We’ve Been Better
On March 1, 2020, New York had its first confirmed case of the coronavirus.[i] On March 6, pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act[ii], over $8.3 billion in emergency Federal funding was appropriated to combat the spread of the coronavirus. On March 7, Governor Cuomo declared a state of emergency in New York.[iii] On March 13, President Trump declared a national state of emergency.[iv] On March 18, the Families First Coronavirus Response Act[v] became law. On March 20, Governor Cuomo signed the “New York State on Pause” Executive Order,[vi] which resulted in the statewide closure of many so-called “non-essential” businesses, and caused other such businesses to operate “remotely.”
On March 27, the President signed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act[vii] which, among other things, created the $349 billion Paycheck Protection Program (“PPP”) to assist “small businesses” with 100 percent SBA-guaranteed forgivable loans. Last week saw the enactment of yet another coronavirus relief bill, which authorized an additional $321 billion of funding for the PPP.[viii]
Although this massive infusion of cash will certainly help many closely held businesses survive through this difficult period, many others are going to fail regardless of the government’s best intentions.[ix] What’s more, it is reasonable to assume that, even among those that survive, most are not likely to fully recover for many months to come given the state of the economy. For example, as of the end of last week, the estimated number of unemployment claims filed in the U.S. was approximately 26 million; the first quarter GDP is expected to show a decline of more than 3 percent, while the second quarter is expected to register a 25 percent drop in economic growth; other economic indicators are following suit.[x]
Then there are the state and local governments that have thrown their budgets out the proverbial window. Many of these are experiencing severe economic stress as tax revenues have plummeted, in part due to the reduction in economic activity, and in part because of the deferrals granted to taxpayers for the payment of various taxes.[xi] It may not be long before these public employers start to lay off workers and to cut services.
Time to Start Looking Forward?
In light of the foregoing, it may be difficult for a business owner to start thinking about, let alone implementing, a plan for what will likely be an uncertain – perhaps even “hostile” – economic and tax environment for business once the nation re-opens.
Granted, there are many factors beyond the control of any business that may nevertheless have a significant impact upon the well-being of the business; for example, the relaxation of social distancing measures. However, there are other factors that, generally speaking, may be controlled, or at least influenced, by the owner – it is these factors to which the owner should devote their attention so as to prepare themselves and their business to withstand the difficult times ahead.
One goal on which businesses and the Federal government are both focused is the relatively immediate generation of liquidity in the private sector. The CARES Act provided a number of means by which this may be accomplished – it is up to the business and its owners to take advantage of the opportunities presented.
PPP Loan Forgiveness
It seems as though everyone and their brother[xii] has applied for a PPP loan.[xiii] A business which has received the requested loan proceeds has eight weeks from such receipt to expend the funds on permitted expenses, including “payroll costs,”[xiv] rent, utilities, and certain other items.
After the eight-week period, the business may apply to its lender for forgiveness of the loan. In order to secure this benefit, the business will have to provide documentation that demonstrates how it has spent the funds, including proof that at least 75 percent of the funds were applied toward payroll costs.
Any loan that is forgiven in accordance with the terms of the PPP will not be included in the gross income of the borrower-business as income from cancellation of indebtedness.[xv]
At the same time, nothing in the CARES Act denies the borrower-business the ability to claim a deduction for the expenses paid with the loan proceeds in determining the taxable income of the business.[xvi] Thus, the payment of the salaries, rent, etc. for which the PPP loans are intended will be deductible, thereby reducing taxable income or increasing losses.
However, the amount of the loan forgiven may be reduced – meaning that a portion of the loan will have to be repaid[xvii] – if the business has reduced by more than 25 percent the salary of any employee with an annual salary of not more than $100,000. Likewise, the loan forgiveness may be reduced if a business reduces its number of employees.
