Tag: Paycheck Protection Program

Paycheck Protection Program Answers Your Looking For

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The Paycheck Protection Program (PPP) loan process has become increasingly complicated as new guidance and enhancements to the program have been announced. Not only does the guidance continue to change but some of the provisions have retroactive application, such as the availability of 2020 employee retention credits (ERCs) for borrowers of PPP loans.  

How can I maximize the employee retention credit while still achieving full PPP loan forgiveness?

Section 2301(g)(1) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Tax Certainty and Disaster Tax Relief Act of 2020 (Relief Act), allows recipients of PPP loans to also claim the ERC for qualified wages as long as the same expenses are not used for both benefits. IRS Notice 2021-20, issued on March 1, 2021, provides guidance for employers claiming the ERC and indicates that an eligible employer generally makes the election to use payroll costs for PPP loan forgiveness by not claiming the ERC for those qualified wages on its federal employment tax return.
 
The general rule is fairly easy to apply for PPP borrowers who have not yet applied to have a PPP loan forgiven, because they can make the election on an original or amended federal employment tax return (typically a Form 941). ERC qualified wages are limited to $10,000 for calendar year 2020 and $10,000 for each of Q1 and Q2 of 2021 (note that the American Rescue Plan Act of 2021 (ARP), which was signed into law on March 11, 2021, extends the ERC through December 31, 2021).
 
The determination of the ERC wage amount for each quarterly return begins with an employee-by-employee analysis of qualified wages paid during each quarter before and after the PPP loan covered period. If the maximum qualified wage amount is paid or projected to be paid outside the PPP loan covered period, then the analysis is complete for that employee and all wages paid to that employee during the covered period can be used for PPP loan forgiveness. If, however, the ERC maximum qualified wage is not reached with respect to wages paid outside the PPP loan covered period, additional analysis is needed to determine whether wages paid during the PPP loan covered period can be designated as ERC wages without affecting total loan forgiveness. It is important to note that total loan forgiveness can be achieved with payroll costs that equal only 60% of the PPP loan as long as there are eligible non-payroll costs paid during the covered period to cover 40% of the loan.  
 
This process works differently for PPP loan borrowers that have already filed a forgiveness application for a 2020 PPP loan. When these borrowers filed 2020 Q2 and Q3 federal employment tax returns, they were not eligible for the ERC and, at the time the 2020 Q4 return was filed, they had very little information on how to claim the credit. As a result, borrowers generally did not include an ERC qualified wage election on their originally filed 2020 employment tax returns. 
 
To address this issue, Notice 2021-20 provides that an eligible employer is deemed to have made the election under section 2301(g)(1) of the CARES Act for the amount of qualified wages included in the payroll costs reported on the PPP loan forgiveness application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the application, sufficient to support the amount of the PPP loan that is forgiven. Wages and health care costs covered by this deemed election cannot be considered qualified wages for purposes of the ERC.
 
For example, to simplify the forgiveness process a 2020 PPP borrower with payroll costs of $100,000 and nonpayroll costs of $50,000 reported only payroll costs of $100,000 on its PPP loan forgiveness application. Under Notice 2021-20, the borrower may not include any of the $100,000 of payroll costs as qualified wages in its ERC calculation, notwithstanding that 100% PPP loan forgiveness could have been achieved by reporting only $60,000 of payroll costs and $40,000 of nonpayroll costs.
 
If the PPP borrower had reported payroll costs of $100,000 and nonpayroll costs of $40,000 on its PPP loan forgiveness application, the deemed election would apply to only $60,000 of payroll costs.
 
Key takeaway: Unfortunately, borrowers who have already received PPP loan forgiveness do not have the same planning opportunities that are available to borrowers who have not yet filed the loan forgiveness application.

How do I measure gross receipts to determine eligibility for a second draw loan?

Generally, gross receipts for purposes of second draw PPP loan eligibility are defined as all revenue received or accrued by the borrower and its affiliates from all sources. This includes revenue from the sale of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns and allowances but excluding net capital gains and losses. Importantly, gross receipts do not include forgiven PPP loan proceeds or economic injury disaster loan (EIDL) advances. Guidance released by the Small Business Administration (SBA) provides a shortcut to calculating gross receipts based on the relevant lines of the tax return.
 
To be eligible to receive a second draw PPP Loan, the borrower must demonstrate at least a 25% decline in either:

  • Gross receipts in any calendar quarter of 2020 compared to the same quarter of 2019, or
  • Annual gross receipts in 2020 compared to annual gross receipts in 2019.

