Evolution Tax & Legal’s Week in Review – September 14, 2020

For this week’s in review, we discuss a remaining issues in obtaining forgiveness on PPP loans provided to employee-owners, commentary on Democratic nominee Joe Biden’s proposed tax plans, and the impact of an updated exclusion provided applicable to US foreign tax regimes.

Specifically, we will be covering the following this week—

• Remaining Confusion Over Calculating PPP Loan Forgiveness for the Self-Employed
• Impact of Biden Offshore Tax Plan – Focus on Curbing Offshore Income Sheltering and Moving Manufacturing Back to the US.
• Biden Tax Plan Provides a 10% Tax Penalty on Foreign Profits
• Impact of the New “High Tax Exclusion” Regime for Offshore Tax

Remaining Confusion Over Calculating PPP Loan Forgiveness for the Self-Employed

For reasons known only to the Small Business Administration (SBA), it continues to attempt to treat “owners-employees” in the same manner as sole proprietors and partners for purposes of loan forgiveness under the paycheck protection program (PPP).

However, the PPP loan regime treats owner-employees differently from sole proprietors and partners in many regards, including the ability of sole proprietors and partners to receive PPP loan proceeds as tax-free compensation. Such key differences undermine the logic of extending the treatment of sole proprietors and partners to owner-employees.

In the 18th round of interim rules and the instructions to the regular PPP loan forgiveness application, the SBA capped the forgivable cash compensation paid to an owner-employee of a business using a 24-week covered period at $20,833, rather than the $46,154 that applies to other employees.

The 24-week covered period for PPP loan forgiveness has not ended yet for any business with a PPP loan. Although the SBA has stated that businesses can apply for forgiveness before the end of the 24-week covered period, it may not be possible, as a practical matter, for a business to submit a forgiveness application before the end of its 24-week covered period. Still, with the SBA opening its PPP loan “forgiveness portal” for banks, and banks expected to start accepting PPP loan forgiveness applications soon (if they have not already), businesses are starting to put together drafts of the PPP loan forgiveness applications. For the regular forgiveness application, this requires calculating the business’s FTE ratio.

Businesses with owner-employees completing the application understandably want a solution that fixes this problem. The SBA needs to provide guidance, including a correction to the application and instructions. In the meantime, businesses should consider the following:

1. Take the position that employees with an ownership interest below the 5% threshold are not “owner-employees” for any purposes. Under this reasonable interpretation of the PPP “de minimis” test, the business can include these employees in Table 1 or Table 2, as applicable.

2. Include owner-employees in Table 1 or Table 2, as applicable, but inserting $0 for the cash compensation. The application already has a specific spot (Line 9 of PPP Schedule A) for the compensation of owners, including owner-employees.

3. Exclude owner-employees from the denominator of the FTE ratio. This would be consistent with the SBA’s general policy of treating owner-employees in the same manner as sole proprietors and partners.

Impact of Biden Offshore Tax Plan – Focus on Curbing Offshore Income Sheltering and Moving Manufacturing Back to the US.

Democratic presidential nominee Joe Biden’s plan to curb corporate offshoring and to renew domestic manufacturing may block companies from parking profits in tax havens, but may not do enough to make shuttered factories hum again.

Biden’s proposal uses a carrot-and-stick approach that raises taxes on a corporation’s foreign profits but rewards companies with tax incentives for moving jobs and investment back to the U.S.

Biden launched a renewed focus on economic issues this week, beginning with a push to boost American manufacturing and operations. He called for a 10% tax penalty on U.S. companies that move operations overseas and a 10% tax credit for companies that create jobs in the U.S.

But the tax breaks may not be juicy enough for companies to justify a massive supply-chain shift back to the Midwest or create a slew of new jobs when companies are relying more heavily on automation.

For Biden’s plan to work companies would have to significantly boost productivity and output

That presents a challenge for Biden, who has focused on reviving the economy and increasing employment in critical battleground states, including Michigan, where he unveiled the plan on Wednesday at a United Auto Workers union hall.

Still, the plan could fix a perennial problem that both Democrats and Republicans have denounced: corporations ducking federal tax bills by shifting profits offshore where they can pay little or nothing to the Internal Revenue Service.

Biden’s plan creates a large disincentive to move profits out of the U.S. The plan would place a 30.8% tax on profits generated from offshore manufacturing on products sold in the U.S., which means companies would pay more on foreign profits than the 28% they would pay at home under the Biden plan. The current corporate tax rate is 21%.

