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.

Manufacturing & Distribution

Supply Chain Network Optimization

International

Federal Tax

International Tax

International Growth Services

Coronavirus Resource Center

Federal tax coronavirus resources

International tax coronavirus resources

Manufacturing and distribution coronavirus resources

Center for the Return of Manufacturing

Key tax measures implemented in Mexico due to COVID-19

Authored by Paul Dillon, Michelle Hobbs and Michael Wronsky The Small Business Administration (SBA) released two new interim final rules on the Paycheck Protection Program (PPP). One set covers the requirements for loan forgiveness, confirming and expanding upon the previously released loan forgiveness form and instructions (please see our previous tax alert); the other addresses the SBA’s procedures for reviewing applications for loans and loan forgiveness. Key takeaways from both sets of rules are below. The guidance is effective immediately.  Separately, the House and Senate introduced bipartisan bills to amend the PPP. Both bills propose to expand the covered periods in which borrowers can use loan proceeds and qualify for forgiveness, and remove the limit on the amount of non-payroll costs that can be forgiven. The Senate bill would also allow expenses funded with forgiven loan proceeds to be deductible, overriding Notice 2020-32 previously issued by the IRS. While numerous members of the House indicated support for such a provision, the House bill does not include a similar provision. The House is expected to vote on its bill this week, but timing for the Senate is less certain at this time.  Key takeaways Requirements for loan forgiveness Cash compensation eligible for forgiveness is generally limited to $15,385 per employee over the eight-week covered period in 2020 ($100,000 limit multiplied by (eight-week covered period divided by 52-week year)), however, the interim rule imposes an additional limit on “owner-employees,” being the lesser of $15,385, or 8/52 of 2019 compensation in total, across all businesses. The “across all business” requirement may come as a surprise to many and may serve to further limit the amount of owner compensation eligible for forgiveness.

Unfortunately, the term “owner-employees” is not defined for this purpose. It presumably includes S corporation shareholders in accordance with general tax principles. This additional limitation could render substantial amounts paid by borrowers under previous guidance no longer eligible for forgiveness. It is also unknown whether attribution rules will apply to pull in related-party salaries into a single limitation. Consider a family business taxed as an S corporation. If the business has a sole equity shareholder whose family members are salaried employees, it is unclear whether attribution rules would apply and additionally limit the forgiveness of the amounts paid to the family members. The rules include new limitations on health insurance for owners. In general, noncash compensation paid to employees, such as retirement and healthcare contributions made on their behalf, is additionally eligible for forgiveness, and these amounts do not count toward the above-mentioned limit on cash compensation. 

The interim rule provides these additional amounts cannot increase the compensation cap described above for amounts paid for self-employed individuals, including Schedule C filers and general partners.

However, the interim rule does not discuss S corporation owner-employees for this purpose. It is unclear whether this exclusion reflects a policy position or a drafting error. Bonuses and hazard pay as well as salaries, wages and commission payments to furloughed employees during the covered period are eligible for loan forgiveness, subject to the $100,000 limit prorated for the covered period.  A full-time equivalent (FTE) employee is defined as one who works 40 hours or more on average each week. The rule provides the methodology for calculating FTEs by dividing the average number of hours paid for each employee per week by 40 and capping the result at 1.0. This echoes the guidance included in the loan forgiveness application. For part-time employees, employers have the choice of computing FTEs by average actual hours during the covered period or they can use a default FTE of 0.5 for each part-time employee regardless of actual hours worked.  Prepayments of eligible costs other than mortgage interest are eligible for forgiveness.  The guidance also addressed documentation requirements for employers regarding reduced headcounts if they attempt to rehire the same employee but the employee rejects the offer. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE employee headcount that is attributable to an individual employee if:
i. The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
ii. The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
iii. The offer was rejected by such employee;
iv. The borrower has maintained records documenting the offer and its rejection; and
v. The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. Loan application review procedures Borrowers are responsible for the accuracy of the PPP forgiveness calculation as well as the supporting loan forgiveness application and documentation. The SBA may review PPP loans of any size and at any time. Specifically whether: 
– The borrower was eligible for the loan, based on the Coronavirus Aid, Relief, and Economic Security (CARES) Act and guidance available at the time the loan was applied for, 
– The loan amount was calculated correctly,
– The loan proceeds were used for eligible costs, and
– The borrower is eligible for the amount of loan forgiveness applied for. Borrowers will have the opportunity to respond to questions posed by the SBA and/or the lender during the loan review process. Lenders must approve or deny an application for loan forgiveness within 60 days of submission. Borrowers will have an opportunity to appeal a denial of PPP loan forgiveness under soon-to-be-issued guidance. Borrowers must retain documentation supporting the PPP loan and corresponding forgiveness for six years after the loan is forgiven or repaid in full. 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 SBA issued two new interim final rules for Paycheck Protection Program (PPP) – one set covers loan forgiveness requirements and the other looks at the SBA’s procedures for reviewing applications for loans and loan forgiveness. Read about key takeaways from both sets of rules.

Higher Education

Not-for-Profit

State & Local Government

Small business

Municipal Advisory

Higher education institution coronavirus resources

Not-for-profit coronavirus resources

Small and family business coronavirus resources

State and local government coronavirus resources

SBA issues final interim rules providing PPP guidance

Authored by Christine Faris, Paul Dillon, Michelle Hobbs and Devin Tenney On May 12, 2020, the IRS released Notices 2020-29 and 2020-33 which are intended to help taxpayers address unanticipated health and dependent care expenses due to the COVID-19 pandemic. Under this collective guidance, employers have the option to amend their section 125 cafeteria plans and flexible spending accounts (FSAs) to allow employees to make prospective midyear election changes, regardless of the reason, during calendar year 2020.  Background The general rule is employee elections for pretax payment of employer-sponsored health coverage, health FSAs and dependent care assistance programs must be made prior to the first day of the plan year. They also must be irrevocable for the plan year unless the employee experiences a permitted change in status or there are significant changes in the cost of coverage. This requirement includes an affirmative election to participate or a default election not to participate.  Key takeaways  Employers can modify plans to allow employees to make prospective midyear elections for health coverage, health FSAs and dependent care assistance programs. Claim periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits are extended through Dec. 31, 2020. The permitted carryover amount for health FSAs is increased to $550 from $500.  Previously provided temporary relief for high deductible health plans (HDHPs) may be applied retroactively to Jan. 1, 2020. An employer electing to provide this midyear election flexibility, or allow additional time to apply unused amounts in a health FSA to pay or reimburse expenses for the remainder of the 2020 year, must adopt a plan amendment documenting the change to its plan. Any amendment for the 2020 plan year can be adopted as late as Dec. 31, 2021. Employee election revisions under section 125 cafeteria plan allowed An employer may amend its section 125 cafeteria plan to allow employees to: Make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;  Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);  Revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;  Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; and  Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis. Extended claim periods An employer may amend its section 125 cafeteria plan to permit employees to apply unused amounts remaining in a health FSA or dependent care assistance program at the end of the grace period or end of the plan year to pay or reimburse medical care expenses or dependent care expenses through Dec. 31, 2020. For example, if a calendar-year health FSA provided for a 2 ½ month grace period following its 2019 plan year, the employer could amend the plan to provide that any unused amounts in the health FSA as of March 15, 2020 (the last day of the grace period) could be used to pay or reimburse the employee for healthcare expenses incurred through Dec. 31, 2020. Similarly, a health FSA with a non-calendar plan year ending in 2020 that allows for a $500 carryover could be amended to allow any unused amounts (including amounts greater than $500) to be used to pay or reimburse health expenses incurred during the remainder of the 2020 calendar year. This relief applies to all health FSAs, including limited purpose health FSAs compatible with health savings accounts (HSAs). However, an employee who had unused amounts remaining at the end of the plan year or grace period ending in 2020 and who is allowed an extended period to incur expenses under a health FSA will not be eligible to contribute to an HSA during the extended period, unless the health FSA is a limited purpose health FSA compatible with an HSA. Permitted carryover amount increased The maximum unused amount remaining in a health FSA from a plan year beginning in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550. However, for the 2019 plan year and amounts carried over into 2020, the limit remains $500. Plan amendments An employer that elects to provide the additional flexibility regarding midyear election changes, or to provide additional time to apply unused amounts in a health FSA or dependent care assistance program to pay or reimburse expenses for the remainder of the 2020 year, must adopt a plan amendment to allow the change to its plan. Any amendment for the 2020 plan year can be adopted as late as Dec. 31, 2021, and may be effective retroactively to Jan. 1, 2020, provided that the plan operates in accordance with the requirements of the notices, and the employer notifies all plan participants of the changes to the plan. Retroactive HDHP/HSA relief Prior IRS guidance permitted plans to cover any COVID-19-related services at no cost without affecting HSA eligibility. Notice 2020-29 provides three points of clarification: Guidance was applicable on a retroactive basis to Jan. 1, 2020, Coverage for any COVID-19 testing or supply services required to be covered at no cost under the Families First Coronavirus Response Act and Coronavirus Aid, Relief, and Economic Security (CARES) Act will not influence HSA eligibility, and Plans that provide free telehealth services (whether COVID-19-related or not) will not impact HSA eligibility through Dec. 31, 2020, and will be applied retroactively to Jan. 1, 2020. 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 IRS released guidance to help taxpayers with unanticipated pandemic-related health and dependent care expenses by letting them amend their section 125 cafeteria plans and flexible spending accounts.

