Authored by Michelle Hobbs and Mike Schiavo  The Internal Revenue Service (IRS) released the long-awaited final regulations under IRC section 163(j) that contain some good news for manufacturers and other taxpayers.  Upon preliminary review of the 575-page final regulations, it appears the IRS generally was responsive to taxpayer comments. For example, one of the rules in the proposed regulations that disproportionately impacted manufacturers was revised. The regulations narrow the scope of expenses considered business interest expense subject to the limitation, provide additional clarity and flexibility for real estate businesses, and simplify the treatment of business interest for certain small business owners. All that said, the rules are still extremely complex and require careful study and analysis. And, as if almost 600 pages of final regulations wasn’t enough, the IRS issued another set of proposed regulations, which address various issues not covered in the previous guidance. The new proposed regulations provide rules for tiered partnerships, self-charged lending transaction between partners and partnerships, and debt-financed distributions, and several other areas. Lastly, the proposed regulations clarify the application of the changes to section 163(j) as made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The final and new proposed regulations are generally effective for tax years beginning after the date that is 60 days from the date they are published in the federal register. However, taxpayers may choose to rely on the newly released regulations or continue to rely upon the initial set of proposed regulations (issued in December 2018) for taxable years beginning after Dec. 31, 2017, and before the aforementioned effective date. In either case, the regulations must be applied consistently, and barring certain exceptions, in their entirety.  This alert is a preliminary overview of some key areas in the final regulations. We will be providing additional information in the coming weeks and months as we analyze the new guidance in detail. We encourage you to contact your Baker Tilly advisor to discuss how these issues may affect your tax position. Background A key revenue raiser included in the Tax Cuts and Jobs Act (TCJA or Act) was the limitation of the business interest expense deduction for many taxpayers. Essentially, a limitation of 30% of adjusted taxable income (ATI) was placed on the amount of business interest expense that could be deducted in a given tax year. Broadly, ATI is the equivalent of earnings before interest, taxes, depreciation and amortization (EBITDA) for tax years through 2021, then EBIT for tax years thereafter. Any excess business interest expense would be carried forward and potentially deducted in the subsequent tax year (handled somewhat differently for certain types of taxpayers). The CARES Act, passed in March 2020 to stimulate the economy during the ongoing COVID-19 pandemic, increased this limitation to 50% of ATI for the 2019 and 2020 tax years for nonpartnership taxpayers.  Notable changes in the final regulations Good news for manufacturers Under the proposed regulations, depreciation, amortization or depletion capitalized into inventory under the uniform capitalization (UNICAP) rules was not added back in the computation of a taxpayer’s ATI. This rule was particularly detrimental to taxpayers in the manufacturing industry, who generally are required to capitalize most of their depreciation expense. Baker Tilly, along with other tax practitioners, urged the IRS to reverse this position — and fortunately, the IRS listened. For tax years beginning before Jan. 1, 2022, taxpayers will now be allowed to add back depreciation, etc., to ATI that was capitalized into inventory, regardless of the period the amounts are actually recovered through cost of goods sold. This change increases a taxpayer’s ATI, thereby allowing for a larger interest deduction. Definition of interest narrowed, fewer items subject to limitation  The initial proposed regulations contained an unexpectedly broad definition of business interest expense. Commenters noted that many items that are typically not viewed as interest were nevertheless caught up in this wide net, and subject to limitation. To the benefit of taxpayers, the final regulations have somewhat narrowed the definition of interest. For example, commitment fees, debt issuance costs and certain hedging costs were removed from the definition of interest. In the partnership context, guaranteed payments for the use of capital are now only treated as business interest expense under narrow circumstances. More clarity and flexibility for real estate businesses  The final regulations include several taxpayer-friendly changes related to the real property trade or business election. As a refresher, eligible real property trades or businesses can elect out of the business interest expense limitation, with the trade-off being longer depreciable lives and no bonus depreciation for residential real property, nonresidential real property and qualified improvement property. The IRS took the position in the initial proposed regulations that real property trades or businesses that were already exempt from section 163(j) by reason of the small business exemption (i.e., the gross receipts test) could not make the election. The final regulations clarify that eligible taxpayers can make this election, even if they also qualify for the small business exemption. In addition, the final regulations allow certain taxpayers conducting rental real estate activities to make a protective section 163(j) election to ensure their business interest expense is not subject to limitation, even if the activities don’t rise to the level of a trade or business.  Safe harbor provided for qualified nursing/assisted living facilities Along with the regulations package, the IRS also issued a proposed revenue procedure (Notice 2020-59) that provides a safe harbor for qualified residential living facilities to be treated as a real property trade or business for purposes of section 163(j) and, thus, eligible to elect out of the limitation. The safe harbor applies to facilities that provide supplemental assistance, nursing and/or other routine medical services to customers/patients that are in residence for 90 days or more.  Interest expense of exempt partnerships and S corporations not subject to further testing Under the initial proposed regulations, partnerships and S corporations (nontax shelters) that are exempt from section 163(j) by reason of the gross receipts test were not subject to the interest limitations under section 163(j). However, these entities were still required to pass business interest expense through to the owners for testing on their respective returns. This approach was burdensome and appeared contrary to the general principle that section 163(j) apply at the entity level. In another taxpayer-friendly result, the final regulations reverse this position, allowing business interest expense to be deducted by partnerships and S corporations exempt from the section 163(j) limitation. The final regulations also eliminate the requirement that the allocated interest expense be subject to the limitation at the individual partner or shareholder level.  Conclusion These final and proposed regulations apply to most businesses; therefore, it is important to gain an understanding of how the limitation will apply to your set of facts and circumstances. This alert covers only a small portion of these rules. We encourage you to contact your Baker Tilly advisor to discuss their application to your specific 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 IRS released final regulations under section 163(j) with a number of taxpayer-friendly revisions.

