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The COVID-19 Pandemic: IRS Guidance & Loan Assistance to Businesses

By: John V. Aksak Jason Carter |

Congressional Action to Date

In response to the COVID-19 crisis, government officials in Washington DC have taken a number of actions related to the economic effects of the crisis including legislation, regulatory action, and government agency action.

Three pieces of legislation have been enacted thus far, including: (1) COVID-19 Funding bill; (2) Families First Coronavirus Response Act (FFCRA); and (3) the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  For a summary of these bills, please see the following True Alerts:

Tax Issues Addressed by COVID-19 Emergency Legislation

Congressional Action on the COVID-19 Pandemic: The Coronavirus Aid, Relief & Economic Security Act

Treasury and the IRS have taken a number of actions related to the enactment of this legislation and made changes in procedures for several types of tax returns, tax payments, and administrative procedures.  This True Alert summarizes the actions taken to date.

Businesses were also given access to two loan programs through the Federal government as a result of the CARES Act – the $349 billion Paycheck Protection Program and the $10 billion expansion of the Economic Injury Disaster Loan Program (EIDL Program).  This True Alert summarizes the details of each of these loan programs.

In our next True Alert, we will highlight several issues that business taxpayers should consider with respect to the provisions of the CARES Act. 

IRS Activity and Related Actions by Other Government Agencies

In response to the COVID-19 crisis, the IRS has taken a number of actions to delay due dates for the filing and payment of a variety of taxes, while also announcing changes to several procedures designed to alleviate burdens on individuals and businesses.

However, some tax deadlines have not changed, including the due date for information returns and the schedule per Notice 2019-20 to report negative tax basis capital, so taxpayers should carefully review the current rules in order to ensure compliance.

Observations

  • Certain fiscal-year taxpayers may not be covered by the extensions and are advised to confirm their filing and payment deadlines.
  • Not all state and local governments have extended their deadlines and some are still issuing guidance, so taxpayers should continue monitoring for new information in all jurisdictions where they file.
  • Foreign companies with US subsidiaries may be unable to determine their US tax bill for another three months due to the payment extension, thereby affecting the foreign tax credit calculations in their local jurisdiction as well as tax disclosures in their financial statements.

IRS Guidance on Filing/Payment Deadlines & Estimated Tax Payments

On March 24th, the IRS issued a set of answers to frequently asked questions (FAQs) to further clarify the relief granted to taxpayers due to the ongoing COVID-19 pandemic with respect to the delay of the filing and payment deadline to July 15th included in Notice 2020-18.  The FAQs cover eligibility requirements for the deferred deadlines, individual retirement accounts (IRAs), workplace-based retirement plans, Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs), and corporate estimated payments.  The IRS plans to update the FAQs on an ongoing basis and is expected to release additional guidance on these issues.  For a summary of the FAQs, please see True Alert: IRS Q&A about Extended Filing and Payment Deadlines.

Payment of Estimated Taxes:  Notice 2020-18 postpones the deadline for first quarter 2020 estimated income tax payments from April 15 to July 15, 2020.  Second quarter 2020 (Q2 2020) estimated income tax payments are still due on June 15, 2020.  This may result in confusion about how each payment should be computed in order to avoid underpayment penalties, particularly taxpayers who typically use the annualized income or adjusted seasonal installment method.

Eligible taxpayers may still rely on safe harbor rules to compute 2020 estimates, but that requires knowledge of the taxpayer’s 2019 tax liability and that return is now due after the due date for Q2 2020 payments.  To deal with these issues, taxpayers concerned about underpayment penalties should consider computing their 2019 taxes before June 15th even if they plan to file the return after that date.

IRS Adjusts Compliance and Enforcement Programs and Delays FATCA Filing Deadline

On March 25th, under its new People First Initiative, the IRS announced that it is making several administrative adjustments in response to the COVID-19 crisis including “postponing certain payments related to Installment Agreements and Offers in Compromise (OIC) to collection and limiting certain enforcement actions.”  The IRS Commissioner stated that the agency was taking a series of steps to help people and businesses during this period starting on April 1st and running initially through July 15th with more details on implementation to be provided soon.  The IRS will suspend automatic liens and levies and stop referrals of delinquent taxpayers to private debt collection companies until at least July 15th.  in They are generally not planning to begin new audits, but they will continue to pursue high-income individuals who have not filed.  The IRS Independent Office of Appeals will continue to process cases without in-person meetings, using telephone or video conferences instead.

The IRS also granted a reporting extension for certain financial institutions filing under the Foreign Account Tax Compliance Act (FATCA) from March 31, 2020, to July 15, 2020.  A Form 8809-I (Application for Extension of Time to File FATCA Form 8966) is not required for this extension.

