info, Author at Urish Popeck

“Loan Necessity Questionnaire” Must Be Submitted From Borrowers With PPP Loans Over $2M

Posted on November 2020 by info

Earlier in the year, the Small Business Administration (SBA) announced in an updated FAQ on the program that it will be auditing all Paycheck Protection Program (PPP) loans of $2 million or more. Borrowers whose loans meet this threshold amount might receive a Loan Necessity Questionnaire from their lender soon after they apply for loan forgiveness.

Even though the official channels indicate the questionnaire is not yet final, we understand that SBA is already sending letters to lenders instructing them to send the questionnaire to specific borrowers within five business days. Borrowers have only 10 business days of receipt of the questionnaire to return a completed version to the lender, which the lender must then submit to SBA within five business days. Both borrowers and lenders may be surprised by the short turnaround time and the extent of detailed information requested, as well as signatures, certifications and supporting documentation. Since the requested information may not be readily available and could take considerable time and effort to compile, borrowers should begin gathering the information on the questionnaire even before they receive the request from their lender.

What You Should Know:

SBA has already sent the questionnaire to some PPP lenders for delivery to borrowers, although SBA has not officially announced the finalization of the form and the process.
For-profit employers will receive Form 3509 asking about business operations, while non-profit employers will receive Form 3510.
Unlike the PPP loan application and loan forgiveness forms, SBA has not yet posted Form 3509 or 3510 on its website. However, copies of Forms 3509 and 3510 have been widely circulated on the internet.
Despite the short turn-around time and complex data required to complete the questionnaire, it seems that extensions of time to complete the questionnaire will not be available. SBA has 90 days under the CARES Act to approve PPP loan forgiveness (regardless of the size of the loan), which may make it unlikely for SBA to grant extensions on information that might be relevant to its approval process.

The following is a summary of the purpose of new Forms 3509 and 3510 (for profit-making borrowers and non-profit borrowers, respectively), which contain the questionnaire, as well as the key items included on both forms.

What’s The Purpose of The New Forms?

It seems that SBA will use the new Forms 3509 and 3510 to evaluate borrowers’ good-faith certifications of their economic need for the PPP loan. Some critics view the forms as SBA’s attempt to change PPP rules retroactively to penalize borrowers that (in hindsight) did not actually have the requisite financial need to qualify for a PPP loan.

Remember that the PPP was intended to provide disaster relief to small employers (generally those with 500 or fewer employees) facing economic uncertainty (for example, due to COVID-19 governmental shut-down or stay-at-home orders) and for whom the loan was necessary to support the ongoing operations of the business. In the early days of the PPP, some entities received sizable PPP loans even though they were not eligible (often because they did not face the requisite economic uncertainty for the PPP loan).

Widely circulated media reports identified several well-funded publicly traded companies, universities with significant endowment funds and affiliates of such entities that had quickly received PPP loans and may have caused the program’s original funding to run out prematurely. Many of those ineligible borrowers returned their loans during an amnesty period that expired in May 2020. To further address possible abuse, the Treasury Secretary said that SBA will closely review all PPP loans of $2 million or more, seemingly using the Loan Necessity Questionnaires to do so.

In The Know:

In the October 26, 2020 Federal Register, SBA estimated that 52,000 borrowers will need to complete these new forms (about 42,000 for-profit borrowers and 10,000 non-profit borrowers).
Notably, the new forms may be sent to borrowers that received a PPP loan of less than $2 million if they, together with their affiliates, received an aggregate of $2 million or more in PPP loans. Original PPP program rules generally limited the availability of PPP loans to one loan per controlled group of entities, but in reality, various members of a controlled or affiliated group may have received separate PPP loans. To address that situation, SBA included a box that borrowers must check on their PPP loan forgiveness applications (the Form 3508 series) if they, together with affiliates, received $2 million or more of PPP loans. SBA will review all loans within that controlled group.
The questions on the new forms seem to indicate that SBA will be evaluating the “economic necessity” for the borrower’s PPP loan both on the PPP loan application date and thereafter. The loan application only required borrowers to make a good faith certification of economic necessity as of the loan application date, so it is unclear why SBA is asking about what actually happened to the borrower’s operations afterwards.

Key Items On The New Forms

Each of the forms has two sections: a “Business Activity Assessment” and a “Liquidity Assessment.”

Business Activity Assessment

This section asks for-profit borrowers for detailed information and documentation about the impact of COVID-19 on their businesses, including whether the business was subject to mandatory or voluntary closures and whether it made any changes in its operations. The borrower also must report gross revenue for Q2 2020 and Q2 2019 and indicate whether it made any capital improvements between March 13, 2020 (i.e., the date that COVID-19 was declared a national disaster) and the end of the borrower’s “covered period” (a maximum of 24 weeks from the date their PPP loan was funded). Borrowers can include additional comments on any of these questions. Non-profit borrowers must provide similar information, but the definition of gross receipts includes grants, gifts and contributions, and non-profit borrowers must submit Q2 expenses for 2019 and 2020.