Healthcare & Life Sciences

Health plan coronavirus resources

Healthcare provider coronavirus resources

IRS provides COVID-19 flexibility for section 125 cafeteria plans and high deductible health plans

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor and Michael Wronsky  On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) loan forgiveness application form and instructions for small businesses. Under this initial guidance, borrowers will have two options to calculate payroll costs, including use of a loan support period that matches with the applicant’s payroll schedule. The SBA is expected to issue further regulations and other guidance relating to debt forgiveness in the coming weeks. Key takeaways Covered period The covered period is defined as the eight-week period beginning on the PPP loan disbursement date. The instructions also allow borrowers with a biweekly (or more frequent) payroll schedule to elect to use an alternative covered period with respect to its payroll costs only, which is the eight-week period beginning on the first day of their first pay period following the loan disbursement date. Payroll costs that are paid or incurred during the covered period, or the alternative covered period, generally are eligible for forgiveness. Other costs – i.e., mortgage interest, rental/lease payments and utilities – generally are eligible for forgiveness if they are paid or incurred during the covered period only. 75% cliff effect As discussed in previous alerts, the SBA’s interim rules on loan forgiveness raised the possibility of a cliff effect – that is, if less than 75% of the loan proceeds were used for payroll costs, it was unclear if any of the loan would have been forgivable. Fortunately, the application does not include a cliff effect. The forgiveness amount is the lesser of:  Payroll costs divided by 75%,  The total loan amount, or  “Modified” total cost (adjusted for salary reduction/headcount reduction). Salary/hourly wage reduction The loan forgiveness amount may be reduced if the employer cuts the salary/wages of certain employees by more than 25% during the covered period (or the alternative covered period) compared to the first calendar quarter of 2020. However, there is a safe harbor. If, by June 30, 2020, the employer restores employees’ average annual salaries/hourly wages to their Feb. 15, 2020, levels, the loan forgiveness amount is not reduced.  Full-time equivalency (FTE) reduction The loan forgiveness amount may be reduced if the employer decreases its headcount. Certain FTE reductions will not affect the loan forgiveness amount, including employees that: reject a written offer to be re-hired were fired for cause voluntarily resigned or voluntarily requested a reduction in hours Similar to the salary/wage reduction safe harbor, if the employer restores headcount to the Feb. 15, 2020, level by June 30, 2020, then the loan forgiveness amount is not affected. Application components The loan forgiveness application consists of three components: Schedule A Worksheet. Much of the analysis is completed on this worksheet, including computing eligible compensation for each employee, determining the number of FTEs, and calculating salary/wage and FTE reduction amounts. Independent contractors, owner-employees, self-employed individuals and partners are not included in the computation. Schedule A. Schedule A pulls information from the Worksheet and adds amounts for group healthcare benefits, retirement benefits and state/local tax withholding; these amounts are in addition to the maximum compensation per employee. Schedule A also includes amounts paid to owner-employees and partners.  Loan Forgiveness Calculation Form. The calculation form reports mortgage interest paid or incurred during the covered period, business rent or lease payments, and business utility payments. The last section of the form computes the loan forgiveness amount). Open issues  Whether March wages incurred, but not paid until the employer received its PPP loan proceeds in April will qualify for forgiveness. Similarly, whether prepayments of payroll or rent expenses for periods after the applicable covered period will qualify for forgiveness. Confirmation is needed that guaranteed payments to partners are included in compensation paid to owners in line 9 of Schedule A. If a borrower’s covered or alternative period extends past June 30, 2020 (the date through which PPP loans are available and can be used to fund eligible expenses), whether eligible expenses incurred and paid after June 30 will be eligible for forgiveness. Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.
Paycheck Protection Program solutions Baker Tilly has a comprehensive set of solutions readily available to assist qualifying businesses that have received, or will receive, loan proceeds that may be eligible for forgiveness under the PPP. No matter where you are in the process, through a self-service model or managed-service process, our specialists can help you through: Applying for a PPP loan Monitoring utilization of loan proceeds Complying with forgiveness submissions requirements
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The SBA released the Paycheck Protection Program loan forgiveness application form and instructions for small businesses. Read about key takeaways from the guidance as well as issues not yet addressed.

SBA releases PPP loan forgiveness application

In the midst of the coronavirus (COVID-19) pandemic, businesses of all sizes are concerned with either how to keep operations going or how to start them back up. To ease the financial burden, business owners are looking toward government aid, especially tax relief. In the third webinar from Baker Tilly’s four-part business resiliency series, tax professionals discuss the many tax-related opportunities created in the wake of COVID-19.  The Families First Coronavirus Response Act (FFCRA) along with the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted a number of significant relief measures and taxpayer-friendly provisions, including several new tax credits, payroll tax deferrals and helpful extensions and deductions.  Tax credits The employee retention credit is a refundable tax credit that encourages employers to keep employees on their payroll for the balance of 2020. To be eligible, employers that carried on their trade or business during the 2020 calendar year must either fully or partially suspend operations because a governmental authority: 1) limited commerce, travel or group meetings due to the coronavirus; or 2) experienced a substantial decline in gross receipts. The amount of the credit that is refundable is 50% of the first $10,000 of qualified wages (i.e., the maximum credit is $5,000 per employee). It applies to wages paid from March 13 to Dec. 31, 2020. Additionally, qualified wages are determined by the size of the company.  Employers should know, if they take a small business loan under the Paycheck Protection Program (PPP) or claim the Work Opportunity Tax Credit (WOTC), they cannot also take an employee retention credit. And they may not use the same wage expenses used to qualify for the employer credit for paid family and medical leave under section 45S. Furthermore, employers cannot use those same wage expenses toward the two medical leave credits enacted as part of the FFCRA – one is designated for emergency paid sick leave, and one for emergency paid family and medical leave. These medical leave credits apply to employers with fewer than 500 employees. They are refundable payroll taxes and effective for wages paid between April 1 and Dec. 31, 2020. Employers can only claim one of these credits and may not use the same wage for other credits, for example, the employee retention credit. The sick leave credit is capped at $5,110 for an employee who is sick and/or quarantined due to the coronavirus, or $2,000 for an employee caring for either a sick and/or quarantined individual or a minor child whose school has been closed or whose child care provider is unavailable, due to the coronavirus. The family and medical leave credit is capped at $10,000 for an employee who is caring for a minor child whose school has been closed, or whose child care provider is unavailable, due to the coronavirus. For more information about these tax credits, download our coronavirus benefit coordination matrix. Payroll tax deferral The CARES Act payroll tax deferral is perhaps the fastest cash relief for companies, as it allows employers to defer the deposit and payment of the employer’s share of Social Security taxes on wages normally due from March 27 through Dec. 31, 2020. Similarly, self-employed individuals can defer paying half of the Social Security tax due on their net self-employment income earned during the same period. Note: To be considered timely and to avoid penalties, employers and self-employed individuals must pay half of these deferred taxes by Dec. 31, 2021, and the remainder by Dec. 31, 2022. Employers who have had a PPP loan forgiven cannot participate in a deferral; however, IRS guidance clarified PPP loan recipients can use the deferral up until the time they are notified their loan has been forgiven. CARES Act changes to the Tax Cuts and Jobs Act With the CARES Act, Congress made some major changes to parts of the Tax Cuts and Jobs Act (TCJA), including fixing the “retail glitch” and modifying or delaying several “revenue-raisers.” The so-called retail glitch was a drafting error in the original TCJA that omitted the 15-year recovery period for qualified improvement property (QIP). The CARES Act added new language that defined QIP as 15-year property and made it retroactive to 2018. This correction is especially valuable for retail and restaurant owners. (For more on bonus depreciation, read our recent tax alert.) The TCJA created a number of provisions intended to raise revenue to help pay for a lower corporate tax rate, and the CARES Act altered or delayed many of those. Specifically, the CARES Act: Increased the business interest expense deduction limitation to 50% of adjusted taxable income (ATI)  Allowed net operating losses (NOLs) to offset 100% of taxable income for 2018, 2019 and 2020  Allowed NOLs arising in 2018, 2019 and 2020 to be carried back five years Delayed the section 461(l) business loss limitation rule that restricted business losses for noncorporate taxpayers in 2021 These are positive changes for taxpayers, but, since many are retroactive to 2018, taxpayers will need to amend returns, revoke elections, make accounting method changes and take other actions in order to receive their refunds. Given the complexity, careful consideration and modeling should be performed prior to action. Claiming benefits The IRS released guidance addressing the administrative difficulties businesses will face when filing amended returns in order to claim tax benefits from the CARES Act. The IRS has released separate guidance for partnerships and C corporations. If the business is a partnership and subject to the centralized partnership audit regime (CPAR), the IRS issued Rev. Proc. 2020-23 to help those partnerships take advantage of CARES Act relief and other adjustments more quickly.  Under the CPAR rules, partnerships cannot amend to correct prior years; however, under this new guidance, CPAR partnerships are permitted, for a limited time, to amend 2018 and 2019 returns. Amended returns must be filed before Sept. 30, 2020. Alternatively, CPAR partnerships can file an administrative adjustment request (AAR); the deadline to file an AAR is Oct. 15, 2021. Be careful with AARs, though – the benefit of adjustments passed through to partners may be lost if the partners are already in a loss position, or do not have income from other sources to full absorb the additional loss. Most amended tax returns for businesses organized as C corporations have to be filed by mail. As of April 22, the IRS is not opening mail and all service centers are closed; therefore, the IRS is allowing C corporations to file Form 1139, a quick claim for refund, via fax. Because hundreds of pages will need to be faxed and data needs to be input into the IRS’ system before a return is processed, there is some doubt about how quickly refunds will be issued. If a C corporation needs a refund soon, we recommend soliciting assistance from the IRS Taxpayer Advocate Service and documenting why the refund is needed.   State and local considerations Almost all states provided an extension to file and/or pay 2019 returns in line with the federal extension of July 15, 2020. Typically, interest will start to accrue July 16, 2020. If a taxpayer needs additional time to pay a tax bill, most states will consider a short-term payment plan, but we recommend reaching out to the state’s revenue department as soon as that need is known, as most government offices are closed and it may take some time to receive a response from appropriate revenue personnel. Unfortunately, many states have been less generous with 2020 relief on paying quarterly estimated taxes. For the most part, if a state granted a delay to pay, it has been for first-quarter payments only, with few exceptions. The second-quarter due date is June 15 for most states, and if a taxpayer’s state hasn’t announced an extension yet, it can be assumed the state is not going to, especially as the majority of states are predicting significant tax revenue shortfalls. Taxpayers should remember the states in which they do business may not automatically adopt, or “conform” to Internal Revenue Code (IRC) amendments, such as the CARES Act’s provisions. In fact, even states that typically conform to federal tax changes can “decouple” or decide not to adopt specific aspects of the code or, in this case, the CARES Act. In many cases, states will need to enact legislation to adopt certain aspects of the CARES Act, including the changes to bonus depreciation, the business interest deduction limitation and the NOL carryback, and it may take months before that happens.  Overall, states are recognizing the difficulties companies are experiencing to remain operational during this crisis and are making concessions where they can. For instance, the majority of states have frozen debt collection and/or understand delay in responding to audit inquiries and activities. Some have issued guidance stating employees working remotely during the pandemic are not creating nexus in the state. A few states, like California, are allowing additional time to file a refund claim or an appeal.  For more on states’ reactions to the coronavirus, view the matrices Baker Tilly’s state and local tax team created to track the ongoing changes states are making to business, sales and use, and individual taxes. You may find the most up-to-date matrices on our state and local tax coronavirus resources page. Information contained here is current as of April 22, 2020. Please consult with your tax advisor for the most current information. For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.
Baker Tilly COVID-19 support Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Tax-related opportunities were created in the wake of COVID-19 from the FFCRA and CARES Act. Learn more about tax credits, payroll tax deferral, CARES Act changes to the Tax Cuts and Jobs Act, claiming benefits and more.

