Over the past year, many government stimulus programs were enacted to help businesses and individuals combat the financial impact of the COVID-19 pandemic. Restaurants have been one of the hardest hit industry segments and should explore any and all avenues possible to subsidize efforts to keep the doors open and employees on the payroll. One of the subsidies enacted within the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March 2020 was the Employee Retention Credit (ERC). It was overshadowed by the Paycheck Protection Program (PPP) because the law at the time stated if your company received a PPP loan, it was not eligible to also claim the ERC. Therefore, many companies disregarded the ERC as the PPP loan was a more advantageous program. In December 2020 this dynamic changed. Under the Consolidated Appropriations Act, taxpayers are now able to receive a PPP loan and claim the ERC. What’s more, this change was made retroactive to all of 2020. This change of law, along with an easing of the eligibility requirements, opens the door for many restaurants to claim this valuable credit.  How is the credit determined in 2020? The credit is equal to 50% of qualified wages determined on an employee-by-employee basis and must be calculated separately for each quarter the company is eligible during 2020. The maximum wages allowed in 2020 for all quarters for each employee is $10,000, thus allowing for a maximum credit of $5,000 per employee. Eligible wages generally include payroll and employer paid health plan expenses. A company may not, however, claim the credit on wages that were paid using a PPP loan that was forgiven or wages that were used to determine other payroll tax credits such as WOTC and FFCRA credits. There are many detailed considerations and calculations, including interplay with PPP funds, which need to be made. Restaurants should consult with their tax advisor for assistance to maximize their ERC.
I got a PPP loan, how much will my credit be? As can be seen in the example, the credit available to restaurants can be a meaningful portion of total payroll for the year in addition to the PPP loan that was received. This is because of two traits common among many restaurants during 2020:  Government orders forced most restaurants to limit in-store dining throughout the majority of the year. In many cases, the restaurant business would therefore qualify for the ERC as being “partially suspended” for the duration of the order [1]. Since PPP loans were designed to cover only 2.5 months of wages, there are sufficient wages remaining to also claim the ERC.  Many restaurant employees earn less than $10,000 per year. Therefore, a high percentage of the business total payroll costs qualify for the credit.  What are the eligibility requirements? To qualify, businesses must meet one or more of certain eligibility requirements, including a substantial decline in gross receipts and being suspended by a government order due to COVID-19. While generally obtainable to restaurants, these requirements must be reviewed thoroughly with an advisor to ensure the business is eligible.  How do I claim the credit? The credit is a payroll tax credit and is claimed on Form 941. Because all Forms 941 have been filed for 2020, eligible companies will need to adjust their quarterly payroll reports using Form 941-X to claim the credit.   What’s the impact on my income taxes? You do not need to claim the credit received as taxable income. However, the business must reduce the wage deduction on their income tax return by the amount of the credit received. If your income tax returns have already been filed, an amendment would be necessary.   Is this credit available in 2021? Yes! In fact, the credit is even higher in 2021. Businesses may claim a credit equal to 70% of qualified wages and the wage limits resets each quarter. The result is a maximum of $7,000 per employee per quarter for all of 2021. So, an employer could claim $7,000 per quarter or up to $28,000 per employee if they are eligible for all four quarters in 2021.  Once an afterthought, the ERC is now a valuable benefit to many restaurant owners. Although it requires detailed record keeping and careful calculation, the reward can help sustain your operations. Contact Baker Tilly’s Employee Retention Credit advisors for further guidance.
Resources: [1] Eligibility requirements should be reviewed thoroughly.  Safe harbor tests on gross receipts and other metrics may also apply.

One of the subsidies enacted within the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March 2020 was the Employee Retention Credit (ERC). Read this article to see how the credit is determined for your restaurant and if you qualify for it in 2021.

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Sustain your restaurant operations with Employee Retention Credit

Authored by Michael Wronsky On March 25, 2021, Congress passed the PPP Extension Act of 2021 (the Act), which keeps the loan program open through June 30, 2021. It was set to close March 31. The loan application deadline is also extended, but only to May 31, 2021. President Biden is expected to sign the Act into law.   The extension gives borrowers more time to apply for the popular loan program designed to assist businesses with weathering the continued economic effects of the coronavirus pandemic. While the program was formally extended to June 30, the Act prohibits the Small Business Administration (SBA) from accepting new first- or second-draw loan applications during June. For the remainder of the month, the SBA is only to process applications it has received from lenders before June 1, 2021.   We encourage you to reach out to your Baker Tilly advisor regarding 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.

Congress passed legislation to keep the Paycheck Protection Program open until June 30, 2021, after it was set to close at the end of March. 

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Congress extends Paycheck Protection Program through June 30, 2021

Authored by Paul Dillon, Michelle Hobbs and Mike Schiavo  Tax-related identity theft continues to be a problematic issue and is becoming more dangerous as scammers adapt to preventive measures taken by the IRS and law enforcement. Thieves work year-round to steal personal identification, bank or investment account balances, and tax payments or refunds.  This year’s stimulus payments and tax law changes are providing scammers additional opportunities to attempt to deceive taxpayers into giving them access to their computers and personal information. Email, telephone calls, text messages and social media channels are all used to persuade or intimidate taxpayers into providing such data. With the extension to May 17 for the April 15 deadline, this alert is to remind taxpayers to remain vigilant in protecting sensitive information throughout the year.  Tax document scam One of the most recent schemes involves emails supposedly containing tax documents. Hackers entice the recipients to open embedded attachments, which then release malware onto computers capable of stealing personal data and possibly even tax refunds. Taxpayers receive an email seemingly from a trusted source containing documents purported to be related to their tax return. If opened, these attachments appear blurry on the screen and a “helpful” prompt pops up asking the viewer to click through to edit the documents. Under the guise of viable software, often even including fake service package offerings, promotions and sales, the taxpayer, instead, downloads onto their computer invasive malware, which now allows scammers to steal personal data and potentially access connected or related computers. COVID-19 scams Taxpayers should also be aware of multiple types of pandemic-related scams. Hackers use phishing schemes via email, letters, texts and links coupled with COVID-19 or other pandemic-related language to obtain personal identifying data, passwords and other login information in order to steal economic impact payments and other stimulus benefits. Fake charities are another mechanism thieves are using to play on people’s emotions and instead steal money and identifiable information.  Fraudulent refunds In the refund scam, perpetrators execute the heist by stealing taxpayer data and using it to file fraudulent returns by posing as the taxpayers. Overpayments are refunded via direct deposit into the taxpayers’ bank accounts. Then the thieves contact the taxpayers, stating the refunds were deposited in error and ask that they be returned. The IRS identified two versions of the scam and warned that it may continue to evolve: The thief contacts the taxpayer, posing as a debt collection agency official acting on the IRS’ behalf, reports the erroneous refund deposit and asks for the money to be returned to the collection agency. The taxpayer receives a recorded message via phone, with the recorded voice saying the call is from the IRS and threatening criminal fraud charges, an arrest warrant and blacklisting of the taxpayer’s Social Security number. A fake case number and phone number to call to arrange the repayment of the refund are provided near the end of the message.  The scheme has been listed by the IRS as one of the “Dirty Dozen” scams identified annually, raising awareness of the many varieties of theft attempted most often during return filing season. Perpetrators alter caller ID numbers, use IRS employee titles and fake badge numbers, and reference the taxpayer’s name, address and other personal information in an effort to make the calls appear legitimate. Email schemes Recently, the IRS has seen email schemes targeting tax professionals, payroll professionals, human resources personnel, school systems and individual taxpayers. In these email schemes, criminals pose as a person or organization the taxpayer trusts or recognizes. They may hack an email account and send mass emails under another person's name. They also pose as a bank, credit card company, a tax software provider or government agency. These schemes focus on employees rather than the taxpayer directly. Thieves target employees’ roles at work, especially human resources or finance-related roles. They mask their communications to appear to be coming from a boss or co-worker, or from a trusted business associate, such as a payroll provider. They then request information instead of money, typically, employee data such as W-2 forms. Identity thieves often go to great lengths to create websites that appear legitimate but contain phony login pages. Fake emails and websites also can infect a taxpayer's computer with malware without the user knowing, thereby giving thieves’ access to the computer. Recognizing a plot is critical to prevent further damage. Things to consider include: Remind employees in sensitive positions (access to critical data) to verify requests made via email. They should call or initiate a separate email confirming the request as a reply email may be routed to a false source. Report suspicious requests to your IT department. How to protect yourself Keep in mind, the IRS generally conducts its correspondence via the U.S. mail. In addition,  The IRS will not call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer.  The IRS will not threaten to immediately bring in local police or other law enforcement groups to have the taxpayer arrested for not paying. The IRS will not demand tax payments without giving taxpayers the opportunity to question or appeal the amount owed, ask for credit or debit card numbers over the phone, or call about an unexpected refund. If contacted by any of the above methods or any semblance thereof, taxpayers should: Contact their tax preparer immediately  Report the incident to their local police department and the Federal Trade Commission Place a fraud alert or credit freeze with one of the three major credit bureaus (Equifax, Experian, TransUnion) and request a copy of their credit report Contact their financial institution and close accounts as needed Follow the steps provided by IRS Topic Number 161 for returning an erroneous refund COVID-19-related fraud should be reported to the National Center for Disaster Fraud (NCDF) hotline at +1 (866) 720 5721 Theft of economic impact payments can be reported to the Treasury Inspector General for Tax Administration (TIGTA)  Taxpayers can take a number of steps to help prevent identity theft: Protect Social Security numbers and personal financial information. Confidential information should not be carried around and should only be provided when absolutely necessary, and with extreme caution; Never email or text sensitive personal or financial information; Monitor credit reports; Check Social Security Administration earnings statements annually; Shred financial documents or any other document containing confidential information when no longer needed; Use security software with firewall and anti-virus protections combined with strong passwords (combinations of uppercase and lowercase letters, numerals and special symbols); Recognize and avoid phishing emails and threatening communications; and Refrain from clicking on links or downloading attachments from suspicious emails or other sources. Before opening attachments or links in an unexpected email or text from a trusted provider, contact the provider to confirm documents were indeed sent for review. For more, see the IRS Taxpayer Guide to Identity Theft.  For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our 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.