Liquidity Assessment

This section asks for the following information:

All borrowers must disclose:
- Whether the borrower prepaid any outstanding debt before it was contractually due, between March 13, 2020 and the end of the borrower’s covered period.
- The number of employees (including owners) paid more than $250,000 on an annualized basis and the total number of employees and total compensation paid to those employees during the covered period.
- Whether the borrower received funds from any CARES Act programs other than the PPP, excluding tax benefits.
- Any additional comments that have bearing on any of the liquidity assessment questions.
For-profit borrowers must disclose:
- The borrower’s cash position as of the end of the quarter immediately before the PPP application date and whether the borrower has paid any dividends or other capital distributions (other than estimated taxes) between March 13, 2020 and the end of their covered period.
- Whether the borrower (or any affiliate) is publicly traded in the United States or a foreign country (and if so, total market capitalization must be reported).
- Whether at least 20% or more of the borrower was owned by a private equity, venture capital or hedge fund.
- Its book value (i.e., shareholder’s equity) on the last day of the calendar quarter immediately before the PPP application date.
Non-profit borrowers must disclose:
- Cash, cash equivalent and short-term investment position as of the end of the calendar quarter immediately before the PPP application date, as well as the value of non-cash investments.
- Whether the borrower has restrictions on using net income, cash, savings or investments for payroll and nonpayroll costs otherwise eligible for the PPP forgiveness.
- Whether the borrower holds assets in endowment funds.
- If the borrower is a school, college or university, whether it offered additional financial assistance to students and if it had declines in tuition revenue due to COVID-19.
- If the borrower provides healthcare services, the amount of its program service revenue relating to patient care in Q2 2019 and 2020.

As a reminder, the PPP loan eligibility and loan forgiveness process continues to evolve; hopefully, SBA or the Treasury Department will soon clarify how the answers to these questionnaires may impact borrowers’ PPP loan forgiveness.

Tax Relief Opportunities That Could Enhance Your Operations

Posted on October 2020 by info

Although companies that have managed to survive up to this point will have overcome immediate safety and cashflow problems, they still face an uncertain future. No one can predict how long the downturn will last, whether the world will revert into crisis mode or whether the path towards long-term recovery has begun.

Despite the persistent uncertainty, savvy companies can position themselves to outperform their competitors by capitalizing on market shifts and strengthening their core business models. To do so, liquidity will continue to be at a premium, but many companies at this stage should be able to spend a bit in order to reap considerable returns. The tax function is poised to help them do just that.

After conquering tax solutions that are within reach, it’s time to consider low-risk strategies that will plant the seed for future growth.

Consider which tax strategies can help you find a competitive edge, including:

Uncovering missed opportunities for savings: Look for potential projects that, though they may require an upfront investment of time and capital, have the potential to uncover significant savings opportunities.
- R&D tax credit studies: The money companies spend on technology and innovation can offset payroll and income taxes via R&D tax credits. The credits benefit a broad range of companies across industries, yet many businesses are leaving money on the table.
- Property tax assessments appeals: In the wake of the COVID-19 pandemic, some jurisdictions are reevaluating their property tax processes via disaster relief and conducting assessments at an earlier date. Property tax appeals can generate cash savings by challenging assessed values and reducing property tax liabilities.
- Cost segregation studies: Cost segregation studies can help owners of commercial or residential buildings increase cash flow by accelerating federal tax depreciation of construction-related assets. Depending on the type of building and cost, the increased cash-flow and time-value benefits are often significant.

Advising on business decisions: In this phase, it’s likely that your C-suite is beginning to think about what’s next. Tax professionals should aim to provide strategic insights into the tax implications of these critical business decisions, including supply chain shifts, transactions, restructuring and more.

Maintaining compliance: If your business secured any federal funding in the early stages of the pandemic, those funds likely came with certain tax and financial reporting compliance measures attached. Work with the finance and accounting department to ensure that these benefits don’t result in unexpected penalties and costs. You should also aim to secure forgiveness for any forgivable loans.

Continue to grow liquidity: Cash is still key to navigating an uncertain road ahead. Continue to leverage liquidity-generating tactics, such as:
- Evaluating accounting methods and making changes, if necessary, to defer income tax and increase cash flow.
- Reviewing transfer pricing strategies to identify opportunities to optimize cash flow.
- Pursuing a tax deduction through charitable donations.
- Maximizing state NOLs through elections, structural changes, intercompany transactions and triggering unrealized gains.

Businesses that effectively use tax strategies to focus on seizing the strategic opportunities they do have will be able to make the most of tough conditions and emerge as market leaders.

