The long-awaited proposed regulations on the effect of IRC §67(g) on trusts and estates have now been issued by the IRS.[1] The big item in the proposed regulations is an explanation of the treatment of excess deductions on termination under IRC §642(h)(2) after the Tax Cuts and Jobs Act provided, in IRC §67(g), that miscellaneous itemized deductions would no longer be deductible on individual income tax returns.

Existing Reg. §1.642(h)-1 provided that such deductions are “allowed only in computing taxable income and must be taken into account in computing the items of tax preference of beneficiaries; it is not allowed in computing adjusted gross income.” This holding led to such deductions being treated as miscellaneous itemized deductions prior to the TCJA addition of §67(g).

As the SBA has advised borrowers who don’t want to have to worry about being asked about whether their certification that their loan application was necessary was made in good faith to repay those loans by May 7 (recently extended to May 14), a question has arisen regarding the employee retention credit (ERC).

An employer who receives a PPP loan is not eligible to claim the employee retention credit per CARES Act §2301(g). If an employer decides to return its PPP loan under the SBA’s safe harbor repayment program, are they still ineligible for the ERC since they did have a PPP loan, even though they have now repaid it?

In now current Question 80 on the IRS’s page for “COVID-19-Related Employee Retention Credits: Interaction with Other Credit and Relief Provisions FAQs,”[1] the answer is that employers who return the funds by May 7 will be able to claim the ERC if otherwise eligible.

The IRS has added information to their “Economic Impact Payment Information Center”[1] on their website dealing with payments made to deceased taxpayers.

Shortly after the IRS began issuing economic impact payments (EIP) to taxpayers, reports began coming up of amounts being paid to deceased taxpayers. While the Treasury Secretary indicated that such payments were made in error and should be returned to the government, no specific guidance was issued by the IRS until May 6.

The new guidance both makes clear the IRS position on when the payment will need to be returned and also the mechanics of returning the payment. The May 6 changes also contain information about EIPs related to resident aliens and incarcerated individuals.

Key members of the Congressional tax-writing committees have, for the second straight day, sent a letter to Treasury Secretary Mnuchin, voicing their displeasure with IRS guidance on a CARES Act issue and requesting that the agency reverse this guidance.[1] This time the letter, signed by Senate Finance Committee Chair Chuck Grassley (R-IA), Ranking Member Ron Wyden (D-OR) and House Ways & Means Committee Chair Richard Neal (D-MA), raises issues with the guidance in Notice 2020-23.

Notice 2020-23 provided that amounts expended that were used to justify the forgiveness of a PPP loan would not be deductible by the taxpayer in computing federal taxable income. The Treasury Secretary had defended that guidance specifically in an interview with Fox News on May 4. Tax Analysts, in a May 5, 2020 story, provided the following quotes from the Fox News Interview:

“The money coming in the PPP is not taxable,” Mnuchin said May 4 in an interview on Fox Business. “So if the money that's coming is not taxable, you can't double dip.”

…

Mnuchin said the IRS guidance is correct, adding, “I have reviewed this personally. This is basically Tax 101.”[2]

Another interim final regulation on the PPP loan program has been issued by the Small Business Administration.[1] The new guidance deals with non-discrimination rules and student workers.



Two days before the May 7 due date to return PPP loan funds to gain the presumption that the borrower had made a good faith representation that the loan was necessary, the SBA has granted a one week extension on that deadline in an update to the Payroll Protection Program loan FAQ.[1]

When the SBA published Question 31 that emphasized that borrowers who had sufficient liquidity likely could not have correctly represented the loan was necessary for the business, the agency gave borrowers who had already obtained a loan until May 7 to repay the loan. While the relief says in that case it will be presumed the borrower made a good faith certification, in reality what it does is allow the borrower to avoid the risk of being asked to demonstrate the necessity of the loan and any potential sanctions that might arise if it is found that the certification was not made in good faith.

The Chairs of both Congressional tax writing committees (House Ways and Means Committee and Senate Finance Committee) and the Ranking Member of the Senate Finance Committee have sent a letter to Secretary of Treasury Mnuchin questioning the IRS’s position on the payment of health insurance benefits for employees no longer receiving payroll and the employee retention credit enacted as part of the CARES Act.[1]

The employee retention credit, found at Section 2301 of the CARES Act, provides employers who meet certain conditions a credit of up to 50% of amounts paid for certain payroll costs. The question the IRS sought to answer in the FAQ on the matter is whether an employer could claim this credit if it was not currently paying wages to the employee but continued to pay for the employee’s health insurance costs.

