Evolution Tax & Legal’s Week in Review – June 15, 2020

The past week was full of updates as it pertains to the CARES Act and COVID-19 relief put out for American taxpayers. We’ve picked the most relevant updates to discuss from this past week and update you on how things are moving forward in light of the continuing impact of COVID-19—

  • New Guidance Released on PPP Loan Use and Forgiveness Guidelines;
  • Expansion to CARES Act Relief when utilizing Retirement Plan Proceeds;
  • Release of Draft Instructions to File a Tentative Claim for a Refund for the 2018 Tax Year; and
  • Those with PPP Loans $2 million + should be prepared for an IRS Audit

New Guidance Released on PPP Loan Use and Forgiveness Guidelines

June 17, 2020 – This past Wednesday, new regulations were released by the US government for recipients of the PPP loan to update and account for the changes brought about the Paycheck Protection Flexibility Act of 2020. The main changes address in this round of guidance are the forgiveness guidelines for those now choosing to utilize the 24-week use period, instead of the original 8-week use periods for a PPP Loan.

In addition to this, the US Treasury and the Small Business Administration released two versions of the Paycheck Protection Program (PPP) forgiveness form, including a shorter, simplified version that requires fewer calculations and less documentation. The forms reflect congressional changes to the loan program, including an extended 24-week covered period. The links to these updated forms are below—

As we talked about in last weeks update, more guidance was needed for businesses to properly apply for forgiveness for business owners who chose to use their PPP loan over the original 8-week period in stead of the new 24-week period provided.

Thankfully, the new guidelines released by the US government makes clear that borrowers who received their PPP loans before June 5, 2020 can elect an eight-week period to use the funds.

As part of the guidance released, the agencies issued an updated interim final rule reflecting compensation caps for both the 8-week covered period under an earlier version of the program and the new, extended period. This guidance is reflected in the updated forms released as well.

Don’t get your hopes up, because the jury is still out on guidance needed. It was unclear if businesses that use the loan in the period between eight and 24-weeks will be able to apply for forgiveness the moment the funds are exhausted.

For example, if a business elects the 24-week period to use the loan, but uses the money in 12 weeks, it may have to maintain the numbers of employees and pay, as well as wait another 12 weeks for forgiveness.

You can read the recently released interim rules here.

Expansion to CARES Act Relief When Utilizing Retirement Plan Proceeds

June 19, 2020 – The US government released IRS Notice 2020-50 expanding the list of those affected by COVIID-19 to utilize distribution from retirement plans. Not only did the IRS Notice expand the list of those entitled to utilize this taxpayer friendly provisions, they also provided guidance and examples on how qualifying individuals will reflect the tax treatment of these distributions and loans on their federal income tax returns.

So, what provisions does the notice relate to? The CARES Act provided two major form of relief with respect to retirement plans—(1) eligible taxpayers can take up to $100,000 in distributions from a retirement plan and avoid the 10% early withdrawal penalty on; and (2) eligible taxpayers are allowed to take a loan of up to $100,000 against their retirement plans. Specifically, the guidance released here pertains to the former of the two forms of relief.

IRS Notice 2020-50 expands the definition of who is a “qualified individual” for utilizing this relief. The Notice takes into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual’s spouse or household member. As expanded under Notice 2020-50, a “qualified individual” is anyone who – 

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARSCoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or  
  • experiences adverse financial consequences because of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence): 
    • being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; 
    • being unable to work due to lack of childcare due to COVID-19; 
    • closing or reducing hours of a business that they own or operate due to COVID-19; 
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

You can read the official IRS news release on this topic here.

IRS Releases Draft Instructions Showing Recent Changes on Tentative Claims for a Refund

June 17, 2020 –The IRS releases draft instructions to Form 1045, Application for a Tentative Refund reflecting updates to the form in wake of changes brought about by the CARES Act.

The draft instructions note new rules for the following—

  • Net operating loss (“NOLs”) carryback allowing taxpayers to carry back NOLs arising in 2018, 2019 and 2020 to each of the 5-eyars preceding the year of loss.
  • Election to exclude from the 5-year carryback any years containing an income inclusion from the “Transition Tax” (i.e. IRC 965).
  • Election to file a 6-month extension for tentative claims for a refund pertaining to the e2018 tax year with respect to the upcoming deadline of June 30, 2020
  • Filing an election to carryback an NOL to a year with an income inclusion from the “transition tax”.
  • The ability to utilize NOLs without being subjected to limitations imposed as part of the recent Tax Cuts and Jobs Act of 2017 (i.e. 80% of NOL only allowed to be used).

You can read the official document here.

Expect an Audit if You Received an PPP Loan over $2 million – Evolution Tax & Legal Insight

The CARES Act was passed and signed into law on March 27, 2020 by Congress and President Trump to provide US taxpayers with relief considering the economic fallout brought about by COVID-19. A major provision of this relief was that passed as part of the Paycheck Protection Program (PPP) which provides qualifying small businesses a forgivable loan to cover payroll, rent, mortgage obligations and utilities. The amount of the loan granted was based upon a businesses or taxpayers prior payroll filings. Specifically, 2.5 times your average monthly payroll costs from 2019, or $10 million, whichever is lower. This forgivable loan is better known as the “PPP Loan”.

On April 28, 2020, the U.S. Treasury Department and Small Business Administration (SBA) announced that a review would be performed of “all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” In addition, the government warned that PPP Loan recipients would subject themselves to civil and criminal liability if their certifications to qualify for the loan were not made in “good faith”.

So, what do borrowers with a loan more than $2 million need to be prepared for? Essentially, a full audit and/or review of their loan certifications showing the PPP Loan was necessary to continue their business operations and supporting documentation.  Additionally, documentation showing the PPP Loan was used within the guidelines put out by the US government to qualify for forgiveness will need to be in place.

For supporting the certification to obtain the PPP Loan, a variety of documents can be used. Documents like comparative financial statements, bank statements, and contract cancellations could help demonstrate a disruption in business activity. In addition, a borrower can also show a decrease in cash flow to prove that the PPP loan was necessary. Similarly, board meeting minutes and documentation outlining the rationale as to why the PPP Loan was needed can also support initial certifications. Any proof of a failed attempt to secure non-PPP financing during the COVID-19 pandemic would also bolster the credibility of the borrower’s certification.

On the back end, there are various documents you should be aware of to support your claim that the PPP Loan was used in compliance with the government’s requirements to qualify for forgiveness. Specifically, borrowers must collect and maintain documentation to support qualifying expenses. Some examples of requested documentation may include:

  • Payroll tax reports
  • 2020 IRS Forms 941
  • State income and unemployment tax returns
  • Payroll registers
  • Bank statements detailing date and amount of cash disbursements
  • Health care benefits:
    • Documentation showing total costs paid for all health care benefits, including insurance premiums paid by the organization under a group health plan
  • Retirement plan benefits:
    • Documentation showing the sum of all retirement plan funding costs paid by the organization
  • Other documentation related to mortgage interest, lease payments, and utility payments:
    • Canceled checks
    • Receipts
    • Account statements
    • Any other documentation of payment

If you’re a PPP Loan recipient, and received over $2 million, you need to have your ducks in a row. Without it, you could be subject to civil or criminal liability if your certification to obtain the loan were not in “good faith”. In addition, without supporting documentation of your expenses during the PPP Loan 8- or 24-week period (whichever you choose to elect), you run the risk of not having some or all of the PPP Loan forgiven.

June 22, 2020

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