Notwithstanding that a business may have reduced salaries and/or workforce, it may still qualify for full forgiveness of the PPP loan (as well as any accrued interest) if the business restores salaries and fills “vacant” positions no later than June 30, 2020.[xviii]
It should be noted that there is nothing in the PPP that prevents a business from reducing the salaries of employees whose salaries exceed $100,000. Moreover, the legislation does not prohibit the reduction of salaries or workforce at any level after the end of the eight-week spending period. Thus, a business that survives long enough to spend the PPP loan proceeds in accordance with the statute is not required to maintain salary levels or to retain employees if the business cannot afford to do so.
Building Liquidity: Tax Refunds, Tax Reductions
The PPP will support the continued existence of some closely held businesses that do not lay off their employees and do not cut their salaries, especially those businesses that had few reserves[xix] before they were suddenly shut down. But will it help these businesses to “reboot” after the health crisis passes?
Other parts of the CARES Act, however, may assist certain businesses to obtain some badly needed cash relatively quickly, and to thereby mitigate the economic effects of the health crisis.[xx]
I am referring to the few business tax-related provisions in the legislation. Most of these are not “new” tax benefits or incentives; rather, they represent the temporary relaxation of amendments enacted as part of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).[xxi]
In sum, the intended effect of the CARES Act’s tax provisions is to allow businesses that realized losses during prior years (before 2020) to convert those losses into refunds that will be payable (and usable) currently, and to permit business owners to use other losses to offset otherwise taxable income, thereby enabling those tax dollars to be applied elsewhere.
In light if these changes, businesses should review earlier year returns to see if a refund is available. If a business believes it has overpaid tax for 2019, it should file its tax return and claim a refund as soon as possible.
Delay Tax Payments
The due date for filing Federal income tax returns and, more importantly for our purposes, for making Federal income tax payments otherwise due April 15, 2020, was automatically postponed to July 15, 2020.[xxii]
Unless a business is owed a refund for 2019, it should probably take advantage of the deferral.
Historically speaking, in the case of a business coming out of an economically challenging period, the ability to carry current losses back to profitable years often provided a ready source of liquidity by generating a refund of monies that the business could use in its operations.
The TCJA eliminated a taxpayer’s ability to carry back its NOLs. It also limited the use of loss carryovers to a taxable year to 80 percent of the taxpayer’s taxable income for such year, though it permitted NOLs to be carried forward indefinitely.[xxiii]
The CARES Act allows a taxpayer that realizes an NOL during a taxable year beginning after December 31, 2017 and before January 1, 2021 to carry such NOL back to each of the five taxable years preceding the year of the loss; for example, a loss arising in 2020 may be carried back to 2015.[xxiv]
The CARES Act also repealed the “80 percent of taxable income” limitation for NOL carryovers arising in taxable years beginning before January 1, 2021.[xxv]
Thus, a taxpayer that realized an NOL during a taxable year beginning in 2018 or in 2019 may carry those NOLs back five years, which may create an opportunity for a refund claim in 2020 with respect to an earlier year for which the taxpayer had an income tax liability.
In addition, an NOL realized in a taxable year beginning in 2018 that is carried to 2019 and 2020, and an NOL realized in a taxable year beginning in 2019 that is carried back to 2018 and forward to 2020, may be utilized without regard to the TCJA’s “80 percent limitation” – the NOLs may be used to offset all of the taxpayer’s taxable income.[xxvi]
Unfortunately for a taxpayer that suffers a loss during a taxable year that begins in 2020, the tax benefit attributable to the carryback of such loss will not be realized until the taxpayer files its return for that year, in 2021, which is still several months away. That is not to say that a refund at that time would not be welcomed – it’s just that the liquidity it may provide would likely be more helpful sooner rather than later.
That being said, the tax benefit attributable to the realization of significant losses in 2020 may be used to facilitate certain strategic transactions during 2020. For example, if a business operated through a corporation wants to dispose of an unwanted asset, the NOLs may be used to offset the gain from such disposition. The same reasoning may apply with respect to the taxable spin-off of a line of business to one or more of the corporation’s shareholders.[xxvii] Similarly, if a corporation with losses incurred during 2020 is planning the sale of its assets, it may want to complete the sale in 2020, before the reinstatement of the 80 percent limitation in 2021.
