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SBA Publishes New PPP Guidance For The Self-Employed & General Partners

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By Jeff Drew

The U.S. Small Business Administration issued a new interim final rule Tuesday that supplements the guidance for the Paycheck Protection Program (PPP) included in the first interim final rule for the PPP issued on April 2 and FAQs that are being updated periodically.

The additional guidance provides specific information on calculating the maximum loan amount for individuals with self-employment income who file a Form 1040, Schedule C, Profit or Loss From Business. The 2019 Form 1040 Schedule C is required to be provided with the PPP loan application, according to the interim rule, which notes that detailed documentation guidelines are also required. Guidance is also provided on how PPP loans may be used and how loan forgiveness will be calculated.

The SBA stated it will issue additional guidance for those individuals with self-employment income who: (1) were not in operation in 2019 but who were in operation on Feb. 15, 2020, and (2) will file a Form 1040 Schedule C for 2020.

Additionally, the new guidance directs that the self-employment income of partners in a partnership may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership (or LLC filing taxes as a partnership). Individual partners may not submit a separate PPP loan application as a self-employed individual.

The guidance also addresses the eligibility issues of certain business concerns and requirements for certain pledges of PPP loans.

Congress created the PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. Under the PPP, Treasury and the SBA are offering $349 billion in forgivable loans that small businesses damaged by the COVID-19 pandemic can use to cover costs including payroll, rent, utilities, and mortgage interest.

Businesses with no more than 500 employees began applying for the loans on April 3. The application window opened April 10 for those with self-employment income who file Schedule C with their Form 1040. This includes independent contractors, gig workers, and sole proprietors, including those who have other employees.

As of the close of business on Monday, the SBA had approved $242 billion in PPP loans to 1.01 million small businesses through 4,662 approved SBA lenders, according to a tweet Tuesday from U.S. Sen. Marco Rubio, R-Fla., one of the biggest supporters of the program.

The CARES Act established the PPP as a new 7(a) loan option overseen by Treasury and backed by the SBA, which is authorized to provide a 100% guarantee to lenders on loans issued under the program. The full principal amount of the loans and any accrued interest mayqualify for loan forgiveness if the borrower meets requirements related to having employees on payroll.

This article originally appeared in AICPA’s “Journal of Accountancy”. Copyright © 2020 Association of International Certified Professional Accountants. All rights reserved. https://www.journalofaccountancy.com/

COVID-19 Postponement Relief Under Notice 2020-23 Expanded By IRS

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On April 9,2020, the IRS issued Notice 2020-23, which contains expanded relief for those tax forms and other filings that are postponed as was originally announced last month.  See the IRS Coronavirus website for more details.

First, the payments and returns eligible for relief are expanded.  Any tax return or payment due on or after April 1, 2020, and before July 15, 2020, is now automatically postponed to July 15, 2020—no extension forms, letters, or other forms of documentation or communication are required to make use of this relief.  This will now cover, for example, calendar-year 2020 second quarter estimated tax payments, among other things. If an Affected Taxpayer as defined by the notice needs additional time to file, such taxpayer may choose to file the appropriate extension form by July 15, 2020, to obtain a filing extension. However, the taxpayer’s extension date may not exceed the original statutory or regulatory extension date. For example, a taxpayer can file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by July 15, 2020, to extend the due date of their 2019 calendar year tax return (generally due on April 15, 2020). However, the extension granted will only be to October 15, 2020, which is the original extension date for 2019 calendar year individual tax returns.

Second, the IRS has expanded the forms that are now postponed.  These forms now include:  1040-series, 1120-series, 1065, 1066, 1041, 706 (estate tax payments and returns), 709 (gift tax payments and returns), 8971, 990-T, and estimated tax payments.  The relief includes not just the specified forms, but also all schedules, returns, and other forms filed as attachments, such as schedule H, schedule SE, and Forms 3520, 5471, 5472, 8621, 8858, 8865, and 8938.
 

