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News on Good Faith Loans, PPP Audits & Other Questions

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Good news for PPP loan recipients(05-14-20)

The Treasury Department has announced the following news regarding the Paycheck Protection Program (PPP):

  • A new “current economic uncertainty” safe harbor applies for PPP loans of less than $2 million. These loan recipients will automatically be deemed to have made the required certification concerning the necessity of the loan request in good faith (FAQ #46);
  • For loans of $2 million or more, the deadline to return PPP loans to avoid an audit concerning the good faith certification has been extended from May 14, 2020, to May 18, 2020. If a borrower returns the funds by May 18, the Treasury will not pursue administrative enforcement or make referrals to other agencies (FAQ #47);
  • The Treasury also won’t pursue administrative enforcement or make referrals to other agencies against a borrower with a loan of $2 million or more who didn’t repay the loan by May 18, if the borrower returns the loan after notification by the SBA that it found on audit that the borrower lacked an adequate basis for required certification concerning the necessity of the loan request (FAQ #47);
  • All borrowers who return PPP funds by May 18, 2020, are eligible to claim an Employee Retention Credit (FAQ #45);
  • Partnerships and seasonal employers may be eligible for increased loan amounts resulting from changes in the rules as to how their loans were originally calculated. Lenders may automatically request the SBA increase the loan amount for:
    • Partnerships that received a loan based on payroll costs that did not include compensation paid to partners in their payroll costs. An interim final rule issued on April 14, 2020, now allows self-employment income of general active partners as allowed under the interim final rule posted on April 14, 2020; and
    • Seasonal employers who received a loan based on payroll costs for one of the lookback periods specified in the CARES Act (the 12-week period beginning February 15, 2019, or March 1, 2019, to June 30, 2019) rather than the alternative lookback period adopted by the Treasury Department. Under the alternative rule, seasonal employers may use any consecutive 12-week period between May 1, 2019, and September 15, 2019.

No increased loan amount is available if the lender has already listed the loan on Form SBA 1502 filed with the SBA.

Partnerships and seasonal employers who might be eligible for these increased loan amounts should contact their lenders immediately to ensure they are applying for these increased loan amounts.

The Treasury Department FAQs are available at:

https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

The interim final rule allowing for increased loans for partnerships and seasonal employers is available at:

https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Loan-Increases.pdf

Feel free to reach out to discuss this article further or if you have other questions for you or your business. (949) 877-3143 (local) or (800)425-0570 (toll-free) email info@mrarrachecpa.com

Filing A Superseded Tax Return to Claim a Refund

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File a superseding tax return to get a refund (05-04-20)

The IRS Taxpayer Advocate has suggested that a taxpayer who previously filed a 2019 return can file a superseded 2019 return on or before July 15, 2020 (October 15, 2020, if an extension was filed), and change the request to apply an overpayment to the 2020 year to request a refund instead.

As the Advocate explains in the April 29, 2020, blog post, taxpayers who have filed 2019 tax returns and have elected to apply the 2019 overpayments against their 2020 tax liabilities have made an irrevocable election, which cannot be changed — that is, unless the taxpayer files a superseded return prior to the original due date of the return. Once the original due date passes — in this case, July 15 (or October 15 if on extension) — the election can’t be revoked.

For business entities, the superseded return may be e-filed by checking the superseding return box on the electronic submission.

For individuals, the process takes longer. Superseding individual returns (Forms 1040) must be filed on paper and mailed to an IRS processing center where they are subject to processing delays and a greater risk of transcription errors. Because the IRS processing centers were closed to protect the health of employees, documents sent to the IRS through the mail were not being opened.

As the processing centers re-open, the IRS anticipates delays in processing the backlog of paper returns and correspondence. Even so, filing a superseding return to request the overpayment be refunded now will generate the refund payment in 2020 rather than 2021.

Providing bank or financial institution account information will further speed up the payment by four to six weeks. Paper returns will be processed in the order received, so file the superseded return as soon as possible.

