PPP – NEW INTERIM FINAL RULE (IFR)

August 31, 2020
Dear WZ Clients, Business Associates and Friends,
The SBA published a new Interim Final Rule (IFR) on Aug. 24, 2020, related to the Paycheck Protection Program (PPP). The IFR addresses a) treatment of certain owner-employees and b) limitations on eligibility of certain non-payroll costs for loan forgiveness.
Owner-Employee Compensation Rules Inapplicable to Certain Owners
The First Loan Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), capped the amount of loan forgiveness for payroll compensation attributable to an owner-employee to either eight weeks’ worth (8/52) of their 2019 compensation (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of their 2019 compensation (up to $20,833) for a 24-week covered period per owner in total across all businesses. There was no exception in the rule based on the owner-employee’s percentage of ownership.
The new IFR provides that an owner-employee in a C- or S-corporation who has less than a 5 percent ownership stake will not be subject to the owner-employee compensation rule. The IFR describes the exemption as intending to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated. It should be noted that the IFR applies this exception only to corporate entities and does not provide an exception for partnerships or limited liability companies.
Eligibility of Certain Non-Payroll Costs for Loan Forgiveness
Shared Rent, Mortgage Interest and Utility Costs
Although a borrower might expect to capture all rent, mortgage interest or utility expenses when calculating its forgiveness amount, it must be careful to take into the account the portion of such expenses that are attributable to a tenant or subtenant or to household expense for a home-based business. The IFR provides four examples that can be found by going to the link here: Interim Final Rule (IFR)
Related Party Rent and Mortgage Interest
While many borrowers operate on real estate leased to the borrower by a company owned by a related party, until now the SBA’s guidance did not provide any express restrictions on the use of rent expense under related party leases as a forgivable use of loan proceeds. The IFR places a new cap on loan forgiveness available for rent paid to related parties to no more that the amount of mortgage interest owed on the property during the covered period in question that is attributable to the space being rented by the business, and only to the extent that both the lease and the mortgage were in place prior to Feb. 15, 2020, on the theory that if the property was held directly by the borrower, the borrower would only be entitled to obtain forgiveness for this amount of mortgage interest. As a further note, the IFR provides that any mortgage interest owed to a related party is not eligible for forgiveness.
As a further reminder, the PPP allows for forgiveness for rent and mortgage interest for both real and personal property (i.e., items such as vehicles, copiers, or servers). Although the IFR used only real property examples, there is no reason to assume that these limitations would not apply equally to any rent or mortgage interest with respect to personal property.
The term “related party” is not addressed in the statutory language of the CARES Act or previously in prior rules and is thus described in the IFR as including “any ownership in common between the business and the property owner.” Interestingly, although appearing in the same IFR, the SBA did not elect to exclude owners of less than 5 percent as was done for the owner-employee compensation rule describe above. As a result, the safest approach seems to be to treat any level of co-ownership as creating a related party relationship no matter the size of the interest or the indirect nature of ownership.
Furthermore, if applying for forgiveness for related party rent, the borrower is required to provide its lender with mortgage documentation to substantiate the related payment, something lenders will now need to be prepared to accept into any portal system intended to accept forgiveness applications.
For more information, please go to the IFR link here: Interim Final Rule (IFR)
AS ALWAYS, WAGNER & ZWERMAN IS HERE TO ANSWER ALL OF YOUR QUESTIONS AND CONCERNS. WE ARE ALL IN THIS TOGETHER.
STAY SAFE AND HEALTHY
** IF YOU HAVE MISSED ANY PREVIOUS WZ COMMUNICATION IN REGARDS TO COVID-19, PLEASE REFER TO OUR WEBSITE
Best,
WZ Partners

 

UPDATE:SMALL BUSINESS EXPENSE PROTECTION ACT OF 2020

TAX PLANNING STRATEGIES PRIOR TO A PRESIDENTIAL ELECTION

Dear WZ Clients, Business Associates and Friends,
With the upcoming presidential election in November, now is the time for you to revisit your tax planning strategies.
The two most important items to focus on now are income taxes and estate planning.
On the income tax side, there could be a raise on the top individual income tax rate to 39.6% from 37% and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.
There could also be an increase to payroll taxes, per the Tax Policy Center, as the limit on the 12.4% portion of the Social Security tax which is shared by both the employee and employer may increase to $400,000 (instead of the current $137,700).
Additionally, now is the time to look at the impact of changes to rates that could be boosted on long-term capital gains and qualified dividends to 39.6% , the same top rate as ordinary income for those with income over $1 million, according to the Tax Foundation.
The tax rate applies when you sell investments that you have held for at least a year. Selling appreciated investments, as well as converting traditional individual retirement accounts to a Roth and paying the income tax at a lower rate now may be a good idea if taxes may rise after the election.
Estate taxes could also be raised back to the historical norm. The Tax Cuts and Jobs Act roughly doubled the amount that you can transfer to other people, either at death or as a gift during life without facing the 40% estate and gift tax. The gift and estate tax exemption are $11.58 million per individual in 2020.
The “step-up in basis,” a provision in the tax code that allows an individual to hold onto an asset for years, watch it appreciate and then bequeath it to an heir at death may also change where there could be taxation on unrealized capital gains in the asset at death, which essentially would do away with the “step-up in basis” provision.
Today, wealthy households are likely to use gifting strategies to head off any potential changes that the election may bring. This can be as simple as giving assets to a trust or outright to kids or grandkids while using the exemption.
While you do not want to give away your assets prematurely, it doesn’t hurt to start talking to your financial advisor about these potential areas of change.
AS ALWAYS, WAGNER & ZWERMAN IS HERE TO ANSWER ALL OF YOUR QUESTIONS AND CONCERNS. WE ARE ALL IN THIS TOGETHER.
STAY SAFE AND HEALTHY
** IF YOU HAVE MISSED ANY PREVIOUS WZ COMMUNICATION IN REGARDS TO COVID-19, PLEASE REFER TO OUR WEBSITE
Best,
WZ Partners