Non-Corporate Taxpayer Losses
Following the enactment of the TCJA, for taxable years beginning after December 31, 2017 and before January 1, 2026, the “excess business losses” of a taxpayer other than a corporation are not allowed for the taxable year. Instead, such losses are carried forward and treated as part of the taxpayer’s NOL carryforward in subsequent taxable years.[xxviii]
A taxpayer’s excess business loss for a taxable year – which is determined after the application of the passive loss rules – is the excess of the aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer (whether or not related to a trade or business) plus a “threshold amount.”[xxix]
This provision was to be effective for taxable years beginning after December 31, 2017, but the CARES Act defers the effective date (actually, suspends it retroactively) to taxable years beginning after December 31, 2020.
Consequently, an individual taxpayer who realizes a loss from an operating business in a taxable year beginning before January 1, 2021 – whether as a sole proprietor, as a partner in a partnership, or as a shareholder in an S corporation – and who runs the gauntlet of the basis, at risk and passive loss rules,[xxx] will be allowed to apply such losses against their other income for such taxable year, including salary and investment income.
As in the case of NOLs described above, this change will afford some taxpayers an opportunity to claim a refund now with respect to their taxable years beginning in 2018 and 2019, and to use the proceeds therefrom in their business.
Business Interest Deductions
Generally speaking, interest paid or accrued by a business is deductible in the computation of taxable income, subject to a number of limitations. The TCJA further limited the deduction for business interest for a taxable year to an amount equal to 30 percent of the adjusted taxable income[xxxi] of the taxpayer for the taxable year. The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year, and is carried forward indefinitely, subject to certain restrictions.[xxxii]
The limitation does not apply to taxpayers with average annual gross receipts for the three-taxable year period ending with the prior taxable year that do not exceed $25 million. In addition, at the taxpayer’s election, any real property trade or business is not treated as such for purposes of the limitation, and therefore the limitation does not apply to such a trade or business.
This rule applies to taxable years beginning after December 31, 2017. However, according to the CARES Act, in the case of any taxable year beginning in 2019 or 2020, the Act increases the “interest deduction limitation” from 30 percent to 50 percent of adjusted taxable income.[xxxiii]
In this way, a taxpayer filing their income tax return for 2019 may take advantage of the increased limitation to further reduce their income tax liability and to retain the tax savings in the business.
In addition, for a taxable year beginning in 2020, the Act permits a taxpayer to use their 2019 adjusted taxable income for purposes of determining their “interest deduction limitation” for 2020. Thus, if the taxpayer’s 2019 adjusted taxable income is greater than that for 2020 – which may very well be the case given our circumstances today – the taxpayer may claim a greater interest deduction and, thereby, further reduce their income tax liability, thereby retaining liquidity in the business.
Although the relaxation of the limitation on interest deductions[xxxiv] may entice a taxpayer to borrow funds from commercial lenders during 2020, it is important for the taxpayer to recognize that the TCJA’s 30 percent cap will be reinstated in 2021.
As indicated above, a taxpayer with a real property trade or business may have elected out of the application of the interest limitation rule.[xxxv] In doing so, the electing taxpayer was precluded from claiming bonus depreciation,[xxxvi] and was required to extend the depreciation period for its real properties.[xxxvii]
In recognition of the CARES Act’s increase of the interest limitation from 30 percent to 50 percent of adjusted taxable income, the IRS has issued guidance[xxxviii] that allows a qualifying taxpayer to withdraw their earlier election, and to thereby claim an increased depreciation deduction (including bonus depreciation)[xxxix] for those years to which the election would otherwise have applied.
Thus, a real estate business that reverses its election out of the interest limitation regime may thereby have another opportunity for a refund of taxes paid.
