2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Paycheck Protection Program Updates

The tweaks to the program took pressure off businesses to spend funds quickly and further allowed businesses to be more fiscally responsible with the loan proceeds. The Act also raised the minimum loan maturity from the initial two-year period to five years. The PPP Flexibility Act added two Safe Harbor options, which were designed to help businesses struggling to achieve the Full Time Equivalent (FTE) employee headcount necessary for full forgiveness. Safe Harbor 1 helps businesses unable to return to the same business activity level due to government orders, by allowing them to be fully exempt from FTE counts. Hair salons and restaurants are examples of businesses that would fall into this exception. Safe Harbor 2 was an update to the original legislation. The updated flexibility legislation changed the measurement date for benchmarking Safe Harbor FTEs from June 30, 2020, to December 31, 2020, thereby allowing more businesses the ability to achieve 100% forgiveness in the event they were unable to rehire their original employees, or hire new talent quickly. Today, we stand at an intersection. While many banks have opened their loan forgiveness application (LFA) portals, not all banks are fully equipped to begin the process. At the date of this writing, around 100,000 applications have been submitted by banks to the SBA since the portal opened in mid-August, and exactly zero have received approval. The SBA has 90 days from the submission date to approve or reject the bank’s recommendation. Business is no longer at a standstill, as it was in March 2020. Mergers and acquisition (M&A) activity has resumed, and for businesses with PPP loans considering M&A, at the forefront of owner’s minds is not violating loan covenants, which would jeopardize the business’s ability to receive full forgiveness at the conclusion of the covered period. To assist business owners in navigating the interaction of a PPP loan with changes in ownership, the SBA issued a Procedural Notice on October 2, 2020. The Notice states that the PPP borrower, as well as the successor entity in the event of a merger, will remain subject to all obligations of the PPP SIGNIFICANT ISSUES WORTH NOTING

loan. Additionally, if the funds are used inappropriately, the SBA will have recourse against either the original borrower, the acquirer, or both (depending on the circumstances). Another concern for borrowers relates to the taxability of any PPP proceeds forgiven. In the original CARES Act legislation, many Congressional representatives stated that they intended for the PPP forgiveness to be a non-taxable event. However, the IRS has taken a contrary stance and has stated that associated expenses will be disallowed, effectively making the loan proceeds taxable. In addition to tax considerations, businesses are concerned about financial statement presentation of the loan and subsequent forgiveness. While there is no formal guidance in US GAAP, the American Institute of CPAs, in conjunction with the Financial Accounting Standards Board (FASB), has developed Technical Question and Answer (TQA) 3200.18, which essentially requires PPP loans to be reported as a liability until there is reasonable assurance that any conditions attached to a loan will be met and the forgiveness will be received. At the end of August 2020, the SBA and Treasury released additional information pertaining to related party rentals, which disallows businesses that rent their buildings from related parties to deduct their rent payments on the LFA. As an alternative, business owners may deduct the portion of mortgage interest paid to the related person or entity. This guidance was contrary to prior guidance and caught many businesses by surprise. The SBA has also clarified how much forgiveness a business can seek on behalf of its owners, which is as follows for the indicated covered periods: X 8 weeks – Maximum owner compensation is $15,385, further limited by (8/52) of 2019 compensation (or self-employment earnings). X 24 weeks – Maximum owner compensation is $20,833, further limited by (2.5/12) of 2019 compensation (or self-employment earnings). Further, owner-employee and self-employed owner compensation limits and includable costs vary depending on the entity type: