COVID-19 Tax Issues

Update: The Latest News,

Changes and Guidance

PPP Updates

PPP Legislation

• Congress passed a bill on June 3rd (signed into law on June 5th) that:

• Changes the rule about using at least 75% of PPP proceeds for payroll in order to get

100% loan forgiveness; it will now be 60%.

• Extends the forgiveness period from 8 weeks to: the earlier of 24 weeks from the date of

the loan, or December 31, 2020. (For perspective, 24 weeks from today is November

26th — Thanksgiving Day) The 24-week period is optional for businesses that

received their PPP loan before June 5th.

• Gives businesses until December 31st to rehire workers to avoid a reduction in

forgiveness amount (previously the date was June 30th).

• For anything not forgiven, the payback period is 5 years instead of 2 years.

• Allow businesses to defer employer-side Social Security taxes even after loan

forgiveness (previously the ability to defer Social Security taxes ended on the date the

lender decides on loan forgiveness).

PPP Legislation

• Under the wording of the bill, a business MUST spend at

least 60% on payroll or the forgiven amount will be ….

ZERO! But the Treasury Department says the rules

around PPPs will be written in a business friendly

way:

• The Treasury Department issued a statement (here:

https://home.treasury.gov/news/press-releases/sm1026)

on Monday the 8th saying partial forgiveness will be

available if a business uses less than 60% on payroll.

PPP Legislation: Loan

ForgivenessExample under the old 75% rule:

A business receives a $100,000 PPP loan. It spends $58,000 on

payroll and $22,000 on rent and utilities, so it spent $80,000 of the

PPP loan on qualifying expenses. It used 58% on payroll. It’s

forgiveness would be: $58,000 / .75 = $77,333.33.

New 60% rule:

We don’t know how the formula will work, but if it follows the old

formula, it would be: $58,000 / .60 = $96,666.67 forgiveness cap; in

our example the company spent $80,000 of the PPP proceeds, so all

$80,000 would be forgiven. WARNING: we don’t know for sure

that this is how the formula will work!

PPP Legislation: Loan

Forgiveness

• But because of the 24-week forgiveness period now, it will

be very hard for a business not to get to 60% payroll

usage.

Polling Question #1

In the new law passed June 3rd, what percentage of payroll

costs must be reached in order to get loan forgiveness?

A. 75%

B. 60%

C. 50%

D. 10%

PPP and Tax Deductions

• In Notice 2020-32, released April 30th, the IRS said expenses paid with forgiven PPP

proceeds are not tax deductible.

• The reasoning: the CARES Act specifically says forgiven PPP proceeds are not taxable

income.

• The CARES Act does not address tax deductibility of expenses paid with forgiven funds.

This allows Notice 2020-32 to come onto the scene.

• EXAMPLE: let’s say a business receives a $25,000 PPP loan and uses all of it to pay

payroll, rent and utilities, and it gets all $25,000 forgiven.

• The forgiven $25,000 is not taxable income

• But the business cannot deduct $25,000 worth of payroll, rent and utilities paid with the

tax-free forgiven proceeds.

• In effect, this business’s net income for 2020 will be increased by $25,000.

PPP and Tax Deductions

Two things can be true at the same time with this:

1. Congress almost certainly didn’t intend for tax

consequences such as this to arise from PPP loans.

2. The IRS’s position may be annoying and certainly is not

taxpayer-friendly … but it’s also correct — you can’t take

deductions for expenses paid for with tax-free income.

If tax deductions are to be allowed, CONGRESS needs to

pass a fix. See the next slide.

PPP and Tax Deductions

• The Senate Finance Committee introduced a bill —

Senate Bill 3612 — on May 5th that would allow tax

deductions for expenses paid with forgiven PPP proceeds.

• This bill has not advanced out of committee yet.

• The bill passed on June 3rd DID NOT address the tax

deduction issue.

How Common Are

PPP Loans?