Like Kind Exchanges
Most like kind exchanges are effected as deferred exchanges, with the replacement real property being acquired sometime after the sale of the relinquished real property. Generally speaking, in order for such a transaction to qualify for tax deferral as a like kind exchange,[xl] the replacement property must be identified no later than 45 days after the date of the sale of the relinquished property (the “identification period”),[xli] and it must be acquired no later than 180 days after the date of such sale (the “exchange period).[xlii]
The above-described dates are prescribed by statute and, generally, cannot be changed by the IRS. However, because the President declared a national emergency,[xliii] the IRS was authorized to postpone the time for taxpayers to perform specified “time-sensitive actions,”[xliv] including the identification of a replacement property, and the acquisition of such replacement property, in connection with a transaction intended to qualify as a like kind exchange.
Specifically, the IRS has determined that identification and exchange period deadlines occurring between April 1 and July 15, 2020 (the “relief period”) are extended to July 15, 2020. Any such period that does not end within the relief period is not affected.
Thus, a taxpayer that began an exchange before or during the relief period may want to take advantage of the extended identification or replacement period in order to avoid a taxable event and the resulting outflow of cash to pay the tax liability.
Deferring Employment Taxes
The CARES Act allows employers to defer the deposit and payment of the employer’s share of social security taxes.[xlv]
The deferral applies to deposits and payments that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. The deferred amounts must be deposited by the following dates (the “applicable dates”): (1) On December 31, 2021, 50 percent of the deferred amount; and (2) On December 31, 2022, the remaining amount.
Employers who have received a PPP loan, that has not yet been forgiven, may defer deposit and payment of the employer’s share of social security tax. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer the deposit and payment of the employer’s share of social security tax that is due after that date. However, the amount of the deposit and payment of the employer’s share of social security tax that was already deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the applicable dates.[xlvi]
A qualifying employer may want to take advantage of this deferral opportunity and the increased liquidity that should arise from it.[xlvii]
Thus far, we have been considering how opportunities afforded by the CARES Act, including IRS actions related thereto, may assist a taxpayer in generating liquidity to replace the revenues lost as a result of the shutdown and the resulting economic downturn.
Of course, a business may also try to save money by reducing the salaries of highly compensated employees. As indicated below, this may be easier said than done; nonetheless, a business should consider all of its options, being mindful, however, of the tax and other potentially adverse consequences thereof.
For example, a reduction in salary may give an executive the right to terminate their employment “for good reason,” thereby triggering an immediate obligation for the employer to make severance payments under an employment agreement.[xlviii]
Similarly, a termination of employment, or a reduction in work hours, may trigger the payment of deferred compensation under the terms of a nonqualified deferred compensation agreement.[xlix]
A business may also consider the suspension of contributions toward an executive’s future deferred compensation benefit provided their agreement allows such a suspension or the employee agrees to it.[l]
The business may also seek to suspend or defer payments to be made to an executive pursuant to a nonqualified deferred compensation plan. However, such a deferral may violate Section 409A of the Code – thereby triggering imposition of a 20 percent excise tax on the executive – unless it can be demonstrated that the current payment would “jeopardize” the business as a going concern.[li]
If the plan allows the participating executive an election to delay a payment or to change the form of a payment, such an election may not take effect until at least 12 months after the date on which the election is made,[lii] and the payment with respect to which the election is made must be deferred for a period of at least 5 years from the date such payment would otherwise have been made.[liii]
Alternatively, a business make also seek to terminate such a plan; however, such a termination will likely violate Section 409A because it is being made in connection with the “downturn” in the health of the employer’s business.[liv] Instead, the executive and the business may negotiate a reduction in the benefits to be provided to the executive without violating Section 409A, provided they do not agree to substitute another, “replacement” benefit.[lv]
When cash pipeline is constricted, a business may have difficulty in paying executive bonuses or raising executive salaries. In that case, in order to keep its executives incentivized, the business may want to consider some form of equity-based compensation arrangement.
