Simpler Forgiveness Application for Small PPP Loans

Last Thursday, October 8, the Small Business Administration (“SBA”) released a simplified application form (Form 3508S) and instructions for Paycheck Protection Program (“PPP”) loans of $50,000 or less.  Any qualifying PPP borrower that uses the new two-page application is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or reductions in employee salary or wages that would otherwise apply.  Accordingly, the new Form 3508S application “does not require borrowers to show the calculations” supporting the requested loan forgiveness amount, though the SBA reserves the right to request information to review the borrower’s calculations.

Borrowers using the Form 3508S application must still submit documentation to verify employee cash compensation and non-cash benefit payments and nonpayroll expenses. The instructions include examples of appropriate documentation. Borrowers must also retain all documents supporting their PPP loan application, their forgiveness application, and their compliance with PPP requirements for six years after the date their loan is forgiven or repaid in full.

A borrower with affiliates (defined by the SBA here) may not use Form 3508S if the borrower, together with its affiliates, received PPP loans totaling $2 million or more.

How the 2020 Election Might Impact Federal Gift and Estate Tax Law

There has been a lot of discussion about the impact that the upcoming election might have on federal gift and estate tax law. In light of this, we feel that it would be helpful to provide an update of the current situation and a brief summary of some of the planning opportunities that may be beneficial in the current environment. We also want to highlight the recent passage of the SECURE Act and discuss the impact this new law might have on your estate plan.

The current available estate and gift tax exemption is $11.58 million. Generally speaking, this is the amount that can be transferred during lifetime (by gift) or at death before transfer tax is imposed. Under current law, this exemption amount is tied to the rate of inflation and is therefore likely to gradually increase through 2025. If Congress does not act in the interim, then on January 1, 2026, the estate and gift tax exemption will reduce to $5 million, as indexed for inflation.

The Internal Revenue Service issued final Treasury regulations confirming that taxable gifts made between 2017 and 2026, in excess of the exemption amount available on the date of death, will not be “clawed back” into the gross estate for federal estate tax purposes. In other words, if a taxable gift of $11 million is made this year, and in the year of the transferor’s death the exemption amount is $5 million, the transferor’s estate will not pay transfer tax on the excess $6 million that was gifted when the exemption amount was $11 million. The anti-clawback regulations provide unique tax planning opportunities to lock in the temporary increase in the exemption via gifting prior to its reversion.

Since the upcoming elections may yield a political shift in both the executive and legislative branches, the estate and gift tax exemption might be adjusted prior to January 1, 2026. There is also discussion that such a political shift could lead to the imposition of an additional tax on unrealized appreciation upon the transfer of assets by gift or at death and an increase in both marginal gift and estate tax rates. Obviously, we do not know what the upcoming election holds, and we do not know what legislation might be passed in the coming years. Regardless, it seems prudent for those who potentially might have a taxable estate to monitor the situation and consider whether they wish to avail themselves of any planning opportunities before any possible changes are made.

Given the current situation, most people are drawn to strategies that allow them to make a gift in a manner that will (1) lock in the current $11.58 million exemption amount; (2) remove assets, and the appreciation thereon, from their gross estate; and (3) retain some use of the gifted assets after the gift. Some popular strategies that meet these criteria are as follows:

Spousal Lifetime/Limited Access Trust (SLAT): A SLAT is an irrevocable trust established by someone for the benefit of his or her spouse. The general concept is that the gifted SLAT funds remain available for the spouse (and possibly children) during the spouse’s lifetime. A SLAT is structured so that it does not qualify for the marital deduction; thus it utilizes the transferor spouse’s exemption. During the beneficiary spouse’s lifetime, the beneficiary spouse retains use of the funds. When the beneficiary spouse dies, however, such access is lost, and the trust assets are distributed or held in further trust for designated beneficiaries.

Many people like to maximize this strategy by having both spouses create SLATs for the benefit of each other. This is permitted; however, such SLATs must be carefully structured to include enough differences so as not to be deemed reciprocal trusts.

Grantor Retained Annuity Trust (GRAT): A GRAT is an irrevocable trust that is established for a specific term of years. During the term, the grantor retains the right to receive an annual payment from the trust. The term of the GRAT and the amount of the payment can be modified based on how much of the exemption the grantor wishes to utilize. As long as the assets in the GRAT appreciate greater than the Section 7520 rate (currently only 0.4 percent), then there will be assets that can pass to beneficiaries tax-free at the end of the term. A grantor who wishes to utilize a larger portion of his or her exemption through a GRAT would reduce the size of the annual payment that comes back during the term of the GRAT.

