New FAQs on PPP Loan Forgiveness

On Oct. 13, the Treasury Department issued new FAQs on Paycheck Protection Program (PPP) loan forgiveness. The FAQs address many questions relating to the timing of loan forgiveness and the method of accounting for qualifying expenses.  

The answer to FAQ No. 3 states,

“As long as a borrower submits its loan forgiveness application within 10 months of the completion of the covered period (as defined), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments.”

The FAQs also address the loan forgiveness form’s expiration date of Oct. 31, 2020. This expiration date does not affect the time an application for loan forgiveness must be made, as shown in the answer to FAQ No. 4,

“Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred and the borrower must begin making payments on the loan.”

The FAQs are at https://home.treasury.gov/system/files/136/PPP--Loan-Forgiveness-FAQs.pdf

The Treasury webpage regarding the Paycheck Protection Program is at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.


IRS Adds QR Codes to Pay by Smartphone

The IRS, in Notice 2020-233, announced that QR technology would be added to Balance Due Notices CP14 and CP14 IA. Taxpayers can now use their smartphones to scan a QR code in the CP14 or CP14 IA to go directly to IRS.gov and securely access their account, set up a payment plan or contact the Taxpayer Advocate Service.

Among other benefits, this technology will allow practitioners to instruct their clients to arrange payment plans directly, which should limit the practitioner’s involvement in this process, especially for smaller taxpayers.

https://www.irs.gov/newsroom/irs-adds-qr-technology-to-key-balance-due-notices-to-help-taxpayers


Carried Interest Three-Year Holding Period

By Tom Ochsenschlager, J.D., CPA

Section 1061 enacted with the Tax Cuts and Jobs Act (TCJA) generally requires that a taxpayer, other than a C corporation, must hold a “carried interest” in a partnership for three years in order to be treated as a long-term capital gain. This is applicable for tax years beginning after Dec. 31, 2017. Recently issued Proposed Regulation 107213-18 provides the details for implementing the three-year requirement. The three-year holding period applies regardless of whether the receipt of the carried interest is not subject to tax in accordance with Rev. Proc. 93-27. The guidance is effective when the regulations are made final, but taxpayers have the option to apply them before.

A carried interest is described as an interest in a partnership received by an “applicable trade or business” in exchange for having provided “substantial services” for the partnership. Under Section 1061, a service is substantial if it consists of raising or returning capital, or investing in, disposing of, or developing specified assets. For example, such an interest is relatively common in real estate partnerships where an individual receives a partnership interest for having negotiated the terms and conditions for the purchase of, say, an apartment complex on behalf of the partnership. The proposed regulations provide a detailed definition of applicable trade or business that generally comports with an entity that is engaged in providing substantial services as described above.

It is important to note that the three-year holding period continues to be applicable to any individual or entity, other than a C corporation, to whom the partner transfers their interest in the partnership. The proposed regulation preamble clarifies that where the services are provided through a tiered structure, each passthrough entity in the tiered structure is subject to the three-year holding period requirement for long-term capital gain treatment. Transfers of a carried interest to a related or unrelated entity are subject to revaluations at the date of the transfer. If the transfer is a gift to a related person within the three-year holding period, it is subject to tax at the donor level – an exception to the general rule that gifts are not taxable. The three-year holding period cannot be avoided by utilizing an installment sale of the carried interest. The holding period is based on the date of the sale regardless of when the cash is received.

The three-year holding period requirement not only applies to a disposition of the partnership interest by the service provider, it also applies to that partner’s share of the partnership’s long-term capital gain other than the partnership’s Sections 1231 and 1256 gains (and losses), qualified dividends under Section 1(h)(11) and mixed straddle rules described in Section 1092(b). The proposed regulations provide an exception referred to as “partnership transition amounts” whereby the partnership can elect an exception for the disposition of assets that were held by the partnership for more than three years as of Jan. 1, 2018. The partnership can make this election for its taxable year beginning in 2020 or later but, once the election is made, it is applicable to all subsequent years.