The IRS is warning taxpayers to be careful of scammers disguised as legitimate sources requesting personal information. Find out what you should be looking for and how you can protect yourself from succumbing to their appeals.

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IRS alerts taxpayers of cyber, refund scams

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky The IRS announced in an informal statement that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended to May 17, 2021, from April 15, 2021.  The situation remains fluid and the IRS will be providing formal guidance in the coming days. Unlike last year’s across-the-board extension, this relief initially appears to be much more limited. Whether the relief will be expanded to apply to other taxpayers, tax filings or other time-sensitive actions remains uncertain. Here is a summary of the key points from the IRS news release:  Individual taxpayers can also postpone, to May 17, 2021, federal income tax payments for the 2020 tax year originally due April 15, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.  Estimated tax payments for the 2021 tax year are still due April 15, 2021.   This announcement does not impact any state filing deadlines.  Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17 deadline can request an extension until Oct. 15 by filing Form 4868. The IRS statement made no mention of extending this relief to other filings due April 15 including those for C corporations, trusts, etc. There is also no current indication that the extension would apply to other time-sensitive matters, for example, section 1031 exchanges and opportunity zone investments. We encourage you to reach out to your Baker Tilly adviser regarding how any of 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 IRS extended the 2020 tax year federal income tax filing due date for individuals to May 17, 2021, but it was not extended for all filing deadlines. Formal guidance is expected soon.

Opportunity Zones

IRS extends filing deadline for some taxpayers

The American Rescue Plan Act of 2021 (the Act) passed the U.S. Senate and the House of Representatives and is on its way to being signed into law by President Biden. Of the $1.9 trillion spending bill, $28.6 billion is designated for the Restaurant Revitalization Fund, which is based on the Real Economic Support That Acknowledges Unique Restaurant Assistance Needed To Survive (RESTAURANTS) Act of 2020, will provide relief for small and midsize restaurants. 
 
With the passage of this new legislation, restaurant operators need to understand their eligibility and the benefits provided to them. Similar to the Paycheck Protection Program (PPP) loans, the borrower is required to make a good faith certification that the uncertainty of the current economic conditions makes the grant necessary to support their ongoing operations. Additionally, the business cannot apply for a Shuttered Venue Operators Grant. The eligible businesses that can apply for a grant include: Restaurants Food stands/trucks/carts Caterers Bars/taverns or similar drinking establishments Brewpubs/tasting or tap rooms To qualify for funding, restaurants must not be part of an affiliated restaurant or restaurant group with more than 20 locations. Public companies also are not eligible. Food and drink entities with 20 locations or fewer will qualify for grants equal to the difference between their 2020 and 2019 revenue, with alternative calculations for entities not in business all of 2019 or 2020. The amount of pandemic-related revenue loss is reduced by any amounts received under the PPP loan program. The Act will provide up to $10 million in relief per entity and affiliated businesses (limited to $5 million per physical location). Grants received under this program are exempt from federal income tax, and expenses paid with the funds are deductible. The first 21 days of the grant period will prioritize providing funding to entities owned and controlled by women, veterans and socially and economically disadvantaged small businesses. 

The list of eligible expenses is long, allowing every restaurant to determine their biggest need and seek the appropriate funding. The types of eligible expenses include: Payroll, including paid sick leave  Mortgage principal and interest (but not prepayment of the mortgage) Rent and utilities Maintenance, including construction to accommodate outdoor seating Supplies including protective equipment and cleaning supplies Food and beverages  Covered supplier costs and operational expenses Other costs determined by the administrator to be essential Baker Tilly professionals can help you take advantage of timely and important tax credits for the restaurant industry. 


The fifth federal COVID-19 relief bill is moving on to be signed by the president. The massive bill includes extensions to the employee retention credit, unemployment benefits, PPP qualification parameters among other programs, and it establishes a revitalization fund for restaurants. Read this article to learn more about how the Restaurant Revitalization Fund impacts restaurants. 

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Preparing your restaurant for the American Rescue Plan Act of 2021

Authored by Paul Dillon, Christine Faris, Michelle Hobbs, Mike Schiavo and Michael Wronsky Both houses of Congress have now passed the American Rescue Plan Act of 2021 (the Act). In the process, the Senate made several substantive changes to the version the House passed at the end of February. The Act now heads to the White House where President Biden is expected to sign it into law prior to March 14, when unemployment benefits are set to expire.  Notable changes by the Senate include expansion of the employee retention credit (ERC), additional restrictions on executive compensation deduction limitations for public companies, tax exclusions for a portion of unemployment benefits, and a faster phaseout for the income threshold for individual tax rebates.  Key provisions Employee retention credit The ERC is extended to apply to qualified wages paid by eligible employers through Dec. 31, 2021. Beginning after June 30, 2021, the credit is expanded to apply to recovery startup businesses, defined as employers that began operations after Feb. 15, 2020, with average gross receipts of $1 million or less, and have not experienced a full or partial suspension or significant decline in gross receipts for the calendar quarter. Additionally, “severely financially distressed” employers, with gross receipts for a calendar quarter that have declined by more than 90% from the same calendar quarter in 2019, can claim the ERC on any wages paid to employees during the calendar quarter. The credit also becomes refundable against the Medicare tax after June 30, 2021. Paycheck Protection Program The Act further expands the PPP to include certain internet publishing organizations (NAICS code 519130) and increases program funding another $7.25 billion. The Act also creates new eligibility for certain not-for-profit organizations with not more than 300 employees and that spend less than $1 million or 15% of receipts and expenses on lobbying activities. In addition, charitable organizations can be eligible for PPP loans if they employ 500 or fewer employees per physical location.  Individual tax rebates The Act provides rebate checks of $1,400 per individual (including dependents) based on their adjusted gross income (AGI) reported on their 2019 tax return (or 2020 return, if filed). However, the final version accelerates the phase-out range of taxpayers no longer eligible for the direct payments.   Eligible individuals mean any individual other than nonresident aliens or individuals who are a dependent of another taxpayer at the beginning of the year. Trusts and estates are also ineligible. Restaurant Revitalization Fund The Act establishes the Restaurant Revitalization Fund. Through this program, the Small Business Administration (SBA) will provide grants to restaurants, food trucks, bars, brewpubs and other eligible entities to cover payroll, rent, utilities, food costs and other expenses essential to operations. Entities with more than 20 locations, publicly traded companies and entities that have applications pending under the grants for shuttered venue operators program are not eligible. Of the $28.6 billion appropriated for this program, $5 billion is earmarked for businesses with gross receipts of $500,000 or less. Further, during the initial 21-day period of the program, the Act directs the SBA to prioritize grants to small businesses owned by women, veterans, and socially and economically disadvantaged small businesses. Grants received under this program are exempt from federal income tax, and expenses paid with the funds are deductible.  Child tax credit and dependent care benefits enhancements The Act increases the child tax credit to $3,000 per qualifying child ($3,600 in the case of children under the age of 6 as of the close of the tax year) and makes it refundable for 2021. The increased credit over the $2,000 available under prior law would phase out at AGI levels of $150,000 for joint filers, $112,500 for head of household and $75,000 for all other taxpayers. The AGI phase-out levels for the $2,000 previously available credit remain the same ($400,000 for joint filers, $200,000 for all others). The Act additionally instructs the Treasury Department to establish a program under which taxpayers will receive periodic advance payments that in total equal 50% of the estimated credit they are entitled for the year. Paid leave payroll tax credits extensions Originally provided for by the Families First Coronavirus Response Act, the payroll tax credits for providing paid sick and family leave are extended through Sept. 30, 2021. Additionally, effective for calendar quarters beginning after March 31, 2021, the limit on wages that can be taken into account for computing the family leave credit with respect to all calendar quarters in total increases to $12,000 from $10,000, and the 10-day limit on the emergency paid sick leave credit resets. In other words, if, as of the end of the first calendar quarter of 2021, an employer reaches both of these respective limits for a given employee, the employer would be able to claim an additional family leave credit up to $2,000 of qualified family leave wages plus an emergency paid sick leave credit up to 10 days for qualified sick leave wages paid to that same employee during the second and third quarters of 2021.  Taxability of student loan forgiveness Student loans forgiven after Dec. 31, 2020, and before Jan. 1, 2026, can be excluded from gross income except in certain circumstances. The Act does not itself include student debt forgiveness, but it could be a sign that potential legislation may be on the horizon. Unemployment benefits The federal unemployment subsidy remains at $300 per week and is further extended through Sept. 6, 2021. For taxpayers with AGI of less than $150,000, the first $10,200 of unemployment benefits received in 2020 will not be subject to income tax (in the case of a joint return, the first $10,200 received by each spouse). Election to allocate interest expense worldwide repealed The Act repeals a provision allowing U.S. affiliated groups to elect to allocate and apportion interest expense on a worldwide basis to determine taxable income applied to foreign tax credit limitations. Section 864(f) was enacted as part of the American Jobs Creation Act of 2004, but its implementation has been deferred several times. This section is relevant in computing the foreign tax credit limitation, which is based on the amount of taxable income from foreign sources and the allocation and apportionment of deductions between U.S.- and foreign-source gross income from different limitation categories. Allocating and apportioning interest expense on a worldwide basis would generally result in increasing the ability to use foreign tax credits. Executive compensation deductibility limitations  The Act expands the executive compensation deduction, which is limited to $1 million each for the highest paid executives at public companies. The limitation will now apply to the CEO, CFO and the next five highest-paid employees. Currently, this limit applies to the CEO, CFO and the top three highest-paid employees.  The purpose of this provision is to offset the costs of providing funding relief to financially struggling multiemployer and single-employer pension plans as described below. It is effective for tax years beginning after 2026.  Excess business loss limitation First enacted in the Tax Cuts and Jobs Act (TCJA), the limitation of certain current trade or business losses of noncorporate taxpayers was extended through 2026. Indexed for inflation, the TCJA placed a $250,000 ($500,000 for married filing joint taxpayers) limit on using these losses originally through 2025. The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily suspended the limitation for the 2018, 2019 and 2020 tax years. Pension plan relief The Act contains provisions to assist troubled multiemployer pension plans as well as single-employer pension plans. Multiemployer plans – The Act creates a special program to allow the Pension Benefit Guaranty Corporation (PBGC) upon application by plan sponsors to make direct cash payments to financially troubled pension plans to ensure they remain solvent. Applications must be submitted by Dec. 31, 2025. Single-employer plans – The Act provides that shortfall amortization bases for plan years beginning in 2019 and 2020 would be reduced to zero. For plan years beginning after Dec. 31, 2019, all shortfalls would be amortized over 15 years rather than seven years under current law. Cost-of-living adjustment freeze for qualified retirement plans The Act contains provisions to freeze cost-of-living adjustments for certain annual limitations beginning after Dec. 31, 2030. The 2030 dollar amount would remain in effect until further notice. Defined benefit plans – The limitation on annual benefits Defined contribution plans – The limitation on contributions and other additions Compensation – The limitation on the annual compensation taken into account under the plan  The freeze on the cost-of-living adjustments described above would not apply in the case of a plan maintained by one or more collective bargaining agreements.  The freeze on cost-of-living adjustments applicable to benefits, contributions and compensation is designed to: Raise revenue and help offset the cost of the multiemployer plan reforms. Fill a budget hole in the 10-year scoring window. The freeze may also serve to foreshadow future legislative proposals to cut back on tax incentives for retirement plans as revenue raisers to offset the cost of other policy proposals. Expanded 1099 reporting The Act expands the 1099 reporting threshold for third-party settlement organizations to $600 annually with no fixed number of transactions from $20,000 and 200 transactions per payee under current law. This provision would be effective for transactions after Dec. 31, 2021. This provision is intended to capture more of the money earned by independent contractors in so-called “gig economy” jobs. This will primarily affect companies like eBay, Airbnb, Amazon, but the final rules and ensuing guidance will need to be reviewed to see how expansive this change may be.   We encourage you to reach out to your Baker Tilly adviser regarding how any of 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 fifth federal COVID-19 relief bill is moving on to be signed by the president. The massive bill includes extensions to the employee retention credit, unemployment benefits, PPP qualification parameters among other programs, and it establishes a revitalization fund for restaurants.