Qualified Personal Residence Trust (QPRT): A QPRT is an irrevocable trust funded with the grantor’s personal residence (or secondary home) in which the grantor retains the right to use the residence for a term of years. Upon the expiration of such term (if the grantor survives the term), the ownership of the property will pass to the remainder beneficiaries, either outright or subject to continuing trust.

The establishment of a QPRT will be deemed a taxable gift of the remainder interest to the trust beneficiaries. The value of the taxable gift will be the overall fair market value of the transferred property reduced by the value of the retained interest (i.e., the term of years selected). This allows the grantor to transfer the full value of the residence using only the exemption equal to the value of the remainder interest. After the term of the QPRT ends, the grantor may lease the property back from the remainder beneficiaries for fair market value.

The federal income tax consequences of the aforementioned trusts should also be considered. Each of the trusts, at least for a period of time, is structured as a “grantor trust,” which means that the grantor is taxed on all the income earned by the trust during such time period. This may be beneficial because the income taxes paid by the grantor serve as an additional transfer of wealth to the beneficiaries, free of transfer tax. Another important income tax consequence is that when a gift is made during life, the recipient of the gift receives a “transferred basis” in the asset. This means that the recipient of the gifted asset has the same basis in the asset that the transferor held. Alternatively, if an asset is transferred upon death, the recipient’s basis would be adjusted to the asset’s fair market value, which is generally more desirable for income tax purposes. Therefore, the specific assets utilized for any gifting strategy must be carefully considered.

This is not an exhaustive list of options. For example, those who do not care to retain any interest in the gifted assets can continue to utilize outright gifting directly to a beneficiary or to a trust for the benefit of one or more beneficiaries. The gifted assets could consist of closely held business interests, which might qualify for a valuation discount. If you have previously loaned money to a beneficiary, you might consider forgiving the note and thereby triggering a gift. Some clients are also looking to refinance existing loans at lower current applicable rates. You should speak with your estate planning attorney to determine which techniques are appropriate for you. There are a multitude of options, depending on your intent, family structure, asset holdings, and market outlook.

The SECURE Act and Its Impact

In addition to the possible changes to the transfer tax rules, the recent passage of the SECURE Act has caused a major change in how many retirement plans can be administered and distributed following the account owner’s death. Many of such plans are now subject to a 10-year payout requirement after the death of the account owner. Previously, such accounts could generally be paid out over the life expectancy of the named beneficiary. For many plans, this change will result in an acceleration of the income tax liability following the account owner’s death. Therefore, we also suggest that you review your retirement accounts and the named beneficiaries of such accounts to ensure that the treatment of such assets after your death is consistent with your intent.

If you would like to review the options available in further detail, or if you simply feel that it may be beneficial to review your estate plan in light of the SECURE Act or our uncertain political and estate tax environment, please feel free to contact us. We will be happy to help you protect your intent and preserve your estate for you and your family. 

FINAL OPPORTUNITY TO FILE – 2020 Florida Annual Uniform Business Reports

The deadline to file a 2020 Florida Annual Uniform Business Report for your Corporation, Limited Liability Company, Limited Partnership, or Limited Liability Limited Partnership to maintain its active status with the State of Florida was June 30, 2020. If you have not already filed a Florida Annual Report for your entity for 2020, you may still do so to avoid the administrative dissolution of the entity by filing the report by the close of business on Friday, September 18, 2020, and paying a $400 late fee in addition to the standard filing fee. Failure to file a 2020 Florida Annual Report by Friday, September 18, 2020, for an entity will result in the entity’s administrative dissolution or revocation on September 25, 2020. Entities that are administratively dissolved or revoked may be reinstated; however, such reinstatement will require the submission of a reinstatement application, as well as the payment of a reinstatement fee and the standard annual report fee.

Even if a third party, like Cross Street Corporate Services, LLC, serves as your entity’s registered agent, it is your responsibility to file the Annual Report with the State of Florida. Annual Reports should be electronically filed at the Florida Department of State’s website: www.sunbiz.org. If you need assistance, please contact us.

You may disregard this notice if your entity was formed in 2020 or has already filed a Florida Annual Report for 2020.