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Law Firm & Professional Services

Federal Tax

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Federal tax coronavirus resources

Long-awaited guidance issued on the business interest expense deduction limitation

Authored by Alyssa Sihelnik and Jim Alajbegu In mid-July, the Treasury Department and the IRS released a proposed redesigned partnership form for tax year 2021 (for the 2022 filing season). The goal of the proposed form is to clarify for partners how they compute U.S. income tax liability for items related to international tax.  Key takeaways  The IRS released Form 1065, Schedules K-2 and K-3 in draft form as well as the instructions for Schedules K-2 and K-3.  Any partnership required to file Form 1065, U.S. Return of Partnership Income, and that has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the IRC must complete the relevant parts of Schedule K-2 and Schedule K-3.  The Treasury Department and the IRS plan similar revisions, as applicable, to Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.  The new designed partnership form creates additional complexities and increased tax compliance in partnership reporting as well as additional costs of preparation. The draft schedules do not replace existing U.S. international tax information reporting requirements of the partnership but are intended to provide additional information to their partners to satisfy tax-filing obligations. Discussion  The redesigned form and instructions provide guidance to partnerships on how to report international tax information to their partners in a standardized format. Currently, partners are required to report international tax information on their returns on several tax forms and schedules. Partners generally obtain the information required for reporting from their partnerships, usually through footnotes attached to K-1s.  The proposed parts included in new Form 1065, Schedule K-2 replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r), and the new Form 1065, Schedule K-3 replaces portions of Schedule K-1, Part III, Boxes 16 and 20. Additionally, Schedule K-3 provides information to the partner in the same general format that might be completed by the partner on the following forms:  Form 1040, U.S. Individual Income Tax Return Form 1040-NR, U.S. Nonresident Alien Income Tax Return  Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) Form 1118, Foreign Tax Credit- Corporations Form 1120, U.S. Corporation Income Tax Return Form 1120-F, U.S. Income Tax Return of a Foreign Corporation Form 4797, Sales of Business Property  Form 8621, Passive Foreign Investment Company or Qualified Electing Fund  Form 8949, Sales and Other Dispositions of Capital Assets Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)  Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)  Schedule K-2 will be attached to a partnership’s Form 1065 and filed by the due date (including extensions) for that return. Schedule K-3 will be provided to the partners in according to the timeline for providing the Schedule K-1.  It is expected that final versions of the partnership return will be released later in 2020. Please refer to the following IRS links for the new Schedule K-2 and Schedule K-3.  The Treasury Department and the IRS released the draft returns early to afford time for stakeholder input and engagement. The Treasury and IRS welcome comments from affected stakeholders through Sept. 14, 2020, and written comments should be sent to the following email address: lbi.passthrough.international.form.changes@irs.gov with the subject line “International Form Changes.”  In addition, both agencies are planning a series of listening events to take comments and answer questions about the proposed form. More details about participating in these events will be posted by the IRS as soon as they are finalized. Please reach out to your Baker Tilly international tax advisor to discuss how these changes may affect your tax 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 Treasury Department and the IRS released a proposed designed partnership form that should clarify how partners compute their U.S. income tax liability for international tax-related items.

International Tax

International tax coronavirus resources

2021 draft partnership returns – international revisions

Authored by Christine Faris, Devin Tenney, Paul Dillon and Michelle Hobbs  The IRS recently provided guidance in the form of proposed Treasury regulations (Proposed Regulations), which address the disallowance of employer deductions for the cost of providing commuting and parking benefits to employees. As you may recall, following the Tax Cuts and Jobs Act (TCJA) of 2017, the IRS provided complex, yet incomplete, guidance on how to calculate disallowed parking expenses. The Proposed Regulations provide some significant updates to simplify the process of calculating the disallowed deduction. While many of these changes are favorable to taxpayers, some may have unfavorable impacts.  Background The TCJA disallowed a deduction for the expense of any qualified transportation fringe benefit (QTFB) provided by taxpayers to their employees for expenses paid or incurred after Dec. 31, 2017. These benefits can still be excluded from an employee’s income, but an employer no longer gets a corresponding tax deduction if the amounts are not included in the employee’s income. Note, however, the disallowed deduction relates to the expense of providing a QTFB, not its value, and the determination of an expense is not always straightforward, especially for the cost of employee parking.  In 2018, the IRS provided interim guidance for taxpayers to determine the amount of parking expenses that is nondeductible. The interim guidance created as many questions as it answered, and the Proposed Regulations attempt to address some of these more glaring issues by clarifying the statutory requirements. In particular, they address QTFBs paid or incurred by an employer and transportation and commuting expenses paid or incurred by an employer. Disallowance of deductions for certain qualified transportation fringe expenditures The Proposed Regulations define relevant terms and modify previous guidance by providing a general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. Taxpayers may choose to apply the general rule or one of the three simplified methods for each taxable year and for each parking facility. General rule. The general rule in the Proposed Regulations allows taxpayers to calculate the disallowance based on a reasonable interpretation of the statute subject to a few requirements (using actual expenses paid or incurred, allocating expenses to reserved parking spots, and properly applying the exception for parking made to the public).  Primary use method. This method is largely based on the safe-harbor method in the 2018 guidance. Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used. The proposed regulations also include new definitions for geographic location, inventory/unusable spaces, available parking spaces, peak demand period and mixed parking expense. Qualified parking limit method. Under this method, taxpayers calculate the disallowance by multiplying the total number of spaces used by employees during the peak demand period or, alternatively, the total number of the taxpayer’s employees, by the monthly per employee limitation on exclusion for qualified parking ($270), for each month in the taxable year. Cost-per-space method. This method allows taxpayers to calculate the disallowance by multiplying the cost per parking space by the number of available parking spaces to be used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses for inventory/unusable spaces) by total parking spaces (including inventory/unusable spaces). Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used with the cost-per-space methodology. Payments to third parties. The Proposed Regulations provide that if the taxpayer pays a third party for its employee’s QTFB, the amount of the deduction disallowed is generally the taxpayer’s total annual cost of the QTFB paid to the third party.  New definitions. This Alert will not provide all definitions listed in the Proposed Regulations, but instead, draws attention to newly defined terms and resulting impact.  Geographic locations. The Notice provided that if a taxpayer owns or leases more than one parking facility in a single geographic location, the taxpayer may aggregate the number of spaces in those parking facilities. It was unclear, however, what constituted a “geographic location.” The Proposed Regulations define the term to mean contiguous tracts or parcels of land owned or leased by the taxpayer. Two or more tracts or parcels of land are contiguous if they share common boundaries or would share common boundaries but for the interposition of a road, street, railroad, stream or similar property. Tracts or parcels of land which touch only at a common corner are not contiguous. Reserved nonemployee spaces means the spaces in the parking facility, or the taxpayer's portion thereof, exclusively reserved for nonemployees. For example, such parking spaces may include, but are not limited to, spaces reserved exclusively for visitors, customers, partners, sole proprietors, 2-percent shareholders of S corporations, vendor deliveries and passenger loading/unloading. Nonemployee spaces in the parking facility, or portion thereof, may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility, or portion of a facility, segregated by a barrier to entry or limited by terms of access. It was unclear in the Notice whether this included handicap spaces. The Proposed Regulations state that since these parking spaces could be used by employees, handicap parking spaces are not reserved nonemployee spaces.  Inventory/Unusable spaces include parking spaces used for inventoried vehicles, qualified nonpersonal use vehicles, other fleet vehicles used in a taxpayer’s trade or business, or otherwise not usable for parking by employees. These spaces specifically excluded from the definitions of “available parking spaces” and “reserved nonemployee spaces” under the primary use method the Proposed Regulations exclude inventory/unusable spaces because those spaces are generally not available to employees or the general public but are instead used for other purposes. However, inventory/unusable spaces are included in total parking spaces under the cost-per-space methodology because taxpayers do incur costs in maintaining the spaces. Mixed parking expense is defined as an amount paid or incurred by a taxpayer for both a parking facility and nonparking facility property that a taxpayer owns or leases. Such expenses for parking and nonparking property may include rent or lease payments, repairs, maintenance, utility costs, insurance, property taxes, interest, snow or ice removal, and security. For purposes of determining total parking expenses, a taxpayer may use any reasonable method to allocate the applicable portion of mixed parking expenses to a parking facility. If using the primary use method or cost-per-space method, a taxpayer may choose to allocate 5% of the following mixed parking expenses to a parking facility: lease or rental agreement expenses, property taxes, interest expense, and expenses for utilities and insurance. Multitenant parking. If a taxpayer owns or leases space in a multitenant building, employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors or customers of unrelated tenants in the building are included in the definition of general public. Consequently, the Proposed Regulations appear favorable to taxpayers.  Disallowance of deductions for certain transportation and commuting benefit expenditures The Proposed Regulations also address the disallowance of deductions for amounts paid or incurred after Dec. 31, 2017, for any expense incurred to provide any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee. Travel between the employee’s residence and place of employment includes travel that originates at a transportation hub near the employee’s residence or place of employment. For example, an employee who commutes to work by airplane from an airport near the employee’s residence to an airport near the employee’s place of employment is traveling between the residence and place of employment. 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.