Overview of Extensions Granted in Notice 2020-23
 Type of Tax ReturnForm 12020 Deadline
 Individual/Married Tax Return &   Payments Form 1040, 1040-SR, 1040-NR, 1040-NR- EZ,
 1040-PR, 1040-SS		7/15/2020
 Trust & Estate Tax Return & Payment Form 1041, 1041-N, 1041-QFT7/15/2020
 Partnership Returns Form 1065; Form 10667/15/2020
 Corporation Tax Return & Payments Form 1120, 1120-C, 1120-F, 1120-FSC,
 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-
 POL, 1120-REIT, 1120-RIC, 1120-S, 1120-SF		7/15/2020
 United States Estate and
 Generation-Skipping Transfer Tax   Return & Payment		 Form 706; 706-NA, 706-A, 706-QDT, 706-   GS(T), 706-GS(D), 706-GS(D-1)7/15/2020
 Form 706 Pursuant to Rev. Proc.   2017-34 Form 7067/15/2020
 Information Regarding Beneficiaries   Acquiring Property from a Decedent Form 89717/15/2020
 United States Gift and Generation-   Skipping Transfer Tax Return and   Payment Form 7097/15/2020
 Exempt Organization Business   Income Tax Return & Payment  Form 990-T7/15/2020
 Excise Tax Payments on       Investment Income & Payment Form 990-PF; Form 47207/15/2020
 Quarterly Estimated Income Tax   Payments & Payments Form 990-W; Form 1040-ES; 1040-ES (NR),   1040-ES (PR); Form 1041-ES; Form 1120-W7/15/2020
 Return of Organization Exempt from   Income Tax 2 Form 9907/15/2020
 Annual Return/Report of Employee   Benefit Plan2 Form 55007/15/2020

1 – This relief includes not just the filing of specified Forms, but also all schedules, returns, and other forms that are filed as attachments to specified forms or are required to be filed by the due date of Specified Forms
2 – This relief comes through Rev. Proc. 2018-58 for affected taxpayers with a time sensitive act which is due to be performed on or after April 1, 2020.

NOTE: The above list is not intended to be all inclusive. Rev. Proc. 2018-58 provides other disaster-related relief for time-sensitive actions and elections. 

The period beginning on April 1, 2020, and ending on July 15, 2020, will be disregarded in the calculation for interest, penalty, or addition to tax for failure to file the forms or make payments that are temporarily postponed by Notice 2020-23. Such amounts will accrue starting on July 16, 2020.

Welcome Relief For Partnership Filings To Obtain CARES Act Benefits

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General Rules for Amending Partnership Returns

Prior to 2018, partnerships were generally subject to unified partnership audit and litigation rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982, commonly referred to as the TEFRA partnership procedures.
 
For taxable years beginning after December 31, 2017, the Bipartisan Budget Act of 2015 (BBA) replaced the TEFRA audit procedures with a centralized partnership audit regime. These new audit procedures apply to all partnerships, unless the partnership makes a valid election not to have those procedures apply. Partnerships subject to the centralized partnership audit regime are referred to as BBA partnerships.
 
Partnerships file annual returns on Form 1065 each taxable year and report each partner’s distributive share of income, gain, loss, deduction and credit on Schedule K-1. Partnerships are required to furnish a copy of Schedule K-1 to each partner.
 
BBA partnerships are generally prohibited from amending the information required to be furnished to their partners after the due date of the return, unless specifically provided by the Secretary of the Treasury or his delegate. On April 8, 2020, the Internal Revenue Service issued Revenue Procedure 2020-23, which exercises that authority to allow a BBA partnership to file an amended partnership return and issue amended Schedules K-1 for taxable years that began in 2018 or 2019, and only under certain circumstances.


Impact of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The CARES Act provides retroactive tax relief that affects partnerships, including relief for the taxable years ending in 2018, 2019, and, in some cases, 2020. Without the option to file amended returns, BBA partnerships that already filed their Forms 1065 for the affected years generally are unable to take advantage of the CARES Act relief for partnerships except by filing Administrative Adjustment Requests (AARs). Filing an AAR would result in the partners only being able to receive any benefits from that relief on the current taxable year’s federal income tax return. Thus, if an AAR were filed during 2020 affecting taxable years that began in 2018 or 2019, the partners generally would not be able to take advantage of CARES Act benefits from an AAR until they file their current year returns, which could be in 2021. In the view of the IRS, this process would significantly delay the relief provided in the CARES Act intended to provide an immediate benefit to taxpayers.
 

Special Rule for Filing Amended Partnership Returns

Revenue Procedure 2020-23 allows BBA partnerships the option to file an amended return instead of an AAR. However, the revenue procedure does not prevent a partnership from instead filing an AAR to obtain the benefits of the CARES Act or any other tax benefits to which the partnership is entitled. A BBA partnership that files an amended return pursuant to this revenue procedure is still otherwise subject to the centralized partnership audit procedures enacted by the BBA.
 
BBA partnerships that filed a Form 1065 and furnished all required Schedules K-1 for the taxable years beginning in 2018 or 2019 prior to the issuance of Revenue Procedure 2020-23 may file amended partnership returns and furnish corresponding Schedules K-1 before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.