Congress passes latest round of stimulus legislation

Authored by Paul Dillon, Pat Balthazor and Michael Wronsky On March 3, 2021, the Small Business Administration (SBA) released additional Paycheck Protection Program (PPP) loan guidance, including a new interim final rule (IFR), frequently asked questions (FAQ) and updated loan application forms. The guidance accounts for changes made to the PPP by the Consolidated Appropriations Act, 2021 (CAA) and incorporates directives by the Biden administration to increase the maximum loan amounts available to Form 1040 Schedule C filers and to allow applicants and entities owned by individuals who have been convicted of nonfraud-related felonies or are delinquent or have defaulted on their student loans to be eligible for PPP loans.  This tax alert is a preliminary overview of critical points covered by the guidance. Baker Tilly continues to analyze the content in greater detail and will issue additional communications as warranted. Key takeaways  IFR on loan calculation amount and eligibility  A Form 1040 Schedule C filer’s maximum loan amount was previously calculated based on its net profit reported on Schedule C line 31 (in essence, deemed owner compensation), plus payroll costs, if the proprietor had employees. The deemed owner compensation component, redefined as “proprietor expenses,” can now be calculated using either line 31 or gross income as reported on Schedule C line 7. Proprietors with employees must reduce the gross income figure by any expenses for employee benefit programs (line 14), pension and profit-sharing plans (line 19) and wages (line 26), to avoid double counting as these amounts constitute payroll costs that factor into the maximum loan amount. To mitigate the risk of increased fraud that could arise from use of the gross income methodology, borrowers of loans calculated using gross income of more than $150,000 will not automatically be deemed to have made the loan necessity certification in good faith, and such certification may be subject to SBA review.  The SBA will review a sample of first-draw loans applied for based on Schedule C gross income, which will require the use of new application Form 2483-C (second-draw borrowers will use Form 2483-SD-C) to determine whether loans computed with gross income amounts of $150,000 or more were applied for in compliance with loan eligibility criteria, including the good-faith certification. The sample size is not specified in the IFR. The IFR removes certain restrictions from loan eligibility as directed by the Biden administration in February; specifically, applicants or owners of applicants who have been convicted of nonfraud-related felonies (fraud, bribery, embezzlement or making a false statement in a loan application or application for federal assistance) or are delinquent or have defaulted on their student loans are now eligible for the PPP. FAQ FAQ No. 46: Revised to provide that as second-draw borrowers must demonstrate a 25% reduction in gross receipts, they be automatically deemed to have made the good-faith certification that their loan is necessary. It additionally clarifies the requirement that all loans greater than $2 million are subject to SBA review for compliance applies only to first-draw loans.   FAQ Nos. 57 and 58: Defines lobbying activities for purposes of determining whether section 501(c)(6) and destination marketing organizations are eligible for loans, and provide that loan proceeds cannot be used for lobbying activities or expenditures, by referencing section 3 of the Lobbying Disclosure Act of 1995 (2 U.S.C. 1602).   FAQ Nos. 59 and 60: Clarify that if a first-draw loan borrower files for bankruptcy protection after disbursement of their loan, they are still eligible for forgiveness provided other eligibility requirements are met. However, the borrower will not be eligible for a second-draw loan pursuant to the prohibition against applicants being presently involved in any bankruptcy proceedings.   FAQ Nos. 61 and 62: Provide that if a second-draw applicant uses or will have used all of its first-draw loan proceeds on eligible expenses, but fails to meet the requirement that 60% of loan proceeds be used on payroll costs, it will still be eligible for a second-draw loan (though its first-draw maximum forgiveness amount will be reduced). Additionally, a first-draw borrower will not be rendered ineligible for a second-draw loan on account of receiving only partial loan forgiveness (i.e., for failure to meet the aforementioned 60% requirement or due to salary or headcount reductions). FAQ No. 63: Confirms that SBA size and alternate size standards are not available for determining eligibility for second-draw loans. FAQ No. 65: Confirms that borrowers are eligible for the employee retention credit, but cannot request forgiveness for payroll costs that were used to claim the credit.  First- and second-draw loan application forms – Forms 2483 and 2483-SD, respectively, are revised to account for the removal of certain restrictions on borrower eligibility as ordered by the Biden administration.  First- and second-draw loan application forms for Schedule C filers using gross income – Forms 2483-C and 2483-SD-C, respectively, are new for use by applicants using gross income as reported on Schedule C, discussed above. We encourage you to reach out to your Baker Tilly advisor with questions on how the above may affect your tax situation.

Newly released Paycheck Protection Program guidance includes a new interim final rule, an FAQ and updated loan application forms, reflecting changes that were made in December’s relief bill as well as directives from the Biden administration.