Loan Count as of 5/30

Source: https://www.sba.gov/sites/default/files/2020-06/PPP_Report_200530-

508.pdf

Billion with a B

Loan Size

Source: https://www.sba.gov/sites/default/files/2020-06/PPP_Report_200530-

508.pdf

Form 3508 Loan

Forgiveness

PPP Loan Forgiveness

• SBA has released Form 3508, the form for loan forgiveness

• And the interim final rules relating to loan forgiveness:

https://www.sba.gov/sites/default/files/2020-05/IFR%20-

%20SBA%20Loan%20Review%20Procedures%20FINAL.p

df

• Presumably the form will be changing, as well as the SBA

Interim Final Rules…..

• We will cover the Form 3508 line-by-line but understand

there are unknowns here because of the new law.

Form 3508

EIDL Loans

• It is okay for a business to have both a PPP and an

Economic Injury Disaster Loan; however, the EIDL loan

must be for a different purpose than the PPP.

• The EIDL comes with an advance option ($1,000 per

employee up to $10,000) which does not have to be paid

back. This advance must be subtracted out of the

forgiveness amount of the PPP.

• Example: a business receives a PPP loan of $20,000,

and an EIDL advance of $1,000. The maximum amount

of PPP forgiveness will be $19,000.

Polling Question #2

Which type of EIDL payment is subtracted from the PPP

amount eligible for forgiveness?

A. Loans

B. Advances

C. None

Covered Period

• The application asks for the period being used (8 weeks

under the old rules; 24 weeks under the new rules).

• Businesses that received a PPP loan before June 5th (when

the bill was signed into law) can choose to use either the 8-

week forgiveness period or the 24-week period.

• Why might a business choose to use the 8-week period

instead of 24 weeks? Answer: if they’ve already used up

the PPP funds and know they will get 100% forgiveness,

they may want to just apply with the 8-week period and

get on with it.

Covered Period

• What if a business uses the 24-week period, but knows it

has reached 100% forgiveness by, say 16 weeks. Can it

apply after 16 weeks or does it have to wait until the entire

24 weeks are up?

• We don’t know

Alternative Payroll Period

• A business with biweekly or more frequency (i.e. biweekly or

weekly payroll) can choose to use an alternate covered period

for payroll expenses only.

• OLD LAW WITH 8-WEEK FORGIVENESS PERIOD: a business

with a biweekly or weekly payroll could choose to use an 8-week

period that lines up with their pay periods. Helpful since

forgiveness is available for costs “paid or INCURRED.”

• NEW LAW WITH 24-WEEK FORGIVENESS PERIOD: the

application of alternative payroll period is unknown until further

guidance is released, but presumably would still be available.

Loans in Excess of $2 Million

• Don’t check this box unless it applies!

• SBA is automatically auditing loans in excess of $2 million.

Loans in Excess of $2 Million

Loan “necessity.”

• Borrowers must certify that the loan was a “necessity.”

This is a big deal because if the SBA disagrees with

“necessity,” criminal charges could apply (30 years in

prison, $1 million in fines.)

• Loans of less than $2 million are deemed to have met a

“safe harbor” on this.

Loans in Excess of $2 Million

• But remember: the SBA can audit ANY loan.

• If it determines the loan wasn’t “necessary” the SBA could

still deny loan forgiveness.

• There has never been a definition given of “necessary.”

Polling Question #3

The SBA says it will automatically audit loans above what

dollar amount?

A. $2 million

B. $10 million

C. $50,000

D. All loans

Form 3508

Let’s start

here

Schedule A

Non-Owner Employees

Owners

Schedule A, Worksheet 1

$100,000 Limit

• Old rules of 8-week forgiveness period: $100,000 annual

limit / 52 = 1,923 x 8 = $15,384 compensation limit during

the forgiveness period.

• UNKNOWN: under the new 24-week period, will the

compensation limit be $100,000 / 52 = 1,923 x 24 =

$46,152? We don’t know.

• What if a business received its PPP prior to June 5th and

wants to use the 8-week period instead of 24 weeks?

Presumably the $15,384 limit would apply but we don’t

know yet.

Average FTE

• For Worksheet A, with each employee, take:

• Average weekly hours worked during the forgiveness

period, divided by 40

• Round to the nearest tenth

• If an employee works more than 40 hours per week, the

FTE calculation is capped at 1.0.

• Example: employee works an average of 35 hours per

week. 35/40 = .875, rounded to the nearest tenth = 0.9 on

the Schedule A.