To see the Advocate’s post, go to:

https://taxpayeradvocate.irs.gov/news/NTA_Blog_The_Value_of_a_Superseding_Tax_Return?category=Tax News

If you have any questions, please contact us to Schedule your Consultation Today. 949-877-3143 (local) or 800-425-0570 (toll-free)

SBA Provides Self-Employed and Partners Guidance on PPP Loans

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PPP loan calculations for self-employeds and partnerships (04-27-20)

The SBA has finally issued guidelines on calculating monthly payroll costs for Paycheck Protection Program loans for all entities, including self-employed taxpayers and partnerships.

Self-employed individuals

Self-employed individuals with no employees determine their monthly payroll costs by dividing their Schedule C, line 31 net profit amount, up to a $100,000 maximum, by 12. If the line 31 net profit amount is zero, the individual is ineligible for a loan.

If the self-employed individual has employees, add the monthly employee payroll costs to the amount above. These payroll costs are based on the 2019 IRS Form 941 taxable Medicare wages and tips (line 5c, column 1), plus any excluded pre-tax employee contributions for health insurance or other fringe benefits, up to a $100,000 maximum per employee.

To this amount, add the following 2019 costs:

  • Employer contributions for employee health insurance (portion of Schedule C, line 14 attributable to health insurance);
  • Employer contributions to employee retirement plans (Schedule C, line 19); and
  • Employer state and local taxes assessed on employee compensation (UI, ETT, and SDI).

Partnerships

The application for partnerships should be completed at the partnership level. Individual partners may not apply for separate PPP loans.

The maximum loan amount is based on 2.5 times the 2019 monthly self-employment earnings reported to U.S.-based general partners on the 2019 Schedule K-1, Box 14a, net earnings from self-employment tax, with a maximum of $100,000 per partner. If the 2019 K-1s have not yet been completed, they must be completed for purposes of the loan application.

This amount must be reduced by any claimed IRC §179 expense, unreimbursed partnership expenses, and depletion on oil and gas properties. The result is then multiplied by 0.9235 (to remove the “employer” share of self-employment tax).

To this amount, add any 2019:

  • Monthly employee payroll costs based on the 2019 IRS Form 941 taxable Medicare wages and tips (line 5c, column 1), plus any excluded pre-tax employee contributions for health insurance or other fringe benefits, up to a $100,000 maximum per employee; 
  • Employer contributions for employee health insurance (portion of Form 1065, line 19, attributable to health insurance);
  • Employer contributions to retirement plans (Form 1065, line 18); and
  • Employer state and local taxes assessed on employee compensation (UI, ETT, and SDI).

LLCs

LLCs compute their payroll costs based on whether they are taxed as a sole proprietorship (SMLLC), partnership, or corporation.

Additional guidance

The guidance also specifies how nonprofit organizations and C and S corporations should calculate their maximum loan amounts, as well as the documentation each entity type must provide with its application.

The guidance is available at:

https://home.treasury.gov/system/files/136/How-to-Calculate-Loan-Amounts.pdf

Partners and Self-Employed – New guidance for PPP Loans

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PPP guidance for self-employed borrowers (04-15-20)

The SBA has issued a second set of Interim Final Rules for the Paycheck Protection Program (PPP), this time focusing on how these loans work for self-employed individuals. The guidance clarifies the following issues:

