Tax Week in a Nutshell - 5.29.20
Since all the upcoming concerts have been cancelled, I figured a musical medley of tax news might cheer us up. PPP dominates again but some other tax news squeaks through. Let's take a look at highlights from this week in tax.
Who’s Tired of PPP? (Yeah You Know Me!)
If you’re getting worn out keeping up with Payroll Protection Program (PPP) updates and uncertainty, you’re far from alone. But it’s important for so many and hopefully on the down slope. As predicted last week, the SBA gave holiday weekend reading late last Friday night in the form of two PPP loan forgiveness related Interim Final Rules (IFRs).
Please Forgive Me
The first IFR is what many had been waiting for – narrative style guidance specifically discussing what would be included in forgiven amounts of PPP loans. Much of the information confirmed what we already knew and had in front of us from the recently released PPP Loan Forgiveness Application and instructions. But there were some new twists, including:
Explanation of caps for owner-employees, self-employed individuals, and general partners
Broadening of definitions for employee pay, with annualized $100K cap remaining
Requirement for employers to report an employee’s refusal to return to work to the state unemployment agency after a rehire offer has been extended if the employer would like to exclude such employee from a reduction in FTEs
Unfortunately, the IFR did not cover all questions and more clarifications will be necessary in the form of further guidance.
Under My Thumb
The second IFR provides SBA loan review procedures and borrower and lender responsibilities. Previously, the SBA PPP FAQs announced it will review loans in excess of $2M, giving a safe harbor for loan under that amount which deems the borrower to have made the required good faith certification necessitating the funds.
But I believe the SBA is leaving wiggle room in case they need it? The IFR indicates loans of any size may go under SBA review at their discretion reviewing use of proceeds and appropriate loan forgiveness is still on the table…for six years! Keep your records available. You’ll know if you got picked though - SBA review will be communicated to the lender, who is then required to notify the borrower.
If after SBA review it’s determined a borrower was ineligible for the loan, no amounts will be forgiven and the loan may be requested to be repaid sooner than expected. Borrowers will have a chance to respond, provide additional information, and appeal if SBA review goes south.
Lender guidelines for reviewing forgiveness are discussed as well. While forgiveness calculations are the responsibility of the borrower, for each forgiveness application a lender should confirm:
Receipt of borrower certifications in the forgiveness application
Receipt of documentation to substantiate forgiveness expenses
Borrower’s forgiveness calculations
Lenders may rely on borrower representations but if forgiveness calculation errors are found or there is a lack of supporting documents, action should be taken to remedy the issues.
Forgiveness determinations must be completed by lenders not later than 60 days after receipt of a completed loan forgiveness application from the borrower. It’s not over yet though at that point, the lender decision is passed onto the SBA before the process is finalized. The SBA has 90 days to review the PPP loan and forgiveness and disburse funds to lenders, meaning the entire forgiveness application process could take up to 150 days.
Could this delay cause problems if the forgiveness period is extended from its current 8-week timeframe? Accounting for potential forgiveness could be uncertain if the decision period extends beyond year-end. We’ll cross that bridge when we get to it.
A Change Would Do You Good
While the PPP, as cumbersome as it has been, may actually be helping businesses, further changes could provide needed flexibility. Discussions circle Congress with House bill HR 7010 being the most recently passed potential PPP program amendment with flying colors. Among other changes, the bill extends the 8-week covered forgiveness period to 24 weeks and increases eligible use of non-payroll costs to 40% from 25%.
Word on the street is the Senate largely agrees with making similar changes but will not take the House bill completely as is. Stay tuned for Senate response when they return from Memorial Day recess.
Employer Credits Feel-Me-Flowchart
Everyone loves a solid chart to give a breakdown of complex issues! The IRS decided to try their hand at explaining new COVID-19 related employer tax credits with a more visual representation in Publication 5419.
Just two pages long, with the first a flowchart providing a very high-level overview of the Employee Retention Credit (recall there are 90+ ERC FAQs!). The second chart sums up the two new paid leave credits under the FFCRA (Families First Coronavirus Response Act), which again, is more complex than it would appear.
If you’re wanting an in-depth overview of the ERC and are a Thomson Reuters PPC subscriber, check out NTA-1107 in Issue 2020-10 that came out today for my latest piece!
Hip Hop Hooray!
Toss aside your certified mail forms and “AMENDED” rubber stamps, if you still use those. Yesterday the IRS announced Form 1040-X will finally be available for electronic filing later this year!
For now, only 2019 amended Forms 1040 and 1040-SR will be included in this e-filing world but at least it’s a start. Hopefully it’s not foreshadowing, indicating there’s a good chance 2019 personal income tax returns will need to be amended - the IRS noted roughly 3 million amended individual returns are filed each year already. Let’s just focus on the good for now.
Don’t Throw It All Away
Remember when we were kids and getting mail was exciting!? My great-uncle subscribed me to Ranger Rick for years when I was a kid and I absolutely loved seeing the monthly magazine addressed to little old me. I have passed the environment/animal loving torch by subscribing my friends’ kids now! But mail as an adult is no fun. Aside from the annual birthday card run it’s filled with mostly unsolicited junk. It’s estimated the average American household annually receives junk mail equaling 1.5 trees and throws away 44% unopened.
However, the IRS wants you to take a closer look before tossing those inconspicuous letters in the trash. Economic Stimulus Payments (EIPs) are being sent to nearly 4 million people in the form of prepaid debit cards arriving in a plain envelope from “Money Network Cardholder Services”. Probably not a bad general practice to open mail before throwing it away, but I will plead guilty to doing so at times as well.
And while we’re on EIPs and if you care to know, the IRS released its latest EIP state-by-state data. I broke it down to average payment on my own to see if there were any big outliers and didn't notice any. Utah was highest at $1,938 and D.C. was lowest at $1,368, which makes sense if you think about it.
Rikki You Lost That Number
NOL FAQs have been updated (or posted for the first time?) to discuss the interplay of post-TCJA net operating losses carried back and the alternative minimum tax (AMT). Not sure when they snuck that in there but I'll allow it for this week's nutshell as it was an outstanding issue needing to be addressed!
Recall that C corporations are not subject to AMT in taxable years beginning after December 31, 2017 thanks to the TCJA. Sweet! But they also generally are no longer allowed to carryback...boo. However, the CARES Act temporarily suspended the latter, providing five-year carrybacks for NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021.
So now, what happens when a C corporation has an NOL in a post-2017 year and wants to carry that loss back to a pre-2018 year where AMT is still alive and kicking? Surely the post-2017 AMT NOL would be either equal to or created in a pro-forma manner to carryback and be allowed for pre-2017 year AMT calculations, right? The IRS disagrees.
For Forms 1120X, Amended U.S. Corporation Income Tax Return, or 1139, Corporation Application for Tentative Refund, filed on or after June 1, 2020, treat the ATNOL amount arising in a post-2017 year as zero.
This is the opposite outcome many of us expected and at first blush seems like could be unnecessary tangled mess with the related credits that gets you to the same answer as you hoped for, but I haven't worked through one yet so don't hold me to that. Maybe it'll work out just great.
I'll try to capture only non-PPP news next week, unless it demands front and center attention yet again, stay tuned!
I know times are worrisome and many who feel compassionate also feel helpless. What can we individually do? For starters you can be the change; be kind - to every person and creature on this earth. Real change occurs in the mind, one person at a time.