As most people are aware, the 2019 income tax filing and payment deadlines for all taxpayers who file and pay their federal income taxes on April 15, 2020, were automatically extended until July 15, 2020. This relief is automatic and generally applies to all individual, trust and corporation tax returns. Additionally, this relief extends to estimated tax payments for tax year 2020 that were due on April 15, 2020.
People First Initiative
Additionally, the People First Initiative offered taxpayers who owed taxes some further relief. IRS Commissioner Chuck Rettig stated relative to the People First Initiative:
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act waives the requirement that taxpayers take required minimum distributions (“RMDs”) for 2020 from IRAs, 401(k) plans and other defined contribution plans. Taxpayers who already took 2020 RMDs may be able to return them to their retirement plans or IRAs and avoid paying income tax on the distributions. The timing, however, is critical.
Notice 2020-51, issued by the IRS last week, provides needed clarity about this provision of the CARES Act.
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.
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.
On Friday, May 22, 2020, the Small Business Administration (“SBA”), in conjunction and consultation with the U.S. Department of the Treasury (“Treasury”), published an interim final rule (“IFR”) containing new guidance on the treatment of bonuses, prepayments, and the loan forgiveness application and process for Paycheck Protection Program (“PPP”) loans.
Loan Forgiveness Process
Loan forgiveness under the PPP is not automatic. Rather, borrowers must apply for forgiveness using the SBA’s Loan Forgiveness Application (SBA Form 3508) or their lender’s equivalent form, if any. The process is somewhat streamlined:
- The application is submitted to the lender for review and approval.
- The lender will review the application and make a decision regarding loan forgiveness.
- The lender has 60 days from receipt of a complete forgiveness application to issue a decision to the SBA.
- The lender is responsible for notifying the borrower of the amount approved for forgiveness.
- The lender will then request that the SBA repay the amount forgiven.
- Within 90 days from the lender’s request for payment, the SBA will pay the lender the amount forgiven, plus any accrued interest. (If applicable, the SBA will deduct the amount of advances under the Economic Injury Disaster Loan program from its payment to the lender.)
Today, as a result of the COVID-19 pandemic and resulting stay-at-home orders issued by the governors of most states, many employees are working remotely from home for their employers. In fact, for many employers and employees, the arrangement is working well enough that they will likely consider continuing the arrangement, on a full-time or part-time basis, when the stay-at-home orders are lifted. This type of arrangement raises all kinds of issues and concerns for employers, including compliance with applicable laws. Many of the issues are obvious, but some of them are more nuanced and may not be on the minds of employers.
Employees Working Remotely
The trap is set when an employer has an employee performing services outside of the state(s) where it operates. Historically, this scenario was likely rare. It probably only occurred when an employer was physically located near a state border and had an employee working from his or her home located in the neighboring state. Today, with the internet and sophisticated communication technologies, it is not limited to employees residing in neighboring states. Further, with the COVID-19 pandemic facing the world, more and more employees are working remotely. Assuming a remote work arrangement is acceptable to both an employer and an employee, I suspect it will continue to be a prevalent employment arrangement post-COVID-19. As a result, employers may find themselves with employees working in states, and possibly countries, different from where the employer has its business physically located. As discussed below, it is vital that employers know where their employers are performing services. The consequences of not knowing where your employees are working could be costly.
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.
During these trying times, especially with stay-at-home orders still in effect in most states, it is difficult not to over-focus on the uncertainty that lies ahead. Hopefully, we can find healthy distractions to refocus our attention.
In normal times, one of the many healthy distractions in our lives was viewing live sporting events such as basketball, football, baseball and soccer. Unfortunately, COVID-19 shut down these activities. The television networks quickly responded, without letting their stations go dormant, rebroadcasting historic sporting events.
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.
Upcoming Speaking Engagements
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Portland Tax ForumTo be rescheduled
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Oregon Association of Tax ConsultantsBeaverton, OR, To be rescheduled
- To be rescheduled