 

AICPA URGES CONGRESS TO ALLOW PPP LOAN EXPENSE DEDUCTIONS

Dear WZ Clients, Business Associates and Friends,
The AICPA joined with more than 170 business and trade organizations in asking congressional leaders to allow businesses to write off expenses paid for with Paycheck Protection Program loans that have been forgiven.
The letter, addressed Tuesday, Aug 4, 2020 to House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell, urged Congress to make a technical correction to fix the tax treatment of loan forgiveness on PPP loans. The letter asks Congress to reverse an IRS Notice 2020-32 that denies borrowers the ability to deduct the same expenses that qualified them for loan forgiveness. However, the groups argue that this goes against the intention of the CARES Act. The groups contend that the IRS notice got the intent of the legislation wrong and argue against the interpretation of Treasury Secretary Steven Mnuchin, who has rejected previous appeals on the matter.
When the PPP was adopted as part of the CARES Act, Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting cancelled indebtedness excluded from the borrower’s taxable income.
The IRS issued Notice 2020-32 effectively overturned this policy by denying these borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness. The Notice argues Section 265(a)(1) of the Code disallows any otherwise allowable deduction for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness. Defenders of the IRS’ position argue that allowing businesses to deduct these expenses would result in business owners receiving a ‘double’ benefit. This is simply untrue. Congress intended for the loan forgiveness under PPP to be tax-free. The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit. If a business has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses, the result is the same as if the loan forgiveness was fully taxable. Section 1106(i) becomes moot if the IRS Notice is allowed to stand. On the other hand, denying the correct tax treatment of these loans will result in hardship for many struggling businesses.
More than 5 million businesses have participated in the PPP and over $520 billion has been lent to businesses through the program.
As part of the next round of COVID-19 relief legislation, the groups are asking Congress to clarify the matter by restoring the tax benefits as intended under the CARES Act to help distressed businesses.
Separately, on Tuesday, the U.S. Small Business Administration released a set of questions and answers on PPP loan forgiveness. Here’s the link:
PPP Loan Forgiveness FAQ’s (as of Aug 4, 2020)
There are three notable clarifications in the PPP Loan Forgivenss. They involve accelerated payments of health care coverage and retirement plan contributions; payments made under agreements executed prior to Feb. 15, 2020; and the definition of transportation costs that are eligible for loan forgiveness. Unfortunately, like the SBA’s previous guidance for mortgage interest, the FAQ document says forgiveness is not provided for expenses for group health benefits or retirement benefits accelerated from periods outside the covered period or the alternative payroll covered period.
For payments under lease or mortgage agreements to be eligible for loan forgiveness, they need to be related to an agreement before Feb. 15, 2020. However, the FAQ expands that guidance to clarify that if a lease existed before Feb. 15 and expires on or after that date and is renewed, the lease payments made under the renewed lease during the covered period are eligible for forgiveness. Similarly, if a mortgage loan on real or personal property that existed before Feb. 15 is refinanced on or after that date, the interest payments on the refinanced mortgage loan are eligible for forgiveness.
The FAQ also clarifies exactly what qualifies as transportation costs and eligible expenses for loan forgiveness related to a service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Guidance relating to transportation has been vague until now.
AS ALWAYS, WAGNER & ZWERMAN IS HERE TO ANSWER ALL OF YOUR QUESTIONS AND CONCERNS. WE ARE ALL IN THIS TOGETHER.
STAY SAFE AND HEALTHY
** IF YOU HAVE MISSED ANY PREVIOUS WZ COMMUNICATION IN REGARDS TO COVID-19, PLEASE REFER TO OUR WEBSITE
Best,
WZ Partners

Wagner & Zwerman LLP

PPP APPLICATION DEADLINE IS AUG 8th!!

Dear WZ Clients, Business Associates and Friends,
Small businesses still have until August 8, 2020 to apply for potentially forgivable loans via the Paycheck Protection Program (PPP), which was extended from its original June 30, 2020 deadline.
While a second PPP is under consideration in the Continuing Small Business Recovery and Paycheck Protection Program Act, part of the HEALS Act in the Senate, it’s more restrictive and the available amounts are smaller. The law’s adoption is far from certain, but it does at least set the minimum provisions around the negotiations in Congress for a second PPP.
For more information regarding the application deadline and process, follow the link below:
Small Business Administration
AS ALWAYS, WAGNER & ZWERMAN IS HERE TO ANSWER ALL OF YOUR QUESTIONS AND CONCERNS. WE ARE ALL IN THIS TOGETHER.
STAY SAFE AND HEALTHY
** IF YOU HAVE MISSED ANY PREVIOUS WZ COMMUNICATION IN REGARDS TO COVID-19, PLEASE REFER TO OUR WEBSITE
Best,
WZ Partners

 

Wagner & Zwerman LLP