For entities that were not in business during all of 2019, the decline in gross receipts can be demonstrated starting with the first quarter in which business began if it was before February 15, 2020. For example, applicants that were not in business until the fourth quarter of 2019 should compare the fourth quarter of 2019 to each calendar quarter of 2020 when measuring the decline in gross receipts.
 
If the requested second draw PPP loan amount is greater than $150,000, the applicant must provide documentation supporting the decline in gross receipts with the loan application. For loan amounts of less than $150,000, SBA allows the documentation to be provided no later than the time the loan forgiveness application is submitted to the lender. Supporting documentation includes quarterly financial statements or quarterly or monthly bank statements. If relying on annual gross receipts, the 2019 and 2020 annual tax filings are required. If the 2020 annual tax filing is not yet available, SBA recommends submitting a mock 2020 return with signatures attesting that the values entered will be the same values included on the filed return.

What’s different about second draw loans in addition to the gross receipts requirement?

Maximum number of employees

Unlike for first draw eligibility, the only definition of small employer for purposes of the second draw is that the employer can have no more than 300 employees. Therefore, an employer that exceeds the 300-employee threshold cannot rely on the size standards established by SBA for purposes of second draw eligibility.
 
When counting the number of employees, all employees of the borrower and its affiliates (both U.S. and foreign) must be included, unless the borrower satisfies the alternative criteria for businesses with a North American Industry Classification System (NAICS) code beginning with 72 or qualifying news organizations. (The ARP includes provisions that also make more nonprofit organizations eligible for the PPP.) Special rules also apply to franchisees. This is not a full-time equivalent determination. One person equals one employee no matter the hours worked.
 
SBA does not determine affiliates based solely on ownership. According to SBA guidance, affiliation generally exists when one business controls or has the power to control another, or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. The totality of the circumstances must be considered when determining which entities are affiliates when applying the 300-employee threshold. 
 
Key takeaway: Many first draw PPP loan recipients are not eligible for second draw loans due to the requirement that second draw applicants have no more than 300 employees.
 

Processing delays

The new process implemented by SBA to fight fraud in the PPP program has delayed some loan applications for weeks, resulting in about 30% of the applications being rejected or requiring more documentation. In addition, the loan application approval process for lenders includes various SBA validation and other checks that can result in the application being sent back to the lender or otherwise stalled, including when a lender submits the loan application to SBA via the SBA E-Tran (processing) system, during the SBA underwriting process (where applications may be flagged with any of 40 possible error codes), and during the actual SBA review process. For stalled applications, it can take significant manual effort by lenders and borrowers to rectify error codes and provide additional documentation.
 
Common error code and validation issues have included:

  •  The imposition of a loan cap of $35,000 per employee for both first draw and second draw applications by the SBA E-Tran system, something not addressed in any of the PPP legislation or SBA’s IFRs or FAQs. This system cap is also causing lenders to reduce the amount of a loan they are approving before sending the loan to SBA.
  • The use of a “doing business as” name (DBA), which may trigger a hold code error for second draw applications even though the DBA was used by the entity in the first draw loan cycle.
  • The requirement for an entity that applies for a first draw loan and then immediately applies for a second draw loan to certify it has or will have used the first draw loan proceeds for eligible expenses prior to the disbursement of the proceeds of the second draw loan.
  • The requirement that the same EIN is used on both the first draw and second draw loan applications. Some sole proprietors (Schedule C businesses) used their social security number (SSN) for first draw loans, but the SBA processing system is now requiring the use of an EIN. Changing from an SSN to an EIN will generate an error and, in some cases, the SBA system is generating an error even where the EINs on the first and second draw applications match.

In an attempt to speed up loan approvals and disbursements while still maintaining the integrity of the program, SBA changed its processing system in February 2021 to give lenders the authority to clear certain codes and to delay some supporting documents until the borrower applies for loan forgiveness. Even with this change, the application process can be very time intensive because lenders and borrowers are still trying to navigate the new process.

Is there any standard language that should be included when replying to a Form 3509 or 3510?

Borrowers that, together with their affiliates, received $2 million or more in PPP loans are required to complete one of two loan necessity questionnaires, either Form 3509 or 3510, depending on whether the borrower is for-profit or nonprofit, respectively. The information that the borrower provides on either form will be used by SBA to assess the borrower’s certification made at the time of the loan application that the economic uncertainty makes the PPP loan necessary to support the borrower’s ongoing operations (the economic uncertainty certification). 
 
