Payroll Protection Program Flexibility Act of 2020 Enacted Into Law

Congress has now passed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA),[1] with the Act passing the Senate by unanimous consent in the early evening hours of June 3, 2020. The Act changes a number of provisions in the original PPP loan program enacted as part of the CARES Act. The President is expected to sign the bill into law.

Update: The President signed the bill into law on June 5, 2020, which now becomes the date of enactment for items where that date is referenced in the law.

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Guidance Issued on ATNOL Issues When Carrying Back Corporate NOLs Under CARES Act

Guidance has been posted on the IRS website in the form of questions and answers regarding the carryback of net operating losses for corporations under the CARES Act into years when the alternative minimum tax (AMT) was still in force.[1]

The Tax Cuts and Jobs Act (TCJA) repealed the corporate alternative minimum tax beginning in 2018 and removed the ability for taxpayers to carry losses from 2018 back into 2017 and earlier years. However, when the CARES Act added a provision allowing net operating losses from 2018-2020 to be carried back five years, these losses from years when the AMT no longer applied were being carried back to years when the AMT still applied to taxpayers. So what was the alternative tax net operating loss (ATNOL) for these years to carry back to those earlier years?

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Relief Granted for Time to Take Certain Actions Related to Employee Benefit Plans, Payroll Taxes and Related to Exempt Organizations

The IRS has expanded relief for the performance of certain time sensitive actions in Notice 2020-35.[1] The relief provision covers:

  • Certain employment taxes,

  • Employee benefit plans,

  • Exempt organizations,

  • Individual retirement arrangements (IRAs),

  • Coverdell education savings accounts,

  • Health savings accounts (HSAs), and

  • Archer and Medicare Advantage medical saving accounts (MSAs).

The notice also provides “a temporary waiver of the requirement that Certified Professional Employer Organizations (CPEOs) file certain employment tax returns and their accompanying schedules on magnetic media.”[2]

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Forms 1040-X for 2019 Will Be Available for Electronic Filing Later in the Summer of 2020

The IRS announced in a news release[1] that later this summer the agency will begin accepting Form 1040-X, Amended U.S. Individual Income Tax Return, electronically. However, the agency did not announce a specific date for the availability of this option.

The electronic filing option will initially be limited to amendments of 2019 individual returns, as the news release states:

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future.[2]

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SBA Gives Details of Loan Reviews and Steps a Lender Should Take in Determing if Borrower Qualifies for Forgiveness

The Small Business Administration issued a second interim final regulation late in the evening of May 22, 2020, this one entitled “Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities.”[1]

The SBA’s potential review of loans has been a topic of discussion since the SBA released Q&A 31 in the “Paycheck Protection Program Loans Frequently Asked Questions (FAQs),” where the agency indicated concern over loans taken by various public companies, followed up by Q&A 39 where the agency announced:

To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review 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.[2]

This particular IFR was issued to describe the review process and related responsibilities for the borrower and the lender.

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PPP Forgiveness Interim Final Rule Released by the Small Business Administration

The SBA continued with the release of guidance late in the evening, with a release around 10:00 pm EDT on May 23.

A week after issuing the application form for PPP loan forgiveness, the Small Business Administration released an interim final rule covering the forgiveness process.[1] The IFR provides the formal guidance to go with the application package.

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Memorandum Discusses IRS View on Timing for Payroll Purposes of Income Inclusion for Stock Options, Stock-Settled SARs and Stock-Settled RSUs

Many employers offer some form of stock-based compensation to employees. In AM-2020-004[1] the IRS has issued guidance related to the computation of payroll and withholding taxes on certain types of such compensation, as well as the timing of payroll tax deposits related to such compensation.

The guidance deals with three different programs:

  • Nonqualified stock options

  • Stock-settled stock appreciation rights (SARs)

  • Stock-settled restricted stock unit (RSU)

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Foreign Affiliates Count for PPP Loan 500 Employee Test But Applicants Before May 5 Qualify for Relief

The Small Business Administration has issued interim final rules clarifying how foreign affiliates affect a borrower’s qualification to obtain a Payroll Protection Program (PPP) loan.[1]

The IFR deals with whether an applicant must count employees of foreign affiliates who will generally have residences outside the United States when determining if the entity has more than 500 employees and thus is not eligible for a PPP loan. The SBA concludes that the answer will be yes if the foreign entity fits the definitions found in the SBA’s own affiliation rules.