In its most recent addition to the questions and answers for the Payroll Protection Program loans,[1] the SBA has given some protection on forgiveness for an employer that attempts to rehire an employee if the employee declines the offer of employment.

Question 40 provides:

Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

The IRS has updated the FAQ on the procedures to fax Forms 1045 and 1139 under temporary procedures.[1]

The IRS has updated the initial question describing how the process has changed:

1. How does the process change from the normal hard copy mailing requirement?

Previously, these forms could be filed only via hard copy delivered through the USPS or by a private delivery service. There are well-established procedures for processing the hard copy forms in order to provide quick tentative refunds to taxpayers. A temporary procedure to accept these forms via fax permits us to make the relief in the CARES Act available to taxpayers before IRS processing centers are able to reopen. The procedures to process claims generally remain the same, except as noted in these FAQs. (updated April 30, 2020)

The IRS has now published the draft of the Form 941[1] to be used for the rest of 2020. The new form takes into account the changes made by the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act that added various types of payroll tax relief.

Specifically, the form adds lines to account for:

• Credit for Qualified Sick and Family Leave Wages;

• Employee Retention Credit; and

• Deferred Amount of the Employer Share of Social Security Tax.

The Small Business Administration has published yet another Interim Final Regulation for the PPP loan program.[1] While much of the document relates to issues of interest to non-bank lenders, one key piece of guidance was issued that limits the amount of loans for corporate groups.

The IRS has answered one of the key unanswered tax questions involving the PPP loan program, and the answer is one that taxpayers will not like. In Notice 2020-32[1] the IRS has provided that any otherwise deductible expenses that result in forgiveness of a PPP loan pursuant to Section 1106 of the CARES Act will not be deductible in computing the taxpayer’s income.

The Notice begins by pointing out that while Congress told us PPP loan forgiveness is not taxable income, they said nothing about deducting the expenses paid with such loan proceeds:

Neither section 1106(i) of the CARES Act nor any other provision of the CARES Act addresses whether deductions otherwise allowable under the Code for payments of eligible section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven under section 1106(b) of the CARES Act as a result of the payment of those expenses. This Notice addresses the effect of covered loan forgiveness on the deductibility of payments of eligible section 1106 expenses.[2]

The IRS and U.S. Department of Labor have issued a notice on relief for certain timeframes for employee benefit plans, participants and beneficiaries related to the COVID-19 emergency.[1]

The agencies describe the need for such relief as follows:

As a result of the National Emergency, participants and beneficiaries covered by group health plans, disability or other employee welfare benefit plans, and employee pension benefit plans may encounter problems in exercising their health coverage portability and continuation coverage rights, or in filing or perfecting their benefit claims. Recognizing the numerous challenges participants and beneficiaries already face as a result of the National Emergency, it is important that the Employee Benefits Security Administration, Department of Labor, Internal Revenue Service, and Department of the Treasury (the Agencies) take steps to minimize the possibility of individuals losing benefits because of a failure to comply with certain preestablished timeframes. Similarly, the Agencies recognize that affected group health plans may have difficulty in complying with certain notice obligations.[2]

The SBA continues to slowly add questions to the frequently asked questions on the Payroll Protection Program (PPP) loans,[1] in this case giving guidance on what happens if a business had a change of ownership after February 15, 2020.

The IRS has added a new question to the agency’s set of frequently asked questions on the extension of filing and other deadlines to address the issue of the deadline to file with the United States Tax Court.[1]

In Notice 2020-23 the IRS extended most due dates for items falling due between April 1, 2020 and July 14, 2020 to July 15, 2020. That extension of time included filings with the United States Tax Court. However, the United States Tax Court also has its own relief rule, outlined in the case of Guralnik v. Commissioner, 146 TC 230 (2016), that applies when the clerk’s office is closed (in that case due to a snow emergency).

After Treasury Secretary Mnuchin initially mentioned the issue in an interview with CNBC[1] on April 28, the Treasury Department posted a statement by the Treasury Secretary and Small Business Administration (SBA) Administrator Jovita Carranza on a process for the review of Payroll Protection Program (PPP) loans.[2]

The CNBC article quoted the Treasury Secretary as stating that all PPP loans in excess of $2 million would be subjected to a full review of the loan by the SBA. Later in the day, the Wall Street Journal published a story on its website citing their interview with the Treasury Secretary where he added that smaller loans will be spot checked by the agency as well.[3]

The latest addition to the frequently asked questions for the Payroll Protection Program loans[1] is short, but it clarifies that the warning found in question 31 is not just limited to public companies. Given that the agency is reportedly working on guidance for loan forgiveness, this may mean that information on liquidity and access to credit may become part of the information requested of all applying for forgiveness.