Authored by Devin Tenney and Christine Faris On Dec. 27, 2020, the Consolidated Appropriations Act (CAA) was signed into law, comprising several bills that provide continued economic relief from the COVID-19 pandemic. Chief among this relief is an extended and expanded employee retention credit (ERC), featuring sweeping changes impacting its availability both retroactively and prospectively.  Due to the prospective nature of certain notable changes to the now extended ERC, the CAA, in effect, creates an entirely new credit for 2021 that is separate and distinct from the ERC available for 2020, and appears to offer a significant opportunity for many employers. Employers are strongly encouraged to work with their tax advisors to explore eligibility in both 2020 and 2021, to ascertain if one or more opportunities are presented.  Retroactive changes The Coronavirus Aid, Relief, and Economic Security (CARES) Act incentivized employee retention by offering a payroll tax credit based on employee wages paid or incurred from March 13, 2020, through Dec. 31, 2020. However, the CARES Act prohibited Paycheck Protection Program (PPP) loan recipients from also taking an ERC. Given the immense popularity of the PPP, this limitation excluded numerous employers from eligibility for the credit. The CAA changes this by striking this prohibition from the CARES Act and allowing employers to potentially benefit from both the PPP and the ERC. The CAA also codifies certain guidance previously provided by the Internal Revenue Service pertaining to gross receipts for tax-exempt entities and treatment of certain allocable healthcare expenses such as qualified wages.  For those employers that already received a PPP loan in 2020 and are looking to take advantage of the ERC in 2020, it’s important to understand both how the credit works and that the rules remain unchanged for 2020. Broadly, the ERC is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order (Suspension Test) or (2) a significant decline (i.e., greater than 50%) in gross receipts due to COVID-19 (Gross Receipts Test).  For the 2020 credit, the amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020. Qualified wages are limited to $10,000 per employee for the entire year — allowing up to $5,000 in credit per employee. Wages that can be treated as “qualified” hinge on whether an employer is a large or small employer. Specifically, large employers may only count as qualified wages those wages paid for services not rendered, whereas small employers can count all wages paid as qualified. For 2020, a large employer is one with more than 100 average full-time equivalent employees based on calendar year 2019. Additional resources and guidance pertaining to these rules can be found on bakertilly.com. Employers should be aware of two items of note pertaining to the coordination between PPP loans and the ERC: PPP loan forgiveness and the ERC are not available for the same wages (i.e., no double dipping). The mechanics for calculating the retroactively available ERC are unclear at this time. Guidance is forthcoming from the Treasury Department and Small Business Administration, which hopefully will clarify how the two benefits interact. As such, we strongly encourage waiting to pursue claiming the retroactive credit until this clarity is provided. Prospective changes (applicable to 2021 only) As discussed above, the ERC available to employers in 2021 should be treated as a different credit from its 2020 counterpart, a distinction drawn as a result of the sweeping changes that the CAA made to the ERC for the first and second quarters of 2021 only. These changes, paired with the lifting of the prohibition on PPP recipients, presents an opportunity for employers meeting certain eligibility criteria to obtain refundable payroll tax credits of potentially significant dollar value.  The following is a non-exhaustive list summarizing key changes to the ERC that are prospective only, and therefore apply only to the period of Jan. 1, 2021, through June 30, 2021: Large employer threshold increased to 500 from 100. The prior rules permitted employers with 100 or fewer 2019 average full-time equivalent employees to count all eligible wages paid as qualifying wages. That limit increased to 500 average full-time equivalent employees in 2019, greatly expanding the amount of wages many employers can treat as qualified. However, keep in mind that aggregation rules apply. Qualified wages. The limit on the amount of qualifying wages per employee increased to $10,000 per calendar quarter in 2021 from $10,000 per calendar year, for total potential qualified wages of $20,000 — double the limit in 2020.  Credit conversion ratio. The amount of the credit increased to 70% from 50% of qualifying wages, entitling employers up to $7,000 per employee per quarter in 2021 ($14,000 in total). This is a significant increase of the $5,000 limit for 2020. Gross Receipts Test relaxed for 2021. As many employers found eligibility under the Gross Receipts Test out of reach due to the greater than 50% decline in gross receipts requirement, lawmakers reduced the threshold by requiring employers to a greater than 20% decline in gross receipts compared to the same quarter in 2019. Under this change, an employer may elect to have the test determining eligibility for the quarter measure whether the gross receipts for the immediately preceding quarter are less than 80% of the gross receipts for the same calendar quarter in 2019. What is currently unknown is whether the election, once made, is permanent, requiring employers to look at the prior quarter to determine eligibility for the current quarter. Employers may still rely on the Suspension Test to show eligibility in 2021.  Based on these changes to the credit for 2021, a remarkable opportunity is presented to employers that can show they: qualify as a small employer for 2021 (i.e., 500 or fewer average full-time equivalent employees in 2019), and  experienced a greater than 20% decline in their gross receipts in the fourth quarter of 2020 and/or the first quarter of 2021 compared to the comparable quarter in 2019.  We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The latest round of COVID-19 relief extends and expands the employee retention credit, creating retroactive and prospective changes for employers.

