Tax and financial advice from the Silicon Valley expert.

Paycheck Protection Program Loan relief passed by Congress

The Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was previously passed by the House of Representatives on June 3, 2020.  President Trump is expected to sign the legislation.

Here is a URL for the text of H.R. 7010.  https://www.congress.gov/bill/116th-congress/house-bill/7010/text

The legislation relaxes the requirements to qualify for forgiveness of Paycheck Protection Program (PPP) loans.

Here is a summary of key points:

  • The time in which businesses that receive a PPP loan may count their expenses that qualify for loan forgiveness is extended from 8 to 24 weeks, and the period ends no later than December 31, 2020.
  • Businesses that received a PPP loan before the date of enactment may elect to keep an eight-week period to count expenses that qualify for loan forgiveness.  (A borrower might want to make this election because it paid the required expenses and can apply for forgiveness sooner.)
  • The portion of the loan proceeds used to pay payroll costs is decreased from 75% to 60%.  Under the language in the Act, if the business doesn’t use at least 60% of the loan funds for payroll costs, the loan doesn’t qualify for forgiveness.  Congress is expected to pass a technical correction later to permit a sliding scale forgiveness if the 60% threshold isn’t met.  This means up to 40% of loan proceeds may be used to pay rent expenses, qualified mortgage interest and utilities and still qualify for full loan forgiveness.
  • Borrowers may use the earlier of the date 24-weeks after receiving the loan or December 31, 2020 to meet the requirement to restore their workforce and wages to pre-pandemic levels required for full forgiveness.
  • Two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce were included in the legislation.  (1) The borrower was unable to find qualified employees.  (2) The borrower was unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions.
  • New borrowers have five years to repay the unforgiven portion of the loan instead of two.  Those who received loans before the date of enactment may extend the repayment term of the unforgiven portion of their loans from two to five years, if the lender and borrower agree.  The interest rate remains 1%.
  • Under the CARES Act, businesses that received a PPP loan didn’t qualify for delayed payment of employer taxes.  That prohibition is repealed under the Paycheck Protection Program Flexibility Act.

This legislation should enable many more PPP loan borrowers to qualify for loan forgiveness.  The Small Business Administration will have to update the forms that it just issued to apply for loan forgiveness.

Loan Forgiveness Application Form issued for Paycheck Protection Loans

If your business is one of the fortunate ones that received a PPP (Paycheck Protection Program) loan, now you need to deal with the next challenge:  qualifying for forgiveness of the loan.

The SBA (Small Business Administration) has issued Form 3508, Paycheck Protection Program Loan Forgiveness Application, and Schedule A, Worksheet.

Here is a URL to download the application.  https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application

The purpose of the form is to report the expenses actually incurred that qualify for loan forgiveness.

The form is submitted to the lender where you got the loan, NOT the SBA.

There is no due date listed to submit the form.  Since the rules relating to PPP loans may be amended based on developments for “opening up” the U.S. economy relating to the COVID-19 pandemic, I suggest not hurrying to submit the form.

For example, a Salary/Hourly Wage Reduction is computed on Schedule A for a reduction in full-time equivalent employees that isn’t restored by June 30, 2020.  I think there is a good chance the June 30, 2020 date will be extended if the reopening is slower than Congress initially expected.

An item that isn’t explained very well is self-employment income.  Self-employment income isn’t a normal “payroll” type item.  That information might not be available until the 2020 income tax return is prepared for the business or the business owner.

The “Covered Period” for covered expenses is the eight-week (56-day) period beginning on the PPP Loan Disbursement Date.  For example, if the borrower received its PPP loan proceeds on Monday, April 20, the Covered Period begins on April 20 and ends on June 14.

Generally, covered expenses are incurred and paid during the Covered Period.

Payroll costs must be paid during the covered period (or Alternative Payroll Covered Period) or paid on or before the next regular payroll date.  The Alternative Payroll Covered Period for borrowers with a biweekly (or more frequent) payroll schedule is the eight-week (56-day) period that begins on the first day for their first pay period following their loan disbursement date.