  • Individuals who are partners in a partnership (or LLC taxed as a partnership) should include their self-employment income from the partnership in the payroll costs of the partnership (up to $100,000) when applying for loans and calculating loan forgiveness. The partners will not qualify for loans individually based on the self-employment earnings from the partnership. The guidance does not provide any further definition of what should be included in self-employment income for the partners. For example, there is no discussion of guaranteed payments, etc. However, under IRC §707(c) guaranteed payments are subject to self-employment tax unless they are payments to limited partners.
  • For Schedule C filers, the guidance is clear that the maximum loan amount (and loan forgiveness) will be based on the taxpayer’s 2019 Schedule C, even if they haven’t filed their 2019 return yet. They will be required to complete a 2019 return to apply for the loan.
  • For determining the loan amount, the Schedule C filers will take the net profit from line 31 of the Schedule C (limited to $100,000), divide it by 12, and multiply it by 2.5 for the loan application. If they have employees, they will add the employees’ wages (limited to $100,000 each) and other payroll costs.
  • Schedule C filers will also be required to provide a 2020 invoice, bank statement, or book of record to prove they were in business on February 15, 2020.
  • Loan forgiveness for Schedule C filers will also be based on their net earnings from 2019 (8/52 of that amount, to reflect eight weeks of earnings), plus amounts paid for employee payroll costs, interest on mortgages (for real and personal property), rent, and utilities. There are no additions for health insurance premiums or retirement contributions of the self-employed individual.
  • Self-employed individuals who take credits for sick time or family leave under the Families First Coronavirus Response Act will reduce their loan forgiveness by those amounts.
  • Self-employed individuals who receive these loans may not qualify for unemployment. 

To view the full text of the interim rules, go to:

http://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf

Eligible Employers can request an advance of the Employee Retention Credit by submitting Form 7200

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IRS UPDATE: The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit onForm 7200, Advance of Employer Credits Due To COVID-19.

Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:

  1. the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
  2. a significant decline in gross receipts. 

A significant decline in gross receipts begins:

  • on the first day of the first calendar quarter of 2020
  • for which an employer’s gross receipts are less than 50% of its gross receipts
  • for the same calendar quarter in 2019.

The significant decline in gross receipts ends:

  • on the first day of the first calendar quarter following the calendar quarter
  • in which gross receipts are more than of 80% of its gross receipts
  • for the same calendar quarter in 2019.

The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.

Qualified wages

The definition of qualified wages depends on how many employees an eligible employer has.

If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.

Impact of other credit and relief provisions

An eligible employer’s ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:

  • If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
  • Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
  • Wages counted for this credit can’t be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
  • Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.

Claiming the credit

In order to claim the new Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures.

In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act (PDF). 

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Source https://www.irs.gov/coronavirus/employee-retention-credit

California Franchise Tax Board answers important questions related to Recent Federal COVID-19 Response

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The FTB has posted the following new FAQs about conformity to various portions of the CARES Act:

Q: Are the payments that individuals receive from the federal government (i.e., $1,200 [$2,400 for individuals filing a joint return] and $500 per qualifying child) under the recently enacted federal CARES Act subject to California income tax?

A: No, these payments are not subject to California income tax.

Q: Is the emergency increase in unemployment compensation benefits (in the amount of $600 per week) that individuals receive under the recently enacted federal CARES Act subject to California income tax?

A: No, these payments are not subject to California income tax.

Q: Are the modifications for net operating losses (NOLs) in the recently enacted federal CARES Act applicable for California income and franchise tax purposes?

A: No, these modifications for NOLs do not apply for California income and franchise tax purposes.

Q: Does California conform to the federal early withdrawal penalty waivers for distributions from qualified retirement accounts under the recently enacted federal CARES Act?

A: Yes, the federal early withdrawal penalty waivers for distributions from qualified retirement accounts under the federal CARES Act also applies for California income tax purposes.

The FTB’s COVID-19 FAQs can be found at:

www.ftb.ca.gov/about-ftb/newsroom/covid-19/help-with-covid-19.html

Updates and New IRS guidance on Tax Deadline Extension

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IRS provides additional extensions and NOL guidance (04-09-20)

The IRS has now expanded its extension relief to most taxpayers who had income tax filing and/or payment obligations due on or after April 1, 2020, and before July 15, 2020, including second-quarter estimated tax payments that fall within this period. (IRS Notice 2020-23)

These taxpayers will now have until July 15, 2020, to file and pay, or to request an additional extension.

Note: Even though calendar-year partnerships and S corporation returns are due March 15, 2020, they are specifically listed in the Notice as having an extension until July 15, 2020.