IRS Grants Filing and Payment Relief for Gift and Generation-Skipping Taxes

The IRS issued Notice 2020-20, which broadens the agency’s prior payment and filing relief to cover gift and generation-skipping taxes so that the due date for filing Forms 709 (US Gift and Generation-Skipping Transfer Tax Return) and making payment of the Federal gift and generation-skipping transfer tax is extended to July 15, 2020, with no interest, penalty, or addition to tax accruing during this time period.  The grant of relief is automatic so there is no need to file Form 8892 (Application for Automatic Extension of Time to File Form 709).

IRS Penalty Relief for Failure to Deposit Employment Taxes

On March 31, 2020, the IRS issued Notice 2020-22, which provides guidance regarding potential penalty relief related to the deposits of employment taxes (both the employer and employee portion of Social Security and Medicare taxes and income taxes withheld at the source) related to tax credits available to employers under legislation passed in response to the COVID-19 crisis.  The relief is related to the new refundable tax credits for paid sick leave and paid family leave under the FFCRA and the employee retention credits under the CARES Act.

IRS Guidance on Partnerships/GILTI

On April 8th, the IRS issued Revenue Procedure 2020-23, which allows partnerships to file amended returns for 2018 and 2019 to claim retroactive tax relief under the CARES Act.  Without the option to file amended returns, the IRS explained, “certain partnerships that already filed their Forms 1065 for the affected years generally are unable to take advantage of the CARES Act relief for partnerships except by filing Administrative Adjustment Requests (AARs) pursuant to section 6227.”  The guidance instructs eligible partnerships to file Form 1065 with the “Amended Return” box checked and to issue an amended Schedule K-1 to each partner.

The guidance issued also included guidelines for coordinating compliance with Notice 2019-46 for domestic partnerships and S corporations filing under the proposed GILTI regulations.  The IRS states: “If, under Notice 2019-46, 2019-37 I.R.B. 695, a partnership has applied the rules of the proposed GILTI regulations under proposed §1.951A-5 for its taxable years ending before June 22, 2019 (Form 1065, Form 8992, US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), and Schedules K-1), the partnership may continue to apply the rules of proposed §1.951A-5 for purposes of filing an amended Form 1065 for such taxable years under this revenue procedure if the partnership furnishes amended Schedules K-1 consistent with those proposed regulations and provides appropriate notifications to its partners under the principles of section 5.01 of Notice 2019-46 within the period described in section 3.02 of this revenue procedure. “

IRS Action on Information Document Request Procedures and Enforcement

On April 2nd, the Tax Exempt/Government Entities (TE/GE) Division instructed its staff to ease enforcement of its existing Information Document Request (IDR) procedures effective through July 15, 2020.  The memorandum stated that it “allows an increased reasonable application of business judgment by examination agents and managers in the exercise of duties related to IDR requests and follow-ups.”

Similarly, the Large Business and International (LB&I) Division issued a temporary reprieve from its IDR enforcement process as outlined in IRM Exhibit 4.46.4-2 with IDR procedures suspended through July 15, 2020.  Examiners can continue issuing and receiving certain IDRs and “managers retain the discretion to continue with the IDR enforcement process when in their judgment the interests of tax administration warrant, for example for cases with short statutes, listed transactions or fraud development.”

The IRS also notified taxpayers in Announcement 2020-04 that all public hearings on proposed rulemakings will be held by phone until further notice.

IRS Accepting Email and Digital Signatures on Tax Documents

As of March 31, 2020, the IRS is now accepting email and digital signatures on tax documents to facilitate taxpayers communicating with the agency, stating that it would “begin temporarily accepting images of signatures (scanned or photographed) and digital signatures on documents related to the determination or collection of tax liability.”  The IRS is also letting its employees accept documents through email, transmitting documents to taxpayers using SecureZip or other “established secure messaging systems.”

The choice of whether to transmit documents electronically is solely up to the taxpayer.  For emails, the taxpayer or their representative should include a statement, either in the form of an attached cover letter or within the body of the email, saying to the effect: “The attached [name of document] includes [name of taxpayer]’s valid signature and the taxpayer intends to transmit the attached document to the IRS.”

The category of documents which can be handled this way includes:

  • extensions of statute of limitations on assessment or collection,
  • waivers of statutory notices of deficiency and consents to assessment,
  • agreements to specific tax matters or tax liabilities (closing agreements), and
  • any other statement or form that needs the signature of a taxpayer or representative and is traditionally collected by IRS personnel outside of standard filing procedures.