SBA releases new PPP IFR, FAQ and loan applications 

Authored by Paul Dillon, Christine Faris, Michael Wronsky and Devin Tenney On March 1, 2021, the IRS released Notice 2021-20, providing long-awaited guidance on the retroactive changes made to the employee retention credit (ERC) by the Consolidated Appropriations Act, 2021 (CAA). The notice is mainly in the form of 71 frequently asked questions (FAQ), most of which are similar to the ERC FAQ the IRS previously published on its website. Specifically, the notice outlines how Paycheck Protection Program (PPP) loan borrowers who have already applied for forgiveness can claim the ERC. Broadly, the ERC can be retroactively claimed for qualified wages reported on a forgiveness application that exceed the total reported payroll and nonpayroll costs needed to support the forgiven amount of the loan.  Further, the notice adopts the definition of “full-time employee,” initially provided by the IRS FAQ for use in determining an employer’s headcount to assess whether it is a large or small employer, without requiring either seasonal workers or part-time employees be included in the computation. It also defines key terms used in determining whether an employer is eligible under the suspension test. This tax alert is a preliminary overview of critical points covered by the notice. Baker Tilly will provide additional information in the coming weeks and months as we analyze the guidance in detail. Key takeaways The notice retains the FAQ format of the preexisting IRS guidance: updating it for retroactive changes made to the ERC by the CAA and making additional clarifications. The notice does not cover CAA updates to the credit that apply exclusively to 2021. While the guidance relies on the FAQ format, by being incorporated in a notice and formally published in the Internal Revenue Bulletin, it allows taxpayers to rely on the contents for penalty protection. Determining PPP loan recipient’s qualified wages: A PPP loan recipient is deemed to have made an election under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to exclude qualified wages from its ERC determination for all wages that are reported on an application for forgiveness — up to the amount of total payroll and nonpayroll costs reported on the application needed to support the forgiven amount. The ERC can be claimed on qualified wages in excess of this figure, but not on any amounts for which the election is deemed made (unless forgiveness is ultimately denied). As stated in the notice, the IRS’ position is effectively that an employer “cannot reduce the deemed election by the amount of the other eligible expenses that it could have reported on its PPP Loan Forgiveness Application” (emphasis added); a potentially damaging blow to borrowers that have already filed a forgiveness application.  The borrower is not considered to have made the election for any qualified wages paid that are not included in payroll costs reported on the forgiveness application.  Example 1: Employer X received a PPP loan of $200,000 and is an eligible employer for ERC purposes who paid $250,000 in qualified wages during the second and third quarter of 2020 (which overlapped with X’s covered period). X reported $250,000 of payroll costs on its loan forgiveness application, which was ultimately approved by the Small Business Administration (SBA) in full. X is deemed to have made an election to exclude $200,000 of qualified wages from its ERC determination (the maximum reported payroll costs needed to support the $200,000 forgiven amount), and can claim the ERC for the remaining $50,000 of qualified wages in 2020’s second and third quarters. Example 2: Same facts as Example 1, except X additionally incurred and reported $80,000 of eligible nonpayroll costs on its forgiveness application. In this instance, X is deemed to have made an election to exclude $120,000 of qualified wages ($200,000 PPP loan principal * 60% minimum payroll cost requirement), the minimum amount of payroll costs together with the reported nonpayroll costs needed to support the $200,000 of forgiveness. X can therefore claim the ERC on $130,000 of qualified wages ($250,000 total, less $120,000 in reported payroll costs needed to support forgiven amount) in the second and third quarters of 2020. Example 3: Same facts as Example 2, except X did not report the $80,000 of eligible nonpayroll costs on its forgiveness application, despite incurring them during its covered period. As such, X is deemed to have elected to exclude $200,000 of qualified wages from its ERC determination (the maximum reported payroll costs needed to support the $200,000 forgiven amount) and can claim the ERC for the remaining $50,000 of qualified wages in 2020’s second and third quarters. FAQ definition of “full-time employee”: For purposes of the 2020 credit, an employer is considered a large employer if it had more than 100 average full-time employees in 2019 (for purposes of the 2021 credit, the 100 threshold is increased to 500). The notice retains the same definition of full-time employee provided by the original IRS FAQ for this purpose, which appears to limit the employees that need to be included in the calculation to those who performed an average of at least 30 hours of service per week or 130 hours of service in the month. References to part-time employees and seasonal workers remain absent from the definition.  “More than nominal portion” of employer’s operations defined: An essential business can be an eligible employer under the suspension test if based on the facts and circumstances that “more than a nominal portion” of its operations have been suspended by a government order. Per Q&A No. 11, a portion of an employer’s operations will be considered more than nominal for the quarter in which the employer is testing eligibility if either: The gross receipts from that portion of the business make up at least 10% of the employer’s total gross receipts (both determined using the gross receipts from the same calendar quarter in 2019), or The hours of service performed by employees in that portion of the business make up at least 10% of the employer’s total employee service hours (both determined using the service hours performed by employees in the same calendar quarter in 2019). “More than nominal effect” on employer’s operations defined: An employer can qualify under the suspension test if its operations are not shut down, but rather subject to a government-mandated modification that has “more than a nominal effect” on the operations under the facts and circumstances. Per Q&A No. 18, a modification will have more than a nominal effect if it results in a 10% or more reduction in an employer’s ability to provide goods or services in its normal course of business. The notice however does not appear to provide any parameters by which this reduction can be measured. Factors for defining “comparable operations” via telework provided: An employer subject to a government-ordered closure will not be eligible under the suspension test if it can maintain “comparable operations” via telework. Q&A No. 16 provides the following four factors for consideration in determining whether comparable operations have been maintained and allows for additional factors to be considered if relevant:  Telework capabilities – Determine whether an employer has adequate support (IT and otherwise) such that operations can continue from another location.  Portability of employees’ work – Determine the amount of work that is portable or otherwise adaptable to be performed from a remote location. Need for presence in employee’s physical workspace – If an employer’s physical workspace is so critical to its trade or business operations that central tasks cannot be performed remotely, this factor alone indicates the employer is unable to continue comparable operations. Examples of critical physical workspaces include laboratories or manufacturing involving special equipment or materials that cannot be accessed or operated remotely.  Transitioning to telework operations – A period of adjustment to telework is expected, and an employer will not be considered to have a suspension of operations while it experiences inefficiencies attributable to the transition. However, if an employer incurs a significant delay (for example, two weeks) in moving operations to comparable telework on account of a need to, for example, implement teleworking policies or provide employees with necessary equipment, the employer’s operations may be deemed subject to a partial suspension during such a transition period.  Some areas remain unclear: While much is covered by the notice’s 102 pages, questions and areas of uncertainty remain, most notably, whether foreign affiliates must be included for aggregation purposes.  Please 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 IRS issued guidance regarding retroactive changes made to the employee retention credit, including how Paycheck Protection Program loan borrowers can claim the ERC – even if they already applied for forgiveness.

IRS updates, formalizes ERC guidance 

Authored by Paul Dillon, Christine Faris, Michelle Hobbs and Michael Wronsky By the end of February, the House of Representatives is expected to pass the American Rescue Plan Act of 2021 (the Act), a combination of several bills making up the fifth stimulus legislation package designed to provide further economic relief from the continuing COVID-19 pandemic. The Senate is expected to begin discussions the first week of March when it is likely the legislation will be modified and sent back to the House. While the Act contains an increase of the minimum wage to $15 per hour, this provision was deemed to violate the Senate reconciliation rules. Additionally, other elements of the Act may not have unanimous support of all Democratic senators.  Both chambers of Congress are using budget reconciliation to pass the Act. In the Senate, this means the Act is not subject to filibuster and only a simple majority is needed to pass it. Therefore, ratification can occur without any Republican votes if no Democratic senator dissents. The final bill is expected to be signed into law by President Biden shortly after passage by both chambers. From a tax perspective, what is not included in the Act is perhaps as important as what is included. The Act contains no tax increases, including those that had been outlined in President Biden’s campaign proposals. At this time, individual, corporate and capital gains rates are unchanged, and no adjustments were made to the estate and gift tax regime. During a CNBC interview earlier this month, Treasury Secretary Janet Yellen said any tax increases sought by the Biden administration would be introduced gradually, suggesting these would come later in 2021 as part of a larger legislative package and be phased in slowly. Meanwhile, the Act does include several tax provisions such as an extension of the employee retention credit, another round of individual tax rebates and enhancements to the child tax credit. Notable nontax provisions include modifications to the Paycheck Protection Program (PPP), an increase to and continuation of the federal unemployment subsidy as well as funding for primary school and higher education institutions, and vaccine distribution.  Key provisions Employee retention credit The refundable quarterly payroll tax credit, designed to assist employers experiencing full or partial suspensions or significant declines in gross receipts in keeping employees on their payroll, was extended to apply to qualified wages paid through Dec. 31, 2021. Beginning after June 30, 2021, the credit will become a refundable payroll tax credit against the Medicare tax, otherwise known as the hospital insurance tax. Paycheck Protection Program The Act further expands the PPP to include certain internet publishing organizations (NAICS code 519130) and increases program funding another $7.25 billion. The Act also creates new eligibility for certain not-for-profit organizations with not more than 300 employees and spend less than $1 million or 15% of receipts and expenses on lobbying activities. In addition, charitable organizations can be eligible for PPP loans if they employ 500 or fewer employees per physical location. Finally, the SBA affiliation rules will no longer apply to not-for-profit organizations.  Individual tax rebates The Act provides rebate checks of $1,400 per individual (including dependents) based on their adjusted gross income (AGI) reported on their 2019 tax return (or 2020 return, if filed). Payment amounts will begin to phase out for single filers with AGI of $75,000 or higher ($150,000 for joint, $112,500 for head-of-household filers).  EIDL grants and other loan proceeds Under the Act, Economic Injury Disaster Loan (EIDL) grants as well as restaurant revitalization grants would be exempt from federal income tax. Further, similar to forgiven PPP loans, these exclusions from taxable income would not result in a loss of tax deductions for expenses funded by those grants. Child tax credit and dependent care benefits enhancements The Act increases the child tax credit to $3,000 per qualifying child ($3,600 in the case of children under age 6 as of the close of the tax year) and makes it refundable for 2021. The increased credit over the $2,000 available under prior law would phase out at AGI levels of $150,000 for joint filers, $112,500 for head of household, and $75,000 for all other taxpayers. The AGI phase out levels for the $2,000 previously available credit remain the same ($400,000 for joint filers, $200,000 for all others). The Act additionally instructs the Treasury Department to establish a program under which taxpayers will receive monthly advance payments of the credit they are due, from July through December 2021. Paid leave payroll tax credits extensions Originally provided for by the Families First Coronavirus Response Act, the payroll tax credits for providing paid sick and family leave are extended through Sept. 30, 2021. Additionally, effective for calendar quarters beginning after March 31, 2021, the limit on wages that can be taken into account for computing the family leave credit with respect to all calendar quarters in total increases to $12,000 from $10,000, and the 10-day limit on the emergency paid sick leave credit has been reset. In other words, if, as of the end of the first calendar quarter of 2021, an employer reached both of these respective limits for a given employee, they would be able to claim the family leave credit on up to an additional $2,000 of qualified family leave wages and another 10 days of the emergency paid sick leave credit for qualified sick leave wages paid to that same employee during the second and third quarters of 2021.  Unemployment benefits The federal unemployment subsidy increases to $400 per week from $300 and is further extended through Aug. 29, 2021.  Election to allocate interest expense worldwide repealed The Act repeals a provision allowing U.S. affiliated groups to elect to allocate and apportion interest expense on a worldwide basis to determine taxable income applied to foreign tax credit limitations. Section 864(f) was enacted as part of the American Jobs Creation Act of 2004, but its implementation has been deferred several times. This section is relevant in computing the foreign tax credit limitation, which is based on the amount of taxable income from foreign sources and the allocation and apportionment of deductions between U.S.- and foreign-source gross income from different limitation categories. Allocating and apportioning interest expense on a worldwide basis would generally result in increasing the ability to use foreign tax credits. Pension plan relief The Act contains provisions to assist troubled multiemployer pension plans as well as single-employer pension plans. Multiemployer plans – The Act creates a special program to allow the Pension Benefit Guaranty Corporation (PBGC) upon application by plan sponsors to make direct cash payments to financially troubled pension plans to ensure they remain solvent. Applications must be submitted by Dec. 31, 2025. Single-employer plans – The Act provides that shortfall amortization bases for plan years beginning in 2019 and 2020 would be reduced to zero. For plan years beginning after Dec. 31, 2019, all shortfalls would be amortized over 15 years rather than seven years under current law. Cost-of-living adjustment freeze for qualified retirement plans The Act contains provisions to freeze cost-of-living adjustments for certain annual limitations beginning after Dec. 31, 2030. The 2030 dollar amount would remain in effect until further notice. Defined benefit plans – The limitation on annual benefits Defined contribution plans – The limitation on contributions and other additions Compensation – The limitation on the annual compensation taken into account under the plan    The freeze on the cost-of-living adjustments described above would not apply in the case of a plan maintained by one or more collective bargaining agreements.   For more information about how these issues may affect you, connect with your Baker Tilly tax professional.
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 House passed the fifth federal COVID-19 relief bill. Carrying a hefty price tag – $1.9 trillion – and facing an uphill battle as it moves to the Senate.