Remember payroll costs include wages, bonuses, tips, employer-paid health insurance, and employer-paid qualified retirement plan expenses.  (https://www.govinfo.gov/content/pkg/FR-2020-04-15/pdf/2020-07672.pdf)

An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the the billing date is after the Covered Period.  Eligible nonpayroll costs include (1) covered mortgage obligations (interest payments on business mortgage obligations on real or personal property incurred before February 15, 2020); (2) business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and (3) business payments for distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The forgiveness for nonpayroll costs is limited to 25% of the total forgiven amount.

Consider having your CPA help you complete this form.

 

Due date for property tax statements for California businesses extended

After I spent the day on May 7, 2020 preparing the 2020 property tax statement (Form 571-L) for my business, I learned that Governor Newsom issued an Executive Order on May 6, 2020 extending the date on which penalties can be assessed for late filing from May 7 to May 31, 2020.

Here is a URL for the Order.  https://www.gov.ca.gov/wp-content/uploads/2020/05/5.6.20-EO-N-61-20-text.pdf

So, if you haven’t filed the statement yet for your business, you still have a few days to take care of it.

The county assessors weren’t happy with this decision because they will be scrambling to get the property tax bills out after the information is received.

The governor’s order also suspends penalties and interest for certain real estate taxes paid after April 10, 2020 for California residential real estate occupied by the taxpayer and California real estate owned and operated by a small business until May 6, 2021.  The following requirements must be met to qualify for the waiver :

  • The taxes owed on the property must not have been delinquent as of March 4, 2020;
  • The taxpayer must timely file a claim for relief in a time and manner prescribed by the tax collector; and
  • The taxpayer must demonstrate to the satisfaction of the tax collector that the taxpayer has suffered economic hardship, or was otherwise unable to pay the taxes on time due to the COVID-19 pandemic, or any local, state or federal response to COVID-19.

If the taxes owed on a property are being paid on an installment plan and the payments were made on time as of March 4, 2020, the balance of the taxes due under the installment plan will not be considered to be delinquent for this purpose.

Real estate taxes being paid using an impound account aren’t eligible for this relief.

If you have questions about this matter, consult with your tax advisor or call your county tax collector.

IRS explains some CARES Act retirement plan provisions

The IRS has posted Frequently Asked Questions relating to CARES Act Retirement Plan Provisions.

According to Q & A 7, a taxpayer who elects to repay a COVID-19 related distribution would pay the tax on the three-year schedule and then amend the tax returns and request refunds when the distribution is repaid.

According to Q & A 9, employers may optionally amend their retirement plans to permit loans and distributions permitted under the CARES Act, so some employers might not allow the increased loans and distributions.

Here is a URL for the FAQs.  https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

Some SSI and VA recipients must register by May 5 to receive bigger Economic Impact Payment

The IRS says Supplemental Security Income (SSI) and Department of Veterans Affairs (VA) beneficiaries must act by Tuesday, May 5 if they didn’t file a federal income tax return for 2018 or 2019 and they have qualifying dependents to increase their Economic Impact Payment.

$500 is added to the payment for a child that would qualify for the child tax credit.

Just go to IRS.gov and click “Non-Filers: Enter Payment Information Here.”

(IR-2020-86 https://www.irs.gov/newsroom/va-ssi-recipients-with-eligible-children-need-to-act-by-tuesday-may-5-to-quickly-add-money-to-their-automatic-economic-impact-payment-plus-500-push-continues)

Expenses paid with forgiven PPP loans aren’t tax deductible

The IRS has issued guidance relating to the tax deductibility of expenses paid with a Paycheck Protection Loan that is forgiven.  (Notice 2020-32.  https://www.irs.gov/pub/irs-drop/n-20-32.pdf)

According to the CARES Act, the forgiveness of indebtedness is not taxable income.  (CARES Act Section 1106(i).)

The CARES Act doesn’t specify whether the expenses are tax deductible.

A Paycheck Protection Loan is eligible for forgiveness when the proceeds are used for the following expenses during the 8-week “covered period” beginning on the the loan’s origination date (CARES Act Section 1106(b)):

  1. Payroll costs
  2. A payment of interest on a covered mortgage obligation
  3. A payment on a covered rent obligation
  4. A covered utility payment

The IRS reminds taxpayers that, according to Internal Revenue Code Section 265(a)(1), no deduction is allowed for any item that is allocable to tax-exempt income.