Recently proposed Treasury regulations should offer some clarification in determining what transportation and commuting expenses are nondeductible.

IRS releases guidance on parking lot rules

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

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

Small and family business coronavirus resources

FFCRA and CARES Act Decision Tree

Authored by Paul Dillon and Michelle Hobbs  Immediately preceding the Independence Day holiday, the House of Representatives passed the Moving Forward Act (the Act); a sweeping infrastructure rebuilding plan. More than 2,300 pages in length and estimated to cost over $1.5 trillion, the Act encompasses all types of infrastructure (air, rail, highways, bridges, transit systems, alternate fuel automobiles, broadband, all types of energy, schools, housing, water). Should the Act pass the Senate (which is unlikely based on past comments from Senate leadership), the White House threatened to veto the legislation due to a variety of concerns. However, this could be the starting point for negotiations on an infrastructure plan and parts could be included in any Stimulus 4 legislation.  Included in the Act are extensions and expansions of several popular tax credits.  The New Markets Tax Credit national funding limit would increase to $7 billion from $5 billion for 2020 and 2019’s limit would jump to $4 billion (as opposed to the current $3.5 billion). The amounts would decrease to $5 billion by 2022, indexed for inflation for tax years after 2022.  The rehabilitation tax credit applicable percentage would increase to 30% of qualified rehabilitation costs for taxable years beginning in 2020 through 2024. This applicable percentage slides back to 20% by 2027 and forward. Special provisions for smaller projects are also embedded in the Act. The renewable electricity production credit would be extended through 2026, instead of 2021, as long as qualified construction begins before Jan. 1, 2026. The energy credit (for equipment using qualified solar energy, fuel cell, small wind, ground water) would be extended to tax years beginning before Jan. 1, 2027. The residential energy-efficient property tax credit would be extended through Dec. 31, 2027. The energy-efficient commercial building deduction would be extended to Dec. 31, 2025. The new energy-efficient home credit would be extended to Dec. 31, 2025. The Act would also repeal, temporarily, the limitation on personal casualty losses for tax years beginning after Dec. 31, 2017, as well as exclude from taxable income monies received as part of a state catastrophic loss program for tax years beginning after Dec. 31, 2019. Instead of a sweeping omnibus-style bill, the Senate is looking to pass smaller, issue-specific bills related to infrastructure. For the past year, it has been trying to reauthorize the Highway Trust Fund for another five years. Two months ago, the Senate Committee on Environment and Public Works released bipartisan bills on water infrastructure. Finally, the American Energy Innovation Act, which would create energy-efficiency improvement and green energy incentives, stalled in March.  Prior to the COVID-19 pandemic, the White House flirted with different infrastructure proposals. Currently, it is about to publish a $1 trillion infrastructure spending proposal which appears to have little traction in either chamber of Congress. Unless Congress and the administration come to an agreement on infrastructure legislation sometime soon, it is unlikely anything will pass before the November elections. Traditionally, Congress recesses for most of August. After the presidential nominating conventions and the Labor Day holiday, if tradition holds, it will be campaign season with minimal legislative activity. However, the continuing COVID-19 crisis could force lawmakers to look for additional ways to stimulate the economy, especially as states pause or step back their reopening plans. Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.

The House passed the $1.5 trillion infrastructure rebuilding plan called the Moving Forward Act. The act would make large investments in all types of infrastructure, including bridges, highways, air and rail, as well as renewable energy and public transit.