State & Local Government

House expected to advance latest round of stimulus legislation

Employer payroll tax credits, loans, and other Consolidated Appropriations Act incentives There are numerous relief programs available to lessen the burden of employee expenses and help businesses survive. The Consolidated Appropriations Act, 2021 (“CAA”), funds the government for the next fiscal year and consists of several bills that together mark the fourth economic stimulus package designed to help taxpayers continue to weather coronavirus-related closures. The CAA extends and enhances many relief provisions that were included in the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act. Each business must determine which relief programs will have the most positive impact on their business, while also ensuring the benefits they choose can work together. Baker Tilly’s coronavirus benefit coordination matrix not only explains who can use each benefit but also how each benefit coordinates with others. 
A preview of the matrix is shown below, highlighting the Paycheck Protection Program: 
Download the matrix to learn more about which benefits may help your business during this challenging time, such as: PPP – second draw loans Employee retention credit – 2021 version Emergency Paid Sick Leave credit Emergency Paid Family and Medical Leave credit  Work Opportunity Tax Credit  Shuttered Venue Operators grant Restaurant Revitalization Fund grant Emergency Economic Injury Disaster Loan R&D credit payroll tax offset

Understand Coronavirus benefit and relief programs, who is eligible and how the benefits coordinate with other programs.

Family Business

Not-for-Profit

Not-For-Profit Coronavirus Resources

Relief Funding Assistance

Coronavirus benefit coordination matrix

Authored by Paul Dillon and Michelle Hobbs Borrowers receiving a Form 1099-MISC, “Miscellaneous Information,” that includes as income certain payments on loans authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, such as the Paycheck Protection Program (PPP), may need to request a corrected 1099-MISC from their lenders. If income relating to these types of loan forgiveness is incorrectly included in a Form 1099, it could result in IRS correspondence to borrowers regarding underreported income. The IRS released Announcement 2021-2 directing lenders to issue corrected Forms 1099-MISC within 90 days if payments of principal, interest and associated fees on a loan subsidized by the Small Business Administration are reported as income to the borrower. Directions for filing corrected Forms 1099-MISC can be found in the 2020 filing instructions. Failure to do so could result in penalties assessed to the lender. Taxpayers that received Forms 1099-MISC from a lender that supplied CARES Act funding should carefully scrutinize the amounts reported to ensure such payments are not being reported as income. If this occurs, they should immediately contact the lender and request a corrected Form 1099-MISC. In January 2021, the IRS previously waived any requirement by lenders to issue Forms 1099-MISC reporting payments of principal, interest and associated fees on CARES Act funding.  For more information about how these issues may affect you, connect with your Baker Tilly tax professional.
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.

Borrowers of loans subsidized by the SBA via the CARES Act, including PPP loans, should confirm Forms 1099-MISC sent by their lenders were corrected to indicate the principal, interest and related fees on those loans were not reported as income.

IRS requires corrected 1099s for CARES Act loans

Authored by Paul Dillon, Michelle Hobbs and Pat Balthazor Generally, a corporation’s charitable contribution deduction cannot exceed 10% of taxable income. The Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded this deduction to 25% of taxable income for cash contributions made during calendar years 2020 or 2021. At the end of December, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) further expanded the limitation to 100% of taxable income for certain qualified disaster relief contributions. A qualified disaster relief contribution is a cash contribution that is:  Paid between Jan. 1, 2020, and Feb. 25, 2021 Made for relief efforts in one or more qualified disaster areas Documented with a contemporaneous written acknowledgement from the charity which includes a statement that the contribution was used (or will be used) for relief efforts in one or more qualified disaster areas
– Corporations may have to go back to the donee to obtain documentation that includes the above statement, if not reflected in the receipt they currently have; such documentation must be obtained before the return reflecting the deduction is filed (see below) Taxpayers elect to apply this qualified disaster relief contribution rule by computing its deductible amount of qualified contribution using the increased limit and claiming the amount on the income tax return for the year in which the contribution was made. Qualified disaster relief areas are those under a major disaster declaration by the president (declared between Jan. 1, 2020, and Feb. 25, 2021) and listed by the Federal Emergency Management Agency (FEMA) as such between Dec. 27, 2019, and Dec. 27, 2020. This designation does not include any disasters related to COVID-19.   Contemporaneous records – Since these changes were enacted so late in 2020, the IRS recently issued a release providing limited relief from the contemporaneous written acknowledgement requirements. Acknowledgement must be obtained by the organization before the corporation timely files its tax return (including extensions). With respect to qualified cash contributions made before Feb. 1, 2021, the contemporaneous written acknowledgement does not have to contain the disaster relief statement referenced above.  For more information about how these issues may affect you, connect with your Baker Tilly tax professional.
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 recent IRS release provides corporations with limited relief for the requirement that they need certain documentation to claim deductions for qualified charitable cash contributions made before Feb. 1, 2021.

IRS provides record-keeping relief for corporate charitable contributions 

Authored by Paul Dillon, Michelle Hobbs and Michael Wronsky This week, the Small Business Administration (SBA) and Department of Treasury released several items of guidance on Paycheck Protection Program (PPP) loans:  An updated interim final rule on loan forgiveness, to account for changes to the PPP made by the Consolidated Appropriations Act, 2021 (CAA) Two sets of frequently asked questions (FAQ) about how to calculate the maximum loans available under the first- and second-draw programs, how to calculate the 25% revenue reduction required for eligibility for the latter, and what documentation is needed to be submitted with the loan applications  Updated loan forgiveness applications:
– Form 3508S (for use by borrowers of loans of $150,000 or less)
– Form 3508EZ (for use by borrowers who maintained specified levels of employee salaries and headcounts)
– Form 3508 (for use by borrowers ineligible to use the above forms) Links to the documents are included above and a summary of their contents follows below. We will continue to analyze this guidance and issue additional communications as appropriate. We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact your situation. Interim final rule (IFR) on loan forgiveness: Consolidates previously issued IFRs on loan forgiveness and makes necessary updates to conform to the CAA’s amendments to the program, Provides that for second-draw loans in excess of $150,000, the borrower must submit its loan forgiveness application for their first-draw loan (even if the requested amount is $0) either before or simultaneously with the second-draw forgiveness application, and on separate applications, Clarifies the limit on forgiveness for owner compensation must be prorated based on the length during which the compensation is paid or incurred. For example, if a covered period of 10 weeks is chosen by the borrower, the maximum amount of owner compensation eligible for forgiveness is calculated as $100,000 divided by 52 weeks multiplied by 10 weeks ($19,231). The $20,833 maximum limit previously in effect applies to covered periods exceeding 2.5 months.    FAQ: Provide detailed instructions for how self-employed individuals with and without employees, farmers, ranchers, partnerships, S and C corporations, eligible not-for-profit organizations, eligible not-for-profit religious institutions, veterans organizations and tribal businesses calculate their maximum first- and second-draw loan amounts  Outline the following primary sets of documentation that must be submitted with the second-draw loan application (or forgiveness application, if the loan is $150,000 or less) to support a 25% gross receipts reduction: Quarterly financial statements (if not audited, the first page must be signed and dated by the applicant attesting to their accuracy),  Quarterly or monthly bank statements showing deposits from the relevant quarters, Annual IRS tax filings and further provides the amounts required to compute gross receipts by entity tax return type, including:
– Self-employed individuals other than farmers and ranchers: Form 1040, Schedule C – sum of lines 4 and 7
– Partnerships: Form 1065 – sum of lines 2 and 8, minus line 6
– S corporations: Form 1120-S – sum of lines 2 and 6, minus line 4
– C corporations: Form 1120 – sum of lines 2 and 11, minus the sum of lines 8 and 9
– For not-for-profit organizations: Form 990: the sum of lines 6b(i), 6b(ii), 7b(i), 7b(ii), 8b, 9b, 10b and 12 from Column A of Part VIII Note: these instructions require that for-profit entities exclude net gains or losses on business asset sales, in addition to capital asset sales. The exclusion of business asset sales appears to be in conflict with the definition of gross receipts provided within the FAQ (as well as the definition under Treas. Reg. section 1.448-1T(f)(2)(iv)(A)). It is unclear whether this is intentional or an oversight.  Provide that if payroll costs for the prior 12 months were used to compute a borrower’s first-draw loan amount, those same payroll costs cannot be used to compute that borrower’s second-draw amount. Loan forgiveness applications:  Of particular interest is the loan amount threshold for determining eligibility to file the paired-down Form 3508S increased to $150,000 from $50,000. Applicants do not need to show the computation of their requested forgiveness amounts, but still must attest to the accuracy of the information reported and submit documentation to support the use of loan proceeds on eligible costs. Borrowers of loans of $50,000 or less do not need to reduce their forgiveness amount for any reduction in employee headcounts or salaries.   For more information about this topic, please visit our comprehensive set of Payroll Protection Program Solutions.
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 and Treasury Department released new guidance and updated loan forgiveness applications for the Paycheck Protection Program. 