Family Business

State & Local Tax

Tax credits, extensions and deferrals will help businesses cope with COVID-19 burden

Authored by Paul Dillon, Michelle Hobbs, Pat Balthazor and Michael Wronsky In an effort to further support the economy during the pandemic closures, the House of Representatives passed the fourth COVID-19-related stimulus package, the Health and Economic Recovery Omnibus Emergency Solutions (Heroes) Act. The $3 trillion bill contains multiple spending measures designed to encourage employers to retain employees, provide additional economic impact payments to individual taxpayers and their families, extend the weekly unemployment compensation payments through January 2021, and further modify tax and benefit changes from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Tax Cuts and Jobs Act. The centerpiece of the plan is nearly $1 trillion of aid to state and local governments, which, it seems clear, will require financial assistance to get through this crisis. Some in the Senate may resist state and local aid, but this appears to be the issue that will drive negotiations forward since the current bill is unlikely to pass the Senate as is. Many of the tax items included in this bill could find their way into final legislation. Reports indicate it may be June or later before any compromise is reached on a new stimulus package. While talks continue between the administration and lawmakers, there appears to be no rush in pushing another piece of legislation through as we saw with the first three (and one-half). However, on May 13, Federal Reserve Chairman Jerome Powell urged Congress to consider another ambitious fiscal rescue package, warning that the economy may need additional support to avoid a cycle of business failures, job losses and bankruptcies. The combination of further business closures, rising unemployment claims and the financial condition of the states may pressure Congress to reach a compromise.  Improvements to employee retention credit (ERC) The applicable percentage of qualified wages reimbursed increases to 80% from 50%. The gross receipts requirement is modified to allow for a partial credit with a decline on gross receipts between 10% and 50% compared to same calendar quarter of previous year. The wage limit per employee rises to $15,000 per quarter; limited to $45,000 per calendar year. Large employer redefined to mean greater than 1,500 full-time employees and gross receipts of greater than $41.5 million in 2019. Health plan expenses can be considered qualified wages even when no other wages are paid to the employee. Provisions retroactive to CARES Act enactment date. Individual rebate improvements All dependents are eligible for $500 qualifying dependent payment; full-time student dependents under the age of 24 as well as adult dependents are eligible (retroactive to CARES Act enactment). Economic impact payments will be made to individuals with a taxpayer identification number instead of a Social Security number (retroactive to CARES Act enactment). Additional recovery rebates to individuals A second round of stimulus checks would see a $1,200 refundable tax credit for each family member ($1,200 for single/$2,400 married filing jointly); plus, up to $1,200 per dependent up to a maximum of three dependents. Phase-out begins at adjust gross income (AGI) of $75,000 single/$150,000 married filing jointly). Payments are in addition to CARES Act amounts and excess amounts will not be repaid. Child tax credit The credit amount increases to $3,000 per child ($3,600 for children under 6). It’s fully refundable for 2020 and 17-year-olds qualify. Dependent care assistance The provision is fully refundable for 2020 and its maximum credit rate jumps to 50%. Phase-out begins at $120,000. It doubles the amount of the credit to $6,000 for one qualifying child and $12,000 for two or more. The exclusion for employer-provided dependent care assistance increases to $10,500 from $5,000 for 2020. Flexibility for certain employee benefits Participants can carry over up to $2,750 in unused benefits or contributions from 2020 to 2021 from health flexible spending arrangements. Participants in dependent care flexible spending arrangements can carry over up to the maximum annual amount of unused benefits or contributions from 2020 to 2021. Retroactive amendments to plans are allowed. Deduction of state and local taxes (SALT cap) The limitation on the deduction for state and local taxes is eliminated for 2020 and 2021 Payroll credit for certain fixed expenses The payroll tax credit is 50% refundable for qualified fixed costs, including covered rent obligations, covered mortgage obligations and covered utility payments. Qualified wages (same definition as ERC) are limited to 25% or 6.25% of 2019 gross receipts with a maximum of $50,000. The credit is limited to employers with no more than 1,500 full-time equivalent employees or $41.5 million in 2019 gross receipts. Employers must be subject to a full or partial suspension due to a COVID-19 government order or at least a 20% decline in gross receipts from the same calendar quarter of the preceding year. Business interruption credit for self-employed The individual income tax credit is 90% refundable for certain self-employed individuals experiencing a significant loss of income. Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.   This information should not be construed as a recommendation of a particular investment strategy, it is being provided for illustration purposes only.  The commentaries provided are opinions of Baker Tilly Investment Services, LLC.  While the information is deemed reliable, Baker Tilly Investment Services, LLC cannot guarantee its accuracy, completeness, or suitability for any purpose and makes no warranties with regard to any results to be obtained from its use, or whether any expressed course of events will actually occur.  Past performance does not guarantee future results. Investment advisory services are offered through Baker Tilly Investment Services, LLC, a registered investment adviser.  Baker Tilly Investment Services, LLC is a wholly owned subsidiary of Baker Tilly Virchow Krause LLP, an accounting, tax and advisory firm.  Baker Tilly Virchow Krause LLP trading as Baker Tilly is a member of the global network of Baker Tilly International, Ltd., the members of which are separate and independent legal entities.

The House passed the $3 trillion Heroes Act, the biggest stimulus package in U.S. history. It bolsters parts of the CARES Act, but also proposes $1 trillion in aid to state and local governments – which may be key to how the bill moves forward in the GOP-led Senate.

Construction

Real Estate

Multifamily Housing

Lodging

Real Estate Investors

Baker Tilly Investment Services

Real estate coronavirus resources

Construction coronavirus resources

House passes $3 trillion stimulus package

Authored by Devin Tenney, Paul Dillon, Michelle Hobbs, Christine Faris and Michael Wronsky This alert has been revised to reflect updated guidance provided by the Small Business Administration and the IRS. On April 29, 2020, the IRS provided guidance on the employee retention credit (ERC), by significantly expanding upon a list of “frequently asked questions” (FAQ) posted on its website. The FAQ now includes 94 questions covering an array of topics, including the determination of eligible employers and qualified wages, and how the credit interacts with other relief provisions provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Families First Coronavirus Response Act (FFCRA).  This alert focuses on certain key areas where the IRS provided new or updated guidance.  Background The ERC is a fully refundable payroll tax credit made available by the CARES Act to employers, including not-for-profits, that had their operations fully or partially suspended as a result of a government order limiting commerce, travel or group meetings (the “suspension test”). The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis (the “gross receipts test”). The ERC is equal to 50% of qualified wages, not to exceed $10,000 per employee, paid by the employer from March 13, 2020, through the end of the calendar year. Qualified wages paid by an employer with 100 or fewer employees generally include all wages paid during the economic hardships described above; for employers with more than 100 employees, qualified wages are limited to wages paid to employees while they are not performing services. Qualified wages can also include qualified health plan expenses paid by the employer. Key takeaways from the IRS FAQ Determining eligibility under the suspension test Essential employers that have not been ordered to fully or partially shut down generally are not considered to have a suspension of operations. An employer that operates an essential business most likely will not qualify under the suspension test if the governmental order allows the employer to remain open, even though nonessential businesses being shut down by the order may have an effect on the employer’s operations. Exceptions are available for employers whose: 
1. Facts and circumstances indicate their operations have in effect been suspended due to an inability to obtain critical goods or materials because their suppliers have been shut down, or 
2. Hours of operation have been reduced due to a governmental order. An essential employer will not qualify under the suspension test solely because its customers are subject to a government stay-at-home order. Consider a gas station that is not required to close its location or suspend its operations because it is deemed to be essential. However, its business has suffered significantly because its community is under a governmental order that limits travel and requires residents to stay at home except for certain essential needs. The gas station is not eligible for the ERC under the suspension test. However, if its gross receipts declined by more than 50%, it could be eligible for the ERC under the gross receipts test.  Employers required to close their physical locations, but able to maintain comparable operations through telework are not considered to have a suspension of operations. This can have implications to an employer deemed “nonessential,” but because they are able to continue their operations remotely at a comparable level, they do not pass the suspension test. 
It is unclear what constitutes operations comparable to the business’ operations prior to the closure, but a nonessential employer would likely need to show a significant impact on their ability to perform its operations remotely (e.g., entire functions shut down or a significant reduction in the employer’s capacity to perform operations at a normal level).  It is important to note that the IRS repeatedly emphasizes during its discussion of the suspension test-related issues that employers who are ineligible for the credit on this basis may still be considered an eligible employer if it passes the gross receipts test.  Paycheck Protection Program (PPP) loan recipients are ineligible for the credit  The CARES Act provides that taxpayers cannot benefit from both a PPP loan and the ERC, but, prior to the issuance of these FAQ, it was unclear whether the ERC could be claimed for periods prior to borrowing. The FAQ states that PPP loan recipients cannot claim the ERC regardless of 1) the date of the loan, and 2) whether and when the loan is forgiven. Further, if an employer in an aggregated group is a PPP loan recipient, the entire group is rendered ineligible for the credit.  However, on May 6, 2020, the Small Business Administration updated its list of Paycheck Protection Program Loans Frequently Asked Questions to provide that employers who repay their PPP loans pursuant to a safe harbor by May 14, 2020, will be deemed to have never received the loan and, therefore, eligible for the ERC. For additional details on this safe harbor, please see our previous alert. Impact of aggregation The CARES Act provided that a controlled group of entities as determined under the Internal Revenue Code’s aggregation rules will be considered a single employer when determining eligibility for the ERC, but it was unclear on how the facts and circumstances of one or more component controlled group members would affect the group as a whole. The expanded IRS FAQ addresses several questions in this area: A single business entity operating in multiple locations whose operations have been suspended in one or more jurisdictions, but not others, will qualify under the suspension test. This could be a huge boost to employers with a national or regional presence under this circumstance, as they would qualify under the suspension test with respect to all of its operations in all locations. A single employer in a controlled group qualifying under the suspension test qualifies the entire aggregated group. The FAQ provides that an entire aggregated group’s operations are deemed fully or partially shut down, if merely one of its members’ operations are suspended by a governmental order. For example, consider a restaurant chain that is an aggregated employer group of multiple facilities in various locations. If one restaurant is ordered closed by a governmental order, the entire chain will be considered an eligible employer under the suspension test, even if multiple restaurants are located in jurisdictions not subject to any government restrictions.  The gross receipts test considers the revenue of the entire aggregated group. Consider two entities, X and Y, that are a brother-sister controlled group. Both entities had 2019 second-quarter gross receipts of $500,000. X is in an area hard hit by COVID-19, and its 2020 Q2 gross receipts were only $150,000, 30% of its 2019 Q2 figure. Y is located in an area not as heavily affected by the virus, and its 2020 Q2 gross receipts were $400,000 (80% of its 2019 Q2 figure). Despite X experiencing a significant decline in gross receipts on its own, since the group’s 2020 Q2 gross receipts were 60% of the 2019 Q2 amount, neither entity is eligible for the ERC. Determination of qualified wages For employers eligible for the ERC due to a full or partial suspension in its operations, qualified wages are limited to the period the order is in force. If the order was effective for only a portion of the calendar quarter, the employer can still claim the credit, but only for wages paid during the period the order is in force. Consider a business partially shut down by a governmental order While the business qualifies under the suspension test in both the first and second quarters, the ERC would not be available for wages paid prior to March 13, 2020, or after April 30, 2020.  Eligible employers with more than 100 employees may not treat vacation, holidays, sick days or other leave under preexisting policies as qualified wages. The IRS reasons these wages were accrued during a prior period in which the employees provided services and, therefore, cannot be considered wages while the employee did not work. Conversely, since all wages paid by eligible employers with 100 or fewer employees are considered qualifying wages, such paid leave can produce an ERC. Qualified wages are determined on a pre-tax basis. Federal income and payroll taxes withheld or imposed do not reduce an employer’s qualified wages paid. Healthcare expenses may be treated as qualified wages. Employers with 100 or fewer employees can generally allocate health plan expenses to qualifying wages paid and treat such health plan expenses as qualifying wages. The IRS updated the FAQ to provide this is true even if an employer continues a furloughed or laid-off employee’s healthcare coverage, but does not continue to pay wages to the furloughed or laid-off employee. 
Employers with more than 100 employees that furlough their workers or reduce their hours, but continue to provide them with healthcare coverage may treat health plan expenses allocable to the time that the employees are not working as qualified wages. To illustrate, a business qualifying under the suspension test reduces its employees’ hours by 50%, but continues to pay 60% of their wages and 100% of their health plan expenses. The business’ qualifying wages consist of both the 10% of wages paid to its employees while they are not working and the 50% of the health plan expenses, as they are allocable to the time the employees are receiving benefits, but are not providing services.  Final thoughts It is important to note that each section of the FAQ is prefaced with the following: “This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.” Though not primary authority, the FAQ does provide a window to the IRS’ view of the matters covered in the absence of official guidance, which we hope is forthcoming. That said, there is no guarantee that these positions will be the same as those reflected in any formalized guidance. In closing, the IRS recommends taxpayers retain records supporting their ERC computations for at least four years. We continue to review the FAQ and monitor developments in this area. Please reach out to your Baker Tilly tax advisor to discuss how these changes may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS issued an expanded list of frequently asked questions to help businesses that are pursuing the employee retention credit.