Federal Tax

Federal tax coronavirus resources

Coronavirus recovery and growth resources

Updates to employee retention credit present significant opportunities for employers 

Authored by Michael Wronsky and Pat Balthazor The Small Business Administration (SBA) and Department of the Treasury (Treasury) announced that the Paycheck Protection Program (PPP) will reopen for certain borrowers on Jan. 11, 2021, and released the applications for first- and second-draw loans. Additionally, two interim final rules were recently issued on the program. The first interim final rule (IFR) is intended to cover new first-draw PPP loans authorized by the Consolidated Appropriations Act, 2021 (CAA) as well as the forgiveness applications of existing PPP loans for which the forgiveness proceeds have not yet been remitted. The second IFR applies to second-draw PPP loans authorized by the CAA, highlighting key differences between first- and second-draw loans and providing that, unless stated otherwise, the guidance under the first IFR also applies to second-draw loans.   As part of the reopening announcement, SBA and Treasury said that at least the first two days of the loan application period will be open solely to submissions from community financial institutions to ensure underserved businesses have access to the program. These windows open for first-draw loans today, Monday, Jan. 11, and for second-draw loans, Wednesday, Jan. 13. The program will reopen for all other eligible applicants “shortly thereafter.”   Listed below are key takeaways from both sets of IFRs; we continue to analyze this guidance and will issue additional communications as needed. IFR 1 - PPP as amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act)  Consolidates previously issued IFRs and guidance into one IFR, and incorporates amendments made by the CAA (i.e., expanded costs eligible for loan use/forgiveness, a borrower can now choose the end of their covered period from any date on or between the dates that are eight and 24 weeks after the loan was disbursed) Allows borrowers to use 2019 or 2020 information to calculate their first-draw loan amount Allows certain borrowers to re-apply or request an increase in their first-draw PPP loan amount, including:
– Partnerships whose original loans did not include amounts for partner compensation 
– Borrowers who returned all or part of a PPP loan, or did not accept the full amount for which they were approved IFR 2 - PPP second-draw loans Eligibility requirements for a second-draw loan generally differ from the initial round as follows (though the same affiliation rules largely apply); a business must:
– Have 300 or fewer employees, though businesses in the accommodation and food service industries and eligible news organizations can have 300 or fewer employees per location; 
– Be able to demonstrate a 25% reduction in gross receipts during a calendar quarter in 2020, relative to the same quarter in 2019, or experienced a reduction in annual gross receipts of 25% or more in 2020 when compared to 2019 (if the business was in operation in all four quarters in 2019); and
– Have used or will use their entire first-draw PPP loan for eligible purposes. Appears to provide that the alternative size standard based on tangible net worth and average income after federal income taxes available to determine eligibility for a first-draw loan does not apply; a borrower must pass the 300 or fewer employee test referenced above.  Generally includes “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source” in the definition of gross receipts for the purpose of assessing the 25% reduction test, though forgiven first-draw loan proceeds are specifically excluded. Provides the maximum loan amount is the lesser of (special rules apply for seasonal employers and “new entities”):
– 2 ½ months of the borrower’s 2019 or 2020 average monthly payroll costs (3 ½ months for businesses in the accommodation and food service industries), or
– $2 million ($4 million in the case of businesses that are part of a single corporate group). Please reach out to your Baker Tilly tax advisor to discuss how the above may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The SBA and Treasury Department announced the Paycheck Protection Program would reopen to certain borrowers Jan. 11 and to others Jan. 13. They also issued two interim final rules related to the PPP that should clarify aspects of the first- and second-draw loans for borrowers. 

Small Business

Paycheck Protection Program (PPP) Solutions

Small and family business coronavirus resources

PPP reopening announced, loan applications and interim final rules released

Authored by Paul Dillon and Michael Wronsky After several days of uncertainty, the Consolidated Appropriations Act of 2021, which included a fourth round of COVID-19 stimulus and tax extender provisions, has been signed into law as it passed both chambers of Congress, which, among many other items, allows deductions for expenses funded by forgiven Paycheck Protection Program loans. For additional details, please see our previous tax alert. The president last week had demanded changes to the legislation, including an increase of the $600-per-person stimulus checks to $2,000.  The House is expected to vote on increasing the direct payments from $600 to $2,000 as early as today. No draft of income limitations or phase-outs is currently available at the time of this release. However, we do not expect the bill to prevail in the Senate, but will continue to monitor this legislation and provide updates as needed. Please reach out to your Baker Tilly tax advisor to discuss how the above may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The Consolidated Appropriations Act of 2021 has been signed into law which finalizes a fourth round of COVID-19 stimulus programs.

