Larry's Tax Law

As I previously reported, the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) was jointly introduced in the U.S. House of Representatives (“House”) by Representative Chip Roy, a Republican from Texas and Representative Dean Phillips, a Democrat from Minnesota.  By a nearly unanimous vote, the PPPFA was passed in the House on May 28, 2020.  As anticipated, the legislation was promptly introduced in the U.S. Senate (“Senate”), where (without amendment) it was unanimously passed on June 3, 2020 by a voice vote.  President Trump signed the PPPFA into law today.

This is especially good news for businesses that have been shut down and/or otherwise severely financially impaired by the COVID-19 pandemic.  The PPPFA changes the landscape relative to loans received by businesses under the Paycheck Protection Program (“PPP”) that was enacted as part of the CARES Act.  The PPPFA, at least for some PPP loan borrowers, may not bring glee and joy!  The law contains some provisions that could be detrimental to some businesses.

In News Release 2020-107, issued Thursday, May 28, 2020, the IRS announced that taxpayers will soon be able to electronically file Form 1040-X, Amended U.S. Individual Income Tax Return.  This is welcome news for taxpayers and tax practitioners!

Background

According to the IRS, more than 90 percent of individual taxpayers electronically file their U.S. Federal Income Tax Returns (Form 1040) each year.  Likewise, approximately three million amended U.S. Federal Income Tax Returns (Form 1040-X) are filed each year.

Currently, a large number of tax forms may be filed electronically, including U.S. Federal Income Tax Forms 1040, 1065, 1120 and 1120S.  Additionally, taxpayers may electronically amend U.S. Federal Income Tax Forms 1065, 1120 and 1120S.  They may not, however, amend U.S. Federal Income Tax Form 1040 (Form 1040-X) electronically.  

Despite repeated pleas by tax practitioners for the ability to file Form 1040-X electronically, the IRS has not been able to accommodate practitioners.  That is about to change! 

As I previously reported, the Paycheck Protection Program (“PPP”) was touted as providing emergency assistance (i.e., a lifeline) to restaurants and other businesses ordered to shut their doors (e.g., dental offices, bars, hair salons, fitness clubs, yoga studios, shopping malls and movie theatres).  The owners of these businesses thought the availability of a forgivable loan equal to two-and-one-half times their monthly payroll costs could be exactly what the doctor ordered.  The loan, if forgiven, could keep these business afloat and allow them to retain their trained and skilled workforces once they were allowed to reopen.  Unfortunately, that hypothesis is severely flawed. 

Under the PPP, in order for a borrower to be eligible for forgiveness, the loan proceeds must be used for payroll costs (75 percent), and rent and utilities (25 percent) within eight weeks following the date of the loan.  If a borrower’s business is shut down due to an executive order of the governor for most, if not all, of the eight-week period, how can the borrower use the loan proceeds that indisputably are needed to reopen and maintain the workforce?  That circumstance was clearly not contemplated by Congress when it passed the CARES Act. 

On Friday, May 22, 2020, the Small Business Administration (“SBA”), in conjunction and consultation with the U.S. Department of the Treasury (“Treasury”), published an interim final rule (“IFR”) containing new guidance on the treatment of bonuses, prepayments, and the loan forgiveness application and process for Paycheck Protection Program (“PPP”) loans.

Loan Forgiveness Process 

Loan forgiveness under the PPP is not automatic.  Rather, borrowers must apply for forgiveness using the SBA’s Loan Forgiveness Application (SBA Form 3508) or their lender’s equivalent form, if any.  The process is somewhat streamlined:

• • The application is submitted to the lender for review and approval.
  • The lender will review the application and make a decision regarding loan forgiveness.
  • The lender has 60 days from receipt of a complete forgiveness application to issue a decision to the SBA.
  • The lender is responsible for notifying the borrower of the amount approved for forgiveness.
  • The lender will then request that the SBA repay the amount forgiven.
  • Within 90 days from the lender’s request for payment, the SBA will pay the lender the amount forgiven, plus any accrued interest. (If applicable, the SBA will deduct the amount of advances under the Economic Injury Disaster Loan program from its payment to the lender.) 