Lodging

Multifamily Housing

Real Estate Investors

Real estate coronavirus resources

Additional PPP guidance, forgiveness applications released

Authored by Devin Tenney and Christine Faris On Dec. 27, 2020, the Consolidated Appropriations Act (CAA) was signed into law, comprising several bills that provide continued economic relief from the COVID-19 pandemic. Chief among this relief is an extended and expanded employee retention credit (ERC), featuring sweeping changes impacting its availability both retroactively and prospectively.  Due to the prospective nature of certain notable changes to the now extended ERC, the CAA, in effect, creates an entirely new credit for 2021 that is separate and distinct from the ERC available for 2020, and appears to offer a significant opportunity for many employers. Employers are strongly encouraged to work with their tax advisors to explore eligibility in both 2020 and 2021, to ascertain if one or more opportunities are presented.  Retroactive changes The Coronavirus Aid, Relief, and Economic Security (CARES) Act incentivized employee retention by offering a payroll tax credit based on employee wages paid or incurred from March 13, 2020, through Dec. 31, 2020. However, the CARES Act prohibited Paycheck Protection Program (PPP) loan recipients from also taking an ERC. Given the immense popularity of the PPP, this limitation excluded numerous employers from eligibility for the credit. The CAA changes this by striking this prohibition from the CARES Act and allowing employers to potentially benefit from both the PPP and the ERC. The CAA also codifies certain guidance previously provided by the Internal Revenue Service pertaining to gross receipts for tax-exempt entities and treatment of certain allocable healthcare expenses such as qualified wages.  For those employers that already received a PPP loan in 2020 and are looking to take advantage of the ERC in 2020, it’s important to understand both how the credit works and that the rules remain unchanged for 2020. Broadly, the ERC is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order (Suspension Test) or (2) a significant decline (i.e., greater than 50%) in gross receipts due to COVID-19 (Gross Receipts Test).  For the 2020 credit, the amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020. Qualified wages are limited to $10,000 per employee for the entire year — allowing up to $5,000 in credit per employee. Wages that can be treated as “qualified” hinge on whether an employer is a large or small employer. Specifically, large employers may only count as qualified wages those wages paid for services not rendered, whereas small employers can count all wages paid as qualified. For 2020, a large employer is one with more than 100 average full-time equivalent employees based on calendar year 2019. Additional resources and guidance pertaining to these rules can be found on bakertilly.com. Employers should be aware of two items of note pertaining to the coordination between PPP loans and the ERC: PPP loan forgiveness and the ERC are not available for the same wages (i.e., no double dipping). The mechanics for calculating the retroactively available ERC are unclear at this time. Guidance is forthcoming from the Treasury Department and Small Business Administration, which hopefully will clarify how the two benefits interact. As such, we strongly encourage waiting to pursue claiming the retroactive credit until this clarity is provided. Prospective changes (applicable to 2021 only) As discussed above, the ERC available to employers in 2021 should be treated as a different credit from its 2020 counterpart, a distinction drawn as a result of the sweeping changes that the CAA made to the ERC for the first and second quarters of 2021 only. These changes, paired with the lifting of the prohibition on PPP recipients, presents an opportunity for employers meeting certain eligibility criteria to obtain refundable payroll tax credits of potentially significant dollar value.  The following is a non-exhaustive list summarizing key changes to the ERC that are prospective only, and therefore apply only to the period of Jan. 1, 2021, through June 30, 2021: Large employer threshold increased to 500 from 100. The prior rules permitted employers with 100 or fewer 2019 average full-time equivalent employees to count all eligible wages paid as qualifying wages. That limit increased to 500 average full-time equivalent employees in 2019, greatly expanding the amount of wages many employers can treat as qualified. However, keep in mind that aggregation rules apply. Qualified wages. The limit on the amount of qualifying wages per employee increased to $10,000 per calendar quarter in 2021 from $10,000 per calendar year, for total potential qualified wages of $20,000 — double the limit in 2020.  Credit conversion ratio. The amount of the credit increased to 70% from 50% of qualifying wages, entitling employers up to $7,000 per employee per quarter in 2021 ($14,000 in total). This is a significant increase of the $5,000 limit for 2020. Gross Receipts Test relaxed for 2021. As many employers found eligibility under the Gross Receipts Test out of reach due to the greater than 50% decline in gross receipts requirement, lawmakers reduced the threshold by requiring employers to a greater than 20% decline in gross receipts compared to the same quarter in 2019. Under this change, an employer may elect to have the test determining eligibility for the quarter measure whether the gross receipts for the immediately preceding quarter are less than 80% of the gross receipts for the same calendar quarter in 2019. What is currently unknown is whether the election, once made, is permanent, requiring employers to look at the prior quarter to determine eligibility for the current quarter. Employers may still rely on the Suspension Test to show eligibility in 2021.  Based on these changes to the credit for 2021, a remarkable opportunity is presented to employers that can show they: qualify as a small employer for 2021 (i.e., 500 or fewer average full-time equivalent employees in 2019), and  experienced a greater than 20% decline in their gross receipts in the fourth quarter of 2020 and/or the first quarter of 2021 compared to the comparable quarter in 2019.  We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact 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 latest round of COVID-19 relief extends and expands the employee retention credit, creating retroactive and prospective changes for employers.

Updates to employee retention credit present significant opportunities for employers 

Authored by Michael Wronsky and Pat Balthazor The Small Business Administration (SBA) and Department of the Treasury (Treasury) announced that the Paycheck Protection Program (PPP) will reopen for certain borrowers on Jan. 11, 2021, and released the applications for first- and second-draw loans. Additionally, two interim final rules were recently issued on the program. The first interim final rule (IFR) is intended to cover new first-draw PPP loans authorized by the Consolidated Appropriations Act, 2021 (CAA) as well as the forgiveness applications of existing PPP loans for which the forgiveness proceeds have not yet been remitted. The second IFR applies to second-draw PPP loans authorized by the CAA, highlighting key differences between first- and second-draw loans and providing that, unless stated otherwise, the guidance under the first IFR also applies to second-draw loans.   As part of the reopening announcement, SBA and Treasury said that at least the first two days of the loan application period will be open solely to submissions from community financial institutions to ensure underserved businesses have access to the program. These windows open for first-draw loans today, Monday, Jan. 11, and for second-draw loans, Wednesday, Jan. 13. The program will reopen for all other eligible applicants “shortly thereafter.”   Listed below are key takeaways from both sets of IFRs; we continue to analyze this guidance and will issue additional communications as needed. IFR 1 - PPP as amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act)  Consolidates previously issued IFRs and guidance into one IFR, and incorporates amendments made by the CAA (i.e., expanded costs eligible for loan use/forgiveness, a borrower can now choose the end of their covered period from any date on or between the dates that are eight and 24 weeks after the loan was disbursed) Allows borrowers to use 2019 or 2020 information to calculate their first-draw loan amount Allows certain borrowers to re-apply or request an increase in their first-draw PPP loan amount, including:
– Partnerships whose original loans did not include amounts for partner compensation 
– Borrowers who returned all or part of a PPP loan, or did not accept the full amount for which they were approved IFR 2 - PPP second-draw loans Eligibility requirements for a second-draw loan generally differ from the initial round as follows (though the same affiliation rules largely apply); a business must:
– Have 300 or fewer employees, though businesses in the accommodation and food service industries and eligible news organizations can have 300 or fewer employees per location; 
– Be able to demonstrate a 25% reduction in gross receipts during a calendar quarter in 2020, relative to the same quarter in 2019, or experienced a reduction in annual gross receipts of 25% or more in 2020 when compared to 2019 (if the business was in operation in all four quarters in 2019); and
– Have used or will use their entire first-draw PPP loan for eligible purposes. Appears to provide that the alternative size standard based on tangible net worth and average income after federal income taxes available to determine eligibility for a first-draw loan does not apply; a borrower must pass the 300 or fewer employee test referenced above.  Generally includes “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source” in the definition of gross receipts for the purpose of assessing the 25% reduction test, though forgiven first-draw loan proceeds are specifically excluded. Provides the maximum loan amount is the lesser of (special rules apply for seasonal employers and “new entities”):
– 2 ½ months of the borrower’s 2019 or 2020 average monthly payroll costs (3 ½ months for businesses in the accommodation and food service industries), or
– $2 million ($4 million in the case of businesses that are part of a single corporate group). Please 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 SBA and Treasury Department announced the Paycheck Protection Program would reopen to certain borrowers Jan. 11 and to others Jan. 13. They also issued two interim final rules related to the PPP that should clarify aspects of the first- and second-draw loans for borrowers. 

PPP reopening announced, loan applications and interim final rules released

Authored by Paul Dillon and Michael Wronsky After several days of uncertainty, the Consolidated Appropriations Act of 2021, which included a fourth round of COVID-19 stimulus and tax extender provisions, has been signed into law as it passed both chambers of Congress, which, among many other items, allows deductions for expenses funded by forgiven Paycheck Protection Program loans. For additional details, please see our previous tax alert. The president last week had demanded changes to the legislation, including an increase of the $600-per-person stimulus checks to $2,000.  The House is expected to vote on increasing the direct payments from $600 to $2,000 as early as today. No draft of income limitations or phase-outs is currently available at the time of this release. However, we do not expect the bill to prevail in the Senate, but will continue to monitor this legislation and provide updates as needed. Please 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 Consolidated Appropriations Act of 2021 has been signed into law which finalizes a fourth round of COVID-19 stimulus programs.