Where the actual issuance of equity is not “required,”[lvi] an arrangement similar to a so-called “phantom stock” plan may be advisable. Such a plan may try to mimic the economics of actual ownership (for example, by paying compensation to an executive) when the business makes distributions to its owners, or it may simply provide for a payment upon the sale of the business, with the amount thereof being based upon a percentage of the net proceeds.
Moreover, the phantom equity plan may be structured to defer income recognition, and the resulting tax liability, until the occurrence of a liquidity event.
Many businesses will emerge from the shutdown still owing whatever long-term debt they had previously incurred.[lvii] Some of these same businesses may have to borrow additional sums in order to replenish inventories and supplies, to pay amounts owing to vendors, or perhaps to “disinfect” their place of business.[lviii]
The business may ask its existing lender to consider a modification of the terms of the indebtedness owed by the business so as to accommodate what is likely to be a reduced flow of revenue into the business. The existing lender will probably require some consideration for any concessions given to the business.
For example, the business may have to transfer appreciated property to the lender in satisfaction of a portion of its indebtedness. If the amount deemed satisfied by such transfer exceeds the fair market value of the property, the business will realize both gain from the deemed sale of the property, and cancellation of indebtedness (“COD”) income to the extent the debt forgiven exceeds the value of the property.[lix]
As for the modifications requested by the business, these may include a reduction in the interest rate, a forgiveness of accrued but unpaid interest, perhaps a partial forgiveness of the outstanding principal of the loan, an extension of the maturity date, a relaxation of financial covenants, or some other change in payments terms.
If principal is forgiven, the amount forgiven will be included in the gross income of the business as ordinary income.[lx]
Similarly, the combined effect of several agreed-upon changes – for example, to the interest rate, the maturity date, and the payment schedule – may rise to the level of a so-called “significant modification” of the loan.[lxi] In that case, the “old” debt will be treated as having been exchanged for the “new debt;” if the issue price of the new debt given by the business in exchange for the old debt held by the lender is less than the issue price for the old debt, then the business will realize COD income. If the business is a pass-through entity for tax purposes, such as a partnership or S corporation, the income will be included by the owners on their tax returns.[lxii]
Of course, there are certain exceptions to the recognition of COD income. For example, if the taxpayer is insolvent,[lxiii] the COD income will be excluded from the taxpayer’s gross income provided the debt cancelation does not cause the taxpayer to become solvent.[lxiv]
A business that takes advantage of one of these exceptions, will be required to reduce certain tax attributes; for example, NOLs, certain tax credits, and the adjusted basis of its property.[lxv]
As in the case of a debt obligation, a business is likely to enter the re-opened market with a lease obligation related to the space out of which the business operates. The rent payable by the business is likely a fixed base amount that may be periodically adjusted according to some commercial index.
In any case, if the business is expecting a reduction in revenue for the foreseeable future, it may want to ask its landlord to consider a change in the terms of its lease, especially with respect to the amount and timing of the rent payable thereunder. For example, the business may ask for a reduction in the rent payable, or it may ask that payment of the rent be deferred, for some period of time.
Unfortunately, these seemingly reasonable and straightforward requests, if accepted and implemented, may risk the application of some very complex tax avoidance rules that are directed at the timing of the landlord’s inclusion of the rental in their gross income, on the one hand, and at the timing of the tenant’s deduction of such rental, on the other.[lxvi]
Thankfully, there are various safe harbors which, if satisfied, will prevent the application of these rules and will permit the parties to report the rent in accordance with their normal method of accounting.[lxvii] Among these, for example, is a rent holiday, the duration of which is reasonable (determined by reference to commercial practice in the locality where the property is located), and which does not exceed the lesser of 24 months or 10 percent of the lease term.
Although a business may be indebted to a commercial lender, it is also possible for the business to stand in the shoes of a creditor. In the event a bona fide debt owing to the business becomes worthless during a taxable year, the business is allowed a bad debt deduction in determining its income tax liability for such tax year.[lxviii] “Business bad debts” are deductible against the ordinary income of the business.