IRS significantly expands employee retention credit FAQ

Authored by Paul Dillon, Michelle Hobbs, Christine Faris, Michael Wronsky and Devin Tenney  In a May 7, 2020, update to its list of “frequently asked questions” (FAQ) on the employee retention credit (ERC), the IRS revised the manner in which employers determine the amount of their qualified healthcare expenses for which the credit can be claimed. In a significant taxpayer-favorable development, eligible employers that continue to provide their employees with healthcare coverage can now claim the ERC for these costs regardless of whether the employees continue to receive a salary.  This development marks a reversal of the IRS’ previous stance that only healthcare expenses allocable to employee wages could produce the credit. Lawmakers were quick to rebuke this position, saying it did not conform to congressional intentions behind the ERC, which include incentivizing employers to continue to provide its workers with healthcare coverage during the pandemic.  To illustrate the effect of this change, consider an employer whose operations have been shut down due to a government order. In response, the employer furloughs all of its workers, stops paying their salaries but continues to provide them with healthcare benefits. Based on the IRS’ prior guidance, none of the employers’ costs would have factored into its ERC calculation because there were no qualifying wages related to the associated healthcare expenses. Now, all of the healthcare costs can be considered in determining the credit, as they were provided while the employer’s operations were suspended pursuant to the government order. Note that in the case of an employer with more than 100 employees, the costs must also be attributable to a period during which its workers are not providing services. In this example, that test would be met as the employees were furloughed outright.  For more background and details on the ERC, please see our previous tax alert, which has been revised to reflect this change. The complete FAQ is posted on a dedicated IRS webpage.  Please reach out to your Baker Tilly tax advisor to discuss how these changes may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS is now allowing employers that continue to pay healthcare coverage for their employees to claim the employee retention credit for these costs – even if those employers aren’t continuing to pay their employees a salary. 

IRS expands allocable healthcare expenses eligible for employee retention credit

Authored by Paul Dillon, Michelle Hobbs, Pat Balthazor and Michael Wronsky The Small Business Administration (SBA) extended the deadline for borrowers under the Paycheck Protection Program (PPP) to return their loans to May 14, 2020, from May 7, 2020. This extension was provided via a May 5 update to the Paycheck Protection Program Loans Frequently Asked Questions. Included in the PPP, enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a provision that requires borrowers make a good faith certification that their loan is necessary to support their ongoing operations in the wake of the “uncertainty of current economic conditions.” The statutory language would appear to have broad application given the current economic climate; however, the matter of larger businesses with considerable market value receiving PPP loans has become a topic of controversy in recent weeks.  Eligibility is complicated because the CARES Act offers few guidelines for the loan program. It simply states a taxpayer must self-certify that current economic uncertainty makes the loan request necessary to support the ongoing operation of the business. No timeline has been provided related to the requirement for support of the ongoing operation of the business, leading to additional uncertainty. Does a business need to look at its capital requirements for a short time frame, such as a few months, or a longer time frame? The requirement for support is also not defined. Must a business prove it has suffered an economic downturn at the time of the loan? The Treasury Department has since suggested this concept of necessity blocks many public companies from applying because they can theoretically raise money in other ways, such as by selling new shares on a stock exchange. However, for many loan applicants that are not public companies, self-certifying that the loan request is necessary creates uncertainty for them since the requirements are not clearly defined. Additionally, some lawmakers asserted that borrowers deemed to have received PPP loans without a critical need for them could be liable for penalties for making a false certification in response to the aforementioned requirement. In fact, FAQ No. 31 originally allowed recipients who took out their loans prior to April 24 and returned them by May 7 to have made their certification in good faith, and not be liable for penalties. This safe harbor was subsequently published in an interim final rule on April 28.  The guidance also notes that Treasury will review all loans in excess of $2 million “in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” Finally, the FAQ explains more guidance is forthcoming on how the SBA will review borrowers’ certifications. We recommend that PPP recipients work with their advisors to document the need for the loan as well as assemble the necessary information to support the loan forgiveness portion of the program. Payroll records, including amount of wages and payroll taxes reported to the IRS, along with verification of other qualified expenses paid with PPP loan proceeds, should be retained to corroborate loan forgiveness eligibility. Please connect with your Baker Tilly tax advisor to discuss how this 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 Small Business Administration announced it extended the deadline to May 14, 2020, for borrowers to return loans they may not be able to certify are necessary for their ongoing operations in uncertain economic conditions.

SBA extends deadline to return PPP loans to May 14

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky The IRS issued Notice 2020-32 on the deductibility for federal income tax purposes of some otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan through the Paycheck Protection Program (PPP). The PPP loan program was enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Included in the program is a loan forgiveness provision. Amounts eligible for forgiveness are based on funds used to cover certain payroll, mortgage interest, rent and utility costs paid within eight weeks of the loan’s origination date. In enacting the program, Congress stated the debt forgiveness “shall be excluded from gross income,” but did not codify or otherwise clarify the exclusion. Subsequently, the IRS weighed in with guidance under Notice 2020-32. Specifically, the guidance clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan under the CARES Act and the income associated with the forgiveness is excluded from gross income. Some ranking members in Congress were quick to disagree with the IRS’ position. Senate Finance Committee Chairman Chuck Grassley issued a statement saying, “The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible.” He added, “This notice is contrary to that intent.” The House Ways and Means Committee Chairman Richard Neal said, through a spokesperson, “We are planning to fix this in the next response legislation.” For the time being, we recommend taxpayers plan on these expenses not being eligible for deduction unless Congress acts. While initial indications are favorable, a correction would be part of a larger legislative package that presents the usual political roadblocks. Accordingly, we cannot predict whether Congress will take steps to clarify the intent of the CARES Act loan forgiveness provision. 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.

New guidance related to the loan forgiveness provision in the CARES Act Paycheck Protection Program (PPP) is supposed to clarify what is deductible or not, but the guidance is raising some questions about whether it aligns with the intent of the program.