Treasury Releases Guidance Implementing Executive Action on Employment Tax Deferral

On Friday, August 28, the Treasury Department (“Treasury”) released guidance implementing President Trump’s executive directive to defer the employee portion of social security tax.  As part of the continued response to the COVID-19 pandemic, Notice 2020-65 allows employers to make this deferral during the period of September 1, 2020 through December 31, 2020 for employees earning below a threshold amount of $4,000 during a bi-weekly pay period. This threshold is to be determined on a per-pay period basis rather than as an annualized amount. While not clearly stated in the Notice, both Treasury and the Internal Revenue Service (“IRS”) have framed the deferral as optional for employers.

For those employers who do choose to defer the employee share of social security tax, these amounts will be postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. This could mean that absent further legislation affording permanent forgiveness of these amounts, employees would be obligated to make increased payroll payments for that four-month period. If employers fail to withhold and deposit any deferred amounts by May 1, 2021, the Notice states that they will be on the hook for penalties and interest—again, assuming Congress fails to enact legislation that says otherwise.    

What remains unclear is whether employees may choose to opt out of an employer’s choice to defer and how employers should treat the deferred taxes of employees who are terminated before these amounts are fully repaid in 2021. The Notice does, however, state that “[i]f necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee,” suggesting that an employer could, for example, deduct any deferred tax owing from an employee’s final paycheck to the extent permitted by the Fair Labor Standards Act.  

The IRS has released a draft update of Form 941, Employer’s Quarterly Federal Tax Return, on which employers may take into account employee social security withholding that is deferred. The key change appears to be on page 3, line 24, which asks for the “Deferred amount of the employee share of social security tax included in line 13b.”

We hope to see more concrete guidance from Treasury in the coming weeks.

For the Self-Employed the CARES Act Could Provide Too Much Liquidity: Simultaneous PPP and Unemployment Payments

Self-employed individuals may find themselves in a difficult situation because they have simultaneously received Paycheck Protection Program (“PPP”) loan and Unemployment benefits under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act was enacted this past March with a primary goal of combating COVID-19-related shutdowns and layoffs. It made state unemployment insurance (plus an additional $600 per week through July 31, 2020) (“Unemployment”) available to self-employed individuals, among others, and offers that same group a forgivable PPP loan for their suffering businesses. Faced with the menu of liquidity and uncertainty within the CARES Act, many self-employed individuals immediately applied for both Unemployment and a PPP loan. The question they now face is whether receiving both benefits at the same time is permissible.

The Tension Between The PPP and Unemployment Benefits

While there is no explicit authority in the CARES Act prohibiting the simultaneous receipt of both PPP loan and Unemployment monies, keeping both is risky at best and could potentially be viewed as fraudulent at worst. This is because the receipt of one goes against the purpose and spirit of the other. Looking first at the PPP, its very goal is to allow businesses to keep their employee or employees on the payroll. In other words, the applicant needs the money to keep its business going and pay salaries and wages. It logically follows that a self-employed individual who receives a PPP loan is therefore considered fully employed, at least until the funds run dry.

On the other hand, an individual is only eligible for Unemployment benefits with respect to the CARES Act, where they become totally or partially unemployed (or furloughed) due to COVID-related reasons. These monies serve only as a bridge across gaps in employment. A recipient is therefore very arguably ineligible for Unemployment benefits where compensated work is made possible by PPP funds. This is to be distinguished from a situation where a self-employed individual received necessary Unemployment while waiting for PPP loan approval and disbursement or following the depletion of the PPP loan if it came first.  

Potential Consequences

Continuing to take Unemployment while benefiting from a PPP loan could potentially be, or appear to be, a fraudulent situation. The Department of Labor (“DOL”) has made clear that all states, including Florida, are to exercise due diligence to detect fraud and assess the accuracy of payments to eligible claimants. The Small Business Administration (“SBA”) is also prosecuting PPP loan fraud under federal civil and criminal statutes and has been vocal about the consequences of failing to return unnecessary PPP funds. Most individuals who have simultaneously received or are currently receiving monies from both programs are well-intentioned and unknowing recipients, but this may not save them from an accusation of wrongdoing and/or having to go through state or federal administrative proceedings.