President signs stimulus act into law

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky On Dec. 21, 2020, Congress passed additional stimulus legislation. The Consolidated Appropriations Act, 2021 (the Act), which funds the federal government for the next fiscal year, consists of several bills that together mark the fourth package enacted in order to provide continuing economic relief from the COVID-19 pandemic. The stimulus provisions in total have an estimated price tag of $900 billion. It is expected to be signed into law within the next few days.   The legislative package also contains numerous tax-related items, including renewals of many popular tax extenders. Other provisions in this legislative package are: additional funding for and modifications to Paycheck Protection Program (PPP) loans (via the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act); an extension of the enhanced federal unemployment subsidy and resources for vaccine distribution; a second round of direct payments to many taxpayers; an extension of and revisions to the employee retention credit (ERC); and a temporary allowance for the full deductibility of business meals provided by restaurants.  The Act also overrides the Treasury Department’s guidance, allowing expenses funded by forgiven PPP loans to be deductible for federal income tax purposes.  Lawmakers on both sides of the aisle and President-elect Joe Biden also have discussed the need for additional stimulus legislation in 2021; however, the prospects for this coming together are unknown at this time. Key provisions  Small business loans  The PPP receives additional funding, but this round is more targeted than the first version introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Designed to target small businesses that have been particularly affected by the pandemic, the new stimulus package includes: Directing $284 billion to the Small Business Administration (SBA) to fund additional loans of up to $2 million  Targeting businesses with fewer than 300 employees and that have sustained a 25% revenue loss in any quarter in 2020 relative to the same quarter in 2019  Allowing small 501(c)(6) organizations that have 150 employees or less and are not lobbying organizations to apply for funding In addition, for loans that have not yet been forgiven, the Act extends the covered period for all first draw PPP loans up to March 31, 2021, and expands the list of expenditures eligible for forgiveness to include:  Supplier costs,  Software or cloud computing software that facilitates operations,  Costs related to property damage, vandalism or looting caused by public disturbances that occurred in 2020, that were not covered by insurance,  Investments in facility modifications and personal protective equipment, and  Other group insurance premiums were added to the list of payroll costs (previously, only group healthcare benefits were eligible premiums). The Act also provides a streamlined forgiveness process for borrowers with loans of $150,000 or less. Expenses associated with forgiven PPP loans The CARES Act provided that if taxpayers used PPP loans for certain eligible expenses, those loans would be forgiven. Further, any forgiveness would be excluded from gross income. Treasury subsequently stated in Notice 2020-32 (reiterated in November  in Revenue Ruling 2020-27 and Revenue Procedure 2020-51) that expenses funded with forgiven PPP loans would be nondeductible for federal income tax purposes. In a major win for taxpayers, the Act clarifies Congress’ previous intent that these expenses are deductible. Employee retention credit  The payroll tax credit available to employers experiencing full or partial suspensions or significant declines in gross receipts has been extended to apply to qualifying wages paid through June 30, 2021.   The Act also retroactively provides that recipients of PPP loans are eligible to claim the ERC.  Plus, eligible healthcare expenses can be considered qualifying wages regardless of whether they are allocable to an employee’s salary. The Act separately excludes wages taken into account in computing the credit from a PPP loan borrower’s payroll costs.   The Act also makes  prospective  changes to the credit, which include but are not limited to:  Increasing the amount of the credit to 70% of qualified wages from 50% Increasing the cap on the amount of qualifying wages per employee to $10,000 per calendar quarter from $10,000 for the calendar year An employer will qualify under the “gross receipts” test if their revenues in a calendar quarter are less than 80% of their revenues from the same quarter in 2019 (previously, revenues must have been less than 50% from the same quarter in 2019)  The employee limit for determining “small employer” status increasing to 500 employees from 100 employees Individual tax rebates Rebate checks of $600 per individual (including qualifying children) based on the earned income, Social Security benefits and retirement income of the taxpayer reflected on their 2019 returns. Check amounts will begin to phase out for individuals and couples earning $75,000 and $150,000, respectively.  100% business meals deduction The Act allows 100% deductibility for expenses for business meals provided by restaurants incurred over the next two tax years (2021 and 2022). The 50% limitation dates back to 1993 and will again be effective in 2023. Unemployment benefits The Act extends the $300 per week federal unemployment subsidy payment for 10 weeks, through March 14, 2021. Extender provisions Many so-called “extender provisions” were set to expire on Dec. 31, 2020; however, the Act renews them through 2025. These include, but are not limited to the: New Markets Tax Credit Exclusion from gross income for discharged mortgage debt on qualified principal residences (though the maximum amount is reduced to $750,000 from $2 million) Employer credit for paid family and medical leave Some provisions were made permanent by the Act including: Energy-efficient commercial building deduction under section 179D  7.5% adjusted gross income (AGI) threshold for determining the deductibility of individual medical expenses  Other tax provisions Taxpayers can use their earned income from 2019 to determine their earned income tax credit and refundable portion of the child tax credit. For employers that participated in the voluntary tax holiday, the employee portion of the Social Security payroll tax deferral repayment period was extended until December 2021. The original payback period ran through the first four months of 2021.  Individuals that do not itemize their deductions can deduct up to $300 in charitable contributions in 2021. Originally, this was solely allowed for 2020 returns. The 100% AGI limit for cash contributions to a qualified charity, which was also set to expire at the end of 2020, is extended through 2021.  The payroll tax credits for paid sick and family leave provided by the Families First Coronavirus Response Act are extended through March 31, 2021. Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.
The information provided here is of a general nature and is not intended  to address the specific circumstances of any individual or entity. In  specific circumstances, the services of a professional should be sought.  Tax information, if any, contained in this communication was not  intended or written to be used by any person for the purpose of avoiding  penalties, nor should such information be construed as an opinion upon  which any person may rely. The intended recipients of this communication  and any attachments are not subject to any limitation on the disclosure  of the tax treatment or tax structure of any transaction or matter that  is the subject of this communication and any attachments.