Construction

Lodging

Multifamily Housing

Real Estate Investors

Transactions

Real estate coronavirus resources

Construction coronavirus resources

New Markets Tax Credits

House passes the Moving Forward Act 

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

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

Small business

PPP application deadline extended by Congress

With about three weeks until the extended federal filing deadline, taxpayers with significant capital gains can take steps to reduce their income tax bill by re-investing proceeds from their capital gain event into a Qualified Opportunity Fund (QOF). Either way, the taxpayer will part with funds. A QOF puts those funds towards an opportunity zone (OZ) investment, rather than it going straight to the government.  Example: A taxpayer with a long-term capital gain of $1 million will have a federal capital gain tax liability of $200,000 (20%). If the gain is from the sale of marketable securities, the tax is $238,000 (inclusive of the 3.8% net   investment income surtax). By rolling the $1 million gain into a QOF, the capital gain is deferred, and reported on the 2026 tax return with a 10% discount at $900,000(1). In essence, the deferral functions similar to an interest-free loan to make the investment in the QOF. If you live in a state that conforms to federal tax rules, the amount of your deferral and discount benefit will be greater.   In addition, the most significant opportunity zone benefit, particularly from an investment in real estate, is realized by holding the opportunity zone fund investment for at least 10 years.  An investment in real estate generates significant depreciation deductions, which shields income from that investment from ordinary income taxes. If the depreciation exceeds taxable income from the investment, the excess depreciation deduction can be used to shield income from other passive investments. In other words, an investor may be able to use losses from a QOF investment to offset income from other passive investments. Ordinarily, depreciation deductions are recaptured when the real estate investment is sold, thus making the deduction from depreciation a timing difference. However, depreciation deductions from a QOF investment are not recaptured and become a permanent tax savings. Additionally, appreciation in the market value of the OZ real estate is not taxed – another permanent tax savings(2).  Example: A taxpayer makes a $1 million investment in a QOF. Over the 10 year holding period, the investor is allocated $900,000 of depreciation deductions, which shield the taxpayer from $356,400 of federal income taxes (39.6%). At disposition, the QOF investment returns $2.2 million, the market appreciation of $1.2 million is not taxed, saving the investor another $240,000 in federal taxes (20% capital gain rate), for a total of $596,400 permanent tax savings. The permanent savings will be greater for taxpayers residing in a state that conforms to federal tax rules.  Timing is critical – revised OZ investment “windows” Capital gains have to be invested in a QOF within a prescribed period of time in order to qualify for opportunity zone benefits. Gains reported on a K-1 from a partnership or LLC have a unique set of rules, because investors may not know how much gain is allocable to them as of the transaction date or until they receive their K-1. Also, COVID-19-related tax relief favorably impacted the OZ investment window for 2020. The table below summarizes the timing to make a qualifying investment in a QOF: Capital gain not reported on a   K-1 – 180 days from the date of the transaction Capital gain reported on a K-1(3) 180 days from the date of the transaction; or 180 days after the final day of the reporting   entity’s tax year (typically December 31 for flow-through entities); or 180 days from the original tax return due date   of the reporting entity (March 15 for entities with a December 31 year-end) COVID-19 OZ timing update - if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020 to invest that gain into a QOF. Timing example one: Stock positions sold on February 17, 2020 would normally have a QOF re-investment expiration date of August 15, 2020. However, coronavirus relief extends the expiration date   to December 31, 2020. Timing example two: A capital gain from a sale on April 28, 2019 that is reported on a K-1 (entity has a fiscal year-end of December 31) to a taxpayer normally offers three windows in which to make a QOF investment: April 28, 2019 plus 180 days to October 25, 2019; and/or December 31, 2019 plus 180 days to June 28, 2020; and/or March 16, 2020 plus 180 days to September 12, 2020. However, coronavirus relief also extends the expiration date to December 31, 2020. As we approach July 15  The permanent tax savings from making an investment in a QOF that invests in real estate can be substantial. We are poised to help you evaluate vetted QOF investment options to help you make a well-informed choice before paying substantial capital gain taxes. For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

Taxpayers with significant capital gains can take steps to reduce their income tax bill by re-investing proceeds from a capital gain event into a Qualified Opportunity Fund in time for the tax deadline.

Opportunity Zones

Investment Banking 

Project Finance

Private Client

Reduce your July 15 income tax liability

Corporations, partnerships and individuals are all learning how to use the changes in the CARES Act and other tax strategies to help boost their cash flow during this recovery phase of the COVID-19 pandemic. Baker Tilly has created this guide to help you understand what strategies may be applicable to you.  View larger table Learn more about these strategies by contacting us  or visiting the latest resources below:
Contact  us to learn more about these and other tax strategies to help you on the road to recovery.

As businesses and individuals look to recover from the COVID-19 pandemic, Baker Tilly has created a guide to help understand how new tax strategies, specifically under the CARES Act, can help maintain cash flow.

State & Local Tax

State and local tax coronavirus resources

The road to recovery: tax strategies to increase your cash flow

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

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

SBA releases updated PPP loan forgiveness application

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

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

Family Business

Tax Advocacy & Controversy Services

Working with the IRS during a pandemic

It has been quite a year and we’re not even half way through. A declared pandemic, multiple rounds of government-injected stimulus packages and nationwide closures have completely changed the way we currently do business. Only three years ago, we were just beginning a conversation about major tax reform. Now, many of those historical tax changes have been rolled back or deferred in an effort to help taxpayers survive the COVID-19 pandemic and resulting economic collapse.  The general theme of the tax provisions enacted in the past few months has been to increase deductions, reduce restrictions on the ability to utilize losses, and provide opportunities to carry back net operating losses and claim refunds. Changes include correcting the so-called “retail glitch” in the Tax Cuts and Jobs Act that had failed to classify qualified improvement property as bonus eligible with a 15-year life, ease restrictions on the deductibility of business interest expense, and allow taxpayers to retroactively make certain changes back to 2018.  Taking each provision alone, they sound relatively simple. However, their interplay coupled with the processing of amending prior returns, considering different tax rate structures, and revising past elections add considerable complexities in analyzing how to best apply these new rules for yourself and your business. To supplement our alerts and webinars, we are summarizing here how to take advantage of the many facets of the stimulus packages. 
Visit the sections below for more on what taxpayers need to know to help them through the pandemic and beyond: Planning to manage the QIP and business interest expense changes Should you consider a casualty loss provision for your business?  Federal coronavirus rescue programs
– Protection Program
– Economic Injury Disaster Loans (EIDL) Program
– Employee retention credit Upcoming compliance deadlines for reacting to CARES Act changes  Lease modifications: Watch out for IRC section 467  Working with the IRS during a pandemic  International taxation relief provisions  States’ reactions in a pandemic environment 
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Baker Tilly’s federal, state and local, and international tax professionals review how taxpayers of all types and sizes can benefit from the coronavirus stimulus packages.

Tax planning during and after COVID-19

Authored by Paul Dillon  IRC section 165(i) is a loss provision allowing eligible taxpayers to accelerate current-year casualty and disaster losses into the immediately preceding tax year. This is basically a timing provision in which taxpayers can accelerate loss recognition and obtain the tax benefits a year earlier. The president’s national emergency declarations in March may present an opportunity for taxpayers to make a section 165(i) election in applicable situations to claim a deduction in 2019 for COVID-19-related disaster losses occurring in 2020. Section 165(i)(1) provides that “any loss occurring in a disaster area and attributable to a federally declared disaster may, at the election of the taxpayer, be taken into account for the taxable year immediately preceding the taxable year in which the disaster occurred.” Our research has not identified any authorities that applied section 165(i) (or its predecessor version) to losses attributable to a pandemic or widespread health problem.  For example, a restaurant having to discard food inventory due to state-mandated closures could potentially prove this type of disaster loss. On the other hand, that same restaurant selling equipment at a loss could have difficulty proving the decline in value was exclusively attributable to COVID-19. The following are examples of losses that could arise in 2020 but be accelerated and deducted in 2019. Again, facts and circumstances will dictate and the taxpayer must establish a direct causal relationship to the national emergency. Inventory discarded due to government-ordered shutdown Permanent closure of a location(s) Complete abandonment of leasehold improvements. Caution  Section 165(i) has never been used during a pandemic. Instead, it is more typically applied to casualty events, such as a hurricane, where cause and effect of the loss are more readily traceable. Application of this provision to the current pandemic is an evolving area. The Treasury Department and the IRS are looking at this and indications are that guidance will be issued in the coming weeks. Each of the loss examples described above is highly dependent upon facts and circumstances. Direct attribution to the COVID-19 pandemic must be thoroughly documented. We urge you to discuss your particular fact pattern with your Baker Tilly tax advisor if you believe you have an opportunity in this area. In addition, consider extending your return if you believe section 165(i) may be applicable. View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Qualified taxpayers could take an election that will allow them to claim a deduction in 2019 for disaster losses they experienced in 2020 due to the pandemic.