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§501(c)(12) Electric Cooperatives Are Eligible for PPP Loans

The SBA issued a new interim final regulation that is focused on the qualification of certain electric cooperatives under the PPP loan program.[1]

The preamble explains the entities that this IFR applies to:

Existing SBA regulations define a “business concern” as “a business entity organized for profit,” subject to certain limitations. 13 CFR 121.105(a)(1). Generally, electric cooperatives are organizations that are owned and controlled by members who receive services from the cooperative. Electric cooperatives periodically return any excess of net operating revenues over their cost of operations – generally referred to as “savings” – to their member-owners. In addition, electric cooperatives meeting the description of section 501(c)(12) of the Code may be exempt from federal income taxation under section 501(a) of the Code. To qualify for the exemption, an electric cooperative must receive at least 85 percent of its income each year from its members. The 85 percent member income test is computed annually. An electric cooperative may be exempt in one year, lose exemption in another year if it does not derive at least 85 percent of its income from members, and become exempt in a third year. Because of their potential tax exemption under section 501(c)(12) of the Code, electric cooperatives have faced uncertainty about their eligibility to receive PPP loans.

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Safe Harbor PPP Loan Repayment Date Extended to May 18

The SBA is now offering one more extension of time to repay a loan under the safe harbor that was originally set at May 7 in third iteration of the PPP loan FAQ issued on May 13.[1] Now the SBA has delayed the date for repayment to avoid a question regarding the certification of the need for the loan to May 18th. Of interest, though, is that this has been issued on the same day the SBA issued guidance that provided the question would not be asked on loans of less than $2 million, as well as providing a later safe harbor for repaying the loan if the SBA determines there was no need for the loan.

The one major reason left to repay the loan would be to obtain the right to claim the employee retention credit in the future, assuming the IRS will move the date to repay the loan and regain the right to claim the credit to May 18.

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SBA Announces Most PPP Loans of Less than $2 Million Will Not Have Good Faith Certication Questioned

In an FAQ[1] updated on May 13, 2020, the SBA appears to have mostly backed off the threat to review PPP loans of less than $2 million for improperly certifying their loan was necessary.

On April 29, 2020, Treasury Secretary Mnunchin and SBA Administrator Jovita Carranza issued a Joint Statement that read, in part:

To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review 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. Regulatory guidance implementing this procedure will be forthcoming.[2]

The statement specifically was issued discussing the review of loans and repayment before the then May 7 deadline to avoid having questions raised regarding the correctness of a borrower’s certification that a loan was necessary.

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Maximum FSA Carryover Set to 20% of Maximum Deferral and Change in Timing for Reimbursement for Individual Premium Provided for in IRS Notice

In Notice 2020-23[1] the IRS revised the maximum amount a cafeteria plan may allow a participant to carry over to the next year for a medical flexible savings account and clarified that a health plan may reimburse individual insurance policy premium expenses incurred prior to the beginning of the current year.

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COVID-19 Relief Provided for §125 Plans and Participants

The IRS has released guidance in Notice 2020-29 that allows for additional flexibility for §125 cafeteria plans given the COVID-19 national emergency that was declared on March 13.[1] The guidance deals with three general issues:

  • Plans granting employees the right to make or modify elections mid-year in the §125 plan;

  • Allowing participants to use unused amounts deferred to the plan remaining at the end of 2019 in 2020; and

  • Allowing retroactive relief to January 1, 2020 for issues related to high deductible health plans and telepath services.

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Tax Treatment of CARES Payments to Students Discussed by IRS in FAQ

In yet another set of Frequently Asked Questions on the IRS website, the IRS clarified the tax treatment of funds received by students under provisions of the CARES Act that allows the use of certain funds allocated by the Department of Education to support students.[1]

The IRS cites IRC §139 provisions to support the tax treatments outlined. This provides additional indirect support for those looking to potentially take advantage of §139 to provide tax free relief payments to employees and other parties, as this implicitly finds that the COVID-19 emergency meets the definition of a disaster that is covered by §139.

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IRS Reverses Course, Qualifying Employers Paying Only Health Care Costs Can Claim Employee Retention Credit

Following a letter written by Senator Chuck Grassley (R-IA, Chair Senate Finance Committee), Rep. Richard Neal (D-MA, Chair House Ways & Means Committee) and Senator Ron Wyden (D-OR, Ranking Member Senate Finance Committee) that was critical of the IRS FAQ on the Employee Retention Credit stating that employers could not claim the credit for paying health care benefits for employees on furlough, the IRS has now reversed course.[1]

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Proposed Regulations Upon Which Taxpayers May Rely Issued For Excess Deductions on Termination

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).

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SBA Confirms That Borrowers Who Take Advantage of May 14 Extension to Repay Gets Employee Retention Credit

The SBA published guidance[1] in its PPP loan FAQ that duplicates that provided by the IRS earlier, but confirms that a borrower who pays back their PPP loan by May 14 (the extended due date announced by the SBA) will qualify for claiming the Employee Retention Credit. The original IRS guidance providing the relief only mentioned the original May 7 due date for repaying the loan.

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