IRS says PPP loan forgiveness results in nondeductible expenses

Baker Tilly has a comprehensive set of solutions available to assist qualifying businesses that have received, or will receive, loan proceeds that may be eligible for forgiveness under the Paycheck Protection Program. 
Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provided funding to the Small Business Administration (SBA) totaling $349 billion for loans available to qualifying small businesses. These Paycheck Protection Program (PPP) loans have several favorable characteristics, including a low interest rate, no origination fees, no collateral requirements and the possibility of forgiveness. Since the program launched on April 3, overwhelming demand quickly depleted available funding and prompted Congress to add an additional $310 billion as part of the Paycheck Protection Program and Health Care Enhancement Act, enacted on April 24. Not surprisingly, questions about this novel loan program abound. Primary among them are: (1) how does a potential qualifying applicant (or current recipient) assess or demonstrate “economic need”; and (2) how does the PPP loan recipient consider qualified expenses when seeking forgiveness? Determining economic need Initial regulations issued by the SBA on April 15 require borrowers to certify in “good faith” on the PPP loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” The borrower also needs to certify that the funds “will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.” Apparently recognizing the ambiguity of the required certification, the Treasury Department updated its PPP loan FAQ on April 23 to provide some clarity, stating that:  “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.” After the PPP program launched, but before the regulations and guidance were issued, some public companies such as Ruth’s Chris Steak House, Shake Shack and Potbelly Sandwich Shop applied for and received PPP loans. The combination of public backlash, high-profile opinion, and the SBA’s later clarification of the law led to these three companies and others returning their PPP loan funds.  At least one bank recently sent an email to customers noting that businesses that do not adhere to the SBA’s guidelines may face criminal investigations as described in the PPP loan application and the SBA’s implementing regulations. Any borrower that applied for and received a PPP loan prior to the issuance of the regulation and repays the loan in full by May 7, 2020, however, will be deemed by the SBA to have made the required certification in good faith. Information relevant to current and prospective PPP borrowers Small businesses that have received or are considering a PPP loan face a challenging dilemma: how to make the required certification with ambiguous and inconsistent information, and significant residual uncertainty regarding how the COVID-19 crisis may affect operations. It is unclear how long any business will be closed down, operate at less than full capacity, or experience unsustainable operational inefficiencies that bear directly on employment levels. Also, will the SBA call into question the legitimacy of a certification if a business has received a PPP loan that it has not yet used and may or may not need before May 7, but wishes to retain because it does not know whether future events will affect the viability of its operations? Under the SBA’s interim regulations, a business can only receive one PPP loan and, accordingly, the SBA encourages borrowers to “consider applying for the maximum loan amount.” So, if loan funds already disbursed, but not yet needed, are returned by May 7, a business cannot later reapply for a PPP loan even if an economic need emerges. We encourage the SBA and Treasury Department to resolve this uncertainty. Unless the borrower can make a case, pursuant to its good faith certification that it needs a PPP loan to pay employees that it otherwise would furlough or lay off, and has no other source of funds for these expenses that “is not significantly detrimental to the business,” it runs the risk of further questioning by the SBA. To protect themselves from significant risks, we encourage PPP loan applicants and recipients to speak with their accounting and legal advisors about making disclosures to stakeholders regarding their economic need to keep employees employed, and the business in business. Identifying costs and expenses for PPP loan forgiveness A PPP borrower is eligible for loan forgiveness equal to the amount spent by the borrower on payroll costs, interest payment on any mortgage, rent and utilities, during an eight-week period after the origination date of the loan. Borrowers have expressed concern about how to determine the specific costs and expenses to be considered in determining potential forgiveness of the loans. The April 15 SBA interim regulations require borrowers to provide documentation on payroll costs, covered mortgage interest payments, covered rent payments and covered utilities. Although the SBA has not yet issued regulations governing PPP loan forgiveness, it indicated that forgiveness will be based on the sum of these documented costs, as adjusted for changes in the number of employees or the amount of compensation provided to employees in comparison with the identified base period. Information relevant to PPP borrowers Businesses that receive PPP funds should record the loan and continue recording payroll and operating expenses in accordance with generally accepted accounting principles (GAAP). Potential forgiveness of some or all of the PPP loan is currently undefined and, thus, remains an uncertain future event. Expect to produce accounting records necessary to demonstrate eligibility and compliance with the program, including the statutory forgiveness certification that “the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.” Act quickly and be prepared! Initial funding for PPP loans was exhausted quickly. The new law provides more funds for loans and also makes it easier for smaller banks, credit unions and minority and community development financial institutions to process these loans. Businesses interested in tapping into this new round of funding should make sure they have the right documentation ready before approaching a lender. Check our resource for PPP borrowers. Give us a call – we can help!
Baker Tilly COVID-19 support Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running. 
 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Small businesses have many questions about the Paycheck Protection Program (PPP). Primary among them are: (1) how does a potential qualifying applicant (or current recipient) assess or demonstrate “economic need”; and (2) how does the PPP loan recipient consider qualified expenses when seeking forgiveness?

Government Contractors

Agribusiness

Food & Beverage

Advantage

SBA loan administration staffing augmentation

Medical device and pharmaceutical coronavirus resources

Government Contracting & Compliance

Government contractor coronavirus resources

PPP loans: important economic need and accounting considerations

Webinar video
The coronavirus is impacting your business and it is important to understand the multiple opportunities available to ease your tax burden. Congress recently passed both the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Combined, these two acts provide multiple relief programs designed to alleviate employee expenses and help businesses weather the economic storm created by the coronavirus. While each benefit has its pros and cons, many are mutually exclusive, and organizations will need to determine what makes the most sense for them. View the on-demand webinar to find out more about the programs’ tax opportunities available for your business:  Understand the benefits Know who can use the programs Coordinate with other benefits Understand how states may differ from federal programs Presenters and subject-matter specialists: Joseph O’Neill – Managing Partner Christine Faris – Director Paul Dillon – Firm director Mike Schiavo – Firm director Donna Scaffidi – Partner Colin Walsh – Senior Manager

For more information on this topic, or to learn how Baker Tilly’s Value Architects™ can help, contact our team. Related resources:  Coronavirus  benefit coordination matrix Podcast: Tax relief options for businesses impacted by COVID-19 State and local tax coronavirus resources

Congress recently passed both the FFCRA and CARES Act, which provide multiple relief programs designed to alleviate employee expenses and help your business. Understand the benefits, who can take advantage and how to coordinate with other benefits. 

A briefing on coronavirus-related tax relief 

There are numerous relief programs available to lessen the burden of employee expenses and help businesses survive, including pre-existing benefits as well as benefits released as part of the Families First Coronavirus Response Act (the FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, each business is faced with determining which relief programs will have the most positive impact on their business, while also ensuring the benefits they choose can work together. Baker Tilly’s coronavirus benefit coordination matrix not only explains who can use each benefit but also how each benefit coordinates with others. 
 A preview of the matrix is shown below, highlighting the Paycheck Protection Program: 
 Download the matrix to learn more about which benefits may help your business during this challenging time, such as: Employee retention credit Payroll tax deferral Emergency Paid Sick Leave Act credit Emergency Family and Medical Leave Expansion Act credit Work Opportunity Tax Credit Emergency Economic Injury Disaster Loan R&D credit payroll tax offset

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

Relief Funding Assistance

Coronavirus benefit coordination matrix

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor, Michael Wronsky and Kathleen Meade  On April 17, 2020, the IRS issued guidance on correcting depreciation for qualified improvement property (QIP), including catching up bonus depreciation from prior years. This guidance also provides rules for making late elections, or revoking elections, including the election out of bonus depreciation and the election to use the alternative depreciation system (ADS). Combined with previous guidance on withdrawing the real property trade or business election and amending partnership returns, taxpayers now have a much clearer picture of how to implement these changes. Background The retail glitch Due to a drafting error in the Tax Cuts and Jobs Act (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. CARES Act technical correction All of this changed with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which amended the Internal Revenue Code (IRC) to define QIP as 15-year property. The Act also updated the ADS recovery period for QIP to 20 years. Finally, the Act updated the definition of QIP to include any improvement “made by the taxpayer” (see discussion below). These changes are retroactive to 2018, i.e., to the passage of the TCJA. QIP definition “Qualified improvement property” means any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property, if such improvement is placed in service after the date such building was first placed in service. QIP does not include expenditures attributable to (i) enlargement of the building, (ii) any elevator or escalator or (iii) the internal structural framework of the building. The CARES Act added the phrase “made by the taxpayer” to the definition of QIP. Presumably, rules similar to the existing uniform capitalization (UNICAP) regulations, which address property produced by or for the taxpayer, will apply to determine if QIP is “made by the taxpayer.” The inclusion of this language may mean that partnership basis adjustments arising when a partner sells their interest may not qualify for bonus depreciation for the portion of the purchase price allocable to QIP — unfortunately, the recent guidance does not address this question. This phrase also likely rules out bonus depreciation on used QIP. Catching up bonus depreciation on QIP Taxpayers that made the real property trade or business election to opt out of the business interest expense limitation now have the opportunity to withdraw the election and catch up bonus depreciation. Under IRS guidance issued on April 10, 2020, taxpayers can file an amended return to retroactively withdraw the section 163(j) election (the guidance also allows taxpayers to make a late section 163(j) election). The amended return must recalculate depreciation, the business interest expense limitation and any other collateral adjustments (such as information related to the section 199A deduction) for the year the improvements were placed in service and all succeeding years. The deadline for amended returns is Oct. 15, 2021; for partnerships subject to the centralized partnership audit regime (CPAR) the deadline to file 2018 and 2019 amended returns is before Sept. 30, 2020 (but CPAR partnerships have until Oct. 15, 2021, to make the changes on an administrative adjustment request (AAR)). Taxpayers not revoking the section 163(j) election have a couple of options to catch up bonus depreciation on QIP or switch to shorter recovery periods. Partnerships subject to CPAR may file amended returns or AARs and must recalculate depreciation, etc., for the year the improvements were placed in service and all succeeding years. Amended returns for 2018 and 2019 must be filed before Sept. 30, 2020; CPAR partnerships may also make the changes via AAR until Oct. 15, 2021. Alternatively, CPAR partnerships may correct depreciation on QIP by filing an accounting method change (Form 3115) with a timely filed original return (including extensions). The April 17 guidance includes a new automatic method change specifically for this purpose. All other taxpayers not changing the section 163(j) election may file amended returns for the year the improvements were placed in service year and all succeeding years. The deadline to file amended returns is Oct. 15, 2021. Taxpayers also may correct depreciation on QIP by filing a Form 3115 with a timely filed original return (including extensions) under the new automatic accounting method change procedure. Finally, the IRS provided rules for making late elections, or revoking elections, under the depreciation rules. Specifically, the guidance addresses the election to use ADS, the election out of bonus depreciation, the election to use 50% bonus depreciation for certain property, and the bonus election for certain plants bearing fruits and nuts. Final thoughts This latest IRS guidance is a welcome development and provides flexibility for taxpayers to optimize their depreciation strategy. There are still a lot of moving parts, though — taxpayers also must analyze the interaction of bonus depreciation with the changes to the net operating loss (NOL) rules, the delay of the excess business loss limitation imposed on noncorporate taxpayers, and state conformity to the bonus depreciation rules (some states may not automatically conform to these changes). We encourage you to 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 IRS published guidance on correcting bonus depreciation for qualified improvement property, or QIP, that should better help taxpayers implement this change. 

