The Small Business Administration (“SBA”) continues its quest to provide guidance relative to the Paycheck Protection Program (“PPP”) enacted as part of the CARES Act and the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) enacted by Congress to provide clarification and remove some of the rigidity surrounding the PPP.
The PPP legislation and much of the guidance PPP borrowers have received to date is fraught with complexity and inconsistency. The SBA is doing its best, as Paul McCartney and John Lennon expressed in their hit song We Can Work It Out, to help PPP borrowers get through these trying times:
Try to see it my way
Only time will tell if I am right or I am wrong
While you see it your way
There’s a chance that we might fall apart before too long
We can work it out
We can work it out
In that vein, the SBA recently issued interim final rules (“IFRs”) focused on PPP loan forgiveness. Additionally, last week the SBA published a revised PPP loan forgiveness application (“Form 3508”), and a new short-form forgiveness application (“Form 3508EZ”).
Up until this past Wednesday, the Paycheck Protection Program (“PPP”) loan forgiveness application issued by the Small Business Administration (“SBA”) had not been updated since May. New guidance was issued in the interim (and anyone who has been following this area knows that guidance is constantly evolving). Most taxpayers have some breathing room before they must file their forgiveness applications; so, it may behoove them to wait to file their applications until they digest the most recent guidance.
I previously reported that the Paycheck Protection Program (“PPP”) loan program appeared to have been extended to December 31, 2020. Unfortunately, the U.S. Small Business Administration (“SBA”) quashed that dream. While Congress extended the “covered period” to December 31, 2020, it did not extend the life of the PPP to that date. The SBA recently made that clear when it announced that the extension of the covered period “should not be construed as to permit the SBA to continue accepting applications for [PPP] loans after June 30, 2020.” So, the PPP application deadline remains June 30, 2020; borrowers in need of a PPP loan only have until the end of this month to submit their applications. While funds may remain available ($130 billion according to a recent government announcement), borrowers need to hurry up and get their applications submitted to lenders. Time is of the essence. To avoid any problems with application submissions, borrowers are wise to submit their applications well in advance of the June 30 deadline. According to Murphy’s Law, if something can go wrong, it will. So, applications should be made as soon as possible. Don’t wait until the last minute.
As I previously reported, the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) was jointly introduced in the U.S. House of Representatives (“House”) by Representative Chip Roy, a Republican from Texas and Representative Dean Phillips, a Democrat from Minnesota. By a nearly unanimous vote, the PPPFA was passed in the House on May 28, 2020. As anticipated, the legislation was promptly introduced in the U.S. Senate (“Senate”), where (without amendment) it was unanimously passed on June 3, 2020 by a voice vote. President Trump signed the PPPFA into law today.
This is especially good news for businesses that have been shut down and/or otherwise severely financially impaired by the COVID-19 pandemic. The PPPFA changes the landscape relative to loans received by businesses under the Paycheck Protection Program (“PPP”) that was enacted as part of the CARES Act. The PPPFA, at least for some PPP loan borrowers, may not bring glee and joy! The law contains some provisions that could be detrimental to some businesses.
In News Release 2020-107, issued Thursday, May 28, 2020, the IRS announced that taxpayers will soon be able to electronically file Form 1040-X, Amended U.S. Individual Income Tax Return. This is welcome news for taxpayers and tax practitioners!
According to the IRS, more than 90 percent of individual taxpayers electronically file their U.S. Federal Income Tax Returns (Form 1040) each year. Likewise, approximately three million amended U.S. Federal Income Tax Returns (Form 1040-X) are filed each year.
Currently, a large number of tax forms may be filed electronically, including U.S. Federal Income Tax Forms 1040, 1065, 1120 and 1120S. Additionally, taxpayers may electronically amend U.S. Federal Income Tax Forms 1065, 1120 and 1120S. They may not, however, amend U.S. Federal Income Tax Form 1040 (Form 1040-X) electronically.
Despite repeated pleas by tax practitioners for the ability to file Form 1040-X electronically, the IRS has not been able to accommodate practitioners. That is about to change!