 Insights

  • One of the principal tax benefits under the CARES Act for which partnerships may now file amended returns is the correction of the so-called “retail glitch” that prevented investments in qualified improvement property (QIP) from qualifying for bonus depreciation. This drafting error in the Tax Cuts and Jobs Act significantly increased the after-tax cost of making QIP investments. Partnerships who amend 2018 and 2019 tax returns to report bonus deprecation on QIP will issue amended Schedules K-1 to their partners who can file their own amended tax returns to potentially obtain refunds of taxes previously paid.
  • Notwithstanding the ability to claim bonus depreciation via filing amended returns, partnerships may want to consider filing Form 3115 instead. By filing a Form 3115, the partnership will report a favorable adjustment reducing current year taxable income. The benefit of this adjustment will be allocated to the existing partners which may not be the same partner group as existed during the 2018 and 2019 taxable years.
  • The Tax Cuts and Jobs Act added limitations on excess business losses for noncorporate taxpayers (IRC section 461(l)) for tax years beginning after December 31, 2017, and before January 1, 2026, limiting the ability above a threshold amount to offset business losses against non-business income. The CARES Act suspended these excess loss rules for tax years 2018 through 2020. If noncorporate partners (e.g., individuals) are allocated additional bonus depreciation expenses and they amend their 2018 or 2019 income tax returns, assuming that other loss limitation rules do not apply (e.g., basis, at-risk or passive activity limitations), they are not subject to the excess loss rules and may generally take a deduction against non-business income without limitation.
  • The CARES Act permits taxpayers to carry back net operating losses that arise in tax years 2018, 2019 and 2020 to their five preceding taxable years. If a bonus depreciation deduction allocated to a partner results in generating a net operating loss for that partner, the partner can potentially obtain a refund of taxes paid by carrying back the net operating loss to its five preceding taxable years.
  • The relief provisions under Revenue Procedure 2020-23 is not limited to provisions relating to the CARES Act. Partnerships can take advantage of these rules to amend their 2018 and 2019 tax returns for other matters. For example, an amended return could be filed to correct prior income or loss allocations which could create net operating losses eligible for the carryback provisions.
  • The CARES Act generally increases the business interest expense limitation percentage under Section 163(j) from 30% to 50% of adjusted taxable income. However, the CARES Act also creates a special rule for the business interest expense limitation under section 163(j) as it applies to partnerships. Specifically, there is an increase in the adjusted taxable income considered in determining the limitation from 30% to 50%. However, this increased adjusted taxable income percentage does not apply to a partnership’s 2019 tax year. Instead, 50% of the excess business interest expense from 2019 may be carried forward to 2020 and deducted exclusive of the Section 163(j) limitation. This rule is not impacted by Revenue Procedure 2020-23.
  • Eligible partnerships may have previously made an election to be treated as an electing real property trade or business in order to be exempt from the business interest expense limitation under Section 163(j). The cost for making such an election is that the partnership must use the alternative depreciation system for any nonresidential real property, residential rental property, and qualified improvement property used in its trade or business (i.e. no bonus depreciation permitted for qualified improvement property). Now that the CARES Act has corrected the retail glitch and bonus depreciation may be taken on qualified improvement property, partnerships are undoubtedly thinking about whether they can revoke their election to be an electing real property trade or business. Unfortunately, Revenue Procedure 2020-23 does not provide relief for partnership wanting to revoke their prior election. We await further guidance from the IRS on this issue.
  • REITs and other entities that either chose to use ADS life or are required to use ADS life for QIP may still benefit from the technical correction of the “retail glitch” as the CARES Act, in addition to correcting QIP to be 15-year property, also changes the ADS life to a 20-year life. REITs may prefer to file a Form 3115 to report a favorable adjustment in the current year in order to reduce their distribution requirements and retain more cash in 2020.

Other Considerations

The relief under Revenue Procedure 2020-23 is available only to BBA partnerships that filed Forms 1065 and furnished Schedules K-1 for the partnership taxable years beginning in 2018 or 2019 prior to the issuance of this revenue procedure. The amended return replaces any prior return (including any AAR filed by the partnership) for the taxable year for purposes of determining the partnership’s treatment of partnership-related items.
 

Filing Requirements

To take advantage of the option to file an amended return, a BBA partnership must file a Form 1065 (with the “Amended Return” box checked) and furnish corresponding amended Schedules K-1. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return and attach a statement to each Schedule K-1 sent to its partners with the same notation. The BBA partnership may file electronically or by mail, but the IRS notes that filing electronically may allow for faster processing of the amended return. It is important to note that the revenue procedure explicitly provides that the amended partnership returns are to be filed via Form 1065. Consequently, Form 1065-X should not be used for purposes of filing an amended partnership return pursuant to this revenue procedure.
 
There are special rules for BBA partnerships whose returns are under examination or who have previously filed an AAR. In addition, the revenue procedure provides clarifying guidance about a partnership’s obligation to provide information under the proposed regulations for Global Intangible Low-Taxed Income, or GILTI.