Retail

IRS issues guidance on bonus depreciation for qualified improvement property

On today's episode, Lynette Stolarzyk, a principal and firm specialty tax leader, discusses recently passed tax relief programs designed to help businesses weather the economic storm created by COVID-19. She shares recommendations for businesses seeking to benefit from one of the tax relief opportunity programs, and advice on how to decide which program to choose. 

On today's episode, Lynette Stolarzyk, a principal and firm specialty tax leader, discusses recently passed tax relief programs designed to help businesses weather the economic storm created by COVID-19.

State and local tax coronavirus resources

Understanding tax relief options amid COVID-19

Welcome to the Baker Tilly video series where we bring leaders across our firm to discuss timely, relevant and impactful topics that can enhance or protect your value. Christine Anderson, Baker Tilly managing partner – growth strategies, sits down with Lynette Stolarzyk, a principal and firm specialty tax leader, to discuss recently passed relief programs designed to help businesses weather the economic storm created by COVID-19. She shares recommendations for businesses seeking to benefit from one of the tax relief opportunity programs, and advice on how to decide which program to choose. video To learn more about COVID-19-related relief programs, listen to the full podcast episode with Lynette Stolarzyk, where she discusses the recently passed tax relief programs in more detail.  Podcast

Christine Anderson, Baker Tilly managing partner – growth strategies, sits down with Lynette Stolarzyk, a principal and firm specialty tax leader, to discuss recently passed relief programs designed to alleviate employees and help businesses weather the economic storm created by COVID-19.

Lynette Stolarzyk discusses tax relief options for businesses impacted by COVID-19

Authored by Natalie Zuege, Alan Gallatin and Brian Simpson In the wake of COVID-19, on March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which included significant changes to U.S. federal income tax law. Corporations subject to U.S. federal income tax should give consideration to how these aspects of the CARES Act may impact their provision for income taxes reported in interim and annual financial statements. Following are some key considerations which should be evaluated when measuring deferred tax accounts and determining income tax expense. Accounting Standards Codification 740, Income Taxes (ASC 740) requires the effect of changes in income tax laws (or rates) on deferred tax assets and liabilities to be recorded in continuing operations in the period which includes the date of enactment (i.e., March 27, 2020 in the case of the CARES Act). For interim financial reporting purposes, the tax effects would be recognized during the period of enactment (e.g., the first quarter of 2020 for calendar year-end companies) and not allocated to subsequent interim periods through adjustments to the estimated annual effective tax rate.  As a result, the tax effect of these changes should not be recognized in the December 31, 2019 financial statements of calendar year-end companies. However, if the effects are expected to be material, companies should consider whether they require subsequent event disclosure under ASC 855.  The following discusses certain changes in the CARES Act with potential to impact companies: Net operating losses The CARES Act has temporarily restored the ability to carryback net operating losses (NOL) originating in 2018, 2019 and 2020 to offset taxable income in the five preceding years. This creates the opportunity to recognize a current benefit for losses that would otherwise have been carried forward. If the company intends to elect out of the carryback or there is no historical taxable income to offset, companies should continue to record any NOLs generated as a deferred tax asset. Consistent with the Tax Cuts and Jobs Act (TCJA), losses continue to be carried forward indefinitely. The CARES Act included the elimination of the 80% taxable income NOL limitation for the 2018, 2019 and 2020 tax years. The limitation will be reinstated for tax years beginning in 2021. For companies that limited the utilization of 2018 NOLs on their 2019 financial statements, there may be a balance sheet reclassification between deferred taxes and taxes receivable required in the interim period that includes the enactment date.  Carryback claims should consider impacts to Alternative Minimum Tax (AMT), domestic production activities deduction, foreign tax credits, uncertain tax positions, etc. in the tax years to which NOLs are carried back. Calendar year taxpayers with NOLs originating in 2018 and 2019 which were initially measured at the current corporate income tax rate of 21% may now be carried back to offset taxable income that was taxed at pre-TCJA tax rates of up to 35%. Taxpayers that expect to carryback these NOLs should record the benefit expected to be received as an increase to income taxes income taxes receivable (or a reduction of income taxes payable). Any benefit received at a rate other than 21% will have an impact on the company’s effective tax rate. The CARES Act provided a technical correction for fiscal year taxpayers where the TCJA intended to prohibit NOL carrybacks and apply the 80% limitation on offsets to taxable income to tax years beginning after December 31, 2017, however the TCJA statutory language applied to taxable years ending after December 31, 2017. The technical correction in the CARES Act allows for a two year carryback with no taxable income limitation. Carryback claims or an election to waive the carryback for affected years can be made within 120 days of enactment. Consideration should be given to any need for balance sheet reclassification between deferred tax assets and income taxes receivable. For taxpayers with international operations, carrying back NOLs to any repatriation (Sec. 965) year may introduce further complexities in determining the net benefit to be realized from the carryback. Consideration should be given to the impact on the company’s prior Sec. 965 calculations and the availability of election to exclude Sec. 965 years from the carryback period.  In addition, companies that are paying a Sec. 965 liability in annual installments may be limited in their ability to receive a refund resulting from a carryback claim until their transition tax installment payments have been made. Consideration should be given as to the current versus noncurrent balance sheet classification for any anticipated income tax receivable. Interest expense limitation The CARES Act increases the 30% adjusted taxable income net interest expense deduction limitation to 50% for tax years beginning January 1, 2019 and 2020, although taxpayers may elect not to apply this increased limitation. Taxpayers have the option to make an election in 2020 to use 2019 adjusted taxable income increasing the eligible interest expense deduction in 2020. The 2020 interest expense deduction will be included in the current year provision. For interim tax provisions, the 2019 interest expense will be a discrete item in the period of enactment. For taxpayers that reported an interest limitation on their 2019 financial statements, a balance sheet reclassification between deferred taxes and taxes payable may be required in the interim period that includes in the enactment date.  The IRS has subsequently issued guidance pertaining to the CARES Act to allow taxpayers to revoke a previous election under Sec. 163(j)(7) real property trade or business election for a 2018, 2019, or 2020 taxable year by filing an amended Federal income tax return. Under Sec. 163(j)(7)(B), a real property trade or business may elect out of the Sec. 163(j) business interest expense deduction limitation. The tradeoff is that the taxpayer must use the alternative depreciation system (ADS) for nonresidential real property, residential real property, and qualified improvement property (QIP). Consideration should be given to any remeasurement of deferred tax balance sheet accounts relating to fixed assets resulting from these depreciation changes. Alternative Minimum Credits The CARES Act allows AMT credits to be refunded in their entirety beginning in 2019 instead of over a period of future years. The TCJA previously didn’t allow the credits to be fully refundable until 2021. Remaining credits should be included in the current year income tax receivable and reclassified from noncurrent balance sheet accounts. Taxpayers may elect to make the credits fully refundable for tax years beginning in 2018.  NOL carrybacks and other amendments to prior tax returns may result in changes to the AMT liability in such prior years. Consideration should be given to this impact as well as to any correlative impacts to AMT credit refunds.  Charitable contributions For cash contributions made during the 2020 tax year, the CARES Act temporarily increases limitation on deductions from 10% to 25% of income. Similarly, for qualified contributions of food inventory made during 2020, the limitation on deductions is increased from 15% to 25% of income. Companies should consider these increased limitations when determining the deductibility of current-year charitable contributions.  Qualified improvement property The CARES Act included the long awaited technical correction to classify qualified improvement property as having a 15-year recovery period that is eligible for bonus depreciation. This change is retroactive to 2018. Taxpayers may amend their 2018 tax return or file an automatic change of accounting method to include the bonus depreciation on their 2019 income tax returns. Companies electing to change their method of accounting or amend prior tax returns should record the financial statement impact as a discrete item in the interim period in which the CARES Act was enacted. These impacts could include changes to deferred tax liabilities for fixed assets, deferred tax assets for NOLs and other items that result from limitations based on taxable income. Paycheck Protection Program (PPP) The CARES Act authorizes loans to small businesses via the Small Business Administration (SBA) to provide short-term cash flow for payroll and other operating expenses. If program requirements are met some or all of the loan may be forgiven. The forgiveness of debt is excluded from income for tax purposes. As of the writing of this article, it is not clear whether the GAAP treatment of this forgiveness will be to record income to the income statement or treat as a capital contribution (i.e., treating the forgiveness as a government grant). Careful attention should be paid to the GAAP treatment to determine whether a permanent book-tax difference should be shown when calculating the tax provision. It is also unclear for tax purposes, whether expenses paid with PPP loan funds that are forgiven will be deductible for federal income tax purposes.  Payroll tax deferral The CARES Act permits some companies, particularly those that are not receiving loan forgiveness under the PPP, to defer paying certain 2020 federal payroll taxes to 2021 and 2022 (50% deferral to each year). In that economic performance with respect to these payroll taxes will not occur until later years, the resulting accrued liabilities will not be deductible until such later year. Companies should consider this item as a temporary difference and record a deferred tax asset. Valuation allowance ASC 740 requires companies to assess all evidence, both positive and negative, when evaluating the realizability of deferred tax assets. A valuation allowance must be established for deferred tax assets if it is “more-likely-than-not” that all or a portion of the deferred tax assets will not be realized. ASC 740 provides four sources of taxable income to consider when determining if the benefit should be realized for deferred tax assets:
– taxable income in prior carryback year(s) if carryback is permitted under the tax law; 
– future reversal of existing taxable temporary differences;
– future taxable income exclusive of reversing temporary differences and carryforwards;
– tax planning strategies. With changes under the CARES Act for utilization of NOLs, increased interest expense limitation, etc. companies should review the necessary tax law changes and the ability to realize deferred tax assets ultimately resulting in a recording or release of a valuation allowance. Companies should evaluate all available positive and negative evidence that impact each of the four sources of income, noting that enhanced financial modeling may be required in some instances. (However, if sufficient positive evidence of income arising from one source exists, it may not be necessary to evaluate other sources.) In addition to considering changes arising in law (e.g., availability of NOL carrybacks and changes to interest limitations), companies should reevaluate future income forecasts, particularly in light of current economic conditions.   Changes in judgment of valuation allowance with respect to future income is recorded as a discrete item in the interim quarter. Non U.S. federal income tax law changes Various taxing authorities (e.g., state, local and foreign) may have made or may be considering modifications to their laws that don’t necessarily correlate to U.S. federal tax law changes. Companies will need to monitor and take into account changes in each relevant jurisdiction and make appropriate adjustments to their deferred taxes in the period of enactment, as well as consider impact to current and future tax provision calculations.   Interim reporting The company should give consideration to changes to their projected annual effective tax rate for the current year used in calculating interim tax provisions, including the impact of changes to forecasted income/loss and the ability of the company to recognize the benefit of any losses forecasted for the current year. The company should be cautious in situations where year to date losses exceeds forecasted losses for the year. In evaluating the potential impacts of the CARES Act, including the availability of elections, carryback claims, amended returns, etc., companies should be certain to consider all available information when recording changes to deferred taxes and their provision for income taxes. While changes in estimates can generally be recorded in the tax provisions of subsequent periods, errors resulting from incorrect or incomplete analyses introduce a risk of financial statement errors.
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.