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

Preparing for PPP: CPA Business Funding Portal

Congress agrees to additional stimulus

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky The Department of Treasury and the IRS released Revenue Ruling 2020-27, providing that taxpayers who received Paycheck Protection Program (PPP) loans cannot deduct expenses funded by the debt if forgiveness is reasonably expected. In other words, if the taxpayer has otherwise met the requisite conditions for loan forgiveness, associated expenses are nondeductible if forgiveness has not yet been approved by the lender or even applied for by the end of the borrower’s taxable year.  This addresses an issue outstanding since the IRS released Notice 2020-32 in April, which originally provided that expenses funded by forgiven loan proceeds are nondeductible (see our previous tax alert). As the Coronavirus Aid, Relief, and Economic Security (CARES) Act excludes PPP loan forgiveness from gross income, the IRS’ position under the notice was based on a general tax principle that disallows deductions for expenses incurred in the production of tax-exempt income. Given that borrowers have as long as 24 weeks to use the loan for eligible expenditures and Small Business Administration (SBA) rules give lenders and the SBA up to a combined five months to process forgiveness applications, the notice left unanswered the question of how expenses should be treated in the likely event that a loan was still outstanding at the end of the tax year in which the costs were incurred. See our 2020 year-end tax letter article on this topic for additional discussion. Revenue Ruling 2020-27 reiterates the position taken under the notice and applies it two separate fact patterns: A borrower with a calendar tax year incurs expenses that are eligible for forgiveness under the CARES Act and SBA guidance and applies for loan forgiveness in November 2020. The borrower otherwise meets all conditions for full forgiveness of the loan, but has not received a decision prior to year-end. The same facts as above apply, except the borrower has not applied for forgiveness as of year-end, rather, they expect to apply in 2021. In both instances, the taxpayer’s expenses are nondeductible. In addition to the revenue ruling, the Treasury and IRS concurrently released Revenue Procedure 2020-51, allowing taxpayers to deduct such expenses if forgiveness is fully or partially denied or if the borrower voluntarily withdraws its forgiveness application.  Congress may yet act to provide relief, either in the lame-duck or next session to address this issue as part of any additional economic stimulus package. Consequently, we recommend extending tax returns impacted by this guidance to allow for the possibility of legislative relief. We encourage you to reach out to your Baker Tilly tax advisor regarding how the above may affect your situation. For more information on this topic, or to learn how Baker Tilly specialists can help,  contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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

