Late yesterday, on April 29, 2020, Florida’s Governor issued his Phase 1: Safe. Smart. Step-by-Step Plan for Florida’s Recovery in Executive Order 20-112 and clarifying FAQs, which will be effective 12:01 a.m. on May 4, 2020, until a new order is issued. Continue reading
Lawyers have a saying, “Bad Facts Make Bad Law.” Recent Small Business Administration guidance regarding the Paycheck Protection Program proves it true in one more case.
Even as Congress moves to approve additional funds to the Paycheck Protection Program, the SBA issued a new FAQ in response to news stories about public companies receiving PPP money. The FAQ states that “a public company with substantial market value and access to capital markets” may not receive PPP funding. While understandable with respect to the companies in the headlines, it is concerning that the SBA could apply the guidance more broadly. Doing so would cause more delays or denial in funding for smaller enterprises, and defeat Congress’ intent to support employee retention by private employers.
This is the new FAQ:
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
We understand the political motivation behind the guidance. We also believe applying a strict standard based on a company’s value or a company’s access to outside capital or “other sources of liquidity” is perverse. Congress intended the PPP to motivate companies to retain employees. Valuable companies with reserves and access to capital will still furlough or release employees, as demand for their services or products drops. For even those companies, the PPP is therefore “necessary to support ongoing business operations,” because given the current economic landscape they would not deplete reserves or access other sources of liquidity to retain unprofitable employees. Understanding Congress wanted employers to retain their employees, we interpret the FAQ narrowly. We hope the SBA will as well.
Attorney James-Allen McPheeters contributed to this post.
In response to requests to provide guidance on the impact of mortgage loan forbearance programs on the tax treatment of securitization vehicles, such as real estate mortgage investment conduits (“REMICs”) and investment trusts, the IRS issued Revenue Procedure 2020-26. The IRS establishes that forbearance programs offered as COVID-19 relief will not jeopardize the tax treatment and qualifications of REMICs and investment trusts.
The Rev. Proc. applies to forbearances granted under the CARES Act, and other forbearance programs offered by loan servicers and holders, either voluntarily or state mandated, for borrowers experiencing financial hardship due to the COVID-19 emergency. Continue reading
The IRS has released guidance on certain business tax provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Released on Friday, April 10, Rev. Proc. 2020-22 informs taxpayers how to make certain elections with respect to the newly relaxed business interest expense limitation and provides real estate and farming businesses with the option to make late elections or withdraw pre-CARES elections. One week later, on Friday, April 17, 2020, the IRS announced in Rev. Proc. 2020-25 that taxpayers may change their depreciation for certain qualified improvement property. It also allows taxpayers to make late, revoke, or withdraw certain depreciation elections. While both revenue procedures are separately significant, their interplay, and the interplay of the associated CARES provisions, may be especially important for certain electing real property and farming businesses.
Among the many federal agency actions taken in response to the health and economic consequences of the COVID-19 outbreak is an interesting and much unpublicized one related to the Stark Law, a healthcare fraud and abuse law that prohibits physicians from referring patients for certain designated health services paid for by Medicare to any entity in which they have a “financial relationship.”
On March 30, 2020, the Centers for Medicare and Medicaid Services (“CMS”) unexpectedly announced temporary nationwide Section 1135 blanket waivers (retroactive to March 1, 2020) for certain Stark Law penalties of the Social Security Act. By relaxing some restrictions on payments and referrals, hospitals and healthcare providers should find it easier to collaborate during this time when the healthcare system is confronting an unprecedented pandemic.