The plan also includes a 10% “Made in America” tax break for bringing back domestic manufacturing jobs, renovating closed factories and investing in advanced manufacturing technology.

However, many commentators have issued warnings stating that instead of coming back to the U.S., Biden’s plan could encourage companies to avoid the American tax system all together. Companies could undergo a so-called corporate inversion, become foreign-owned or new startups could choose to be based outside the U.S.

The IRS can only tax U.S. based companies or foreign companies operating within the U.S. Foreign companies doing business in other countries are outside of the U.S.’s reach, which means that American corporations could be at a disadvantage.

Biden Tax Plan Provides a 10% Tax Penalty on Foreign Profits

Democratic presidential nominee Joe Biden is proposing a 10% tax penalty on companies that move operations overseas and a 10% tax credit for companies that create jobs in the U.S. in a policy rollout Wednesday.

Biden, who is launching a renewed focus on economic issues also will promise to reverse Trump administration policies that his campaign said amount to “loopholes” that allow offshoring to take place.

The former vice president will also pledge to take executive action during his first week in office to direct the federal government to buy American goods and support American supply chains in their procurement processes, his campaign said.

Biden’s proposals echo President Donald Trump’s 2016 campaign push to focus on reviving manufacturing in the U.S. and creating more U.S. jobs. Trump’s 2017 tax law was his signature legislative achievement. But the economic strength he planned to run on for re-election collapsed in the spring when the coronavirus began to cause shutdowns across the country.

The policies are part of a broader economic push from Biden in a crucial battleground state as polls show voters about evenly split on which candidate, Biden or Trump, they trust more to manage the economy. Until recently, Trump had a reliable lead on only that issue. But the coronavirus pandemic brought job losses and manufacturing contraction that cut into that lead.

Biden will propose a 28% corporate tax rate plus a 10% penalty surtax on the profits from any production by a U.S. company overseas for sale on American soil, making the overall tax rate on those profits 30.8%. The penalty will also apply to call centers and services that a U.S. company locates overseas but that serve the U.S.

He also plans to implement what his campaign described as “strong anti-inversion regulations and penalties,” though it did not detail those plans. He will also “deny all deductions and expensing writeoffs for moving jobs or production overseas” for jobs that could “plausibly” be done by American workers.

The surcharge is an attempt to “prevent firms from tax rate shopping,” said Carl Tannenbaum, chief economist at Northern Trust and a former official at the Chicago Federal Reserve. “He’s trying to close the doors to multinationals that are flexible enough to move operations to other jurisdictions.”

Biden is also proposing a 10% “Made in America” tax credit for companies that create jobs for American workers and accelerate the U.S. economic recovery. It will be available for revitalizing closed or nearly closed facilities, retooling or expanding facilities, and bringing production or service jobs back to the U.S. and creating U.S. jobs. It will also apply when a company is increasing manufacturing wages above the pre-Covid baseline for jobs paying up to $100,000.

Biden would double the Trump tax rate to a minimum tax of 21% on all foreign earnings of U.S. companies overseas. He would also end the use of tax haven strategies by applying the minimum tax to each foreign country separately.

Impact of the New “High Tax Exclusion” Regime for Offshore Tax

Companies that opt out of a new foreign income tax regime will face a slew of hurdles that could prevent that income from coming back to the U.S. tax-free when it is paid out to U.S. shareholders.

Final high-tax exclusion rules expanded the kind of foreign income eligible to be free from U.S. tax if the income, known as global intangible low-taxed income (GILTI) is already taxed offshore at least 18.9%.

But once a U.S. company’s GILTI is pulled out of the U.S. tax net, it loses its status as previously taxed earnings and profits (PTEP), and has to pass various requirements to qualify for a 100% dividends-received deduction under Section 245A.

The high-tax GILTI exclusion is an attractive option for companies that qualify, since it allows those companies to take tax credits on their high-taxed foreign income and opt-out of paying a 10.5% U.S. tax on that income. But practitioners say it is important for companies to be aware of future consequences, which include losing those foreign tax credits and paying a second tax on that income at the 21% U.S. corporate tax rate.

Losing the dividends-received deduction could be significant to U.S. shareholders who were already subject to a high rate of tax in the country where the income was generated, practitioners said. Modeling the different tax outcomes will become more important for companies seeking to bring dividends back to the U.S.

Companies now have to decide if it’s better to get the GILTI high-tax exclusion and no dividends-received deduction, or is it better not to apply the exclusion and get the deduction.