In its PPP Frequently Asked Questions (specifically, FAQ number 53), SBA provides that the borrower’s receipt of the loan necessity questionnaire does not mean that SBA is challenging the economic uncertainty certification, but rather SBA’s assessment of the certification will be based on the totality of the borrower’s circumstances. The economic uncertainty certification is required to have been made in good faith at the time of the first draw PPP loan application, even if subsequent developments resulted in the loan no longer being necessary. In its review, SBA may take into account the borrower’s circumstances and actions both before and after the economic uncertainty certification, to the extent that doing so will assist in determining whether the borrower made the required certification in good faith.
 
The loan necessity questionnaire makes inquiries that are specific and unique to each borrower to assist SBA in assessing the economic uncertainty certification. The inquiries are centered around two main assessments of the borrower: (i) a business/nonprofit activity assessment, and (ii) a liquidity assessment. The responses to the questions should be based on the borrower’s specific facts and circumstances, and generally these responses do not lend themselves to a standard or canned response. A borrower should make sure that each question is addressed, and if the question is not applicable, the borrower should state this on the questionnaire. At the end of each assessment, the questionnaire provides an optional comment section for the borrower to include additional narrative. Many borrowers view this optional section as a means to address questions where character limits did not allow them to fully complete the response or as an opportunity to address any previous response that may need further context to ensure that the economic uncertainty certification was made in good faith.

How do I account for PPP loans in my financial statements?

There is no specific guidance in U.S. GAAP related to accounting for government assistance by business/for-profit entities. To determine the relevant accounting treatment, entities should analyze the nature and form of the assistance as well as the conditions required to be met.
 
An entity should first consider accounting principles for similar transactions or events within a source of authoritative U.S. GAAP guidance for that entity and then consider nonauthoritative guidance from other sources.
 

Loan model

As PPP loans are considered legal-form debt, it is appropriate to account for them as such under ASC 470, Debt. Under this model, the liability would only be derecognized upon (a) repayment to the creditor or (b) legal release under ASC 405-20, Extinguishments of Liabilities. In this context, some entities may repay the PPP loan at the end of two (or five) years upon maturity, or earlier because they have reconsidered their eligibility. In those cases, debt accounting must be applied.
 
Entities that intend to apply for debt forgiveness should still account for the PPP loan as debt pursuant to the guidance in ASC 470. However, legal release would only occur upon confirmation of forgiveness from SBA. 
 
Key takeaway: Borrowers intending to or that have already applied for forgiveness should not derecognize the PPP loan liability until they have received the confirmation of forgiveness from SBA.  
 

IAS 20 grant accounting model

Alternatively, it may be acceptable to account for PPP loans by analogy to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. This analogy is only acceptable if:

  •  The entity meets the eligibility requirements to participate in the PPP, which may require legal analysis. Entities with loans under the $2 million safe harbor may be eligible, absent evidence to the contrary.
  • At inception, it is probable the borrower will qualify for forgiveness. In practice, “probable” is commonly understood to mean 75%–80% likely to occur (IAS 20 refers to “reasonable assurance” concerning a recipient’s compliance with the conditions required to receive a grant, which is understood to be synonymous with “probable” under U.S. GAAP).

Under an analogy to IAS 20, a deferred income liability would be recognized upon receipt of the forgivable loan if, at the time of receiving the loan, the entity has determined it is probable the entity would meet the conditions for forgiveness, i.e., the loan will be used to pay for qualifying salaries, rent, mortgage interest and utilities. No interest would be accrued due to the expectation of forgiveness.
 
The deferred income liability would be derecognized on a systematic basis over the periods in which the entity incurs the related expenses (e.g., payroll). That is, the deferred income would be recognized in the income statement as qualified expenses are paid and presented as either (1) other income or (2) a reduction of the related expenses (presentation as revenue is not appropriate). This approach will result in the recognition of the proceeds as a grant for the amount expected to be forgiven prior to legal release; the remainder (if any) would be recognized as a loan consistent with ASC 470 and derecognized upon repayment or legal release in accordance with ASC 405-20.
 