President Trump signs stimulus act into law

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky On Dec. 21, 2020, Congress passed additional stimulus legislation. The Consolidated Appropriations Act, 2021 (the Act), which funds the federal government for the next fiscal year, consists of several bills that together mark the fourth package enacted in order to provide continuing economic relief from the COVID-19 pandemic. The stimulus provisions in total have an estimated price tag of $900 billion. It is expected to be signed into law within the next few days.   The legislative package also contains numerous tax-related items, including renewals of many popular tax extenders. Other provisions in this legislative package are: additional funding for and modifications to Paycheck Protection Program (PPP) loans (via the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act); an extension of the enhanced federal unemployment subsidy and resources for vaccine distribution; a second round of direct payments to many taxpayers; an extension of and revisions to the employee retention credit (ERC); and a temporary allowance for the full deductibility of business meals provided by restaurants.  The Act also overrides the Treasury Department’s guidance, allowing expenses funded by forgiven PPP loans to be deductible for federal income tax purposes.  Lawmakers on both sides of the aisle and President-elect Joe Biden also have discussed the need for additional stimulus legislation in 2021; however, the prospects for this coming together are unknown at this time. Key provisions Small business loans The PPP receives additional funding, but this round is more targeted than the first version introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Designed to target small businesses that have been particularly affected by the pandemic, the new stimulus package includes: Directing $284 billion to the Small Business Administration (SBA) to fund additional loans of up to $2 million  Targeting businesses with fewer than 300 employees and that have sustained a 25% revenue loss in any quarter in 2020 relative to the same quarter in 2019  Allowing small 501(c)(6) organizations that have 150 employees or less and are not lobbying organizations to apply for funding In addition, for loans that have not yet been forgiven, the Act extends the covered period for all first draw PPP loans up to March 31, 2021, and expands the list of expenditures eligible for forgiveness to include:  Supplier costs,  Software or cloud computing software that facilitates operations,  Costs related to property damage, vandalism or looting caused by public disturbances that occurred in 2020, that were not covered by insurance,  Investments in facility modifications and personal protective equipment, and  Other group insurance premiums were added to the list of payroll costs (previously, only group healthcare benefits were eligible premiums). The Act also provides a streamlined forgiveness process for borrowers with loans of $150,000 or less. Expenses associated with forgiven PPP loans The CARES Act provided that if taxpayers used PPP loans for certain eligible expenses, those loans would be forgiven. Further, any forgiveness would be excluded from gross income. Treasury subsequently stated in Notice 2020-32 (reiterated in November  in Revenue Ruling 2020-27 and Revenue Procedure 2020-51) that expenses funded with forgiven PPP loans would be nondeductible for federal income tax purposes. In a major win for taxpayers, the Act clarifies Congress’ previous intent that these expenses are deductible. Employee retention credit The payroll tax credit available to employers experiencing full or partial suspensions or significant declines in gross receipts has been extended to apply to qualifying wages paid through June 30, 2021.   The Act also retroactively provides that recipients of PPP loans are eligible to claim the ERC.  Plus, eligible healthcare expenses can be considered qualifying wages regardless of whether they are allocable to an employee’s salary. The Act separately excludes wages taken into account in computing the credit from a PPP loan borrower’s payroll costs.   The Act also makes  prospective  changes to the credit, which include but are not limited to:  Increasing the amount of the credit to 70% of qualified wages from 50% Increasing the cap on the amount of qualifying wages per employee to $10,000 per calendar quarter from $10,000 for the calendar year An employer will qualify under the “gross receipts” test if their revenues in a calendar quarter are less than 80% of their revenues from the same quarter in 2019 (previously, revenues must have been less than 50% from the same quarter in 2019)  The employee limit for determining “small employer” status increasing to 500 employees from 100 employees Individual tax rebates Rebate checks of $600 per individual (including qualifying children) based on the earned income, Social Security benefits and retirement income of the taxpayer reflected on their 2019 returns. Check amounts will begin to phase out for individuals and couples earning $75,000 and $150,000, respectively.  100% business meals deduction The Act allows 100% deductibility for expenses for business meals provided by restaurants incurred over the next two tax years (2021 and 2022). The 50% limitation dates back to 1993 and will again be effective in 2023. Unemployment benefits The Act extends the $300 per week federal unemployment subsidy payment for 10 weeks, through March 14, 2021. Extender provisions Many so-called “extender provisions” were set to expire on Dec. 31, 2020; however, the Act renews them through 2025. These include, but are not limited to the: New Markets Tax Credit Exclusion from gross income for discharged mortgage debt on qualified principal residences (though the maximum amount is reduced to $750,000 from $2 million) Employer credit for paid family and medical leave Some provisions were made permanent by the Act including: Energy-efficient commercial building deduction under section 179D  7.5% adjusted gross income (AGI) threshold for determining the deductibility of individual medical expenses  Other tax provisions Taxpayers can use their earned income from 2019 to determine their earned income tax credit and refundable portion of the child tax credit. For employers that participated in the voluntary tax holiday, the employee portion of the Social Security payroll tax deferral repayment period was extended until December 2021. The original payback period ran through the first four months of 2021.  Individuals that do not itemize their deductions can deduct up to $300 in charitable contributions in 2021. Originally, this was solely allowed for 2020 returns. The 100% AGI limit for cash contributions to a qualified charity, which was also set to expire at the end of 2020, is extended through 2021.  The payroll tax credits for paid sick and family leave provided by the Families First Coronavirus Response Act are extended through March 31, 2021. 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.

Congress passed the fourth economic relief package with the enactment of the Consolidated Appropriations Act, providing additional funding to the Paycheck Protection Program, extending enhanced unemployment benefits and renewing some popular tax extender provisions.

Preparing for PPP: CPA Business Funding Portal

Congress agrees to additional stimulus

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky The Department of Treasury and the IRS released Revenue Ruling 2020-27, providing that taxpayers who received Paycheck Protection Program (PPP) loans cannot deduct expenses funded by the debt if forgiveness is reasonably expected. In other words, if the taxpayer has otherwise met the requisite conditions for loan forgiveness, associated expenses are nondeductible if forgiveness has not yet been approved by the lender or even applied for by the end of the borrower’s taxable year.  This addresses an issue outstanding since the IRS released Notice 2020-32 in April, which originally provided that expenses funded by forgiven loan proceeds are nondeductible (see our previous tax alert). As the Coronavirus Aid, Relief, and Economic Security (CARES) Act excludes PPP loan forgiveness from gross income, the IRS’ position under the notice was based on a general tax principle that disallows deductions for expenses incurred in the production of tax-exempt income. Given that borrowers have as long as 24 weeks to use the loan for eligible expenditures and Small Business Administration (SBA) rules give lenders and the SBA up to a combined five months to process forgiveness applications, the notice left unanswered the question of how expenses should be treated in the likely event that a loan was still outstanding at the end of the tax year in which the costs were incurred. See our 2020 year-end tax letter article on this topic for additional discussion. Revenue Ruling 2020-27 reiterates the position taken under the notice and applies it two separate fact patterns: A borrower with a calendar tax year incurs expenses that are eligible for forgiveness under the CARES Act and SBA guidance and applies for loan forgiveness in November 2020. The borrower otherwise meets all conditions for full forgiveness of the loan, but has not received a decision prior to year-end. The same facts as above apply, except the borrower has not applied for forgiveness as of year-end, rather, they expect to apply in 2021. In both instances, the taxpayer’s expenses are nondeductible. In addition to the revenue ruling, the Treasury and IRS concurrently released Revenue Procedure 2020-51, allowing taxpayers to deduct such expenses if forgiveness is fully or partially denied or if the borrower voluntarily withdraws its forgiveness application.  Congress may yet act to provide relief, either in the lame-duck or next session to address this issue as part of any additional economic stimulus package. Consequently, we recommend extending tax returns impacted by this guidance to allow for the possibility of legislative relief. We encourage you to reach out to your Baker Tilly tax advisor regarding how the above may affect your situation. For more information on this topic, or to learn how Baker Tilly specialists can help,  contact our 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.

Taxpayers who received Paycheck Protection Program loans cannot deduct associated expenses if they anticipate their loan will be forgiven in a subsequent year, according to new guidance from the Treasury and IRS. 

Treasury guidance disallows deductions related to PPP loan proceeds if forgiveness expected