CARES Act impact on income taxes

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor and Michael Wronsky On April 14, 2020, the Small Business Administration released much-anticipated guidance on how self-employed individuals as well as partners in partnerships can participate in the Paycheck Protection Program enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  Background                                                                                                Paycheck Protection Program (PPP) loans are small business loans issued by private lenders and fully guaranteed by the federal government. The principal purpose of these loans is to help employers retain their employees. The loans are intended to cover eight weeks of payroll expenses, applied for any date between Feb. 15, 2020, and June 30, 2020. Under the PPP, an eligible recipient includes: Small business concerns (as defined under the Small Business Act), plus  Other business concerns as long as such business concern employs not more than the greater of:
– 500 employees; or 
– If applicable, the size standard in number of employees established by the SBA for the industry in which business concern operates Others eligible to receive a covered loan include: (a) individuals who operate as sole proprietors, independent contractors or as self-employed persons; and (b) any business concern that employs not more than 500 employees per business location and that is assigned a North American Industry Classification System (NAICS) code beginning with 72 (Accommodation and Food Services). Key takeaways Partners in a partnership, solely in their capacity as partners, cannot qualify for the PPP loan program. Qualification for the program is determined solely at the partnership level. Up to $100,000 (annualized) in self-employment income of a “general active partner” can be included in payroll costs in the partnership’s loan application.  Individual self-employed Schedule C filers are eligible for PPP loans if they were in business on Feb. 15, 2020, their principal place of business is in the U.S., and they filed or will file a Form 1040 Schedule C for 2019. Additional guidance will be issued for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on Feb. 15, 2020; and (ii) will file a Form 1040 Schedule C for 2020.  Individuals will need to have a completed 2019 Schedule C (whether they have filed their Form 1040 or not) to comply with the loan requirements, determine eligible uses of the loan and determine the owner’s eligible compensation. Application to partners Partners in a partnership may not submit a separate application for themselves as self-employed individuals. The self-employment income of general active partners may be reported as a payroll cost (subject to a $100,000 limitation) on the partnership’s PPP loan application. A variety of reasons for prohibiting partners from individually applying for loans on their partnership income is given in the guidance, including: (1) allowing as many applicants as possible to apply by the June 30, 2020, deadline; (2) faster processing of applications; (3) many of the expenses for which the loan is provided are incurred at the partnership level; and (4) avoiding confusion regarding which entity, the partner or the partnership, applies for allocating partner and LLC member income. The guidance does not provide a definition of a “general active partner” – presumably, it is a partner whose income is subject to self-employment taxes. The guidance also does not mention whether partners that receive guaranteed payments for services qualify as self-employment income for purposes of computing the partnership’s payroll. Unless clarified otherwise in additional guidance, we interpret guaranteed payments for services as being self-employment income that would qualify when determining the partnership’s payroll costs. We also believe that Line 1 of Schedule K-1 (ordinary business income (loss)) can be included as payroll costs (limited to a total of $100,000 per partner) as long as that income is subject to self-employment taxes. Eligibility rules for individuals filing Schedule C, Form 1040 Taxpayers are eligible if they meet the following requirements: In operation on Feb. 15, 2020 An individual with self-employment income (such as an independent contractor or a sole proprietor) With a principal place of residence is in the United States Have filed or will file a Form 1040 Schedule C for 2019 Additional guidance will be issued for those individuals with self-employment income who; (i) were not in operation in 2019 but who were in operation on Feb. 15, 2020; and (ii) will file a Form 1040 Schedule C for 2020. The guidance points out that participation in the PPP loan program may affect eligibility to receive state unemployment compensation and to participate in other CARES Act programs, such as the CARES Act employee retention credits. Calculation of maximum amounts that can be borrowed The maximum amount that can be borrowed depends on whether the borrower has employees.  Use of PPP loans Proceeds of PPP loans can be used for: Owner compensation replacement, calculated based on 2019 net profit  Employee payroll costs (only U.S. resident employees) Certain mortgage interest, rent and utility payments. For these expenditures to qualify, they must have been a deductible expense on the 2019 Schedule C Interest payments on any other debt obligations that were incurred before Feb. 15, 2020 (such amounts are not eligible for PPP loan forgiveness) Refinancing certain Economic Injury Disaster Loan (EIDL) program loans It is worth noting that the use of the loan proceeds is limited in some instances to expenditures for which the borrower claimed or could have claimed a deductible expense in 2019. For example, 2020 rent and utility payments on leased property that was not leased in 2019 and for which the borrower had no expenditures in 2019 is not an eligible use of the loan proceeds. The reason is that this is consistent with the intent of the Act, which is “to support the ongoing operations” of the borrower and not business expansion. Although the Act makes businesses eligible if they were in operation on Feb. 15, 2020, individuals will need to rely on their 2019 Form 1040 Schedule C, which provides verifiable documentation on expenses between Jan. 1, 2019, and Dec. 31, 2019.  At least 75% of the loan proceeds must be used for payroll costs. Forgiveness of PPP loans The amount forgiven can be up to the full amount of the principal plus accrued interest. Additional guidance explaining the mechanics of the loan forgiveness component is expected. There are many unanswered questions as to the computation, such as what happens if 75% of the loan proceeds do not end up being spent to cover payroll costs. Does that mean the entire amount of the loan cannot be forgiven? The SBA and the Treasury Department are expected to issue further guidance concerning the loan forgiveness program.  
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 to help self-employed individuals and partners in partnerships participate in the CARES Act’s Paycheck Protection Program (PPP).

Self-employed individuals receive guidance for Paycheck Protection Program participation

