Tax News In a Nutshell - 11.23.20
These Are the PPP Days of Our Lives
PPP has provided no shortage of drama; the ups and downs have us feeling like we’re part of a soap opera! The CARES Act delivered what many considered a critical lifeline for small businesses, but ensuing guidance continues to draw criticism and concern from taxpayers and pros.
The Bold and the Bearers of Bad News
The IRS determined early on in Notice 2020-32 that expenses paid for with forgiven PPP loans are not deductible. And while several members of Congress argue this was not the intent of the law, the IRS maintained its position based on how the law was actually written. Absent further legislative action, it would appear deductibility was settled (unless the IRS's position can be proven incorrect). However, questions remained on timing; would a business be able to deduct expenses paid for with PPP proceeds in 2020 if forgiveness would not be attained until 2021? To the dismay of many, the IRS determined no.
Revenue Ruling 2020-27 provides that if at the end of 2020 forgiveness is reasonably expected, no deduction will be allowed in 2020 regardless of when actual forgiveness is applied for, determined, or received. If the taxpayer knows the amount of its eligible expenses that will qualify for forgiveness and has a “reasonable expectation” of reimbursement in the form of loan forgiveness, the Service has decided forgiveness is foreseeable and therefore no deduction in 2020 will be allowed.
Well, alright. But what if a taxpayer properly disallows PPP-related expenses in 2020 because of this reasonable expectation of forgiveness and then subsequently receives notification that forgiveness has been partially or fully disallowed or the taxpayer decides not to apply for forgiveness? Revenue Procedure 2020-51 kicks in and allows a taxpayer in this situation to deduct eligible expenses that were not forgiven on an original 2020 return, a 2020 amended return or AAR, or a subsequent return.
Check out Tony Nitti’s latest Forbes article on the matter for questions that remain.
The Not-So-Young and the Restless
Initial denial of PPP-related expense deductibility caused controversy and this latest round of guidance did not aid in making amends. Senate Finance Committee leaders Grassley and Wyden released a joint statement in response to the IRS’s double down on unfavorable taxpayer guidance, reiterating the intent of the CARES Act was for “small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses.” They continue by adding:
"We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.”…”While we continue our efforts to clarify in any end-of-year legislation the indented relief in the CARES Act, we have an opportunity to provide meaningful relief to small business at this critical time. We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most.”
In addition to the Grassley/Wyden statement, a potential legislative fix looms as well. The Small Business Expense Protection Act of 2020, a bipartisan Senate bill that would allow PPP-related expenses to be deductible regardless of forgiveness exclusion from gross income, got another cosponsor last week, bringing total cosponsors to 35. Introduced in early May, the bill has been steadily gaining support but has yet to be taken further despite opportunities to do so. AICPA leadership have stated their belief the bill may make it into the next COVID-19 relief legislation but we will have to wait and see if that happens.
Given the strong opposition to IRS determinations on deductibility and timing of deductions in relation to forgiveness, this fight may not be over just yet.
As The PPP World Turns
The Employee Retention Credit (ERC) FAQs were updated to add questions related to interactions with PPP loans involving M&A deals. FAQ 81a discusses stock transactions and FAQ 81b covers asset acquisitions.
And those loan necessity questionnaires being quietly floated to borrowers having $2M or greater in PPP loans are still creating a stir. Criticism of the tactics to evaluate economic uncertainty in ways not disclosed in the initial loan application began almost immediately, with the AICPA leading the inquisition of the SBA’s approach. Eighty business groups have now joined in as well requesting a temporary suspension of the questionnaires, claiming they go beyond initial requirements.
IRS Commissioner Charles Rettig reportedly declared there will be no blanket COVID-19 penalty relief. And despite a mail backlog of 3 million pieces and 1 million paper returns, notices continue to roll out to taxpayers, many of which are incorrect due to returns or payments sitting unopened. On top of it, tax pros are increasingly unable to find resolution via IRS telephone lines either. With long-time concerns of an underfunded IRS coming to a head, an advisory council suggests speeding up and expanding e-services, as well as greater funding of the IRS.
A move in that direction, new electronic signature options will be available for Form 2848, Power of Attorney, and Form 8821, Tax Information Authorization as part of the Taxpayer First Act of 2019. A new form submission platform is planned for release in January that will allow tax pros to upload third-party authorization forms to IRS.gov with either a penned or electronic signature.
The IRS also plans to launch a platform called the “Tax Pro Account” next summer that will be a place for tax professionals to e-sign and initiate an online third-party authorization form that will automatically transfer into the client’s IRS online account.
Notice 2020-81 provides guidance on the corporate bond monthly yield curve, spot segment rates, 24-month segment rates, and the interest rate on 30-year Treasury securities and weighted average rate.
Notice 2020-82 provides that the IRS will treat a contribution to a single-employer defined benefit pension plan with an extended due date of January 1, 2021 pursuant to the CARES Act as timely made if it’s made no later than January 4, 2021 (which is the first business day after January 1, 2021).
Notice 2020-83 provides the 2020 Required Amendments List applying to both individually designed plans satisfying both the §§401(a) and 403(b).
Rev. Rul. 2020-26 provides the applicable federal rates (AFR) for December 2020.
Final regulations address how an exempt organization subject to UBIT determines if it has more than one unrelated trade or business, and how unrelated business taxable income is calculated. They also clarify that individual retirement accounts are included in the definition of an unrelated trade or business, and that subpart F and GILTI inclusions are treated the same as dividends for UBI purposes.
Corporations subject to the extraordinary disposition rule under §245A and the disqualified basis or disqualified payment rules under §951A received final regulations.
Draft Form 1120-S instructions were released explaining new K-1 requirements to disclose the beginning and ending number of shares for each shareholder, as well as beginning and ending loans to each shareholder. Previously, only the shareholder’s percentage of stock in box F was required.
No room for a Case of the Mondays but if you’re thirsty for more, check out this IRS win over Coca-Cola!
Have a great week and a Happy Thanksgiving to you as well, whatever that may look like this year!
Information provided is for educational purposes only and not to be considered tax advice. Consult with your advisors for how to proceed with your unique set of facts.