Today, as a result of the COVID-19 pandemic and resulting stay-at-home orders issued by the governors of most states, many employees are working remotely from home for their employers.  In fact, for many employers and employees, the arrangement is working well enough that they will likely consider continuing the arrangement, on a full-time or part-time basis, when the stay-at-home orders are lifted.  This type of arrangement raises all kinds of issues and concerns for employers, including compliance with applicable laws.  Many of the issues are obvious, but some of them are more nuanced and may not be on the minds of employers.

Employees Working Remotely

The trap is set when an employer has an employee performing services outside of the state(s) where it operates.  Historically, this scenario was likely rare.  It probably only occurred when an employer was physically located near a state border and had an employee working from his or her home located in the neighboring state.  Today, with the internet and sophisticated communication technologies, it is not limited to employees residing in neighboring states.  Further, with the COVID-19 pandemic facing the world, more and more employees are working remotely.  Assuming a remote work arrangement is acceptable to both an employer and an employee, I suspect it will continue to be a prevalent employment arrangement post-COVID-19.  As a result, employers may find themselves with employees working in states, and possibly countries, different from where the employer has its business physically located.  As discussed below, it is vital that employers know where their employers are performing services.  The consequences of not knowing where your employees are working could be costly.

In addition to worrying about keeping their business afloat these days, businesses are focusing on whether their Paycheck Protection Program (“PPP”) loan will be forgiven.  Without loan forgiveness, many of these businesses will not survive.  Consequently, the stakes are high! 

The eligibility requirements for PPP loan forgiveness are complex.  As we discussed previously, in large part, loan forgiveness is based on the borrower using the loan proceeds within the eight-week period immediately following receipt of the loan on specified expenses, including payroll and rent. 

Some landlords have been generous enough to reduce or even abate rent for a period (e.g., three months) to assist the tenant in salvaging its business.  Consequently, these businesses may have little or no rent to pay during the eight-week period.  If a business owner asks the landlord for advice on what to do in this situation, the landlord will likely say: 

Love thy landlord – pay me anyway!

Whether the prepayment of rent (or the payment of rent for a period preceding the eight-week period) applies for purposes of the loan forgiveness computation under the PPP is likely a question being pondered by many businesses and their advisors.

As we recently reported, the Oregon Department of Revenue (“ODOR”) issued written guidance concluding that the receipt of funds pursuant to PPP loans (whether or not forgiven), EIDLP advances and SBA debt relief for certain business loans do not constitute commercial activity under Oregon’s new gross receipts tax, the Corporate Activity Tax (the “CAT”).  Accordingly, taxpayers subject to the CAT do not include these items in their computation of commercial activity. 

Washington state enacted its Business and Occupations Tax (“B&O Tax”) almost 90 years ago. The B&O Tax, like the CAT, is a gross receipts tax.  Unlike the CAT, however, taxpayers subject to the B&O Tax are generally not allowed to deduct any of their costs, including materials and labor, from gross revenues.   

The Washington Department of Revenue (“WDOR”) issued written guidance last week, possibly joining the ranks with the ODOR.  Better late than never!

The WDOR concludes that taxpayers subject to the B&O Tax should not include the receipt of funds pursuant to COVID-19 relief programs for purposes of computing their tax liability under the B&O Tax regime.

During these trying times, especially with stay-at-home orders still in effect in most states, it is difficult not to over-focus on the uncertainty that lies ahead.  Hopefully, we can find healthy distractions to refocus our attention. 

In normal times, one of the many healthy distractions in our lives was viewing live sporting events such as basketball, football, baseball and soccer.  Unfortunately, COVID-19 shut down these activities.  The television networks quickly responded, without letting their stations go dormant, rebroadcasting historic sporting events. 

As discussed in recent blog posts, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the Payroll Protection Plan (“PPP”) under which the U.S. Small Business Administration (“SBA”) was authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments.  On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.

The PPP legislation and the administrative rules promulgated thereunder are plagued with numerous unanticipated defects.  One of the defects in the PPP, as rolled out by the federal government, may be the death of small businesses, including restaurants.

New guidance from the Oregon Department of Revenue (the “DOR”) with respect to Oregon’s Corporate Activity Tax (“CAT”) was issued yesterday.

Specifically, the DOR announced that: 

• • Certain forgivable federal loans and advances, including Paycheck Protection Program (“PPP”) loans, are excluded from the definition of commercial activity under the CAT;
  • The DOR is scheduling a public hearing to discuss the first set of permanent rules promulgated under the CAT; and
  • The DOR released a draft temporary rule regarding the sourcing of commercial activity for financial institutions.