The expanded extension relief specifically applies to the following payments and filings:

  • Individual income tax payments and return filings (Form 1040 series);
  • Corporate and S corporation fiscal and calendar returns and payments (Form 1120 series, including Form 1120S);
  • Partnership calendar-year and fiscal year returns (Form 1065);
  • REMIC Form 1065 returns;
  • Estate and trust income tax payments and returns (Form 1041 series);
  • Estate and generation-skipping transfer tax payments and return filings (Form 706 series);
  • Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, and any supplemental Form 8971;
  • Gift and generation-skipping transfer tax payments and return filings (Form 709);
  • Estate tax payments of principal or interest due as a result of extensions of time to pay estate taxes under IRC §§6161, 6163, or 6166, and annual certification requirements under IRC §6166;
  • Exempt organization business income tax and other payments and return filings on Form 990-T; and
  • Excise tax payments on investment income and return filings on Form 990-PF and Form 4720.

Requests to extend filing deadlines beyond July 15 must be filed by July 15, and extension payments must be made by July 15 to avoid interest and penalties. Filing deadlines are not extended beyond the original extended filing deadlines: September 15 or October 15 for calendar-year taxpayers.

The filing extension relief applies to:

  • All corresponding schedules and other forms that are filed as attachments, such as Schedule H, Schedule SE, and Forms 3520, 5471, 5472, 8621, 8858, 8865, and 8938;
  • All elections that must be made on a timely filed form or attachment; and
  • Installments of any repatriation tax.

Notice 2020-23 is available at:

www.irs.gov/pub/irs-drop/n-20-23.pdf

The IRS also released Notice 2020-26 and Rev. Proc. 2020-24, which provide the following guidance regarding NOL carrybacks:

  • For NOLs from a taxable year that began during 2018 (and ended on or before June 30, 2019), taxpayers have until June 30, 2020, to file tentative refund requests using Form 1045 (for individuals, trusts, or estates) or Form 1139 (for corporations), which requires the IRS to process the request within 90 days. Write “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment” on the top of the form;
  • If the taxpayer is a corporation, the deadline to file a tentative refund claim for a minimum tax credit for 2018 is December 30, 2020, but in order to file one application for a tentative refund for both the NOL carryback and the minimum tax credit at the same time, the taxpayer must do so by the earlier of the two deadlines. Write “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment” on the top of the form; and
  • Taxpayers who do not want to carry back 2018 or 2019 NOLs must attach a statement to their 2020 return to make this election. They will attach a separate statement for each year’s loss. The attachment must state that the taxpayer is electing to apply §172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies. These elections are irrevocable.

To view Notice 2020-26, go to:

www.irs.gov/pub/irs-drop/n-20-26.pdf

For Rev. Proc. 2020-24, go to:

www.irs.gov/pub/irs-drop/rp-20-24.pdf

2020 Tax Deadlines for Business Owners

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  • January 31, 2020
    • W-2s / 1099’s
  • Now July 15, 2020 was March 16, 2020
    • Partnerships / LLC’s
    • S-Corporations
  • Now July 15, 2020 was April 15, 2020
    • C-Corps
    • Individuals
    • Single Member LLC’s
    • Estates and Trusts
    • Gift Tax Returns
    • Foreign Bank Account Rerpots (IRS FinCen Form 114)
    • Last day to make retirement plan contributions to Traditional IRA, ROTH IRA, HSA, SEP-IRA or Solo 401(k) for previous calendar year
    • Estimated Tax Payment Q1
  • May 15, 2020
    • Nonprofits
  • June 15, 2020
    • Estimated Tax Payment Q2
  • September 16, 2020 (Extensions)
    • Partnerships
    • S-Corporations
    • Estimated Tax Payment Q3
  • October 1, 2020 (Extensions)
    • Estates and Trusts
  • October 15, 2020 (Extensions)
    • C-Corps
    • Individuals
    • Single Member LLC’s
    • Gift Tax Returns
    • Foreign Bank Account Rerpots (IRS FinCen Form 114)
  • November 15, 2020 (Extensions)
    • Nonprofits
  • December 15, 2020
    • Estimated Tax Payment Q4

Tax Deductions for Your Auto

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The Art of Technology

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