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

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

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

Coronavirus Resource Center

International Tax

Prospective tax legislation in the next Congress

Authored by Michael Wronsky The Small Business Administration (SBA) recently released draft questionnaires that must be completed by for-profit (Form 3509) and not-for-profit (Form 3510) organizations that, together with their affiliates, received Paycheck Protection Program (PPP) loans of $2 million or more. The questionnaires will be issued by lenders to verify the certification made by borrowers as part of the loan application process that “current economic uncertainty” made the loan request necessary to support business operations. Borrowers must return the completed questionnaires to the lenders within 10 days of their receipt, for subsequent submission to the SBA. The instructions indicate that failure to complete and return the questionnaire within the 10-day time frame could result in the SBA determining the borrower was ineligible for their loan or forgiveness. The questionnaires are not currently available on either the SBA or Department of Treasury (Treasury) websites, and it is unclear whether they will be finalized in their current form. While, as noted above, borrowers were required to certify in good faith that their PPP loans were needed to withstand the economic uncertainties created by COVID-19, little to no official guidance from the SBA or Treasury was previously available to identify how this certification would be examined for compliance. Presumably, these draft questionnaires provide insight into the facts and circumstances that will be evaluated. That said, the questionnaire requests information for several items (including supporting documentation in some instances) that do not bear any relevance to the determination of eligibility for a PPP loan or forgiveness under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or subsequent guidance from the SBA or Treasury. These items include, but are not limited to: The borrower’s 2020 second-quarter revenue, relative to previous quarters, Whether the borrower’s operations were shut down or significantly altered by a government order due to COVID-19, Whether the borrower began any new capital improvement projects unrelated to COVID-19 between March 13, 2020, and the end of its covered period, The borrower’s cash and cash equivalents position on the last day of the calendar quarter that immediately preceded the date of their loan application, Whether the borrower made any dividend or other capital payments to its owners, apart from tax distributions,  Whether the borrower made any prepayments on its debts between March 13, 2020, and the end of its covered period, and Whether any of the borrower’s employees were compensated in an amount that exceeds $250,000 on an annualized basis during the covered period. The draft questionnaires indicate that the SBA may request additional information after receipt of the responses to complete their review of the loan and/or forgiveness eligibility and that the “determination will be based on the totality” of the borrower’s circumstances. It would appear that based on this language, the questionnaire will be used to assist the SBA in determining which loans should be reviewed with greater scrutiny. It should be noted borrowers will have the opportunity to appeal the SBA’s decision with respect to loan and forgiveness eligibility.  Lastly, it should also be noted that while not binding authority, pursuant to an SBA/Treasury FAQ, if the SBA does determine a borrower lacked adequate basis for the certification of loan necessity, the borrower will not face administrative enforcement or penalty if the loan is repaid upon receiving notice of ineligibility from the SBA. We encourage you to reach out to your Baker Tilly tax advisor regarding how the above may affect your situation. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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

SBA releases draft PPP loan necessity questionnaire

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

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

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Real Estate

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Real Estate Investors

Real estate coronavirus resources

Lease modification: Beware of potential tax ramifications

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

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

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

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

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

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

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

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

Private Wealth

International tax coronavirus resources

2020 presidential election: comparing candidates’ tax policies

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

Taxpayers that are patiently waiting for schedules K-1 should have them by (or shortly after) September 15, 2020, which will leave another month to make an investment into a qualified opportunity zone fund (QOF) to reduce their income tax bill before the individual extended tax filing deadline. 

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Multifamily Housing

Transactions

Opportunity Zones

Investment Banking 

Project Finance

Private Client

Reduce the tax liability on your extended tax return

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

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

New PPP guidance addresses owner-employee compensation, nonpayroll costs

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

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

Not-for-Profit

Not-for-profit coronavirus resources

President’s payroll tax holiday generates questions

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

The  information provided here is of a general nature and is not intended to  address the specific circumstances of any individual or entity. In  specific circumstances, the services of a professional should be sought.  Tax information, if any, contained in this communication was not  intended or written to be used by any person for the purpose of avoiding  penalties, nor should such information be construed as an opinion upon  which any person may rely. The intended recipients of this communication  and any attachments are not subject to any limitation on the disclosure  of the tax treatment or tax structure of any transaction or matter that  is the subject of this communication and any attachments.