Generally, a business bad debt is a loss from the worthlessness of a debt that was either created or acquired in a trade or business of the lender, or was closely related to the lender’s trade or business when it became worthless.[lxix] A debt is closely related to the lender’s trade or business if the lender’s primary motive for making the loan was business-related.
In order to claim the deduction, the business must be able to establish that debt became worthless in the year for which the deduction is being claimed, and not in an earlier year.
Gift and Estate Planning
Another option for business owners to consider is whether it makes sense for them to, and whether they can, “rescind” gifts of business interests made in earlier periods.
It is a basic precept of estate and gift tax planning for the owner of a business to transfer interests in the business to a trust for the benefit of the owner’s family before such interests have appreciated in value. The goal of such a transfer is to use as little of one’s exemption amount as possible in order to remove the future value of the business interest from the transferor’s gross estate.
Of course, in retrospect, the business owner may regret having made such a transfer where the economy subsequently takes a turn for the worse. In that case, the owner may wish that they still had the benefit of all of the cash flow from the business, especially if their non-business assets, including retirement assets, have been adversely affected by the economic downturn.
What is the owner to do in these circumstances?
Well, if the owner had retained the right, in a non-fiduciary capacity, to reacquire the gifted property from the trust in exchange for fair market value consideration,[lxx] not only may the owner exercise such right, but they may do so without causing to trust to recognize any taxable gain.[lxxi]
The owner-transferor is thereby able to reacquire the business interest without adverse income tax consequences because the owner’s retained right causes the trust to be treated as a so-called “grantor trust” for purposes of the income tax.[lxxii] In other words, the transferor is treated for tax purposes as owning all of the assets and income of the trust; because one cannot sell property to oneself, the reacquisition of the interest is disregarded for income tax purposes.[lxxiii]
If the business owner has not yet made any gifts of interests in their business, they may want to wait at least until after the November elections.[lxxiv]
A Whole New World[lxxv]
We’re still in lockdown, and the economy is still in a downturn. When the lockdown is lifted, the economy will still be in a downturn, and will likely remain so for some not insignificant period of time – at least that is what I am assuming.
I am certain that many business owners share this assumption, which will, in turn, inform many of their decisions for several months to come.
In light of these circumstances, and all other things being equal, the goal from a tax perspective should be not only to transact business in as tax efficient a manner as possible, but also to build up as much liquidity in the business as possible. This will enable the business and its owners to ride out the downturn, and should put them in a position to expand once the economy finds its new equilibrium.
However, if the Federal government decides to increase tax rates or to eliminate various tax incentives – after all, someone has to pay for the money being distributed through the CARES Act and other programs – the arrival of this new equilibrium may be postponed.
[i] The first death attributed to the coronavirus in N.Y. was on March 14, 2020.
[ii] P.L. 116-123.
[v] P.L. 116-127. The Act requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19
[vii] P.L. 116-136. The Act provided more than $2.2 trillion of Federal relief funds to counter the economic effects of the state-mandated closures and social distancing policies that were implemented to limit the spread of the virus.
[viii] Known as CARES Act 3.5. (The CARES Act being the third round of coronavirus-related Federal legislation.) The total relief package amounted to approximately $484 billion.
[ix] Call it a “natural law,” though the phrase – more accurately, its underpinnings – is out of favor in many circles.
[x] Pick your source – they’re all reporting the same thing. Durable goods orders, manufacturing, auto sales, consumer confidence – the news isn’t good. Banks are increasing their loss reserves. Other economic reports are expected this week, and the Fed is meeting in a couple of days.
“What about the stock markets?” you may ask. To which I would respond, “The equity market is not the economy.”
[xi] The next round of Federal stimulus legislation may include fiscal assistance for the states and for local jurisdictions. Thus far, Republicans and Democrats are not seeing eye-to-eye on this issue.
[xii] I think I nailed that idiom.