To receive tax-exempt income from the federal government and to be allowed a tax deduction paid using the income would be a double benefit.

Taxpayers and their tax return preparers should note that these items won’t be tax-deductible on their 2020 income tax returns.

 

Joint Committee on Taxation explains Tax Provisions in CARES Act

The Joint Committee on Taxation has issued a description of the tax provisions in the CARES Act.

Here is a URL to download the report.  https://www.jct.gov/publications.html?func=startdown&id=5256

Paycheck Protection Loan funding passes in Congress

On Thursday, April 23, 2020, the U.S. House of Representatives passed the Paycheck Protection Program an Health Care Enhancement Act.

Now that both houses of Congress have passed the legislation, President Trump says he will sign it.

The legislation adds $310 billion to funding for Paycheck Protection Loans, $50 billion for Economic Injury Disaster Loans and $10 billion for Emergency Economic Disaster Grants.

Banks are saying it’s likely these funds will be used for loan applications that are already in the pipeline.

Congress will likely soon revisit whether additional funding should be provided.

Due date to complete some IRA rollovers is extended

Notice 2020-23 includes an extension to July 15, 2020 of a host of administrative acts.

“The Secretary of the Treasury has also determined that any person performing a time-sensitive action listed in either § 301.7508A-1(c)(1)(iv)-(vi) of the Procedure and Administrative Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990 (December 10, 2018) which is due to be performed on or after April 1, 2020 and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.”

Two of the specified acts include:

(1) An eligible rollover distribution that may be rolled over to an eligible retirement plan, including an IRA no later than the 60th day following the day the distribute received the distributed property (Rev. Proc. 2018-58, Section 8, item 23), and

(2) An individual with excess deferrals for a taxable year must notify a plan not later than March 1 following the taxable year that excess deferrals have been contributed to the plan for the taxable year.  A distribution of excess deferrals identified by the individual, plus income attributable to the excess through the end of the taxable year, must be made no later than the first taxable year of the excess (Rev. Proc. 2018-58, Section 8, item 25.)

Therefore, rollovers of IRA distributions made after January 31, 2020 to May 16, 2020 may be completed by July 15, 2020.  (Watch for more IRS announcements relating to retirement plan distributions.)  (Remember distributions from inherited IRAs that have a nonspouse beneficiary aren’t eligible for rollovers.)

Excess deferrals for 2019 contributed to a qualified retirement plan or IRA should be distributed by the plan by July 15, 2020.

Here is a URL for Notice 2020-23.  https://www.irs.gov/pub/irs-drop/n-20-23.pdf

Here is a URL for Revenue Procedure 2018-58.  https://www.irs.gov/pub/irs-drop/rp-18-58.pdf

Here is a URL for Regulations § 301.7508-1. https://www.govinfo.gov/content/pkg/CFR-2012-title26-vol18/pdf/CFR-2012-title26-vol18-sec301-7508A-1.pdf

Senate passes a proposal to extend funding for PPP loans and EIDL loans

On April 21, 2020, the U.S. Senate passed the Paycheck Protection Program and Health Care Enhancement Act.  The legislation would increase the authorization level for the Paycheck Protection Program from $349 billion to $659 billion, and increase the appropriation level for the PPP from $349 billion to $670.355 billion.

$30 billion of the increase is earmarked for distribution by community-based lenders.

It also increased the authorization level for Emergency Economic Injury Disaster Grants from $10 billion to $20 billion (maximum $10,000 grant for a business) and adds $50 billion for Economic Injury Disaster Loans.

Certain agricultural enterprises with not more than 500 employees are made eligible for PPP loans.

The House of Representatives is scheduled to pass the legislation on Thursday, April 23, and President Trump says he will sign it.

These funds are expected to be committed as fast as the initial amounts.

Congress will likely be revisiting funding for these loans again.

Here is a URL to the Bill that passed in the Senate.  https://www.trsa.org/wp-content/uploads/2020/04/Bill-Text.pdf

Tax and financial advice from the Silicon Valley expert.