Should you consider a casualty loss provision for your business?

Authored by Paul Dillon and Mike Schiavo The Coronavirus Aid, Relief, and Economic Security (CARES) Act made several changes to the Tax Cuts and Jobs Act (TCJA) intended to help taxpayers through the current economic crisis. The CARES Act corrected the TCJA’s infamous “retail glitch” affecting qualified improvement property (QIP), changing its depreciable life to 15 years from 39 years, thus making QIP eligible for bonus depreciation. This change is retroactive to 2018. The legislation also temporarily relaxed the rules on the deduction for business interest expense. The TCJA included limitations on the deduction for business interest expense that, subject to some exceptions, generally limited business interest deductions to 30% of adjusted taxable income (ATI). The CARES Act eased the restriction to 50% of ATI for 2019 and 2020, except for partnerships (see additional discussion below), where the 50% ATI allowance is only for 2020 returns. For some taxpayers, these changes are interrelated due to the exceptions under the business interest expense limitation rules for real property businesses. First, let’s take a look at the changes.  Business interest expense limitation Under the TCJA, taxpayers’ business interest deductions (IRC section 163(j)) are limited to 30% of ATI, plus business interest income, unless an exception applies. Exceptions include: Small taxpayers, generally with less than $26 million of gross receipts; however, aggregation and tax-shelter rules apply in determining      eligibility for this exception Taxpayers with interest expense relating to floor plan financing  Electing real property trades or businesses For electing real property businesses as well as taxpayers with floor plan financing, the trade-off for not being subject to the business interest expense limitation is that they must use longer depreciable lives under the alternative depreciation system (ADS) for real property assets. In addition to having longer depreciable lives, assets depreciated using ADS are not eligible for bonus depreciation.  ATI is similar to earnings before interest, depreciation and amortization (EBIDA) — the two are not technically the same, but thinking of ATI as EBIDA is a good shortcut — and is calculated as follows: Taxable income, adjusted by Taking out items of income or loss not allocable to a trade or business Adding back any net operating losses (NOLs), section 199A deductions Taking out any business interest income Adding back depreciation, amortization or depletion, for tax years beginning before Jan. 1, 2022 This last item is especially helpful. If you are able to take advantage of the QIP change, the additional bonus depreciation deduction will not lower your ATI for purposes of determining the business interest expense limitation. However, if you utilized the floor plan financing exception or were an electing real property business, QIP is not eligible for bonus. If you want to take advantage of the QIP changes, you will not be able to use the floor plan financing exception or you will have to revoke the 163(j) real property business election and, therefore, you will be subject to the business interest limitation rules.  Any interest expense limited under this computation carries forward indefinitely. The CARES Act: Increases the allowable interest deduction to 50% of ATI from 30% for 2019 and 2020 returns.  Allows taxpayer to use 2019 ATI for 2020 returns. For most taxpayers, this is expected to allow a higher interest deduction. Lets taxpayers choose to elect out of each of these 50% ATI changes. Applies the 50% ATI limitation change to only 2020 returns for partnerships. For partnerships that have interest deductions limited (excess business interest expense) in 2019, partners can deduct 50% of their allocable share of the 2019 excess business interest expense on their 2020 return. Each individual partner can elect to opt out of the additional deduction on their 2020 return. However, only the partnership can decide whether to utilize the 2019 ATI and 50% ATI options on the partnership’s 2020 return. Individual partners cannot make those elections. Considerations related to these changes: If you have already filed a 2019 return and had business interest expense limitations, you may want to amend it to take advantage of the increased ATI limit. If you were an electing real property trade or business and had QIP placed in service in 2018 and/or 2019, you may want to amend to revoke that election and possibly subject yourself to the business interest expense limitation in order to claim bonus on the QIP. Taxpayers with floor plan financing face the same choice if they have QIP placed in service in 2018 and/or 2019. Study and model scenarios, and possibly amend to claim QIP and potentially forgo interest expense deductions. If you believe tax rates will be increasing in coming years to help pay for the economic stimulus, run calculations to decide whether a deferred interest deduction would be more beneficial in the future. On the other hand, if the increased deductions could lead to, or increase a net operating loss, you may be able to carry these losses back and achieve a more immediate tax benefit and at pre-TCJA rates. QIP – The retail glitch Due to a drafting error in the TCJA, QIP placed in service after Dec. 31, 2017, was not eligible for bonus depreciation — this was known as the “retail glitch.” Congress intended for QIP to be bonus-eligible; however, the TCJA did not specifically include a 15-year recovery period for QIP. Therefore, after the tax reform dust settled, QIP was nonresidential real property with a recovery period of 39 years, not eligible for bonus. All of this changed with the passage of the CARES Act, which amended the Internal Revenue Code (IRC) to define QIP as 15-year property. Consequently, QIP is now eligible for bonus depreciation. These changes are retroactive to 2018, i.e., to the passage of the TCJA. Prior to the CARES Act, real property trades or businesses that elected out of the 163(j) business interest expense limitation had to depreciate QIP, residential real property and nonresidential real property over longer recovery periods, and QIP was not eligible for bonus. Before the technical correction, this was not a big deal because QIP was not eligible for bonus, so many taxpayers made the election. Now, however, these taxpayers have to consider the retroactive nature of the change — if QIP had been eligible for bonus in the first place, maybe taxpayers would have postponed the election or not made it at all. How to take advantage of the QIP changes? If, and that can be a big “if,” the business interest limitation rules do not affect your situation, there are multiple choices. Assuming the QIP was placed in service in 2018: If you have not yet filed your 2019 return, you can amend your 2018 return and claim the deduction. For pass-through entities, this will also entail amending shareholder or partner returns as the case may be to take advantage of the increased deduction. Generally, the deadline to amend returns for these changes is Oct. 15, 2021. It is critical to note that if you are a partnership subject to the centralized partnership audit regime (CPAR), the deadline to amend the return to claim this deduction is before Sept. 30, 2020.  Alternatively, you can file for an accounting method change on Form 3115 with either your 2019 return or your 2020 return, if you have already filed your 2019 return. This eliminates the need for an amended return, but may delay the benefit of the deduction. As noted above, partnerships subject to CPAR must amend their returns before Sept. 30, 2020. In general, these partnerships cannot file amended returns, although, due to the retroactive nature of the CARES Act changes, the Treasury Department provided limited relief to these partnerships through this date. Partnerships can also file what is known as an administrative adjustment request (AAR) to claim the additional deduction. The AAR process eliminates the need to file amended returns; however, AARs are subject to complex rules. Further, depending on      individual partners’ tax positions, there is the potential that some tax benefits from a depreciation adjustment could be permanently lost using      this approach. The technicalities are beyond the scope of this article, but you should thoroughly review the AAR rules with your tax advisor if      you are interested. On the other hand, if the business interest limitation rules do affect your situation and you have previously made a qualified real property trade or business election, you’ll need to decide whether it is to your advantage to revoke the election and claim bonus. To revoke a previous election, you must amend the return for the year of election and all subsequent years.  As part of this process, you will need to recalculate the interest deduction since the business will no longer be exempt from the business interest limitation rules once the election is revoked.  Integrating the potential results from these changes with your tax position is critical to determine your maximum benefit. Determinations will need to be made as to whether the additional deductions can create NOL carrybacks, refunds in prior years or are best utilized as carryforward losses. There is no one best practice as each taxpayer’s circumstance is different. The bottom line is model, model, model. View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The CARES Act made some taxpayer-friendly changes to the Tax Cuts and Jobs Act, but the most significant may be correcting the “retail glitch” affecting qualified improvement property.