Average FTE

• A simplified method is available where an employer can

enter:

• 1.0 for employees who average 40 hours a week or

more

• 0.5 for employees who average less than 40 hours per

week

• The FTE calculation comes into play later.

Salary/Wage Reduction

• Requires yet another calculation, a worksheet in Pages 7

and 8 of the instructions.

• Only applies to workers making less than $100,000 per

year.

Wage Reduction Worksheet

Back to Schedule A

Owners

Owner Forgiveness

• Line 9 of Schedule A is for wages paid to owners; you might

also use Lines 6, 7 and 8 on Schedule A (for health insurance

premiums, retirement contributions, and employer-side state

and local taxes paid [i.e. state unemployment tax]) More

discussion on the next slide.

• OLD RULES: limited to the lesser of: $15,385 of compensation

in 2020 or the equivalent of 8 weeks of 2019 compensation

plus 8 weeks of benefits.

• NEW RULES: UNKNOWN. If this is changed to keep up with

the changes to the law, the compensation limit would be

$46,152. But we don’t know.

Owner Forgiveness

• Do health insurance premiums and retirement

contributions to owners count? Yes for S-corp or C-corp

owner/employees. NO for sole proprietors and partners.

Owner Forgiveness

From the interim final rule:

• “In particular, owner-employees are capped by the amount

of their 2019 employee cash compensation and employer

retirement and health care contributions made on their

behalf.” But not for sole proprietors or partners.

Owner Forgiveness

• In the interim final rule, forgiveness is limited to the lesser of 2020

wages and possibly benefits (depending on the entity), or 8/52nds* of

2019 compensation and possibly benefits (depending on the entity).

• Reminder: benefits of any kind do NOT count for sole proprietors or

partners.

• Remember we are talking about employer-side contributions. So

premiums paid by the employer, or employer-side contributions to a

retirement plan.

*-Probably changing to 24/52nds with the new law

Owner-Employee Example

Here’s an example:

Let’s say a business is a C-corporation and George is an owner-employee. In 2019 he draws

a salary of $60,000, and the company pays health insurance premiums of $20,000, and

makes $5,000 of retirement contributions.

Now let’s say he gets a raise in 2020 and makes $70,000 with $20,000 of insurance

premiums and $6,0000 of retirement contributions.

For PPP purposes, George’s forgiveness is limited to 8/52nds of his 2019 compensation

plus benefits. $60,000 + $20,000 + $5,000 = 85,000 / 52 = $1,635 x 8 = $13,080.

NEW MATH: Assuming the rules are changed to 24 weeks (and we don’t know that it will

be !), the calculation would be: $85,000 / 52 = $1,635 x 24 = $39,240.

Compare that with his forgiveness if the 2019 limitation didn’t apply: take 2020 salary of

$70,000 plus $20,000 plus $6,000 = $93,500 / 52 = $1,846 x 8 = $14,768 or x 24 = $44,304.

Polling Question #4

The cap on forgiveness for owner compensation is:

A. No cap

B. 24 weeks of pay

C. The lesser of 2020 compensation or 8 (or maybe 24)

weeks of 2019 compensation plus benefits

D. No forgiveness is allowed at all

What About Sole

Proprietors?

• Sole proprietors receive automatic forgiveness based on what

the interim final rules call “owner compensation replacement.”

• The replacement amount is based on 8 weeks of 2019 net

income.

• OLD RULES: take 2019 net income (maximum of $100,000 for

the year) from the Schedule C, divide by 52 and multiply by 8.

• NEW RULES: don’t know but hopefully will be — divide by

52 and multiply by 24.

What About Sole

Proprietors?

• Whether forgiveness is based on 8 weeks or 24 weeks,

you use Line 31 of their 2019 Schedule C.

What About Sole

Proprietors?

Use Line 31

Sole Proprietor Example

• Let’s say a proprietor has net income on their 2019 Schedule

C of $48,000.

• Their PPP loan limit is $48,000 / 12 = $4,000 x 2.5 = $10,000.

• Automatic 8-week forgiveness is: $48,000 / 52 = $923 x 8 =

$7,384. Less than the loan amount.