Finally, even assuming one could carefully segregate their PPP funds for their business from their Unemployment, using only the Unemployment monies to pay themselves a salary and the PPP to pay all other eligible business expenses, the risk of losing eligibility for full or substantial loan forgiveness remains. At least 60 percent (previously 75 percent) of the PPP loan must be spent on payroll expenses (i.e., wages) to qualify for full loan forgiveness. When comparing the size of most PPP loans to Unemployment payment amounts, the importance of avoiding this risk becomes obvious. It also remains unclear whether such segregation of simultaneous benefits is possible.

Based on the foregoing, self-employed individuals who have received both PPP and Unemployment benefits to review their payouts for any overlap of funds and check with their legal/financial advisors on the best course of action in the event of any overlap.

Join Us for a Webinar: Employment Law and Tax Developments Businesses Might Have Missed While Focused on COVID-19

Over the last several months there have been developments in employment law and tax not directly related to COVID-19 that you may have missed. While businesses have been focused on responding to COVID-19—learning about the Families First Coronavirus Relief Act, the PPP, and developments with unemployment—the Supreme Court and government agencies have been making decisions that impact the workplace.

We invite you to join us for a complimentary, one-hour Zoom webinar to discuss some of these decisions and how they may impact the workplace.

TOPICS INCLUDE:

  • Expansion of Title VII protection of sex to include sexual orientation and gender identity
  • Expansion of rights of religious employers
  • Changes to certain provisions of the Fair Labor Standards Act
  • Updates from the National Labor Relations Board on workplace investigations and work email
  • Amendment to the Florida Civil Rights Act
  • Tax planning for 2020
  • Tax provisions supporting businesses

Wednesday, August 12
10:00 – 11:00 a.m. 

REGISTER NOW >

PRESENTED BY:

Jennifer Fowler-Hermes
Board Certified Labor & Employment Attorney | Williams Parker

Gail E. Farb
Labor & Employment Attorney | Williams Parker

Beth C. Ebersole
CPA, ABV | Kerkering, Barberio & Co.

Moderator:
Thomas B. Luzier
Board Certified Real Estate Attorney | Williams Parker

IRS Releases Guidance for Retirement Plan Related Relief under the CARES Act

As discussed in our prior blog post, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides special relief provisions for individuals in relation to their retirement plans. The provisions of the CARES Act, however, created uncertainties for both plan administrators and individuals when dealing with the administration of their respective retirement plans. On June 22 and June 23, the IRS issued Notice 2020-50 and Notice 2020-51, respectively, which provide guidance related to treatment of coronavirus-related distributions and the 2020 waiver of required minimum distributions (“RMDs”). On July 17, the IRS issued News Release 2020-162 to remind individuals about the CARES Act relief related to RMDs.

Notice 2020-50: IRS Guidance on Coronavirus-Related Distributions

Notice 2020-50 expands the definition of a qualified individual (i.e. the individuals who are able to take advantage of the retirement plan related relief provided under the CARES Act) and provides helpful guidance for reporting coronavirus-related distributions from retirement plans. As a reminder, a coronavirus-related distribution is a distribution from an eligible retirement plan to a Qualified Individual (defined below) between January 1, 2020 and December 30, 2020.

Definition of a Qualified Individual

As provided in an IRS News Release, the definition of qualified individual, as expanded under Notice 2020-50, is anyone who

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-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 as a result 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.

This expanded definition will allow more individuals to reap the benefits associated with receiving coronavirus-related distributions.

Reporting a Coronavirus-Related Distributions

For the Qualified Individual to receive favorable tax treatment, the Qualified Individual must report the distribution on his or her for Form 1040 (Individual Income Tax Return) (if applicable) and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments) for 2020. Form 8915-E is expected to be available before the end of 2020. The favorable tax treatment includes the waiver of the 10-percent additional tax, the allowance of the pro-rata inclusion in income, and recontribution benefits. For more information on these benefits, please see our prior blog post.

If the Qualified Individual recontributes his or her coronavirus-related distributions to an eligible retirement plan, the method to report such recontribution depends on whether the Qualified Individual elected to include the coronavirus-related distribution ratably over a 3-year period. If the Qualified Individual reports the entire coronavirus-related distribution in the year of distribution and recontributes such distribution in a later year, the Qualified Individual is required to file a revised Form 8915-E (and amended Form 1040, if applicable).