Authored by Mark Heroux, Colin Walsh, Brad Polizzano and Joe Heisler Beginning with the 2018 tax year, partnerships subject to the centralized partnership audit regime (CPAR) in general cannot file an amended return to report any changes to a previously filed partnership tax return. This article focuses on the procedures that CPAR partnerships must follow to report changes to a previously filed Form 1065 for tax years beginning after Dec. 31, 2017. Key takeaways Beginning with the 2018 tax year, partnerships subject to CPAR in general cannot file an amended return to report any changes to a previously filed partnership tax return. Instead, CPAR partnerships report changes to a Form 1065 on Form 8082, Administrative Adjustment Request (AAR).  If the adjustments on Form 8082 result in an imputed underpayment, the partnership is, for the most part, required to pay the imputed underpayment and any interest and penalty associated with the imputed underpayment at the time of filing. The determination of any underpayment involves a complicated process (see discussion below) that involves grouping and allocating the items that have changed on the return. While partnerships subject to CPAR cannot file an amended return, they can file a superseding return through the due date of the return. Superseding a return will eliminate the need to go through the AAR process so that the partnership does not have to remit tax, interest, and penalties. Form 7004 will preserve a partnership’s ability to file a superseding original return if needed to correct an item on Form 1065 up to the extended due date for filing the Form 1065. If an error is found or it is otherwise necessary to correct an item on a Form 1065 or Schedule K-1, a superseding original return is much easier to use than filing an AAR. On April 8, 2020, the IRS issued Rev. Proc. 2020-23, which permits CPAR partnerships to file amended Forms 1065 and corresponding Schedules K-1 for tax years beginning in 2018 or 2019 before Sept. 30, 2020. Background and discussion CPAR, which was enacted as part of the Bipartisan Budget Act of 2015, permits the IRS to make assessments and collect those assessments at the partnership entity level. In general, CPAR partnerships report changes to a Form 1065 on Form 8082, Administrative Adjustment Request. The Partnership Representative designated on the originally filed Form 1065 must sign the AAR, under penalties of perjury. Step 1: Determine whether the partnership adjustment results in an imputed underpayment First, the partnership must determine whether the adjustments reported on the AAR result in an imputed underpayment (i.e., an assessment against the partnership). A negative adjustment is any adjustment that is a decrease in an item of income or an increase in an item of loss or deduction. A positive adjustment is any adjustment that is not a negative adjustment. In order to determine an imputed underpayment, each partnership adjustment is first placed into one of four groupings according to the type of partnership-related item being adjusted: Reallocation grouping: Any adjustment that allocates or reallocates a partnership-related item to and from a particular partner or partners, except for credit or creditable expenditure allocations. Credit grouping: Any adjustment to a partnership-related item that is or could be reported as a credit on the partnership’s return. Creditable expenditure grouping: Any adjustment to a creditable expenditure if any person could take the adjusted item as a credit. Residual grouping: A catch-all group that includes any adjustment not within in the prior three groupings. Adjustments within each group are then subgrouped, when appropriate, according to how the adjustment would be required to be taken into account separately under section 702(a) or any other provision of the Code or regulations applicable to the adjusted partnership-related item. After the adjustments are grouped (and subgrouped, if appropriate), then the adjustments are netted within each separate grouping (and subgrouping, if applicable). Note, however, that adjustments are not netted across different groupings or subgroupings. Note further that net negative adjustments are not taken into account for purposes of computing an imputed underpayment. A partnership calculates its imputed underpayment by taking the sum of all net positive adjustments in the reallocation grouping and the residual grouping. This sum is then multiplied by the highest rate of tax in effect under section 1 or 11 for the reviewed year. This amount is then increased by any net positive adjustment from the credit grouping and the creditable expenditure grouping. If the resulting calculated amount is positive, then the partnership has an imputed underpayment.  Step 2A: AAR that results in an imputed underpayment If the adjustments on Form 8082 result in an imputed underpayment, the partnership is generally required to pay the imputed underpayment and any interest and penalty associated with the imputed underpayment at the time of filing. Note that the current version of Form 8082 prescribed by the IRS for filing an AAR is not designed to accommodate the reporting of multiple imputed underpayments. A partnership may file multiple AARs to allocate adjustments into separate imputed underpayments. For example, the partnership may file one AAR reporting an imputed underpayment that the partnership pays, while filing another AAR reporting an imputed underpayment for which the partnership elects to push out the adjustments associated with that imputed underpayment (discussed below).  A CPAR partnership must attach a schedule to the AAR that supports the positions reported on the Form 8082 that result in an imputed underpayment as well as provides support for any modification of the imputed underpayment that is allowed under section 6225(c). i. Modifications to the imputed underpayment Under section 301.6227-2(a)(2), a partnership may modify an imputed underpayment resulting from adjustments requested in an AAR using only the following provisions: Tax-exempt partners  Modification of applicable tax rate  Specified passive activity losses  Limitations or restrictions in the grouping adjustments  Certain qualified investment activities  Tax treaty modifications  As provided in forms, instructions, or other guidance prescribed by the IRS with respect to AARs.  Under section 301.6227-2(a)(2)(i), the partnership is not required to seek approval from the IRS prior to applying modifications to the amount of any AAR imputed underpayment. This rule permits a partnership to determine an imputed underpayment that results from the adjustments requested in an AAR and apply modifications when calculating the amount of the imputed underpayment the partnership needs to pay when filing the AAR. ii. Push-out election A partnership may make the push-out election to have its reviewed-year partners take into account the adjustments requested in the AAR that are associated with the imputed underpayment. If the partnership makes a valid push-out election, the partnership is not liable for, nor required to pay, the imputed underpayment to which the election relates. Instead, each reviewed-year partner must take into account its share of the adjustments reported in the AAR that are associated with such imputed underpayment. A partnership makes the election at the time the AAR is filed. The partnership is required to furnish to each partner of the partnership for the reviewed year, and file with the AAR, a statement of the partner’s share of any adjustment reported in the AAR. Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Items, is used for this purpose. Step 2B: AAR that does not result in an imputed underpayment If any adjustments in an AAR do not result in an imputed underpayment, then the partnership must furnish Form 8986 statements to each reviewed-year partner that support the reviewed-year partner’s share of those adjustments and file such statements along with the AAR. Step 3: Reviewed-year partners taking into account adjustments from AAR As discussed, reviewed-year partners take AAR adjustments into account if either (i) the partnership elects to have its partners take the adjustments into account instead of paying the imputed underpayment or (ii) the partnership adjustments did not result in an imputed underpayment. In general, a reviewed-year partner that receives a furnished statement from the partnership with AAR adjustments must take into account the adjustments on its tax return for the tax year in which the reviewed-year partner receives the statement. To take the adjustments into account, a reviewed-year partner attaches to its tax return Form 8978, Partner’s Additional Reporting Year Tax. Note that the calculations require a recomputation of the reviewed-year partner’s income tax beginning with the reviewed year and continuing with each subsequent year until the year the statement is received. Pass-through partners: If a pass-through partner receives a push-out statement from a CPAR partnership that is associated with an imputed underpayment, then the pass-through partner may (i) compute and pay its share of the imputed underpayment or (ii) issue further push-out statements of the adjustments to its partners. If a pass-through partner receives a partnership push-out statement from a CPAR partnership with adjustments that would not have resulted in an imputed underpayment, then the pass-through partner must issue a further push-out statement to its partners with respect to those adjustments and file with the IRS a partnership adjustment tracking report. Form 8985, Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report, is used for pass-through partners to file with the IRS a partnership adjustment tracking report. The pass-through partner must furnish push-out statements to its partners and file the adjustment tracking report no later than the extended due date for the return of the adjustment-year (the partnership year in which the AAR is filed). Additional considerations 1. Superseding return – Consider filing Form 7004 for CPAR partnerships even if the partnership plans to file Form 1065 by the original due date While partnerships subject to CPAR in general cannot file an amended return, they can file a superseding return through the due date of the return. Superseding a return will eliminate the need to go through the AAR process so that the partnership does not have to remit tax, interest, and penalties. Form 7004 will preserve the ability to file a superseding original return if needed to correct an item on Form 1065 up to the extended due date for filing the Form 1065. If an error is found or it is otherwise necessary to correct an item on a Form 1065 or Schedule K-1, a superseding original return is much easier to use than filing an AAR. 2. CPAR partnerships may utilize Rev. Proc. 2020-23 to file amended 2018 or 2019 Forms 1065 and issue amended Schedules K-1 until Sept. 30, 2020 Rev. Proc. 2020-23 was issued to enable CPAR partnerships to take advantage of Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions. Prior to the revenue procedure, partnerships that already filed 2018 or 2019 returns were not able to account for CARES Act benefits except by filing an AAR. This process would delay relief found in the CARES Act to these taxpayers. If a partnership did not file its 2019 Form 1065 before April 8, 2020, it will be unable to file an amended return for 2019 under Rev. Proc. 2020-23. The partnership is still permitted the option of filing an AAR instead of an amended return if it chooses. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law. To amend the partnership return, the “amended return” box on Form 1065 and all schedules K-1 must be checked. In addition, “FILED PURSUANT TO REV. PROC. 2020-23” must be clearly written at the top of the amended return. A statement with the same notation must also be attached to each Schedule K-1. If a CPAR partnership previously filed an AAR, the partnership should use the adjusted amounts per the AAR from which to change in the amended return. 3. Late section 754 election Because CPAR partnerships in general cannot file amended returns, there is an open question on how a CPAR partnership effectuates a late section 754 election. The IRS has not issued written guidance specifically on this issue.  CPAR partnerships beginning in 2018 or 2019 may utilize Rev. Proc. 2020-23 for this purpose until Sept. 30, 2020. 4. Partnerships may elect into CPAR for tax periods beginning after Nov. 2, 2015, and before Jan. 1, 2018, by filing an AAR A partnership that meets the definition of a CPAR partnership during this time may file an AAR to report changes to the originally filed Form 1065. This option comes into play when the partners prefer to avoid filing amended Forms 1040 to report the adjustments. Under this procedure, the partnership pays any tax, interest, and penalty related to the imputed underpayment with the AAR.
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.

On April 8, 2020, the IRS issued a revenue procedure that permits CPAR partnerships to file amended Forms 1065 and corresponding Schedules K-1 for tax years beginning in 2018 or 2019 before Sept. 30, 2020.

Private Equity

Asset Management

CPAR partnerships reporting changes to Form 1065: the administrative adjustment request

On April 9, 2020, the IRS and Treasury Department issued Notice 2020-23, granting an automatic extension until July 15, 2020, to comply with several federal filing and payment obligations in addition to those already extended (please see our previous tax alert), as well as to perform certain time-sensitive actions. The relief generally applies to all obligations that otherwise would have been due on or after April 1, 2020, and before July 15, 2020, including 2020 second-quarter estimated tax payments. It also extends to both calendar-year and fiscal-year filers. The notice clarifies “all schedules, returns, and other forms” that must be attached to the returns that are automatically extended are covered (such as Schedules H and SE, and Forms 3520, 5471, 5472, 8621, 8858, 8865 and 8938). This relief includes any installment payments of repatriation tax liabilities due on or after April 1, 2020, and before July 15, 2020. In addition, elections that are made or required to be made on a timely filed covered return are extended as well. This relief is automatic: affected taxpayers do not have to call the IRS, file extension forms, or send letters or other documents to receive this extension. Taxpayers may continue to file for additional extensions beyond July 15, 2020, but the extension date may not go beyond the original statutory or regulatory extension date. For example, a request for an extension to file an individual tax return may be filed by July 15, 2020, to extend the time to file the return, but that extension will only be to Oct. 15, 2020. It will not extend the time to pay federal income tax beyond July 15, 2020. Caution: This relief applies to federal obligations only. Each state will have its own deadlines. Please visit our state tax-filing extension matrix to see if your state has extended its deadlines in response to COVID-19. Tax returns and payments covered by the notice include, but are not limited to: Individual income tax payments and filings on Forms 1040, 1040-SR and 1040-NR, Calendar- or fiscal-year corporate income tax payments and filings on Form 1120, 1120-S, 1120-C, 1120-F, 1120-RIC and 1120-REIT, Calendar- or fiscal-year partnership return filings on Form 1065, Estate and trust income tax payments and return filings on Form 1041, Estate and generation-skipping transfer tax payments and return filings on Form 706, Gift and generation-skipping transfer tax payments and return filings on Form 709, Exempt organization business income tax and other payments and return filings on Form 990-T, and Excise tax payments on investment income and return filings on Form 990-PF. Time-sensitive taxpayer actions extended include, but are not limited to: Filing Form 8752 by fiscal-year partnerships and S corporations and making any required deferral period deposits, Filing Form 5500 by certain fiscal-year employee benefit plans (calendar-year 2019 plan filings are due without extension on July 31, 2020, and have not been further extended as of this time), The 45-day period to identify replacement property, and 180-day period to execute a like-kind exchange pursuant to Internal Revenue Code section 1031, Any act relating to the adoption, election, retention or change of any accounting method or period, or to the use of an accounting method or period, Filing Form 3115 for consent of a nonautomatic accounting method change, The 180-day period for investing eligible capital gains in a qualified opportunity zone, Filing a petition with the Tax Court, or for review of a decision rendered by the Tax Court, Filing a claim for credit or refund of any tax, and Bringing suit upon a claim or refund of any tax. This relief is limited to the items specifically provided for by the notice and other official guidance released to date. Any other type of federal tax, return or time-sensitive act has not been extended.  We encourage you to reach out to your Baker Tilly tax advisor to discuss how these extensions 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 and Treasury Department issued a notice that automatically extends several federal filing and payment obligations to July 15, 2020.

Private Wealth

Employee Benefit Plan Audit

IRS significantly expands tax return filing and payment due date relief

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.