• If automatic forgiveness is changed to 24 weeks, take $923 x

24 = $22,152. Way more than the loan amount so would be

100% forgiveness.

• But we don’t know how this will work for sure

What About Sole

Proprietors?

• Interim Final Rules relating to sole proprietors specifically

prohibit proprietors from counting 2020 home-office

deductions (i.e. home mortgage payments, home rent,

home utilities) and personal vehicles toward loan

forgiveness.

• Sort of a moot point since forgiveness is based on Line 31

of the 2019 Schedule C, which would include the home-

office deduction anyway.

Who is an

“Owner/Employee”?• What about:

• Ownership attribution: what about a non-owner whose parent or sibling or child IS an owner?

• Is there a difference between someone who owns 100% of the company vs. someone who owns 1%?

There doesn’t seem to be.

• What if someone was an employee last year but not an owner, and then in 2020 they became an owner

too?

• What if someone wasn’t even a part of the company last year but now they’re an owner in 2020?

• What about limited partners? (Form 3508 uses the term “general partners.”)

• What about someone who owns stock options? And what if the options haven’t vested yet?

• Also, some practitioners have pointed out that the only tax-code definition of the term “owner-employee” is

in the retirement plan section — Section 401(c)(3) — where owner-employee is defined as a sole proprietor

or 10% partner in a partnership. I would be careful taking this stance.

• The form uses the exact wording: “owner-employees/self-employed individual/general partners”

Polling Question #5

True or false: the guidance on PPP loans has given us a

clear definition of what an “owner employee” is?

A. True

B. False

Non-Payroll Costs

Non-Payroll Costs

Can count:

• Business mortgage interest

• Business rent or lease payments

• Business utilities

But what does this really mean?

Mortgage Interest

• Interim final rules say a business can count mortgage

interest on “real or personal property”

• This presumably means interest on things such as car

payments in addition to typical mortgages on buildings

• WARNING: for sole proprietors, you cannot count home

mortgages or personal car payments

What About Leases?

• The interim final rules say rent on “real or personal

property.”

• So rent on a building but also rent on equipment leases

and such.

Utilities

• Interim final rules say: “Business utility payments for the

distribution of electricity, gas, water, transportation,

telephone, or internet access for which service began

before February 15, 2020.”

• Can a sole proprietor include their cell phone costs?

• I don’t see anything that says they cannot.

• But they can’t count anything related to their home.

Applying for

Forgiveness

Deadlines

• Once the forgiveness period is up, the business files Form

3508 with the bank.

• There’s not a specific deadline for when to file the form;

deferral of the first payment on the loan is 10 months from

the end of the loan period, so would want to get the Form

3508 in before that.

• Lenders have 60 days to make a forgiveness

determination; it then goes to the SBA, which has another

90 days to approve or deny the determination.

Polling Question #6

What is the name of the loan forgiveness application?

A. Form 3508

B. Form 1040

C. Form 1099-FOR

D. Form 5471

Problems• For most businesses, the loan forgiveness period will not end until the fall; November 26th for a loan that hits a

business’s bank account today.

• So let’s say this business applies for loan forgiveness on November 30th (the 26th is Thanksgiving so let’s say

they send the application in on Monday the 30th); the bank has until January 29th to make a determination.

(NOTE: we don’t know yet if a business can apply for forgiveness before the end of the 24 weeks.)

• Assuming the bank approves forgiveness — and let’s say it happens on January 29th — the loan goes to the

SBA.

• SBA has until April 29th to approve the forgiveness.

• Let’s say the business wants to file its return before April 29th.

• It cannot really do so without knowing for sure what the forgiven amount of the loan will be, since it can’t take

tax deductions relating to the forgiven amounts.

• This is not the end of the world, but could be a problem; some clients get cranky about extensions or may

need to get the return filed for other reasons. This would mean amendments if the forgiveness amount

was different from what was anticipated.

• Maybe not a big deal for smaller businesses where forgiveness “should” be a homerun; will be an issue for

bigger businesses, especially if the loan amount is over $2 million.

Documentation

Forgiveness Documentation

For payroll, health insurance and retirement contributions, the following must be submitted

with the Form 3508:

• Bank account statements or third-party payroll service provider reports documenting the

amount of cash compensation paid to employees.