Key takeaway: It is important to note that in the context of IAS 20, the assessment regarding eligibility may require significant documentation and the 75%–80% probability hurdle regarding qualifying for forgiveness may be difficult to overcome for many borrowers, as borrowers will need to make this assessment at the inception and monitor on an ongoing basis. In addition, entities should consider whether they have previously established an accounting policy for government grants, which should be applied consistently. If no such policy exists, the selection of a policy to account for a PPP loan will need to be considered for any future forms of government grants received.

Not-for-profit entities

ASC 958-605, Not-for-Profit Entities—Revenue Recognition applies to government grants received by not-for-profit entities. Therefore, no analogy to IAS 20 would be made by not-for-profit entities.

 
Disclosure considerations

All reporting entities should disclose the applicable accounting policy for PPP and, if applicable, its treatment as forgiven in the footnotes and where the loan amounts are presented in the financial statements.
 
In addition, SEC registrants should provide appropriate disclosures throughout their filings. Specifically, a risk factor may be appropriate to address eligibility considerations for the PPP loans as well as uncertainties about forgiveness. MD&A liquidity disclosures should discuss the borrower’s intent and ability to repay the loan. When a registrant’s operations are only viable due to the receipt of the PPP loan, that fact should also be disclosed.

Consolidated Appropriations Act, 2021

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The U.S. House of Representatives and U.S. Senate passed the Consolidated Appropriations Act, 2021 (bill), a massive tax, funding, and spending bill that contains a nearly $900 billion coronavirus aid package. The emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals and provide funding for COVID-19 testing and the administration of vaccines.

The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. According to Treasury Secretary Mnuchin, these checks could be distributed before the end of 2020. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020.
 
The bill earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains a number of important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
 
The bill allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities.
 
The bill also extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits and incentives that are set to expire on December 31, 2020.
 
This alert highlights the main tax provisions included in the bill.
 

Paycheck Protection Program

The PPP, one of the stimulus measures created by the CARES Act, provides for the granting of federally guaranteed loans to small businesses, nonprofit organizations, veterans organizations and tribal businesses in an effort to keep businesses operating and retain staff during the COVID-19 pandemic. (PPP loans are administered by the Small Business Administration (SBA)).
 
A recipient of a PPP loan under the CARES Act (the first round) could use the funds to meet payroll costs, certain employee healthcare costs, interest on mortgage obligations, rent and utilities. At least 60% of the loan funds were required to be spent on payroll costs for the loan to be forgiven.
 

Eligible businesses

Business are eligible for the second round of PPP loans regardless of whether a loan was received in the first round. The bill changes the definition of a “small business.” Small businesses are defined as businesses with no more than 300 employees and whose revenues dropped by 25% during one of the first three quarters of 2020 (or the fourth quarter if the business is applying after January 1, 2021). The decrease is determined by comparing gross receipts in a quarter to the same in the prior year. Businesses with more than 300 employees must meet the SBA’s usual criteria to qualify as a small business.
 
Borrowers may receive a loan amount of up to 2.5 (3.5 for accommodation and food services sector businesses) times their average monthly payroll costs in 2019 or the 12 months before the loan application, capped at $2 million per borrower, reduced from a limit of $10 million in the first round of PPP loans.  
 
The bill also expands the types of organizations that may request a PPP loan. Eligibility for a PPP loan is extended to:

  • Tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c)(6) that have no more than 300 employees and whose lobbying activities do not comprise more than 15% of the organization’s total activities (but the loan proceeds may not be used for lobbying activities)
  • “Destination marketing organizations” that do not have more than 300 employees
  • Housing cooperatives that do not have more than 300 employees
  • Stations, newspapers and public broadcasting organizations that do not have more than 500 employees

 The following businesses, inter alia, are not eligible for a PPP loan:

  • Publicly-traded businesses and entities created or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership, or that retain as a member of the entity’s board of directors a China-resident person
  • Persons required to submit a registration statement under the Foreign Agents Registration Act
  • Persons that receive a grant under the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act

Uses of loan proceeds

The bill adds four types of non-payroll expenses that can be paid from and submitted for forgiveness, for both round 1 and round 2 PPP loans, but it is unclear whether borrowers that have already been approved for partial forgiveness can resubmit an application to add these new expenses:

  • Covered operational expenditures, i.e., payments for software or cloud computing services that facilitate business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses
  • Covered property damage, i.e., costs related to property damage and vandalism or looting due to public disturbances that took place in 2020, which were not covered by insurance or other compensation
  • Covered supplier costs, i.e., expenses incurred by a borrower under a contract or order in effect before the date the PPP loan proceeds were disbursed for the supply of goods that are essential to the borrower’s business operations
  • Covered worker protection equipment, i.e., costs of personal protective equipment incurred by a borrower to comply with rules or guidance issued by the Department of Health & Human Services, the Occupational Safety and Health Administration or the Centers for Disease Control, or a state or local government

 
To qualify for full forgiveness of a PPP loan, the borrower must use at least 60% of the funds for payroll-related expenses over the relevant covered period (eight or 24 weeks).
 