Planning to manage the QIP and business interest expense changes

Authored by Paul Dillon and Mike Schiavo It comes as no surprise that the unprecedented economic downturn caused by the COVID-19 pandemic is prompting many commercial tenants to seek rent relief. Cash-strapped businesses may be negotiating with their landlords for all kinds of concessions, in the hopes of surviving the coming weeks and months until economic activity picks up again. For financial reporting purposes, recent guidance from the Financial Accounting Standards Board (FASB) allows the parties to elect to treat rent concessions as if no changes to the lease contract were made, depending on facts and circumstances. In greatly simplified terms, this means the landlord and tenant would continue to recognize income and expense on a straight-line basis.  For tax purposes, though, it is a different story. Generally, all leases must be tested under IRC section 467, but most standard commercial leases will not be subject to any complex calculations at inception. However, if there is a substantial modification to a lease, it must be retested under section 467, and that is when things could get tricky. The section 467 rules control the timing of rental income and expense for tax purposes in certain situations where there is significant deferred or prepaid rent and/or stepped rents. Depending on the magnitude of the changes, section 467 may require the landlord and tenant to use the accrual method to recognize rental income and expense regardless of their regular accounting method. Further, if the renegotiated lease has significant deferred (or prepaid) rent within the meaning of section 467, the regulations could deem that a loan exists between the parties, forcing them to recognize interest income and expense as well. In other words, the tax results may be much different than the business deal due to these complicated rules. The regulations state that a lease modification is “substantial” if the legal rights and obligations that are altered and the degree to which they are altered is “economically substantial” based on all the facts and circumstances. There are some safe harbors for changes in lease terms due to lessor refinancing, CPI adjustments, expense pass-throughs and de minimis adjustments to fixed rent. But given the severity of the current economic situation, rent holidays, deferrals and/or restructured payment schedules may be significant enough to cross the substantial modification threshold. If this is the case, the modified lease is treated as a new lease as of the effective date of the changes and must be analyzed under section 467.  A section 467 rental agreement is an agreement for the use of tangible property, that has total payments greater than $250,000, and that has prepaid rent, deferred rent, and/or increasing or decreasing rent (“stepped rent”). Certain “disqualified” sale-leasebacks and long-term leases may also fall under section 467 if there is a tax avoidance motive behind the transaction.  A few key concepts are likely to be relevant in the current round of commercial lease renegotiations. A lease “specifically allocates” fixed rent if it unambiguously specifies, for periods no longer than a year, the fixed amount of rent for which the lessee becomes liable, and the total amount of fixed rent specified equals the total amount of fixed rent payable under the lease for the same period. There is an important nuance here. If a disconnect exists between how rent is allocated under the lease and when it is due and payable, that could cause section 467 issues, including deferred rent.  “Deferred rent” is a technical term of art in the section 467 world: If the cumulative rent allocated by the lease at the end of a calendar year is greater than the cumulative rent payable at the end of the following year, a lease has section 467 deferred rent. Unless the lease has adequate stated interest (110% of the applicable federal rate), rental income and expense, and interest income and expense must be recognized using present value calculations. This likely will come as an unpleasant surprise to landlord and tenant.  The section 467 rules are complex, full of defined terms and may be unfamiliar to many landlords and tenants. Whenever you renegotiate lease terms, no matter how small the changes, it is important to consult your Baker Tilly advisor to make sure you do not trigger unintended tax consequences.  View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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

Retail

Lease modifications: Watch out for IRC section 467

Authored by Jim Alajbegu and Chris Brown The new net operating loss (NOL) carryback rules in the Coronavirus Aid, Relief, and Economic Security (CARES) Act can potentially affect numerous U.S. international tax provisions in relation to U.S. taxpayer’s tax filings on its overseas operations. Below, we discuss various issues involving the interaction of the CARES Act NOLs with the so-called “repatriation tax” of section 965(a); U.S. shareholders with controlled foreign corporations (CFCs) that generated global intangible low-tax income (GILTI) (potentially also taking advantage of foreign taxes paid by their CFCs as foreign tax credits and/or availing themselves of the GILTI section 250 deduction); foreign-derived intangible income (FDII); and taxpayers that were subject to the base erosion and anti-abuse tax (BEAT).  In the case of the section 965(a) repatriation tax, the IRS issued guidance on the application of the changes to the NOL rules of section 172 brought about by the CARES Act. Understanding this guidance and modeling the impact of any NOL carryback is key for clients to optimize the intended tax result.  Separately, the IRS also issued three revenue procedures that may provide relief from potential tax obligations resulting from COVID-19. Rev. Proc. 2020-20 applies to nonresident aliens stranded in the United States that, because of certain related travel restrictions, may become resident here. Rev. Proc. 2020-27 provides guidance to U.S. individuals seeking to qualify under section 911 that left their foreign residences during a certain period of time due to COVID-19. Rev. Proc. 2020-30 includes U.S. trade or business/permanent establishment issues and dual consolidated loss relief guidance due to travel restrictions.  Guidance on the interaction of CARES Act NOL carryback rules and section 965 repatriation tax Background The CARES Act amended section 172(b)(1) to allow taxpayers to carry back any NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021 (applicable NOLs), to each of the five taxable years preceding the taxable year in which the NOL arises (the carryback period). This is potentially taxpayer favorable in that applicable NOLs may offset income taxed at a higher marginal tax rate than is in effect today. However, the CARES Act also amended section 172(b)(1) to provide that if an applicable NOL is carried back to a repatriation tax year, the taxpayer will be treated as having made the election under section 965(n). As such, the taxpayer will be required to exclude the section 965(a) inclusion amount in determining its NOL deduction. In other words, applicable NOLs carried back to a repatriation tax year will not reduce any section 965(a) inclusion tax liability. Taxpayers can make certain elections in order to tailor the CARES Act’s NOL carryback provisions to provide the most tax-efficient result.  Rev. Proc. 2020-24 In April, the IRS issued Rev. Proc. 2020-24, providing guidance on NOL carryback election provisions introduced in the CARES Act. For taxpayers to elect how to use an applicable NOL, the revenue procedure provides three alternatives: Election to waive the NOL carryback period for an applicable NOL 
– Made no later than the due date (including extensions) for filing the taxpayer’s federal income tax return for the first taxable year ending after March 27, 2020
– Made by attaching separate statement to its return for each taxable year it intends to make the election   Election to exclude from the carryback period any taxable year in which the taxpayer has a section 965(a) inclusion 
–  Made no later than the due date (including extensions) for filing the taxpayer's federal income tax return for the first taxable year ending after March 27, 2020
– An NOL arising in a taxable year beginning after Dec. 31, 2019, and before Jan. 1, 2021, must make the election no later than the due date (including extensions) for filing the taxpayer's federal income tax return for the taxable year in which the NOL arises 