But seriously, I wonder how many businesses have decided against participating in the PPP. Such a business may have cash reserves and/or a line of credit sufficient to withstand a reduction in revenues. It may also be more willing to cut salaries and/or employees than to accept money from the government with strings attached.
[xiii] You may recall that the “sense of the Senate,” set forth in the Senate version of the bill that eventually became the CARES Act, indicated that the SBA “should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals . . . , women, and businesses in operation for less than 2 years.”
The CARES Act, however, seems to have ignored this. CARES 3.5 tries to redress the oversight.
[xiv] Which include wages, retirement benefits, health insurance, and certain other items paid by the business.
[xv] Section 1106(i) of the CARES Act. IRC Sec. 108.
[xvi] IRC Sec. 162. An oversight or a “gimme?” Definitely the latter.
[xvii] The CARES Act sets a 2-year term for the satisfaction of the loan; interest will be imposed at an annual rate of one percent; the business will have six months before it has to begin making payments under the loan.
[xix] See my Op Ed piece in The Empire Report: https://www.taxlawforchb.com/2020/03/lou-vlahos-op-ed-economic-losses-blame-the-virus-not-entirely-published-in-the-empire-report/
[xx] In addition to the provisions described below, the CARES Act includes the Employee Retention Tax Credit, which is designed to encourage businesses to keep employees on their payroll. The credit is available to eligible employers whose business has been adversely impacted by the coronavirus emergency. However, businesses taking advantage of the PPP are not allowed to claim the credit. The amount of the credit is equal to 50 percent of qualifying wages paid; however, such wages are capped at $10,000 in total per employee.
[xxi] P.L. 115-97. These amendments were intended to compensate for lost tax revenue attributable to the replacement of a graduated rate regime (with a maximum rate of 35 percent) with a flat corporate income tax rate of 21 percent.
[xxii] Notice 2020-18.
[xxiii] These changes were effective for NOLs arising in taxable years beginning after December 31, 2017. For example, NOLs for taxable years ending on December 31, 2018, or on December 31, 2019 (for calendar year taxpayers) could not be carried back. The same applied for any taxable year beginning on or after February 1, 2018 and ending on or after January 31, 2019 (for fiscal year taxpayers); thus, in the case of an NOL realized during the taxable year starting June 1, 2019 and ending May 31, 2020, the NOL could not be carried back to an earlier year.
It should be noted that a taxpayer may waive the carryback if they believe it will be more useful to carry the losses forward, notwithstanding the reinstatement of the 80 percent limitation after 2020. Notice 2020-24.
[xxiv] Section 2303(b) of the Act. Thus, these changes have retroactive effect.
A slightly modified version of the 80% limitation remains in effect for taxable years beginning after 2020.
[xxv] Section 2303(a) of the Act.
[xxvi] The 80 percent limitation is reinstated for taxable years beginning after December 31, 2020.
[xxvii] See IRC Sec. 311(b), Sec. 336, Sec. 355.
[xxviii] IRC Sec. 461(l). In the case of a partnership or an S corporation, the provision applies at the partner or shareholder level.
[xxix] The threshold amount for a taxable year is $250,000 per taxpayer, or $500,000 in the case of a joint return. The threshold amount is indexed for inflation.
[xxx] IRC Sec. 1366(d)/704(d), 465, and 469.
[xxxi] For purposes of this limitation, “adjusted taxable income” generally means the taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; certain other adjustments are also made.
[xxxii] IRC Sec. 163(j).
[xxxiii] Sec. 2306 of the Act.
[xxxiv] That, plus the low interest rate environment in which we find ourselves.
[xxxv] IRC Sec. 163(j)(7)(B).
[xxxvi] IRC Sec. 168(k)(2)(D).
[xxxvii] IRC Sec. 168(g)(8).
[xxxviii] Rev. Proc. 2020-22. Among other things, this guidance requires the filing of an election withdrawal statement that should be titled, “Revenue Procedure 2020-22 Section 163(j)(7) Election Withdrawal.”