As I previously reported, the Paycheck Protection Program (“PPP”) was touted as providing emergency assistance (i.e., a lifeline) to restaurants and other businesses ordered to shut their doors (e.g., dental offices, bars, hair salons, fitness clubs, yoga studios, shopping malls and movie theatres). The owners of these businesses thought the availability of a forgivable loan equal to two-and-one-half times their monthly payroll costs could be exactly what the doctor ordered. The loan, if forgiven, could keep these business afloat and allow them to retain their trained and skilled workforces once they were allowed to reopen. Unfortunately, that hypothesis is severely flawed.
Under the PPP, in order for a borrower to be eligible for forgiveness, the loan proceeds must be used for payroll costs (75 percent), and rent and utilities (25 percent) within eight weeks following the date of the loan. If a borrower’s business is shut down due to an executive order of the governor for most, if not all, of the eight-week period, how can the borrower use the loan proceeds that indisputably are needed to reopen and maintain the workforce? That circumstance was clearly not contemplated by Congress when it passed the CARES Act.
In addition to worrying about keeping their business afloat these days, businesses are focusing on whether their Paycheck Protection Program (“PPP”) loan will be forgiven. Without loan forgiveness, many of these businesses will not survive. Consequently, the stakes are high!
The eligibility requirements for PPP loan forgiveness are complex. As we discussed previously, in large part, loan forgiveness is based on the borrower using the loan proceeds within the eight-week period immediately following receipt of the loan on specified expenses, including payroll and rent.
Some landlords have been generous enough to reduce or even abate rent for a period (e.g., three months) to assist the tenant in salvaging its business. Consequently, these businesses may have little or no rent to pay during the eight-week period. If a business owner asks the landlord for advice on what to do in this situation, the landlord will likely say:
Love thy landlord – pay me anyway!
Whether the prepayment of rent (or the payment of rent for a period preceding the eight-week period) applies for purposes of the loan forgiveness computation under the PPP is likely a question being pondered by many businesses and their advisors.
As discussed in recent blog posts, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the Payroll Protection Plan (“PPP”) under which the U.S. Small Business Administration (“SBA”) was authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments. On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.
The PPP legislation and the administrative rules promulgated thereunder are plagued with numerous unanticipated defects. One of the defects in the PPP, as rolled out by the federal government, may be the death of small businesses, including restaurants.
Last week, we reported that the IRS issued Notice 2020-32, wherein (relying primarily on Code Section 265) it emphatically pronounced that taxpayers receiving Paycheck Protection Program (“PPP”) loans do not get to have their cake and eat it too! As a result of the notice, if a taxpayer’s PPP loan is forgiven and, in accordance with the CARES Act, has no cancellation of debt income as he/she/it would otherwise have under Code Section 61(a)(11), the taxpayer cannot deduct the business expenses for which it used the forgiven loan proceeds.
As we explained last week, the government’s conclusion, from a purely academic perspective, makes some sense. In normal times, taxpayers should not get a double tax benefit from a forgiven debt (i.e., a deduction with respect to expenses paid from the loan proceeds and an exemption from tax on the forgiven loan). However, we are not living in normal times.
In Notice 2020-32, issued yesterday, the IRS emphatically pronounced that taxpayers receiving Paycheck Protection Program (“PPP”) loans do not get to have their cake and eat it too!
As we discussed in a recent blog post, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the PPP under which the Small Business Administration is authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments. On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.
The CARES Act expressly excludes from gross income any amount forgiven under the PPP. The question left unanswered by the CARES Act is whether the amounts forgiven that were spent by borrowers on otherwise allowable business expenses (i.e., payroll costs, rent, utilities, transportation and interest) are deductible under Code Section 162.
Notice 2020-32 quickly points out to taxpayers and tax advisers – not so fast – there are no free lunches. In essence, if the loan is forgiven and, as a result of the CARES Act, a taxpayer has no cancellation of debt income as he/she/it would otherwise have under Code Section 61(a)(11), the taxpayer certainly does not get to deduct the business expenses for which it used the forgiven loan proceeds.
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.