Increase in loan amount

The bill contains a provision that allows an eligible recipient of a PPP loan to request an increased amount, even if the initial loan proceeds were returned in part or in full, and even if the lender of the original loan has submitted a Form 1502 to the SBA (the form sets out the identity of the borrower and the loan amount).
 

Expense deductions

The bill confirms that business expenses (that normally would be deductible for federal income tax purposes) paid out of PPP loans may be deducted for federal income tax purposes and that the borrower’s tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This has been an area of uncertainty because, while the CARES Act provides that any amount of PPP loan forgiveness that normally would be includible in gross income will be excluded from gross income, it is silent on whether eligible business expenses attributable to PPP loan forgiveness are deductible for tax purposes. The IRS took the position in guidance that, because the proceeds of a forgiven PPP loan are not considered taxable income, expenses paid with forgiven PPP loan proceeds may not be deducted. The bill clarifies that such expenses are fully deductible—welcome news for struggling businesses. Importantly, the effective date of this provision applies to taxable years ending after the date of the enactment of the CARES Act. Thus, taxpayers that filed tax returns without deducting PPP-eligible deductions should consider amending such returns to claim the expenses.
 

Loan forgiveness covered period

The bill clarifies the rules relating to the selection of a PPP loan forgiveness covered period. Under the current rules, only borrowers that received PPP proceeds before June 5, 2020 could elect an eight-week covered period. The bill provides that the covered period begins on the loan origination date but allows all loan recipients to choose the ending date that is eight or 24 weeks later.
 

Loan forgiveness

PPP loan recipients generally are eligible for loan forgiveness if they apply at least 60% of the loan proceeds to payroll costs (subject to the newly added eligible expenditures, as described above), with partial forgiveness available where this threshold is not met. Loans that are not forgiven must be repaid.
 
Currently, PPP loan recipients apply for loan forgiveness on either SBA Form 3508, Form 3508 EZ or Form 3508S, all of which required documentation that demonstrates that the claimed amounts were paid during the applicable covered period, subject to reduction for not maintaining the workforce or wages at pre-COVID levels.
 
The bill provides a new simplified forgiveness procedure for loans of $150,000 or less. Instead of the documentation summarized above, these borrowers cannot be required to submit to the lender any documents other than a one-page signed certification that sets out the number of employees the borrower was able to retain because of the PPP loan, an estimate of the amounts spent on payroll-related costs, the total loan value and that the borrower has accurately provided all information required and retains all relevant documents. The SBA will be required to develop the simplified loan forgiveness application form within 24 days of the enactment of the bill and generally may not require additional documentation. Lenders will need to modify their systems used for applications to make an electronic version of the new forgiveness application available to eligible borrowers.
 

Employment Retention Credit and Families First Coronavirus Response Credit

The bill extends and expands the ERC and the paid leave credit under the Families First Coronavirus Response Act (FFCRA).
 

ERC

The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
 
The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:

  • The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
  • The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
  • The credit is available to certain government instrumentalities.
  • The bill clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
  • New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
  • Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, the bill strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

 The bill makes three retroactive changes that are effective as if they were included the CARES Act. Employers that received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. The bill also clarifies how tax-exempt organizations determine “gross receipts” and that group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee.
 

FFCRA

The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021 on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from January 1 to March 31, 2021 may take a federal tax credit for providing such leave. Some clarifications have been made for self-employed individuals as if they were included in the FFCRA.
 