• Tax forms (or equivalent third-party payroll service provider reports) for the periods that

overlap with the Covered Period or the Alternative Payroll Covered Period:

• Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and

• State quarterly business and individual employee wage reporting and unemployment

insurance tax filings reported, or that will be reported, to the relevant state.

• Payment receipts, cancelled checks, or account statements documenting the amount of

any employer contributions to employee health insurance and retirement plans that the

Borrower included in the forgiveness amount (PPP Schedule A, lines (6) and (7)

Forgiveness Documentation

For proving employee headcount:

• No specific documentation is referenced, but the

instructions talk about payroll reports or tax filings that

show employee headcount.

Forgiveness Documentation

For mortgage, rent or utilities (this is copied and pasted directly from the Form 3508

instructions):

• Business mortgage interest payments: Copy of lender amortization schedule and

receipts or cancelled checks verifying eligible payments from the Covered Period;

or lender account statements from February 2020 and the months of the Covered

Period through one month after the end of the Covered Period verifying interest

amounts and eligible payments.

• Business rent or lease payments: Copy of current lease agreement and receipts or

cancelled checks verifying eligible payments from the Covered Period; or lessor

account statements from February 2020 and from the Covered Period through one

month after the end of the Covered Period verifying eligible payments.

• Business utility payments: Copy of invoices from February 2020 and those paid

during the Covered Period and receipts, cancelled checks, or account statements

verifying those eligible payments.

Forgiveness Documentation

Must keep but do not have to submit:

• Documentation relating to the Schedule A salary/wage reduction

calculation

• Documentation relating to employees making more than $100,000

(Schedule A Worksheet, Table 2)

• Documentation showing a business offered an employee his or her job

back and was refused; also documentation relating to employees fired

for cause, or who voluntarily quit.

• Documentation showing the calculations relating to the FTE Safe

Harbor.

Loan Calculations

Calculation of Loan Limit Did

NOT Change

• The loan limit is still: 2.5 times 2019 average monthly

payroll

• Or 2.5 times 2019 net Schedule C income for sole

proprietors

• No more than $100,000 of wages per employee (or

$100,000 of net income for a sole proprietor) can be taken

into consideration

• None of this has changed

How the New 24-Week

Forgiveness Period Is Helpful

• The loan limit calculation is based on 2.5 times average

monthly payroll; this means around 10 weeks of payroll.

• Forgiveness had been limited to 8 weeks, making it hard

to get forgiveness on payroll alone.

• For a typical business, having 24 weeks to spend the

money “should” result in being able to use all of the PPP

funds on payroll in that time. But not always if the

business is shut down or had to lay off workers and is

trying to hire them back!

Example

• Let’s say a business has 1 employee who makes $48,000 per

year. Their salary was the same in 2019 and 2020.

• Let’s say the employee is paid biweekly, so $1,846 each payday.

• Loan limit = $48,000 / 12 = $4,000 x 2.5 = $10,000 loan

• 8-week forgiveness period: let’s say there are 4 paydays in the 8

week period. Loan forgiveness would be $1,846 x 4 = $7,384.

• With 24-week forgiveness, let’s say there are 12 paydays in this

time; $1,846 x 12 = $22,152, easily past the loan amount.

What About Partnerships?

I always get questions about partnership loan limit calculations, so here’s a slide devoted to

partnerships. To calculate a partnership loan limit, you need to know:

• Each partner’s share of 2019 net income (box 14a of their K-1) — minus Section 179

deductions, unreimbursed partnership expenses, and depletion deductions, multiplied by

.9235. (SIDEBAR: you multiply partner SE income by 92.35% but you DO NOT for sole

proprietors….) The limit after the 92.35% multiplication is $100,000 per partner. Editorial

commentary: a partnership will need to ask partners about unreimbursed

partnership expenses — those are actually taken on the partner’s 1040.

• If the partnership has employees, you would take 2019 wages paid.

• If the partnership has employees, you would also count health insurance, retirement

contributions and state unemployment taxes paid on their behalf. But not payments made

on behalf of partners.

• Partners CANNOT apply for a PPP loan for themselves; it must run through the

partnership.