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky Most major news organizations have projected that former Vice President Joe Biden will be the 46th president of the United States. While the outcome is not official until recounts are complete, legal challenges are resolved and states certify the results, discussion has begun about the potential direction of tax policy in the next administration. Democrats are poised to retain their majority in the House of Representatives, but control of the Senate is uncertain. At the time of this writing, four races are still uncalled, including both Senate seats in Georgia. The Georgia races are headed to a Jan. 5 runoff election, which will determine final control of the Senate.  The purpose of this alert is to discuss what the expected tax proposals will be based on the election results to date as well as forecasted economic conditions between now and January. Economic conditions and the state of pandemic-related stimulus will have a significant impact on how quickly any tax policy changes can or will be enacted. When President Obama came into office, his tax proposals were put on hold in order to first stimulate the economy during the 2008-2009 recession. The same could hold true after this election. A number of factors will come into play as to how and when tax policy can be addressed in the next Congress, such as: Stimulus IV in the lame-duck session Status of the Affordable Care Act (ACA) Composition of Congress Status of the economy  Tax policy as a priority Key takeaways The apparent election of Joe Biden would move control of the White House to the Democrats. It appears Congress may remain divided with Democrats controlling the House and Republicans the Senate, but final composition of the Senate will not be known until January. Even if the Democrats obtain control of the Senate, it will be by a razor-thin margin, which would likely limit the chances of drastic tax changes. A divided Congress would also leave the prospects for major tax legislation remote at best. Economic conditions and the state of pandemic-related stimulus will have a significant impact on how quickly any tax policy changes can or will be addressed. Typically, tax increases are not effective prior to the date a bill is first introduced in Congress. If tax legislation does manage to get traction next year, this might create an additional planning window to execute traditional “year-end” tax strategies from early January until a formal bill is introduced in the House Ways and Means Committee. As of yet, there have been no discussions regarding when the proposals will be effective. It remains unclear whether a fourth stimulus package (which could include another round of Paycheck Protection Program (PPP) funding and additional economic impact payments) will be passed in the post-election lame-duck legislative session. A U.S. Supreme Court decision overturning the ACA could prioritize new healthcare legislation over sweeping tax policy changes. A decision is expected in early 2021.  Since Congress has not yet passed a fiscal year 2021 budget resolution, it is possible the new Congress could pass some priorities under a fiscal year 2021 budget in early January followed by a second round later in the year when a fiscal year 2022 budget is negotiated. This could be critical if the Democrats take control of the Senate since budget reconciliation bills are not subject to the filibuster, meaning a simple majority would be all that is needed for enactment. Bipartisan support appears to exist for infrastructure, manufacturing and retirement savings legislation; any or all of which could contain changes to tax law. Stimulus legislation COVID-19 stimulus negotiations between the White House and Congress reached an impasse in the weeks leading up to the election. The House passed its fourth stimulus package, called the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, in May and updated it in late September. On the other hand, the Senate introduced a series of smaller stand-alone bills (Health, Economic Assistance, Liability Protection and Schools (HEALS) Act) in July designed to stimulate the economy, but this package did not get far in the legislative process. While there are many different priorities, both packages would expand the employee retention credit (ERC), extend the supplemental unemployment benefits (albeit different amounts), issue another round of individual recovery rebates and replenish PPP funds. As previously mentioned, Senate races are still being decided, so it is not clear which party will control the Senate in the next Congress. Regardless, early indications suggest a smaller relief package is more likely before the end of the year. To whatever extent further stimulus legislation is not passed by year-end, further coronavirus response appears to be a top priority of the presumptive administration.  Status of the Affordable Care Act It is possible that the ACA will be overturned. The Supreme Court will hear oral arguments in California v. Texas on Nov. 10. This consolidates two cases into one and addresses whether the ACA is unconstitutional in light of the individual mandate penalty being reduced to zero by the Tax Cuts and Jobs Act (TCJA). If the ACA is overturned, Congress may decide to address healthcare before considering changes to the tax code. The state of the economy may divert attention from healthcare, particularly if additional rounds of PPP and/or other funding is necessary to cushion the economy from any continued shutdowns due to COVID-19. Composition of Congress As noted above, a runoff election in January will decide not only the Senate seats, but also, most likely, control of the Senate. Unless the Democratic candidates win both races, Republicans will retain control of the Senate, meaning a divided Congress and more of what exists today: Slow-moving legislation with the likelihood of stalemate over large policy changes. Expect no further reduction of tax rates or extension of TCJA expiring provisions and some support for an infrastructure package. Major tax increases and/or repeal of the TCJA are also unlikely. Additional economic stimulus, either during the lame-duck session or early 2021, could include: ERC expansion COVID-19 cleaning credits Another round of PPP funding Additional economic impact payments (whether it’s $1,200 or another amount remains to be seen) Enhanced unemployment benefits Infrastructure spending Temporary regulation freeze Potential tax proposals A potential increase in the corporate tax rate to fund infrastructure spending may be implemented as this seems to be another area where bipartisan support exists. Recall that an original goal of tax reform was to reduce the corporate rate to 25%, so it is possible that such an increase (from the current 21%) will be part of an infrastructure legislative package. Furthering the idea of a potential infrastructure deal, the Fixing America’s Surface Transportation (FAST) Act was already reintroduced in Congress. In addition, the House passed the Moving Forward Act, which contains infrastructure funding for schools, housing, broadband, green energy and child care.  In 2017, a freeze was put into effect on all regulations issued in the last few months of the Obama administration until those regulations were reviewed. This included tax regulations. If there is a change in administration, this could happen again potentially impacting tax regulations and guidance issued in the last few months.  Passage of the Endless Frontier Act, which had bipartisan support in the Senate back in May, could also occur in a divided Congress. This legislation would provide funds for regional tech hubs creating new American manufacturing and high-tech jobs. Another Setting Every Community Up for Retirement Enhancement (SECURE) Act or similar legislation encouraging Americans to save for retirement as well as place safeguards around current retirement plans may also have backing from both sides of the aisle. The Retirement Security and Savings Act in the Senate and Securing a Strong Retirement Act of 2020 in the House Ways and Means Committee were introduced already. The Organization for Economic Cooperation and Development (OECD) has offered global minimum tax proposals, but the U.S. may assess import taxes on countries imposing a digital services tax. Both sides agree on the need to protect American companies from unfairly imposed taxes by other countries until a global digital tax plan is agreed upon. Bottom line: Expect small changes in tax policy instead of sweeping tax legislation as compromise on these issues has been, and will continue to be, elusive in the current political climate. President-Elect Biden’s tax proposals The Biden campaign platform indicated he would not raise taxes on incomes less than $400,000. However, the term “income” was not defined by the campaign. We are assuming the definition varies depending on the provision (i.e., income and capital gains tax rates and section 199A phaseouts are based on taxable income under current law; the limitation on itemized deductions was based on adjusted gross income (AGI) under earlier law). The limitation on the total dollar amount of itemized deductions a taxpayer can claim based on their AGI (commonly referred to as the Pease limitation) would be reinstated, but the fate of the $10,000 cap on the state tax deduction is unclear. The value of itemized deductions would be further capped at 28%. Biden’s plan would assess the FICA portion (6.2%) of Social Security taxes on self-employment (SE) income and wages greater than $400,000 plus the section 199A deduction is targeted for phaseout on incomes over $400,000. Open questions include: Will S corporation income become subject to SE taxes?  If so, would this be based on a shareholder’s allocable share of S corporation income over $400,000 or on actual cash distributions received?   An increase to the capital gains rate to match ordinary income rates for taxpayers with income greater than $1 million is also being proposed. In addition, an increase of the corporate tax rate is likely to be included in his proposals. Consequently, any conversion from pass-through entity status to C corporation should be reevaluated considering the proposed rate structure.   Carried interest taxation may become a revenue raiser in any tax legislation. Further, even if carried interests are not specifically targeted, the aforementioned increase in capital gains rates to match ordinary income effectively eliminates the preference afforded to long-term capital gains for taxpayers with over $1 million in income. Private equity firms may need restructuring to mitigate or minimize any impact. The uniform federal estate and gift tax exemption would be cut in half or more under a Biden tax plan. Currently $11.58 million, the plan is to lower it to around $3.5 million. Furthermore, the tax rate would be at least 40%, meaning families would have more wealth taxed at higher rates. Plus, the step-up to fair market value at the date of death would be eliminated, so the estate would owe tax on any appreciation in asset value.  As noted above, unless the Democrats obtain control of the Senate, the chances for enactment of many of these proposals would appear remote. We encourage you to reach out to your Baker Tilly tax advisor regarding how the above may affect your situation. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our 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.

In a post-election haze, we take a look at what tax policies are likely to be changed or enacted if there is a divided Congress and a new presidential administration. 

Prospective tax legislation in the next Congress

Authored by Michael Wronsky The Small Business Administration (SBA) recently released draft questionnaires that must be completed by for-profit (Form 3509) and not-for-profit (Form 3510) organizations that, together with their affiliates, received Paycheck Protection Program (PPP) loans of $2 million or more. The questionnaires will be issued by lenders to verify the certification made by borrowers as part of the loan application process that “current economic uncertainty” made the loan request necessary to support business operations. Borrowers must return the completed questionnaires to the lenders within 10 days of their receipt, for subsequent submission to the SBA. The instructions indicate that failure to complete and return the questionnaire within the 10-day time frame could result in the SBA determining the borrower was ineligible for their loan or forgiveness. The questionnaires are not currently available on either the SBA or Department of Treasury (Treasury) websites, and it is unclear whether they will be finalized in their current form. While, as noted above, borrowers were required to certify in good faith that their PPP loans were needed to withstand the economic uncertainties created by COVID-19, little to no official guidance from the SBA or Treasury was previously available to identify how this certification would be examined for compliance. Presumably, these draft questionnaires provide insight into the facts and circumstances that will be evaluated. That said, the questionnaire requests information for several items (including supporting documentation in some instances) that do not bear any relevance to the determination of eligibility for a PPP loan or forgiveness under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or subsequent guidance from the SBA or Treasury. These items include, but are not limited to: The borrower’s 2020 second-quarter revenue, relative to previous quarters, Whether the borrower’s operations were shut down or significantly altered by a government order due to COVID-19, Whether the borrower began any new capital improvement projects unrelated to COVID-19 between March 13, 2020, and the end of its covered period, The borrower’s cash and cash equivalents position on the last day of the calendar quarter that immediately preceded the date of their loan application, Whether the borrower made any dividend or other capital payments to its owners, apart from tax distributions,  Whether the borrower made any prepayments on its debts between March 13, 2020, and the end of its covered period, and Whether any of the borrower’s employees were compensated in an amount that exceeds $250,000 on an annualized basis during the covered period. The draft questionnaires indicate that the SBA may request additional information after receipt of the responses to complete their review of the loan and/or forgiveness eligibility and that the “determination will be based on the totality” of the borrower’s circumstances. It would appear that based on this language, the questionnaire will be used to assist the SBA in determining which loans should be reviewed with greater scrutiny. It should be noted borrowers will have the opportunity to appeal the SBA’s decision with respect to loan and forgiveness eligibility.  Lastly, it should also be noted that while not binding authority, pursuant to an SBA/Treasury FAQ, if the SBA does determine a borrower lacked adequate basis for the certification of loan necessity, the borrower will not face administrative enforcement or penalty if the loan is repaid upon receiving notice of ineligibility from the SBA. We encourage you to reach out to your Baker Tilly tax advisor regarding how the above may affect your situation. For more information on this topic, or to learn how Baker Tilly specialists can help,  contact our 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.

The Small Business Administration released draft questionnaires for organizations that received Paycheck Protection Program loans of $2 million or more to prove their need for the funds. 

SBA releases draft PPP loan necessity questionnaire

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