Other Tax Provisions in the CAA

The bill includes changes to some provisions in the IRC:

  • Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017.
  • Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5% so that more expenses may be deducted.
  • Business meal deduction: Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50% of those expenses).
  • Extenders: The bill provides for a five-year extension of the following tax provisions that are scheduled to sunset on December 31, 2020:
    • The look-through rule for certain payments from related controlled foreign corporations in IRC Section 954(c)(6), which was extended to apply to taxable years of foreign corporations beginning before January 1, 2026 and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end
    • New Markets Tax Credit
    • Work Opportunity Tax Credit
    • Health Coverage Tax Credit
    • Carbon Oxide Sequestration Credit
    • Employer credit for paid family and medical leave
    • Empowerment zone tax incentives
    • Exclusion from gross income of discharge of qualified principal residence indebtedness
    • Seven-year recovery period for motorsports entertainment complexes
    • Expensing rules for certain productions
    • Oil spill liability trust fund rate
    • Incentive for certain employer payments of student loans (notably, the bill does not include other student loan relief so that borrowers will need to resume payments on such loans and interest will begin to accrue).
  • Permanent changes: The bill makes several tax provisions permanent that were scheduled to expire in the future, in addition to the medical expense deduction threshold mentioned above:
    • The deduction of the costs of energy-efficient commercial building property (now subject to inflation adjustments)
    • The gross income deduction provided to volunteer firefighters and emergency medical responders for state and local tax benefits and certain qualified payments
    • The transition from a deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning credit
    • The railroad track maintenance credit
    • Certain provisions, refunds and reduced rates related to beer, wine and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S.

2020 Private Equity Tax Strategy Considerations

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Key strategies for maintaining a strong offensive tax position during times of economic distress, particularly during the current COVID-19 pandemic, include finding money, preserving cash and planning for future success.

While the affiliation rules associated with the Paycheck Protection Program (PPP) precluded many private equity-backed portfolio companies from qualifying for PPP loans, it is possible to find money through three simple tax actions. First, businesses can now carry back net operating losses for five years, meaning that tax losses from 2018, 2019 and 2020 can be used to offset income from the prior five years for a quick cash refund. Second, businesses with any remaining alternative minimum tax (AMT) credits can also get a quick refund by electing to make all such credits refundable for 2018. Finally, businesses can get a tax credit of up to $5,000 per employee for employees kept on payroll during the pandemic, even if those employees are providing partial services for their compensation.

There are several ways to preserve cash at the moment, starting with deferring tax payments. Businesses can now defer employer payroll taxes otherwise payable for the period from March 27, 2020, through December 31, 2020. Half of the amount can be deferred until December 31, 2021, and the other half until December 31, 2022. Employers that received PPP loans can only defer payroll payments until the loans are forgiven, except that amounts deferred before the loans are forgiven can be deferred 50/50 until December 31, 2021 and 2022. In addition, payment (not just filing) of 2019 taxes can be deferred until July 15, 2020.

On top of these deferrals, 2019 and 2020 taxes can be reduced by taking a higher interest expense deduction than was previously allowed. Under the Tax Cuts and Jobs Act of 2017, businesses could only deduct interest expense up to 30% of adjusted taxable income (ATI), a computation that is similar to EBITDA but may differ in some important respects. For 2019 and 2020, the deductible amount has been increased to up to 50% of ATI. Not only that, 2019 ATI can be used to calculate 2020 interest expense deduction. Finally, businesses can take 100% bonus depreciation on qualified improvement property, a defined term that generally combines three previously separate categories (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property).

To plan for future success, we recommend businesses use this time to focus on setting an action plan. Businesses should review any diligence reports from the last 12 to 24 months, address any material issues and review acquisition documents to confirm receipt of any benefits to which they’re entitled (e.g., any net operating loss carryback opportunities).

Businesses should also take this time to consult with tax advisors about state income tax credits and business incentives reviews, as well as consider a reverse sales tax audit to see if a refund of overpaid use taxes is available. In addition, this is a good time to make sure sales tax is being filed properly, especially given numerous changes to sales taxes (with some jurisdictions even taxing services) as well as the Wayfair decision, which permitted states to expand sales tax filing obligations to an economic rather than a physical basis. Sales taxes are generally accepted as a customer tax, unless the business is audited, in which case the business pays.

Although not really a tax, a reverse unclaimed property audit may also be considered. With tax revenues plummeting, states will likely be looking for sources of additional revenue and unclaimed property may be low hanging fruit. This is especially true for businesses incorporated in Delaware, an aggressive state when it comes to unclaimed property.

The government has been providing tax as well as financial aid at a ferocious pace, including additional guidance and expanded (and sometimes nuanced) benefits. While we have outlined some of the bigger benefits currently available, businesses should consult with their tax advisors about these and other tax opportunities.