The blanket waivers are narrowly tailored and require entities to act in good faith to provide care in response to the United States national emergency declared due to the COVID-19 outbreak. The blanket waivers do not excuse any otherwise illegal fraud or abuse and those using the blanket waivers must be satisfying one of the six explicitly defined COVID-19 purposes. A further requirement is that the otherwise illegal relationship must fall into the one of the eighteen permitted relationships. Because of these complex requirements the potential use of any waiver will require fact-intensive analysis of each relationships’ circumstances and conditions. Continue reading
Healthcare providers should note that HHS has deposited funds in many of your bank accounts. The funds are from two programs, the CMS Accelerated and Advance Program and the CARES Act Provider Relief Fund. The CMS Accelerated and Advance Program is a loan against future payments from government healthcare programs and must be repaid (likely from reductions in future payments). The CARES Act Provider Relief Fund is a grant program, but in order to retain the money you have received providers must sign and deliver an attestation within 30 days following receipt of the funds. The clock has already started to run. There has been much confusion about the CARES Act payment because the certification required that the provider be involved in the treatment or diagnosis of potential COVID-19 patients. CMS has clarified, however, that any patient is a potential COVID-19 patient. The newly published HHS Cares Act data page where you can access the required attestation and instructions and learn more about this important update.
The CARES Act provides enhanced financial support for businesses and other eligible entities suffering from the continuing COVID-19 pandemic. While much of the CARES Act provides relief to for-profit businesses (see our previous post), there are specific provisions for nonprofits and tax-exempt organizations (collectively “TEOs”) which help support the operations and fundraising needs of TEOs during the COVID-19 pandemic and recovery.
Operations support for TEOs
Small Business Loan Program. The CARES Act created a new business loan program known as the “Paycheck Protection Program.” In addition to certain other businesses, the Paycheck Protection Program is available to TEOs described in either 501(c)(3) (public charities) or 501(c)(19) (veterans organizations). TEOs falling within these categories are eligible for loans under the Paycheck Protection Program, subject to other eligibility criteria, while TEOs not falling within these categories are excluded from the benefits of the Paycheck Protection Program. TEOs interested in the Paycheck Protection Program should see our previous posts on this subject.
Economic Injury Disaster Loans. The CARES Act specifically includes the COVID-19 pandemic as a disaster for which most TEOs could obtain disaster assistance loans under the SBA’s 7(b)(2) program. Qualifying small TEOs may receive a $10,000 advance if the TEO’s number of employees or annual receipts qualify. The advance under this program is not required to be repaid.
Emergency Relief and Taxpayer Protections. The CARES Act allocates $500 billion for loans, loan guarantees, and other investments to eligible businesses including TEOs with between 500 and 10,000 employees. The emergency relief loans are subject to a favorable interest rate (no higher than 2% per annum) and no principal or interest is due during the first six months.
Employee Retention Credit and Delay of Payroll Taxes. TEOs are eligible for the dollar-for-dollar employee retention credit against payroll tax liability. The amount of the credit is equal to 50% of the first $10,000 in wages per employee. TEOs who qualify may delay the employer’s share of payroll taxes through the end of 2020. The delayed payroll taxes are repaid in two installments, with the first due by December 31, 2021 and the second due by December 31, 2022.
Fundraising support for TEOs
In addition, as we previously discussed, the CARES Act allows a partial above the line deduction of up to $300 of cash contributions to charitable organizations and churches, whether the taxpayer itemizes deductions or not, suspends the 50% of adjusted gross income limitation for charitable deductions by individuals, and increases the 10% limitation for corporations to 25% of taxable income and increases the limitation on deductions for contributions of food inventory from 15 % to 25%.
Attorney Susan B. Hecker contributed to this post.
On Friday, April 10, 2020, the IRS launched a new frequently asked questions (FAQ) page on the deferral of employment tax deposits and payments. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act allows employers to defer the deposit and payment of the employer’s share of social security taxes and self-employed individuals to defer payment of certain self-employment taxes between March 27, 2020 and January 1, 2021. As discussed in our previous blog post, payment of half of these deferred amounts would not become due until December 31, 2021. The second half would be due a year later on December 31, 2022.