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

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Banking & Capital Markets

Community Banks 

Banking and capital markets coronavirus resources

Employee retention credit: exploring the benefit for banks

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

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

Benefit plan action required by Aug. 31, 2020

Authored by Michelle Hobbs and Mike Schiavo  The Internal Revenue Service (IRS) released the long-awaited final regulations under IRC section 163(j) that contain some good news for manufacturers and other taxpayers.  Upon preliminary review of the 575-page final regulations, it appears the IRS generally was responsive to taxpayer comments. For example, one of the rules in the proposed regulations that disproportionately impacted manufacturers was revised. The regulations narrow the scope of expenses considered business interest expense subject to the limitation, provide additional clarity and flexibility for real estate businesses, and simplify the treatment of business interest for certain small business owners. All that said, the rules are still extremely complex and require careful study and analysis. And, as if almost 600 pages of final regulations wasn’t enough, the IRS issued another set of proposed regulations, which address various issues not covered in the previous guidance. The new proposed regulations provide rules for tiered partnerships, self-charged lending transaction between partners and partnerships, and debt-financed distributions, and several other areas. Lastly, the proposed regulations clarify the application of the changes to section 163(j) as made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The final and new proposed regulations are generally effective for tax years beginning after the date that is 60 days from the date they are published in the federal register. However, taxpayers may choose to rely on the newly released regulations or continue to rely upon the initial set of proposed regulations (issued in December 2018) for taxable years beginning after Dec. 31, 2017, and before the aforementioned effective date. In either case, the regulations must be applied consistently, and barring certain exceptions, in their entirety.  This alert is a preliminary overview of some key areas in the final regulations. We will be providing additional information in the coming weeks and months as we analyze the new guidance in detail. We encourage you to contact your Baker Tilly advisor to discuss how these issues may affect your tax position. Background A key revenue raiser included in the Tax Cuts and Jobs Act (TCJA or Act) was the limitation of the business interest expense deduction for many taxpayers. Essentially, a limitation of 30% of adjusted taxable income (ATI) was placed on the amount of business interest expense that could be deducted in a given tax year. Broadly, ATI is the equivalent of earnings before interest, taxes, depreciation and amortization (EBITDA) for tax years through 2021, then EBIT for tax years thereafter. Any excess business interest expense would be carried forward and potentially deducted in the subsequent tax year (handled somewhat differently for certain types of taxpayers). The CARES Act, passed in March 2020 to stimulate the economy during the ongoing COVID-19 pandemic, increased this limitation to 50% of ATI for the 2019 and 2020 tax years for nonpartnership taxpayers.  Notable changes in the final regulations Good news for manufacturers Under the proposed regulations, depreciation, amortization or depletion capitalized into inventory under the uniform capitalization (UNICAP) rules was not added back in the computation of a taxpayer’s ATI. This rule was particularly detrimental to taxpayers in the manufacturing industry, who generally are required to capitalize most of their depreciation expense. Baker Tilly, along with other tax practitioners, urged the IRS to reverse this position — and fortunately, the IRS listened. For tax years beginning before Jan. 1, 2022, taxpayers will now be allowed to add back depreciation, etc., to ATI that was capitalized into inventory, regardless of the period the amounts are actually recovered through cost of goods sold. This change increases a taxpayer’s ATI, thereby allowing for a larger interest deduction. Definition of interest narrowed, fewer items subject to limitation  The initial proposed regulations contained an unexpectedly broad definition of business interest expense. Commenters noted that many items that are typically not viewed as interest were nevertheless caught up in this wide net, and subject to limitation. To the benefit of taxpayers, the final regulations have somewhat narrowed the definition of interest. For example, commitment fees, debt issuance costs and certain hedging costs were removed from the definition of interest. In the partnership context, guaranteed payments for the use of capital are now only treated as business interest expense under narrow circumstances. More clarity and flexibility for real estate businesses  The final regulations include several taxpayer-friendly changes related to the real property trade or business election. As a refresher, eligible real property trades or businesses can elect out of the business interest expense limitation, with the trade-off being longer depreciable lives and no bonus depreciation for residential real property, nonresidential real property and qualified improvement property. The IRS took the position in the initial proposed regulations that real property trades or businesses that were already exempt from section 163(j) by reason of the small business exemption (i.e., the gross receipts test) could not make the election. The final regulations clarify that eligible taxpayers can make this election, even if they also qualify for the small business exemption. In addition, the final regulations allow certain taxpayers conducting rental real estate activities to make a protective section 163(j) election to ensure their business interest expense is not subject to limitation, even if the activities don’t rise to the level of a trade or business.  Safe harbor provided for qualified nursing/assisted living facilities Along with the regulations package, the IRS also issued a proposed revenue procedure (Notice 2020-59) that provides a safe harbor for qualified residential living facilities to be treated as a real property trade or business for purposes of section 163(j) and, thus, eligible to elect out of the limitation. The safe harbor applies to facilities that provide supplemental assistance, nursing and/or other routine medical services to customers/patients that are in residence for 90 days or more.  Interest expense of exempt partnerships and S corporations not subject to further testing Under the initial proposed regulations, partnerships and S corporations (nontax shelters) that are exempt from section 163(j) by reason of the gross receipts test were not subject to the interest limitations under section 163(j). However, these entities were still required to pass business interest expense through to the owners for testing on their respective returns. This approach was burdensome and appeared contrary to the general principle that section 163(j) apply at the entity level. In another taxpayer-friendly result, the final regulations reverse this position, allowing business interest expense to be deducted by partnerships and S corporations exempt from the section 163(j) limitation. The final regulations also eliminate the requirement that the allocated interest expense be subject to the limitation at the individual partner or shareholder level.  Conclusion These final and proposed regulations apply to most businesses; therefore, it is important to gain an understanding of how the limitation will apply to your set of facts and circumstances. This alert covers only a small portion of these rules. We encourage you to contact your Baker Tilly advisor to discuss their application to your specific situation. For more information on this topic or to learn how Baker Tilly specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS released final regulations under section 163(j) with a number of taxpayer-friendly revisions.