If the Qualified Individual instead elects the ratable inclusion, then the amount of the recontribution will decrease the amount of the coronavirus-related distribution included in income for that year. The recontribution will be reported on Form 8915-E. Further, if a Qualified Individual recontributes an amount that is greater than the amount included in gross income for the taxable year, the excess recontribution amount may be carried forward, or carried back, to reduce the amount of the coronavirus-related distribution included in income in the future year, or prior year, respectively.  If the excess recontribution amount is carried back, a revised Form 8915-E (and amended Form 1040, if applicable) must be filed.

Notice 2020-50 also provides detailed guidance for plan administrators for retirement plan loans.

Notice 2020-51: IRS Guidance on Waiver of Required Minimum Distributions

As discussed in our prior blog post, the CARES Act provides a waiver of RMDs from certain retirement accounts. This new waiver rule may certainly be beneficial for individuals who wish for their retirement plan funds to grow tax-deferred in 2020; however, it also created uncertainty, especially in relation to options for rollovers.

Fortunately, Notice 2020-51 provides that distributions from a retirement plan that would have been an RMD but for the CARES Act are eligible for rollover into an eligible retirement plan, as long as other general rollover requirements are met. Further, an IRA owner or beneficiary who already received an amount that would have been an RMD but for the CARES Act may repay such distribution to the distributing IRA. Such repayment will be treated as a rollover for income tax purposes, which means the owner or beneficiary will not have to pay income tax on the distribution.

Generally, an individual must rollover a payment within 60 days to avoid tax and penalties and is only allowed one rollover within a 12-moth period. In Notice 2020-23, the IRS previously extended the rollover deadline to July 15 for RMDs distributed after January 2020. To provide further relief for individuals who already received distributions in 2020, Notice 2020-51 provides a special rule that the deadline to rollover a payment described above is extended to August 31, 2020. Thus, pursuant to Notice 2020-51, individuals who received distributions in January are now also eligible for rollover relief.

Further, these rollovers will not count towards the one rollover per 12-months limitation and are not restricted by the general rule against rollovers for non-spousal beneficiaries.

Notice 2020-51 also provides information related to the SECURE Act, guidance about plan amendments, and advice regarding other various issues addressed by FAQs.

Attorney Colton F. Castro contributed to this blog post.

Amounts Paid to Employees for Sick and Family Leave Wages Are to be Reported on W-2s

Yesterday, July 8, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-54, which provides guidance to employers on reporting qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (FFCRA). Enacted this past March 2020, the FFCRA generally requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to COVID-19.  Notice 2020-54 directs employers to “separately state” each of the paid sick and family leave wage amounts either in Box 14 of Form W-2 or in a statement that accompanies the Form W-2.

The guidance provides employers with adaptable model language for use in the Form W-2 instructions for employees. An excerpt of that language is as follows:

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:

  • Sick leave wages subject to the $511 per day limit because of care you required;
  • Sick leave wages subject to the $200 per day limit because of care you provided to another; and
  • Emergency family leave wages.”

The Notice goes on to state that the wage amount required to be reported by employers on Form W-2 will provide self-employed individuals who are also employees with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities. We recommend that employers review the Notice’s model language for their Form W-2 instructions.

With $130 Billion Left, PPP Application Deadline Extended

On July 1, 2020, the House waived through Senate-passed legislation (S. 4116) that extends the deadline to apply for a loan under the Paycheck Protection Program (PPP), the centerpiece of relief under the CARES Act. The PPP provides forgivable loans to certain small businesses to cover payroll and other permissible expenses.

The original deadline to apply for PPP loans was last Tuesday, June 30, 2020. With the President’s signature over the weekend on July 4, 2020, the deadline for businesses to take advantage of the nearly $130 billion in remaining PPP funds is now August 8, 2020. Business owners interested in applying for a PPP loan should contact their local lender about the program. We are happy to discuss the PPP and other available economic relief for your business.

On-Demand Webinar: Novel Issues Relating to Employees Working Remotely

As more employees work from home, employers are facing questions about how to comply with employment laws in a manner that minimizes risks associated with remote work. Our Business Solutions team recently presented a webinar addressing many of the employment-related issues arising from remote work. The head of our Labor & Employment practice, Jennifer Fowler-Hermes and L&E attorney John Getty were joined by Brad Hall, a workers’ compensation defense attorney, to discuss a variety of topics, including how to properly track work hours, complying with employment laws, the importance of telework agreements, and whether and to what extent workers’ compensation laws apply. Watch it on-demand below.