It was a busy week for the team here at Evolution Tax & Legal. We are working our hardest to stay up to date on the fast paced changes and guidance put out by the US governemnt in light of the CARES Act and continuing relief due to the eocnomic fall-out of COVID-19.
This week’s newletter covers some topics from the prior 3-weeks–
- Passage of the Payroll Protection Flexibility Act of 2020—Guidance Needed for Loan Relief Rules
- IRS Releases Draft Instructions on Increase for Business Interest Limitations
- IRS Issues Proposed Rules on Like-Kind Exchanges After Tax Reform
- Interim Guidance on Filing Amended Partnership Returns to Take Advantage of Relief Provided via CARES Act
Make sure if you have any questions to book a consultation with our team. Also, keep on the look out for future newletters continuing the conversation ont the topics contained herein!
Passage of the Payroll Protection Flexibility Act of 2020—Guidance Needed for Loan Relief Rules
June 5, 2020 – President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020. This bill loosens the requirements surrounding the forgiveness requirements of loans provided to small businesses under the Paycheck Protection Program (PPP), better known as a “PPP Loan”.
Instead of requiring 75% of the loan be used to cover payroll costs, with the remaining 25% to be used for rent, utility, and mortgage obligations, the bill changes this to a 60%/40%. This gives leeway to PPP Loan recipients to utilize more of the loan for costs other than maintaining payroll.
Additionally, instead of being required to spend the PPP loan over an 8-week period, small business can now spend it over a 24-week period.
These changes were intended to provide flexibility to restaurants and other businesses that haven’t been able to fully reopen.
However, what has still not been created and released is guidance for small businesses looking to make sure that their PPP loan is forgivable.
Guidance is needed more now than ever because these changes came right as the earliest loan recipients approached the original 8-week threshold to spend their loan proceeds. Small businesses that haven’t had issues spending their PPP loan are hoping the government makes it clear that they will still qualify for forgiveness under the original requirements. In addition, this guidance is needed as soon as possible because they would like to apply for loan forgiveness as early as possible.
If not provided, then those small businesses who spent their PPP loan proceeds in the original 8-week period may be subject to penalties for not spending it instead over the now required 24-week program.
Theoretically, this issue could be fixed relatively easy. Treasury would have to issue guidance that allows small businesses int his position to elect to calculate their forgiveness under the original 8-week period instead of the newly promulgated 24-week period.
We here at Evolution Tax & Legal expect there to be a plethora of continual guidance issued on this rapidly changing program. As it comes out, we will analyze, interpret and provide to you our thoughts and best practice recommendations.
Stay tuned for further updates on this topic!
IRS Releases Draft Instructions on Increase for Business Interest Limitations
June 11, 2020 – The IRS releases draft instructions to Form 8990 to reflect the enactment of the CARES Act changes to the business interest limitation under IRC 163(j).
As part of the Tax Cuts and Jobs Act of 2017 (TCJA), qualifying individuals and businesses became subject to a new interest expense limitation. Put simply, qualifying businesses are only allows to deduction business interest expenses up to the extent they have business interest income plus 30% of their earnings before interest, taxes, depreciation and amortization (formally known in the accounting world as EBITDA).
This new provision hammered industries that are heavily reliant on debt financing, such as the real estate industry. Its limited their ability to take advantage of interest deductions and cheapen the cost of their debt capital.
As part of the CARES Act, relief was granted on this limitation. For the 2019 and 2020 tax years, the limitation was increased from 30% to 50% of their EBITDA.
The recently released draft instructions note some important points with respect to the relief granted under the CARES Act—
- Applicable to Partner and Partnership’s 2020 Tax Year. This 50% ATI limitation does not apply to partnerships for tax years beginning in 2019. Instead, a partner treats 50% of its allocable share of a partnership’s excess business interest expense for 2019 as an interest deduction in the partner’s first tax year beginning in 2020 without limitation. The remaining 50% of such excess business interest expense remains subject to the section 163(j) limitation applicable to excess business interest expense carried forward at the partner level.
- Election to Use 30% Limitation. You may elect not to apply the 50% ATI limitation to any tax year beginning in 2019 or 2020, and instead apply the 30% ATI limitation. In the case of a partnership, the election must be made by the partnership and may be made only for tax years beginning in 2020.
- Partner’s Election. A partner may elect not to deduct 50% of the 2019 excess business interest expense for tax years beginning in 2020 without limitation. You may elect to use the adjusted taxable income for the last year beginning in 2019 to calculate the limitation for any taxable year beginning in 2020.
IRS Issues Proposed Rules on Like-Kind Exchanges After Tax Reform
June 11, 2020 – The US Treasury released proposed regulations defining real property to implement changes to Like-Kind Exchanges as part of the TCJA.
For context, Like-Kind exchanges were modified by the TCJA in order to exclude personal property form qualifying for purposes of an Like-Kind Exchange. After the TCJA, only real property qualified for the benefits of a Like-Kind Exchange.
In addition to providing a definition of real property, the proposed regulations also provide a rule addressing a taxpayer’s receipt of personal property that is incidental to real property the taxpayer receives in the exchange.
Under the proposed regulations, real property includes land, improvements to the land, unsevered crops and other natural products of land, and water and air space superjacent to land. Improvements to land include inherently permanent structures and the structural components of inherently permanent structures.
Under the proposed regulations, each distinct asset must be analyzed separately to determine if it qualifies as “real property”.
Interim Guidance on Filing Amended Partnership Returns to Take Advantage of Relief Provided via CARES Act
May 28, 2020 – The IRS issued interim guidance on how to process and examining amended partnership returns filed pursuant to Revenue Procedure 2020-23.
Revenue Procedure 2020-23 was issued in response to the relief provided under the CARES Act allowing taxpayers (specifically partnerships) to carry back “net operating losses” incurred in the 2018, 2019, and 2020 tax years. Specifically, these “net operating losses” can be carried back to each of the 5-years preceding the year in which the loss was incurred.
Effectively, this provision allows taxpayer to carry back unused losses to year in which they had positive taxable income, and claim a refund—another tool in the IRS’s bag allowing taxpayer’s affected by COVID-19 to obtain immediately liquidity and provide relief.
In order to provide taxpayers and accountants alike guidance to take advantage of this relief, the IRS issued Revenue Procedure 2020-23 providing the manner in which partnership can file amended returns for taxable years beginning in 2019 and 2019 while issuing amended Schedule K-1s for each of its partners. Without the option to file amended returns under Revenue Procedure 2020-23, specific partnership and their partners would not be able to take advantage of the CARES Act relief in a timely manner.
Specifically, the IRS interim guidance on how to process and examine amended partnership returns requires IRS agents and examiners to follow the process outlined in Revenue Procedure 2020-23.
For example, a partnership already under audit or examination at the time this guidance was adopted and who wishes to take advantage of this CARES Act relief provision may only do so if the partnership send written notice to the agent coordinating the audit and actually provide the agent with a signed copy of the amended return upon filing.