The proposed regulations provide complex rules for a few exceptions whereby, in general, the three-year holding period does not apply to distributions from the partnership related to the amount of capital that was contributed to the partnership by the carried interest partner and/or distributions that are subject to tax under Section 83. However, it does apply to the distributive share of gain from the sale of any asset held less than three years by the underlying partnership.  

The proposed regulations explain that the entity receiving the substantial services must provide the carried interest taxpayer with information required to comply with Section 1061 and, similarly, the carried interest taxpayer must provide similar information for any recipient of its transfer of any portion of the carried interest.

This is a very general summary of 162 pages of proposed regulations. These proposed regs should be read in detail in situations that include carried interest.

https://www.irs.gov/pub/irs-drop/reg-107213-18.pdf


Issues Raised by the Payroll Tax Deferral

By Tom Ochsenschlager, J.D., CPA

On Aug. 28, 2020, the IRS issued Notice 2020-65 in accordance with an Aug. 8 Presidential Memorandum directing the Treasury Secretary to use his authority to allow employees to defer certain payroll tax obligations.

In general, the notice “postpones” the due date for withholding and depositing the employees’ share of Social Security tax, generally 6.2%, for compensation beginning Sept. 1, 2020 through Dec. 31, 2020.

Determining Eligible Employees

The effective dates apply to the “pay dates” rather than the dates the services are provided. The delay is only available where the employee’s compensation is less than $4,000 for a biweekly (or equivalent) pay period. The notice does not explain how to compute the limitation if the pay period is not biweekly.

Possible Election Out of Program

It appears that employers can elect out of the deferral given that the notice refers to IRC Section 7805A and the COVID-19 emergency declaration refers to the voluntary deferral of tax payments. However, there is no guidance on how to make such an election.

Many employers might not have already adjusted their payroll function by the beginning of September. Given that it appears participation by an employer is voluntary, it seems the employer can begin to participate at any time prior to the close of the 2020 year and hopefully the IRS will provide some guidance to permit the implementation of the program retroactively back to the beginning of September. 

Employer Liability

Of course, the employees would need to pay these back taxes in 2021 and the employers would need to deposit them accordingly. The notice requires the employer to “withhold and pay” the deferred taxes “ratably” from the employee’s wages between Jan. 1, 2021 and April 30, 2021. It is unclear how this could be accomplished if the individual is no longer an employee. It is clear the employer is legally obligated to pay the deferred withholding amounts if the former employee does not pay them. The notice addresses this potential issue by merely stating the employer should “make arrangements to otherwise collect” the deferred amount. In circumstances where employers experience significant turnover of employees, the employer might address this issue by electing out of the program altogether.

TXCPA’s Federal Tax Policy Committee submitted a letter to the IRS and Treasury expressing their particular concern that the notice places a potential monetary liability on employers to collect and remit their employees’ tax obligation several months in arrears. The committee asked that the notice be reversed and clarified.

https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

https://www.irs.gov/pub/irs-drop/n-20-65.pdf

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/payroll-tax-deferral-obligations-comment-letter.pdf?sfvrsn=3a54ddb1_4


TXCPA Requests Late Filing Relief Due to CCH Software Outage

On Sept. 18, TXCPA asked IRS Commissioner Rettig for relief from late filing penalties and late elections as a result of a CCH software outage that occurred Sept. 15. The outage hindered many practitioners from timely filing tax returns on behalf of their clients. TXCPA requested that the IRS consider returns otherwise due on Sept. 15, 2020, to be timely filed if submitted by Sept. 30, 2020. Of particular concern are returns with elections reliant on timely submission, for instance, Section 754 or Section 179.

