The 2020 presidential election will be like no other given the COVID-19 pandemic — affecting not only how the candidates are conducting their campaigns, but also how voters will be getting to the polls. While tax policy is not the leading issue in the current election cycle, it will, nonetheless, be one of the likely tools used by November’s winner to address the existing economic crisis. Join Comerica Bank and Baker Tilly for a comparative review of the proposed tax policies under President Trump versus those of presidential candidate Biden. Attendees will learn about planning opportunities that may be available as a result of the current economic, political, and tax environment.   Presenters: Amanda Mahaney, Senior Vice President, Dallas Market President, Comerica Bank Chris Johnson, CPA, Partner, Baker Tilly Jennifer Soltis, CPA, Partner, Baker Tilly Maya Brill, J.D., LL.M., Vice President, Senior Wealth Planning Strategist, Comerica Wealth Management

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Chris   Johnson

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Federal tax coronavirus resources

International tax coronavirus resources

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2020 election impacts on tax and wealth planning

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

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

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Real estate coronavirus resources

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Lease modification: Beware of potential tax ramifications

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

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

Paycheck Protection Program (PPP) Solutions

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

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

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

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

Authored by Paul Dillon and Michelle Hobbs  The 2020 presidential election will be like no other given the COVID-19 pandemic — affecting not only how the candidates are conducting their campaigns, but also how voters will be getting to the polls. While tax policy is not the leading issue in the current election cycle, it will, nonetheless, be one of the likely tools used by November’s winner to address the existing economic crisis.  Further, the passage of the Tax Cuts and Jobs Act (TCJA) at the end of 2017 brought about the most sweeping changes in the tax code since the Tax Reform Act of 1986 (TRA). However, the TRA was enacted on a bipartisan manner, and the TCJA was passed along party lines. As a result, a change in control in the White House, the Senate or House of Representatives could result in a rollback or revision of many of those provisions.  While the tax code is typically used to drive citizen behavior, the specifics of tax policy are rarely addressed during the campaign or debates. To help you sort out the candidates’ current views on various tax issues, we have reviewed their official websites and recent speeches, as well as the analyses made by the Tax Policy Center and other nonpartisan sources, to summarize certain positions.  Even though tax policy was not a focal point of either political convention, there are clear differences in the way both candidates approach how Americans should be taxed. The president’s campaign has not released any detailed tax platform; instead, it has only offered broad ideas. On the other hand, the Biden campaign has published a lengthy policy document, including a wide range of tax changes. The following chart summarizes both candidates’ tax policies to date. Due to the economic uncertainty caused by the pandemic, continuing discussions over a fourth stimulus package and the pending government funding negotiations, it is likely these positions will evolve as the election draws closer.
We encourage you to reach out to your Baker Tilly tax advisor to discuss how the above may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Check out our comparison of the 2020 presidential candidates’ tax positions, including those related to individual, business and wealth preservation provisions. 

2020 presidential election: comparing candidates’ tax policies

Taxpayers that are patiently waiting for schedules K-1 should have them by (or shortly after) September 15, 2020, which will leave another month to make an investment into a qualified opportunity zone fund (QOF) to reduce their income tax bill before the individual extended tax filing deadline. Either way, the taxpayer will part with funds on October 15, 2020. 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.This also means that a taxpayer could amend a return filed by July 15, 2020 (or one filed by October 15, 2020) if they elect to invest into a QOF before December 31, 2020.  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 October 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 that are patiently waiting for schedules K-1 should have them by (or shortly after) September 15, 2020, which will leave another month to make an investment into a qualified opportunity zone fund (QOF) to reduce their income tax bill before the individual extended tax filing deadline. 

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Reduce the tax liability on your extended tax return

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

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

New PPP guidance addresses owner-employee compensation, nonpayroll costs

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

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

Not-for-Profit

Not-for-profit coronavirus resources

President’s payroll tax holiday generates questions

Play video Our financial institution industry and Washington national tax professionals hosted a webinar to discuss the Employee Retention Credit (ERC) and how banks can access the benefits. Listen to the webinar recording to learn what is important for depository and lending operations to take advantage of the tax credit. We covered: How the ERC can be coordinated with other benefits, like the payroll tax deferral and FMLA How your bank can claim the ERC on Form 941 Situations where banks may be eligible for the ERC We also hosted a live Q&A with our attendees at the end of the webinar. The Q&A is available in the recording.  During the webinar, our Washington National Tax presenter referenced a helpful FAQ document that the IRS put together to help companies understand the ERC.  If you believe that your bank may be eligible for the ERC, contact us and we’ll talk through your current 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.

Our webinar covered how banks can access the Employee Retention Credit (ERC), claiming the tax credit on Form 941 and an overview of what is important for depository and lending operations.

Financial Services

Depository & Lending

Banking coronavirus resources

Employee retention credit: exploring the benefit for banks

Authored by Christine Faris and Devin Tenney IRS provides guidance on required minimum distributions under the CARES Act   The IRS recently issued Notice 2020-51 to provide guidance for taxpayers who had already taken required minimum distributions (RMDs) from certain retirement plans, including 401(k) plans, 403(b) plans or IRAs, in 2020 before the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in March. The CARES Act waived the RMD requirement for 2020. With the release of this Notice, taxpayers who already took an RMD in 2020 from retirement plans or IRAs may repay the distribution by rolling those funds back into their retirement account. The deadline to do so is Aug. 31, 2020. IRS provides midyear relief to employers with safe harbor 401(k) plans  Recently released Notice 2020-52 provides guidance for employers that sponsor safe harbor 401(k) plans. Previously, the Internal Revenue Code did not permit plan sponsors to reduce or eliminate safe harbor contributions midyear to their 401(k) plans. Due to the COVID-19 pandemic and unexpected financial challenges facing employers, the Notice permits plan sponsors to make a midyear amendment to reduce or suspend safe harbor contributions. The Notice provides relief in the form of two alternatives for plan sponsors and requires immediate action:  Amend the plan by Aug. 31, 2020, to suspend safe harbor contributions for both highly compensated employees (HCEs) and nonhighly compensated employees (NHCEs). This action will result in the plan losing its safe harbor status, and the plan will be required to satisfy the average deferral percentage (ADP) and average contribution percentage (ACP) tests for the 2020 plan year.  Amend the plan to reduce or eliminate safe harbor contributions made on behalf of HCEs. The Notice clarifies that under this approach, the plan will continue to be a safe harbor plan, and the plan will not be required to satisfy the nondiscrimination tests applicable to 401(k) plans, ADP and ACP. This amendment may be made at any time, though, for financial considerations, the amendment should be made as soon as possible.  Please reach out to your Baker Tilly tax professional to discuss how these changes may affect your situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Taxpayers who had taken out required minimum distributions from certain retirement plans in 2020 may repay the distribution, but they have to act by the end of August. 

Benefit plan action required by Aug. 31, 2020

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.

Manufacturing & Distribution

Law Firm & Professional Services

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.

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.

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

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. 

PPP application deadline extended by Congress

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.

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
– Paycheck 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?

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.