2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

This Year in Review

CARES ACT In March 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act, which includes many provisions to assist businesses, as well as several tax provisions.

Currently, businesses are in a quandary as to how to apply this Treasury position. Since the

business will probably not know at the time of filing its 2020 return how much of

the PPP loan has been forgiven, should the 2020 payments be deducted on that return, or should the taxpayer’s belief that the loan amounts will be forgiven control? Another option is that the costs may be deductible in 2020 and become taxable in the year that forgiveness is approved by the SBA. At this point, we have no guidance from the Service and may not receive any until Congress passes a new stimulus bill, which may address the matter. The CARES Act provided for a cash payment to taxpayers of up to $1,200 per person ($2,400 for a married couple) and an additional $500 for each qualifying child. These payments were subject to phase-out based on adjusted gross income and filing status. The amount payable to an individual is actually an advance payment of a credit which is to be determined in 2020. The payments were based on 2018 tax filings (in some cases 2019), but there is a “true-up” of the amount payable in 2020, i.e., the correct credit is determined in 2020 based on that year’s facts and circumstances. If the taxpayer received an advance that is less than the 2020 calculated credit, the taxpayer is entitled to a credit or refund of the additional amount. However, if the taxpayer has been overpaid, the excess amount received is not owed back to the government. The IRS set up a procedure to obtain information in order to compute and deliver the cash payment based on the prior year’s tax filings. Non-filers were able to provide the Service with information via the “Get My Payment” website using a “Where’s My Refund” tool. INDIVIDUAL TAXATION Cash Stimulus Payment

Paycheck Protection Program Loans A key element of the law benefiting businesses was the creation of Paycheck Protection Program (PPP) loans. This program was intended to provide a direct incentive for small businesses to keep workers on the payroll. Under the program, the Small Business Administration (SBA) will forgive loans where employee retention criteria are satisfied and funds are utilized for specific purposes. These loans have an interest rate of 1% and a maturity date of two years for loans issued before June 5 and five years for those issued subsequently. In general, loan payments are deferred for borrowers who make an application for loan forgiveness and satisfy all of the requirements. Generally, forgiveness should be requested within 10 months of the end of the borrower’s covered period (either 8 weeks or 24 weeks) to avoid payments on the loan. The law specifically states that any amount of PPP loan that is forgiven is not considered to be taxable income to the borrower. However, the Treasury has stated that businesses would not be entitled to a deduction for amounts paid with PPP loan proceeds which are forgiven. The Service relies on the Internal Revenue Code and related regulations, which disallow a deduction to the extent that it is allocable to a class of income that is wholly exempt from federal income tax. The IRS reasons that the amount received under the PPP loan is earmarked for the specific purposes designated under the CARES Act. Use of the funds for these purposes causes the funds to be nontaxable income and, consequently, these expenses are related to such exempt income. Lawmakers have stated “…the intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible. This position is contrary to that intent.” The House Ways and Means Committee Chair announced that Congress intends to fix this result. While proposals have been issued, we have yet to see if such language is ultimately passed by Congress.