Manufacturing & Distribution

Law Firm & Professional Services

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

Authored by Alyssa Sihelnik and Jim Alajbegu In mid-July, the Treasury Department and the IRS released a proposed redesigned partnership form for tax year 2021 (for the 2022 filing season). The goal of the proposed form is to clarify for partners how they compute U.S. income tax liability for items related to international tax.  Key takeaways  The IRS released Form 1065, Schedules K-2 and K-3 in draft form as well as the instructions for Schedules K-2 and K-3.  Any partnership required to file Form 1065, U.S. Return of Partnership Income, and that has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the IRC must complete the relevant parts of Schedule K-2 and Schedule K-3.  The Treasury Department and the IRS plan similar revisions, as applicable, to Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.  The new designed partnership form creates additional complexities and increased tax compliance in partnership reporting as well as additional costs of preparation. The draft schedules do not replace existing U.S. international tax information reporting requirements of the partnership but are intended to provide additional information to their partners to satisfy tax-filing obligations. Discussion  The redesigned form and instructions provide guidance to partnerships on how to report international tax information to their partners in a standardized format. Currently, partners are required to report international tax information on their returns on several tax forms and schedules. Partners generally obtain the information required for reporting from their partnerships, usually through footnotes attached to K-1s.  The proposed parts included in new Form 1065, Schedule K-2 replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r), and the new Form 1065, Schedule K-3 replaces portions of Schedule K-1, Part III, Boxes 16 and 20. Additionally, Schedule K-3 provides information to the partner in the same general format that might be completed by the partner on the following forms:  Form 1040, U.S. Individual Income Tax Return Form 1040-NR, U.S. Nonresident Alien Income Tax Return  Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) Form 1118, Foreign Tax Credit- Corporations Form 1120, U.S. Corporation Income Tax Return Form 1120-F, U.S. Income Tax Return of a Foreign Corporation Form 4797, Sales of Business Property  Form 8621, Passive Foreign Investment Company or Qualified Electing Fund  Form 8949, Sales and Other Dispositions of Capital Assets Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)  Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)  Schedule K-2 will be attached to a partnership’s Form 1065 and filed by the due date (including extensions) for that return. Schedule K-3 will be provided to the partners in according to the timeline for providing the Schedule K-1.  It is expected that final versions of the partnership return will be released later in 2020. Please refer to the following IRS links for the new Schedule K-2 and Schedule K-3.  The Treasury Department and the IRS released the draft returns early to afford time for stakeholder input and engagement. The Treasury and IRS welcome comments from affected stakeholders through Sept. 14, 2020, and written comments should be sent to the following email address: lbi.passthrough.international.form.changes@irs.gov with the subject line “International Form Changes.”  In addition, both agencies are planning a series of listening events to take comments and answer questions about the proposed form. More details about participating in these events will be posted by the IRS as soon as they are finalized. Please reach out to your Baker Tilly international tax advisor to discuss how these changes may affect your tax situation.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The Treasury Department and the IRS released a proposed designed partnership form that should clarify how partners compute their U.S. income tax liability for international tax-related items.