Such deferral is, however, prohibited for an employer who receives loan forgiveness under the CARES Paycheck Protection Program (“PPP”). Because the language of the CARES Act makes clear that employment-tax deferral is not disallowed until PPP loan forgiveness actually occurs, it appeared that employers could currently take advantage of such deferral while in the midst of the loan application and forgiveness processes. What remained more uncertain was how the IRS planned to treat previously deferred employment-tax payments once an employer did receive a decision that its lender would forgive the loan.
Question 4 of the FAQ clarifies this interplay between the employment-tax deferral and PPP loan forgiveness as follows:
- Employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan.
- Employers who do so will not incur failure-to-deposit and failure-to-pay penalties.
- Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of social security tax due after that date.
- The amount of the deposit and payment of the employer’s share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates” (50% on December 31, 2021 and the remaining amount on December 31, 2022).
The IRS has ensured that information will be provided in the near future to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January through March 2020). Employers will not be required to make a special election to be able to defer deposits and payments of these employment taxes.
The FAQ also makes clear that the ability to defer deposit and payment of the employer’s share of social security tax is in addition to the relief provided in Notice 2020-22, which provides relief from the failure-to-deposit penalty for not making deposits of employment taxes (including taxes withheld from employees) in anticipation of the Families First Coronavirus Relief Act (FFCRA) paid leave credits and the CARES Act Employee Retention Tax Credit (ERTC). An employer is therefore entitled to defer deposit and payment of its share of social security tax prior to:
- determining whether it is entitled to the paid leave credits under the FFCRA or the ERTC;
- determining the amount of employment tax deposits that it may retain in anticipation of these credits (FFCRA and ERTC), the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits; and
- receiving a determination of PPP loan forgiveness from its lender.
Keep in mind that an employer who has received a loan under the PPP is not eligible for the ERTC. The FAQ, however, essentially provides that employers can defer deposit and payment of their share of social security tax while in limbo with any of these relief provisions. Additionally, while deferral in anticipation of the ERTC may not be warranted (i.e., because an employer has already received a PPP loan), general deferral would still be permissible until that employer receives official notice of loan forgiveness.
Larger employers who are ineligible for the PPP loans, or employers who choose not to apply for these loans, will be able to utilize both the ERTC (if eligible based on economic decline) and employment-tax deferral. The ERTC and other credits that reduce payroll taxes will reduce the amount eligible for deferral.
On Thursday, April 9, 2020, the Internal Revenue Service (“IRS”) released two notices and one revenue procedure offering additional filing and payment relief for taxpayers and providing procedural guidance on a main business tax provision of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
Extension of Deadlines for Generally All Federal Tax Filings
Notice 2020-23 which “amplifies” Notice 2020-18 and Notice 2020-20 (discussed in a previous blog post) to include any person with a specified Federal tax payment obligation or Federal tax return or other form filing obligation due on or after April 1, 2020 and before July 15, 2020 in the definition of Affected Taxpayer. This includes individuals, trusts, estates, corporations, and other non-corporate tax filers, including Americans who live and work abroad. The deadline is automatically postponed to July 15, 2020.
Among other payment and filing obligations, the following are specifically included in Notice 2020-23:
- U.S. Estate (and Generation-Skipping Transfer) Tax Returns (Form 706)
- U.S. Income Tax Returns for Estates and Trusts (Form 1041)
- Information Regarding Beneficiaries Acquiring Property from a Decedent (Form 8971)
- U.S. Nonresident Alien Income Tax Returns (Form 1040-NR)
- U.S. Corporation Income Tax Returns (Form 1120)
- U.S. Income Tax Returns for S Corporations (Form 1120-S)
- U.S. Returns of Partnership Income (Form 1065)
- Exempt Organization Business Income Tax Returns (Form 990-T)
- Estimated Tax for Individuals (Form 1040-ES)
- Estimated Income Tax for Estates and Trusts (Form 1041-ES)
The three-month relief provided under Notice 2020-23 to an Affected Taxpayer is automatic, and therefore, there is no requirement to file an Application for Automatic Extension to obtain the benefit of the filing and payment postponement deadline of July 15, 2020. However, the Affected Taxpayer must file the appropriate form for an extension of time by July 15, 2020 to obtain an extension to file until October 15, 2020. Nevertheless, any tax payments will still be due on July 15, 2020.