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/late-filing-relief-requested.pdf?sfvrsn=19b1ddb1_2

https://www.journalofaccountancy.com/news/2020/sep/irs-e-file-problems-sept-15-tax-returns.html


IRS Adds Marijuana Industry Page to Website

On Sept. 15, 2020, the IRS released a new webpage for the businesses and self-employed individuals involved in the marijuana industry. The webpage discusses, among other topics, the deductions allowed for these businesses and the handling of large cash balances. Although this business is not legal in Texas, it is not uncommon for Texas taxpayers to be involved in these activities in states where the business is legal.

https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry


TXCPA Committee Responds to Presidential Memorandum on Deferring Payroll Tax Obligations

In a letter to Treasury and the IRS, TXCPA’s Federal Tax Policy Committee endorses AICPA’s request for additional guidance to implement the Presidential Memorandum dated Aug. 8, 2020, on deferring payroll tax obligations and seeks additional guidance on related issues. The committee also disagrees with the approach taken in IRS Notice 2020-65, which requires employers to collect the deferred taxes, and recommends that certain aspects of the notice be reversed and clarified.

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/payroll-tax-deferral-obligations-comment-letter.pdf?sfvrsn=3a54ddb1_4

 


TXCPA Committee Recommends Suspending All IRS Notices

TXCPA’s Federal Tax Policy Committee sent a letter to IRS Commissioner Charles Rettig expressing concerns and offering suggestions for dealing with the mail backlog resulting from the pandemic and strategically targeting the timing and content of notices to improve taxpayer service. The committee recommends that the IRS suspend “all” notices – not just CP501, CP503 and CP504 – to allow for processing of existing, potentially responsive, correspondence and payments, and to allow taxpayers to use proof of delayed receipt of any notices during this pandemic as evidencing reasonable cause for abating any related penalty.

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/irs-mail-backlog-8-28-20.pdf?sfvrsn=381bddb1_2 


New PPP Forgiveness Guidance for Treatment of Owners and Forgiveness of Certain Nonpayroll Costs

By Susan Roberts, CPA-Fort Worth, CGMA, CLA

 

The Small Business Association released a new interim final rule that has some limited, but critical new guidance:

  1. The owner-employee rules are not applicable to owner-employees with less than a 5% ownership stake in a C- or S-corporation. Owner-employees with less than a 5% ownership stake should be included in either Table 1 or Table 2 of Schedule A and use the amounts paid during the covered period, not 2019 earnings.
  2. Related party rent is eligible for forgiveness, but only to the extent that it represents the mortgage interest owed on the underlying property. So, if monthly rent is $5,000 and monthly mortgage interest on the building is $3,000, only $3,000 of the rent would be eligible for forgiveness. This is a treatment consistent with what we thought might be the case. The guidance also reiterates the requirement for the lease and the underlying mortgage to be in place as of Feb. 15, 2020.
  3. With respect to sub-leases, shared rent and home-based businesses, amounts related to sub-leases or tenants are not eligible for forgiveness. There are a few specific examples given:
    1. A lease for $10k per month with a sub-lease for $2,500 per month, only $7,500 per month is eligible for forgiveness.
    2. If a borrower owns a building subject to a mortgage and leases a portion of the building to a third party, only a portion of the mortgage interest related to the borrower occupied space will be eligible for forgiveness.
    3. If a borrower shares a rented space with another business, only the rent and utilities prorated in the same manner as on the borrower’s 2019 tax filings are eligible for forgiveness.
    4. For home-based businesses, costs eligible for forgiveness are limited to the share of expenses that were deductible on the borrower’s 2019 tax filings.

https://www.sba.gov/sites/default/files/2020-08/PPP%20IFR%20-%20Ownership.pdf

https://www.journalofaccountancy.com/news/2020/aug/ppp-forgiveness-guidance-addresses-owner-employee-compensation-rent-costs.html

 


IRS Web Options

IRS.gov has numerous online options to assist tax professionals and their clients.

 

 

  • Taxpayers can check the status of their economic impact payment at Get My Payment.

 

  • Taxpayers who previously have been issued an identity protection PIN but lost it must use the Get an IP PIN tool to retrieve their numbers. Taxpayers who have an IP PIN need to provide it when they file their return or if they are using the non-filer tool to enter their economic impact payment information.

 

 

 

  • Get Transcript, view a transcript online and print it. Tax transcripts are currently only available online.

 

  • Direct Pay, make tax payments or estimated tax payments directly debited from a checking or savings account.

 

 

 

 

  • The Interactive Tax Assistant can help answer tax law questions. Currently, there are no email options that will generate answers to questions posed by taxpayers.