2021 draft partnership returns – international revisions

Authored by Christine Faris, Devin Tenney, Paul Dillon and Michelle Hobbs  The IRS recently provided guidance in the form of proposed Treasury regulations (Proposed Regulations), which address the disallowance of employer deductions for the cost of providing commuting and parking benefits to employees. As you may recall, following the Tax Cuts and Jobs Act (TCJA) of 2017, the IRS provided complex, yet incomplete, guidance on how to calculate disallowed parking expenses. The Proposed Regulations provide some significant updates to simplify the process of calculating the disallowed deduction. While many of these changes are favorable to taxpayers, some may have unfavorable impacts.  Background The TCJA disallowed a deduction for the expense of any qualified transportation fringe benefit (QTFB) provided by taxpayers to their employees for expenses paid or incurred after Dec. 31, 2017. These benefits can still be excluded from an employee’s income, but an employer no longer gets a corresponding tax deduction if the amounts are not included in the employee’s income. Note, however, the disallowed deduction relates to the expense of providing a QTFB, not its value, and the determination of an expense is not always straightforward, especially for the cost of employee parking.  In 2018, the IRS provided interim guidance for taxpayers to determine the amount of parking expenses that is nondeductible. The interim guidance created as many questions as it answered, and the Proposed Regulations attempt to address some of these more glaring issues by clarifying the statutory requirements. In particular, they address QTFBs paid or incurred by an employer and transportation and commuting expenses paid or incurred by an employer. Disallowance of deductions for certain qualified transportation fringe expenditures The Proposed Regulations define relevant terms and modify previous guidance by providing a general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. Taxpayers may choose to apply the general rule or one of the three simplified methods for each taxable year and for each parking facility. General rule. The general rule in the Proposed Regulations allows taxpayers to calculate the disallowance based on a reasonable interpretation of the statute subject to a few requirements (using actual expenses paid or incurred, allocating expenses to reserved parking spots, and properly applying the exception for parking made to the public).  Primary use method. This method is largely based on the safe-harbor method in the 2018 guidance. Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used. The proposed regulations also include new definitions for geographic location, inventory/unusable spaces, available parking spaces, peak demand period and mixed parking expense. Qualified parking limit method. Under this method, taxpayers calculate the disallowance by multiplying the total number of spaces used by employees during the peak demand period or, alternatively, the total number of the taxpayer’s employees, by the monthly per employee limitation on exclusion for qualified parking ($270), for each month in the taxable year. Cost-per-space method. This method allows taxpayers to calculate the disallowance by multiplying the cost per parking space by the number of available parking spaces to be used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses for inventory/unusable spaces) by total parking spaces (including inventory/unusable spaces). Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used with the cost-per-space methodology. Payments to third parties. The Proposed Regulations provide that if the taxpayer pays a third party for its employee’s QTFB, the amount of the deduction disallowed is generally the taxpayer’s total annual cost of the QTFB paid to the third party.  New definitions. This Alert will not provide all definitions listed in the Proposed Regulations, but instead, draws attention to newly defined terms and resulting impact.  Geographic locations. The Notice provided that if a taxpayer owns or leases more than one parking facility in a single geographic location, the taxpayer may aggregate the number of spaces in those parking facilities. It was unclear, however, what constituted a “geographic location.” The Proposed Regulations define the term to mean contiguous tracts or parcels of land owned or leased by the taxpayer. Two or more tracts or parcels of land are contiguous if they share common boundaries or would share common boundaries but for the interposition of a road, street, railroad, stream or similar property. Tracts or parcels of land which touch only at a common corner are not contiguous. Reserved nonemployee spaces means the spaces in the parking facility, or the taxpayer's portion thereof, exclusively reserved for nonemployees. For example, such parking spaces may include, but are not limited to, spaces reserved exclusively for visitors, customers, partners, sole proprietors, 2-percent shareholders of S corporations, vendor deliveries and passenger loading/unloading. Nonemployee spaces in the parking facility, or portion thereof, may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility, or portion of a facility, segregated by a barrier to entry or limited by terms of access. It was unclear in the Notice whether this included handicap spaces. The Proposed Regulations state that since these parking spaces could be used by employees, handicap parking spaces are not reserved nonemployee spaces.  Inventory/Unusable spaces include parking spaces used for inventoried vehicles, qualified nonpersonal use vehicles, other fleet vehicles used in a taxpayer’s trade or business, or otherwise not usable for parking by employees. These spaces specifically excluded from the definitions of “available parking spaces” and “reserved nonemployee spaces” under the primary use method the Proposed Regulations exclude inventory/unusable spaces because those spaces are generally not available to employees or the general public but are instead used for other purposes. However, inventory/unusable spaces are included in total parking spaces under the cost-per-space methodology because taxpayers do incur costs in maintaining the spaces. Mixed parking expense is defined as an amount paid or incurred by a taxpayer for both a parking facility and nonparking facility property that a taxpayer owns or leases. Such expenses for parking and nonparking property may include rent or lease payments, repairs, maintenance, utility costs, insurance, property taxes, interest, snow or ice removal, and security. For purposes of determining total parking expenses, a taxpayer may use any reasonable method to allocate the applicable portion of mixed parking expenses to a parking facility. If using the primary use method or cost-per-space method, a taxpayer may choose to allocate 5% of the following mixed parking expenses to a parking facility: lease or rental agreement expenses, property taxes, interest expense, and expenses for utilities and insurance. Multitenant parking. If a taxpayer owns or leases space in a multitenant building, employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors or customers of unrelated tenants in the building are included in the definition of general public. Consequently, the Proposed Regulations appear favorable to taxpayers.  Disallowance of deductions for certain transportation and commuting benefit expenditures The Proposed Regulations also address the disallowance of deductions for amounts paid or incurred after Dec. 31, 2017, for any expense incurred to provide any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee. Travel between the employee’s residence and place of employment includes travel that originates at a transportation hub near the employee’s residence or place of employment. For example, an employee who commutes to work by airplane from an airport near the employee’s residence to an airport near the employee’s place of employment is traveling between the residence and place of employment. Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.
The information provided here is of a general nature and is not intended  to address the specific circumstances of any individual or entity. In  specific circumstances, the services of a professional should be sought.  Tax information, if any, contained in this communication was not  intended or written to be used by any person for the purpose of avoiding  penalties, nor should such information be construed as an opinion upon  which any person may rely. The intended recipients of this communication  and any attachments are not subject to any limitation on the disclosure  of the tax treatment or tax structure of any transaction or matter that  is the subject of this communication and any attachments.

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

IRS releases guidance on parking lot rules

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

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

FFCRA and CARES Act Decision Tree

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.