[xxxix] The Act also corrected an error in the TCJA which prevented “qualified improvement property” from qualifying for bonus depreciation.
[xl] IRC Sec. 1031.
[xli] Reg. Sec. 1.1031(k)-1(c)(4) provides special rules for the identification of alternative or multiple replacement properties.
[xlii] Or, if earlier, by the tax return due date, determined with extensions, for the year of the sale. IRC Sec. 1031(a)(3).
[xliii] IRC Sec. 7508A. Rev. Proc. 2018-58.
[xliv] Notice 2020-23.
[xlv] Section 2302 of the CARES Act. This tax is imposed on employers at a rate of 6.2 percent of each employee’s wages that do not exceed $137,700 for the 2020 calendar year.
[xlvii] The IRS has indicated that the Form 941, Employer’s Quarterly Federal Tax Return, will be revised for the second calendar quarter of 2020 (April – June, 2020), and information will be provided to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January – March 2020). In no case will Employers be required to make a special election to be able to defer deposits and payments of these employment taxes.
[xlviii] A constructive termination.
[xlix] The key is the definition of “separation from service” under IRC Sec. 409A.
[l] Such a plan is unsecured, and the executive is treated as a general unsecured creditor. What if the plan requires the employer to periodically set funds aside in a rabbi trust so as to provide the employer with a source from which to satisfy its payment obligations under the deferred compensation plan?
[li] Reg. Sec. 1.409A-3(d).
[lii] Query whether this 12-month waiting period makes this option impractical from the perspective of the business?
[liii] IRC Sec. 409A(a)(4)(C).
[liv] Reg. Sec. 1.409A-3(j)(4)(ix)(C).
[lv] Reg. Sec. 1.409A-3(f).
[lvi] It’s all a matter of negotiation and leverage. However, it is often dependent upon the executive’s desire or ability to pay for equity, their aversion toward incurring an income tax liability upon the receipt of equity, and their reluctance to assume any of the responsibilities of actual ownership (for example, personally guaranteeing leases and loans).
[lvii] Hopefully, the business’s PPP loan will be forgiven.
[lviii] I’ve heard stories about how expensive a “deep” clean can be.
[lix] Reg. Sec. 1.1001-2.
[lx] IRC Sec. 108(a).
[lxi] Reg. Sec. 1.1001-3; IRC Sec. 108(e)(10). Basically, a change in yield on the debt, or a change in timing of debt payments.
It should be noted that the so-called “Cottage Savings” regulations include safe harbors for certain modifications to the terms of a debt obligation.
[lxii] IRC Sec. 702 and Sec. 1366. https://www.taxlawforchb.com/2017/12/revoking-s-corp-status-a-fraudulent-conveyance/
[lxiii] IRC Sec. 108(d)(3). The excess of its liabilities over the fair market value of its assets (including intangibles, like goodwill).
[lxiv] IRC Sec. 108(a)(1)(B) and Sec. 108(a)(3). It should be noted that the insolvency exception applies differently to C corporations, S corporations and partnerships. In the case of an S corporation, the insolvency is tested at the corporate level – if the corporation is insolvent, its shareholders will not recognize COD income. By contrast, in the case of a partnership, the exception is applied at the partner level – thus, a partner who is insolvent make benefit from the exception, while a solvent partner will have to include their share of the partnership’s COD in their gross income. IRC Sec. 108(d)(6) and (7).
[lxv] IRC Sec. 108(b), Sec. 1017.
[lxvi] IRC Sec. 467.
[lxvii] Reg. Sec. 1.467-3(c)(3).
[lxviii] IRC Sec. 166.
[lxix] Reg. Sec. 1.166-5.
[lxx] Of course, this leaves open the question of what property to transfer to the trust.
[lxxi] IRC Sec. 675(4).
[lxxii] IRC Sec. 671.
[lxxiii] Rev. Rul. 85-13.
[lxxv] Don’t worry, I’m not singing the Disney song.