s portion of Social Security taxes provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act does not address the deductibility of expenses funded with forgiven loan proceeds. While the PPP has a debt forgiveness component, Notice 2020-32 stipulates any expenses associated with the use of PPP loan proceeds subsequently forgiven are not deductible for federal income tax purposes (see our previous tax alert). Despite numerous lawmakers’ bipartisan rebuke of this position, the Act does not overturn it and, as such, Notice 2020-32 remains in effect.  A minimum five-year maturity replaces the original restrictions put in place by a Small Business Administration interim rule limiting the loan term to two years. The CARES Act’s maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness remains. Workforce reductions no longer necessarily result in a proportional reduction of loan forgiveness. An employer can be exempt from the associated loan forgiveness reduction if they can document in good faith:
– An inability to a) rehire terminated employees and b) hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020; or
– An inability to return to pre-COVID-19 business levels due to compliance with public health and safety standards.  Please reach out to your Baker Tilly tax advisor to discuss how these potential changes may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Congress amends Paycheck Protection Program

The spread of COVID-19 continues to impact small and family businesses nationwide. 

With the unprecedented measures being taken to control the spread, many small and family businesses are being forced to temporarily close or significantly alter the way you do business.  It is more important than ever to understand the critical components of your business and prioritize action steps moving forward. 

Baker Tilly’s small and family business advisors are ready to stand by you and help you through this difficult time.  We understand you are dealing with staffing, cash flow, inventory, and loan agreements, among many other things.  Now is the time to take a look at your business’s critical operations and prioritize the steps you need to take to get through these difficult circumstances. 

We have developed a collection of resources to help you prioritize and navigate your next move.  From a 13-week cash flow analysis to strategies to reorganize your organization, our team will continue to keep you updated on the impacts to your business. 

Video: Accessing SBA loans through the CARES Act

Chris Anderson, Baker Tilly Managing Partner, sits down with Tim Kosiek, a partner in Baker Tilly's financial services group, to discuss how to access SBA loans through the CARES Act.

View the state and local government program matrix

What federal, state and local programs are now available to businesses impacted by COVID-19? Baker Tilly is maintaining an easy to use program guide. Check back often for new program information.

State and local government financial assistance

The importance of cash flow during uncertain times

Helping family businesses achieve their full potential through growth strategies, succession planning and next generation leadership development.

COVID-19 recovery and growth resources to protect and enhance the value of your organization

Baker Tilly has developed a comprehensive set of solutions that are readily available to assist qualifying businesses that have received, or will receive, loan proceeds that may be eligible for forgiveness under the PPP.

Small and family business coronavirus resources

Family Business

Coronavirus Resource Center

Paycheck Protection Program (PPP) Solutions

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State and local government financial assistance

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