Accordingly, the period beginning on April 15, 2020 and ending on July 15, 2020 will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file or to pay. Interest, penalties, and additions to tax with respect to such postponed Federal tax filings and payments will begin to accrue on July 16, 2020.
CARES NOL Guidance
Just one day after the issuance of Revenue Procedure 2020-23, allowing eligible partnerships to file amended partnership returns, as discussed previously, the IRS followed up with procedural guidance with regard to making certain NOL elections under the CARES Act. The IRS also extended the deadline for taxpayers seeking “quick refunds” for 2018 net operating losses (NOLs).
Revenue Procedure 2020-24 provides guidance to taxpayers with net operating losses that are carried back under the CARES Act. The specific guidance includes procedures for:
- waiving the carryback period in the case of an NOL arising in taxable years beginning in 2018, 2019, and 2020;
- disregarding certain amounts of foreign income subject to transition tax that would normally have been included as income during the five-year carryback period; and
- waiving a carryback period, reducing a carryback period, or revoking an election to waive a carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec. 31, 2017.
As stated in our previous post, taxpayers must elect out of the CARES Act NOL carryback. An election to waive the carryback for NOLs arising in tax years beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for the first tax year ending after March 27, 2020. A taxpayer makes the election by attaching to its federal income tax return filed for the first tax year ending after March 27, 2020, a separate statement for each of the tax years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply Internal Revenue Code section 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies.
Notice 2020-26 grants a six-month extension of time to file Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund, as applicable, with respect to the carryback of a net operating loss that arose in any taxable year that began during calendar year 2018 and that ended on or before June 30, 2019. To file for these quick refunds, individuals, trusts, and estates would file Form 1045, and corporations would file Form 1139.
Starting on April 17, 2020 and until further notice, the IRS will accept eligible refund claims on Form 1139 submitted via Fax to 844-249-6236 and eligible refund claims on Form 1045 submitted via fax to 844-249-6237. These fax numbers will not be operational prior to April 17. The IRS is encouraging taxpayers to wait until this procedure is available rather than mailing their Forms 1139 and 1045, as mail processing is being impacted by the COVID-19 emergency. This same procedure may be used by a corporate taxpayer claiming a refund for the acceleration of the recovery of remaining minimum tax credits for its 2018 or 2019 taxable years.
The IRS has released an FAQ to answer common questions associated with this new procedure.
On April 8, the IRS released guidance through Revenue Procedure 2020-23 that will allow partnerships to take advantage of certain tax benefits granted by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act grants certain businesses tax relief in the way of bonus depreciation deductions and an increased business interest deduction limit. This tax relief has been applied retroactively to affect 2018 and 2019 tax years. Partnerships will be allowed to file amended returns for the 2018 and 2019 tax years without first making a request for IRS approval for such changes.
Under the Bipartisan Budget Act of 2017 (the “BBA”), partnerships which have not elected out of the centralized partnership regime are required to file a tax return for the tax year while also furnishing to its partners tax information regarding the partnership, including each partner’s Schedule K-1. Under the BBA, a Schedule K-1 could not be amended without prior IRS approval once the partnership’s tax return due date has passed. This created an inconsistency with the CARES Act, causing a partnership to be unable to take advantage of retroactive tax benefits without first jumping over a number of IRS procedural hurdles.
To alleviate the stress the ongoing COVID-19 pandemic has brought to partnerships, Revenue Procedure 2020-23 allows partnerships that have filed a tax return for tax years beginning in 2018 or 2019 to file amended partnership returns and furnish amended Schedule K-1s to partners before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act affecting a partnership’s tax attributes.