Get To Know Potential Tax Policies For 2020 Election

Posted on September 2020 by info

The U.S. presidential election is just over a month away, yet neither candidate has released a formal, detailed plan addressing his vision for the tax code. We can, however, gain a sense of how their approaches differ through casual mentions of some aspects of tax policy on the campaign trail.

Tax policy underpins business decisions and consumer behavior, so an understanding of the candidates’ more detailed vision for tax policy will be intrinsic to successfully navigating the economic downturn triggered by the pandemic. Savvy businesses and individuals should pay close attention to how any proposed policy may ultimately alter their total tax liability.

It’s also important to keep in mind the fundamental role of Congress in passing tax legislation. Depending on the makeup of the White House, Senate, and House of Representatives, passing tax legislation may be challenging. For example, if both the Senate and House are of the same party as the successful presidential candidate, any changes in tax law may still have to be passed through the budget reconciliation process, because 60 votes in the Senate generally would be needed to avoid using the reconciliation process (and it is very doubtful that there would be 60 members of the Senate of the same party). Both in 2017 and 2001, passing tax legislation through reconciliation meant that most of the changes were not permanent; that is, they expired within the 10-year budget window. If any of the White House, Senate, or House are of a majority party different than the others, the chances of passing and enacting any agreed-to tax legislation becomes more doubtful.

The following table contains side-by-side snapshots of current and potential future tax policies of the presidential candidates as of September 22, 2020, from what has been mentioned informally on the campaign trail.

	Current Tax Law (TCJA–present)	Biden’s stated goals	Trump’s stated goals
Corporate tax rates and AMT	Corporations have a flat 21% tax rate and no corporate alternative minimum tax (AMT), which were both changed by the TCJA. These do not expire.	Biden would raise the flat rate to the pre-TCJA level of 28% and reinstate the corporate AMT on profits of $100 million or more.	Trump has not announced changes and has no plans to reinstate a corporate AMT.
Capital gains and dividends	The top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. There is an additional 3.8% net investment income tax.	Biden would eliminate breaks for capital gains and dividends for income above $1 million. Instead, these would be taxed at ordinary rates.	Trump would reduce the capital gains tax rates, index capital gains for inflation and create a capital gains tax holiday that would eliminate capital gains taxes for a period of time TBD.
Payroll taxes	The 12.4% payroll tax is divided evenly between employers and employees and applies to the first $137,700 of an individual’s income.	Biden would maintain the 12.4% tax split between employers and employees and keep the $137,700 cap but would institute the tax on earned income above $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.	Trump issued an executive order to temporarily postpone social security tax for employees from Sept. 1 through Dec. 31,2020. He has indicated he would make this temporary reprieve permanent.
Estate taxes	The estate tax exemption for 2020is $11,580,000. Transfers of appreciated property at death get a step-up in basis. The exemption is scheduled to revert to pre-TCJA levels, or $5,800,000, in 2025.	Biden would maintain the 2025 reversion and eliminate the current step-up in basis on inherited assets.	Trump would push to extend the exemption and would not change the transfer of appreciated property step-up in basis.
Individual tax rates	The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly. This was lowered from 39.6% pre-TCJA.	Biden would restore the 39.6% rate for taxable income above $400,000. This represents only the top rate.	Trump would keep the current status quo of 37%. In addition, he would enact a 10% rate cut for middle-class taxpayers, which would lower the 22% rate to 15%. For 2020, the 22% rate applies to income over $40,125 for individuals and $80,250 for married filing jointly.
Individual tax credits	Currently, individuals can claim a maximum of $2,000 Child Tax Credit (CTC)plus a $500 dependent credit. Individuals may claim a maximum dependent care credit of $600 ($1,200 for two or more children). The CTC is scheduled to revert to pre-TCJA levels ($1,000) after 2025.	Biden would increase the CTC to $8,000 ($16,000 for two or more children).	Trump would extend the $2,000 CTC past 2025, however, he would also require social security numbers to be eligible to take any of these credits.
Education	Forgiven student loan debt is included in taxable income. There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.	Biden would exclude forgiven student loan debt from taxable income.	Trump would provide a tax credit for individual and corporate donations to state-authorized organizations that sponsor scholarships.
Itemized deductions	For 2020, the standard deduction is $12,400 for single/married filing separately and $24,800 for married filing jointly. After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly. The TCJA suspended the personal exemption and most individual deductions through 2025. It also capped the SALT deduction at $10,000, which will remain in place until 2025, unless repealed.	Biden would enact a provision that would cap the tax benefit of itemized deductions at 28%. SALT cap: Senate minority leader Charles Schumer has pledged to repeal the cap should Biden win in November (the House of Representatives has already passed legislation to repeal to the SALT cap).	Trump would extend beyond 2025 and make permanent the deductions established by the TCJA.

While the candidates’ tax policy plans are not yet publicly formalized, more details may be released as we approach election day. We will be updating election tax policy content as it becomes available.