An election under the second alternative to exclude all section 965 years from the carryback period for an NOL allows a taxpayer to disregard repatriation tax years when applying an NOL to the carryback period. Excluding such years may result in a refundable overpayment or a credit for any of the remaining years in the carryback period to which the NOL is applied. A taxpayer who makes this election must include all repatriation tax years for purposes of counting the five taxable years in the carryback period for the NOL.  Guidance for elections under the CARES Act to waive any carryback period; to reduce any carryback period; or to revoke any election made under section 172(b) to waive any carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017. FAQ about carrybacks of NOLs for taxpayers who have had section 965 inclusions The IRS issued frequently asked questions (FAQ) on its website that further describe the interaction of the NOL carryback rules to taxpayers that had a section 965 inclusion and the procedures for making the elections described above. The FAQ clarifies certain questions regarding the application of Rev. Proc. 2020-24 such as:  Taxpayers may file an election to either waive the entire carryback period or to exclude all of section 965 years from the carryback period;  The statements that taxpayers use to make the elections (i.e., either a Form 1139, Corporation Application for Tentative Refund, or Form 1045, Application for Tentative Refund, applying the NOL to a taxable year in the carryback period); and  The due dates for filing such statements.  Issues to consider when carrying back applicable NOLs  In deciding which year to carry back an NOL, taxpayers should bear in mind the potential impact of the following points: An election to waive the carryback period altogether might make sense where there is a trade-off with foreign tax credits which might go unutilized over a 10-year carryforward period; Any overpayment of tax created through reduction of “without section 965” income must be applied to pay down any remaining installments of transition tax liability payable over an eight-year installment period where a section 965(h) election had been made before any cash refund can be processed; An NOL carryback to a FDII or GILTI tax year could result in a reduction of the section 250 deduction where the sum of FDII and GILTI exceeds taxable income (before taking any section 250 deduction, and after being adjusted for the NOL carryback) for that tax year;  The effect of any NOL deduction on a taxpayer’s BEAT base erosion percentage; and/or The impact on interest deductions under section 163(j) on calculated BEAT liability. Again, careful and detailed modeling may be required to obtain the best tax result from carrying back applicable NOLs to offset taxable income. Other COVID-19-related international tax guidance  Rev. Proc. 2020-20  The IRS issued Rev. Proc. 2020-20 in mid-April and notes that alien individuals who are not lawful permanent residents (i.e., “green card” holders) and who meet the substantial presence test by virtue of being present in the United States for a certain period of time are generally treated as U.S. residents for that year. The revenue procedure provides relief to some nonresident individuals who would not have been in the U.S. in 2020 long enough to be considered resident aliens, if not for COVID-19 emergency travel disruptions.  Relief may be achieved by excluding up to 60 consecutive days spent in the U.S. starting on or after Feb. 1, 2020, and on or before April 1, 2020 (with the specific start date to be chosen by each individual) under the substantial presence test’s medical exception provision. Rev. Proc. 2020-20 also provides procedures for individuals to exclude certain days present in the U.S. in order to claim tax treaty benefits for dependent personal services income.  Rev. Proc. 2020-27  Section 911(a) allows individuals to claim the foreign earned income and housing costs exclusion if certain requirements (including being resident in a foreign country for a certain period) are satisfied. Rev. Proc. 2020-27 provides relief to individuals that reasonably expected to qualify for the section 911 exclusions that left:  China on or after Dec. 1, 2019;  Another foreign country on or after Feb. 1, 2020 But on or before July 15, 2020, if the individual otherwise establishes he or she would have met the ordinarily applicable qualified individual eligibility requirements but for a “COVID-19 emergency.” Rev. Proc. 2020-30 On May 7, 2020, the IRS released Rev. Proc. 2020-30 to address the application of COVID-19 travel restrictions (such as transportation disruptions, shelter-in-place orders, quarantines, etc.) on foreign branches. According to the revenue procedure, certain activities conducted in a foreign country for 60 consecutive calendar days in 2020 by individuals temporarily present there due to travel disruptions will not be taken into account for purposes of determining whether a domestic corporation has a foreign branch separate unit. As a result, such activities will not give rise to a foreign branch separate unit under section 1503(d) and the taxpayer will not have an obligation to file a Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). Transfer pricing Due to COVID-19, many international businesses are experiencing — or anticipating — negative impacts to their global supply chain. Disruptions to businesses’ supply chains may have unexpected or unintended tax consequences related to additional expenses or decreases in revenue. Some taxpayers with intercompany transactions may incur extraordinary expenses due to necessary reactions to the new market conditions. These extraordinary expenses should be analyzed to see if they should be treated differently for tax purposes, both from a domestic and foreign perspective. Taxpayers with intercompany transactions should revisit their transfer pricing strategies and pricing arrangements due to COVID-19’s influence on their global business. View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

International Growth Services

International taxation relief provisions

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

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

Food & Beverage

Advantage

Federal coronavirus rescue programs 

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

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

Upcoming compliance deadlines for reacting to CARES Act changes

Authored by Colin Walsh, Paul Dillon and Michael Wronsky On June 4, 2020, the IRS issued Notice 2020-39  (the Notice), granting relief to qualified opportunity funds (QOFs) and  their investors from some of the opportunity zone (OZ) program’s  time-sensitive requirements. This latest tranche of COVID-19-related  guidance provides automatic relief with respect to some of the  provisions as well as confirmation of the extensions to comply with  others in the event of a federally declared disaster available under the  OZ regulations.  Specific relief provided: Investors  are granted an additional extension of the 180-day period in which they  must acquire a QOF interest in exchange for the OZ tax benefits. In  April, the IRS provided investors whose 180-day period would have  otherwise ended between April 1, 2020, and July 14, 2020, until July 15,  2020, to make an eligible investment in a QOF (please see our previous Tax Alert). Taxpayers  now have until Dec. 31, 2020, to invest if their 180-day period  otherwise would have ended on or after April 1, 2020, and before Dec.  31, 2020. This relief is automatic. Significantly,  pass-through gains reported on a 2019 Schedule K-1, which previously had  to be invested by Sept. 11, 2020, can now be invested until Dec. 31,  2020.  A QOF’s failure to comply with the 90% asset test will be disregarded. A  QOF will incur steep penalties if it fails to hold 90% of its assets in  qualified opportunity zone property (QOZP) as of semi-annual testing  dates, unless it can demonstrate the failure was due to reasonable  cause. The Notice provides a QOF that fails to meet this test whose (1)  last day of the first six-month period of the taxable year, or  (2) the last day of the taxable year falls between April 1, 2020, and  Dec. 31, 2020, will automatically be deemed to have a reasonable cause,  and the failure will be disregarded for determining whether the QOF  otherwise is compliant with the program’s rules. In other words, no penalties will be assessed.  30-month substantial improvement period is extended. A  QOF or qualified opportunity zone business (QOZB) that purchases  non-original use property must “substantially improve” it in order for  the property to qualify as qualified opportunity zone business property  (QOZBP). Broadly, substantial improvement requires that an amount  exceeding the QOF’s or QOZB’s purchase price be spent improving the  property within any 30-month period. The Notice automatically tolls all 30-month windows during the period beginning on April 1, 2020, and ending Dec. 31, 2020.  For instance, if a QOZB’s substantial improvement period began April 1,  2020, that QOZB would have 39 months to improve the property.  Confirmation of federally declared disaster extensions provided by final regulations: As  a result of the national emergency declarations issued by the president  in response to COVID-19, every census tract designated as an OZ is  located within a major disaster area as of Jan. 20, 2020. The Notice  confirms the federal disaster relief included within the OZ regulations  is available to taxpayers. Critically, a QOZB has additional time to make expenditures pursuant to a working capital safe harbor.  A QOZB can utilize up to two consecutive 31-month safe harbors to  deploy working capital to acquire or construct property, or start a  business within an OZ pursuant to a written plan, without running afoul  of certain asset tests. The Notice makes clear that assuming all other  parameters of the working capital safe harbor are met, a QOZB will  receive not more than an additional 24 months to expend such working  capital on account of the federally declared disaster, as provided for  under the OZ regulations.  Please reach out to your Baker Tilly tax advisor to discuss how these potential changes may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS offered relief to opportunity zone funds and investors, including granting an additional extension to make an eligible investment in a qualified opportunity fund.

IRS provides additional relief to OZ funds and investors

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

Congress amends Paycheck Protection Program

Authored by Angel Ramirez To ensure our clients currently doing business in Mexico or considering expanding to Mexico have broad knowledge of the Mexican government’s responses to COVID-19, we have put together a summary of key tax incentives and economic measures currently implemented, so you can identify any opportunities to help manage cash flow during these unprecedented times. Federal measures Suspension of activities The Tax Administration Service has announced the suspension of   deadlines from May 4 to 29, 2020, due to COVID-19. This measure applies to   all procedures that cannot be handled electronically, including   administrative appeals, ongoing tax audits and permits. This suspension does not apply to the filing of tax returns, notices   and reports, payment of taxes, levies and proceeds, tax refunds,   administrative law enforcement actions, customs procedures, and assistance to   taxpayers. Corporate Income Tax (CIT) No reductions,   extensions or deferrals have been granted. Value Added Tax (VAT) There will be no deferrals, reductions or reliefs. However,   accelerated VAT refunds and trade and customs facilitations are in place. Employer’s payments for Social Security Employers may defer some Social Security payments for up to 48   months, under prior agreement with the Mexican Institute of Social Security   (IMSS), and upon a 20% upfront payment for the employer quota and 100% of the   worker quota. No posting of a bond or other kind of guarantee is needed. The monthly interest rate ranges between 1.26% and 1.82%. The National Workers Housing Fund Institute (INFONAVIT) will give   small- and medium-sized enterprises (up to 250 employees) an extension for   the housing contributions corresponding to the second and third bimesters   (i.e., period of two months) until September 2020. State tax Local incentives for state taxes such as relief or deadline   extensions may be available in certain states. The range of measures includes   extensions to file and pay taxes and waivers on certain state taxes such as   wage tax, property tax, vehicle registration, hotel tax, etc. Financial support The Bank of Mexico has implemented measures to strengthen the credit   channels and provide liquidity to financial markets by lowering the interbank   interest rate to 6%. The Office of Treasury and Public Credit has announced jointly with   the National Insurance and Bonding Commission the possibility for insurance   entities to extend deadlines for payment of insurance premiums for up to 60   days. Temporary support from banks for natural and legal persons will   continue for the duration of the COVID-19 emergency. Personal tax The deadline for the submission of individual tax returns for FY2019   is extended until June 30. 2020. Expand section below to view state measures.
For more information on this topic, read this guide.  To learn how Baker Tilly can help you find the best ways to manage your business in Mexico, such as maximizing cash flow and managing credit risk, please contact us.
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.

To ensure our clients currently doing business in Mexico or considering expanding to Mexico have broad knowledge of the Mexican government’s responses to COVID-19, we have put together a summary of key tax incentives and economic measures currently implemented, so you can identify any opportunities to help manage cash flow during these unprecedented times.

Supply Chain Network Optimization

International

Manufacturing and distribution coronavirus resources

Center for the Return of Manufacturing

Key tax measures implemented in Mexico due to COVID-19

Visit Baker Tilly's Coronavirus Preparedness Center to learn more

Depending on where and to the extent that COVID-19 spreads, filing deadlines may be changed and resources to help taxpayers file may be affected.

Baker Tilly’s federal tax professionals will keep you informed on any significant changes in tax requirements related to the spread of COVID-19.

Who is eligible and what are the benefits?

Coronavirus to impact tax-filing deadlines and tax payments

Baker Tilly offers specialized federal tax compliance and planning expertise to help businesses optimize value while minimizing their tax burden.

Baker Tilly’s tax team contributes to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks.

Baker   Tilly’s tax team contributes to clients’ success by accelerating tax   deductions, increasing tax credits, reducing cash taxes and mitigating risks.