IRS FAQs on Paid Leave Tax Credits/Guidance on Effective Dates for Paid Leave Tax Credits/Update to DOL FAQs

The IRS issued Notice 2020-21 providing guidance on the effective date for paid leave employment tax credits under the FFCRA, stating the credits “will apply to wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020.”

The IRS issued a set of FAQs on the paid leave provisions enacted by the FFCRA, which provides tax credits to certain businesses with fewer than 500 employees in order to grant paid leave to employees, either for the employee’s own health needs or to care for a family member.  There are more than 60 questions that cover issues related to the basic operation of the credits for paid leave.  The IRS stated that the FAQs will be updated regularly.

The Department of Labor (DOL) has also issued a set of FAQs on the paid leave provisions, and they have been updating and adding content to these questions.  On April 1, 2020, the DOL also issued temporary regulations on the paid leave provisions and posted a webinar on the rules on April 3, 2020.

IRS/Treasury Details on the Employee Retention Credit

On March 31, 2020, the IRS and Treasury announced the start of the CARES Act employee retention credit, which is a refundable tax credit for 50 percent of wages (capped at $10,000) paid by certain employers adversely affected by the coronavirus.  The IRS posted a set of FAQs on the credit, and the Senate Finance Committee also posted a set of FAQs on its website.  All employers potentially qualify for the tax credit, except state and local governments and businesses with small business loans.

IRS Issues Set of FAQs on Economic Impact Checks

On March 30, 2020, the IRS issued a preliminary set of FAQs on the economic impact checks authorized by the CARES Act covering issues such as eligibility and timing.

IRS Extends Deadlines for Pre-Approved Defined Benefit Plans and 403(b) Plans

The IRS announced on March 27th that it is extending certain deadlines for pre-approved defined benefit plans and 403(b) plans from April 30, 2020, to July 31, 2020.

TTB Postpones Payments on Excise Taxes and Other Submissions

The Alcohol and Tobacco Tax and Trade Bureau (TTB) announced on March 31st that they will be postponing the payment due date for certain excise taxes as well as the due date for many returns, reports, claims, or other submissions that they regularly require.  This applies to required submissions with an original due date on or after March 1, 2020, through July 1, 2020, and postpones any deadlines to 90 days after the original due date.  During this time, the TTB will continue to process submissions, including claims for credits or refunds.

Assistance to Businesses under Two Federal Government Loan Programs

The CARES Act included two programs that are designed to provide small businesses with access to funds to keep their businesses going during the economic shut down.  The $349 billion Paycheck Protection Program (PPP) expands the US Small Business Administration’s guaranteed 7(a) lending program for eligible small businesses.  The second program is the Emergency Economic Injury Disaster Loan Program (EIDL Program) with $10 billion available for emergency loans.

Businesses may apply for both the PPP and the EIDL Program.  If a business receives the (up to) $10,000 EIDL advance (explained below), that amount will be subtracted from the total forgivable amount of the PPP loan.

Anticipating that the PPP may run out of money quickly, Senate Majority Leader McConnell (R-KY) and Senate Minority Leader Schumer (D-NY) have already begun discussions about approving legislation that could add additional money to the fund for these loans, reportedly $200-250 billion.  This legislation may be acted on in the next week with McConnell suggesting the legislation could be approved on the Senate Floor by voice vote (without a roll call vote).

Paycheck Protection Program

The Paycheck Protection Program (PPP) is a low interest, emergency loan program of $349 billion, with potential for loan forgiveness, designed to enable employers to retain employees and cover overhead costs.

Who is Eligible for the Paycheck Protection Program?

  • Small businesses (including sole proprietorships) or non-profits with fewer than 500 employees (starting April 3rd)

Note: employers should check the SBA size table as the limit may be greater than 500 employees for businesses in certain industries

  • Independent Contractors and Self-employed individuals (starting April 10th)
  • Tribal businesses
  • Small 501(c)(19) Veterans organizations

What are the terms of a loan?

  • Maximum loan amount: Lesser of 2.5 times monthly payroll or $10 million
  • Interest Rate & Term: Loan is due in 2 years, no prepayment penalty with interest rate of 1%
  • No fees and no collateral or guarantees required
  • Payments deferred for 6 months
  • Full and partial forgiveness of loan is possible

Can all or part of the loan be forgiven?

The SBA may forgive the amount a borrower spends in the first 8 weeks after receiving the loan, on the following:

  • Salaries, commissions, and benefits
  • Covered rent, mortgage interest payments and utilities

The amount of forgiveness decreases if a borrower lays off employees or reduces wages by more than 25%.  A business has until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.

What is required to obtain the loan?

  • Find an SBA Approved Lender using SBA’s Lender Match (for 7(a) loans) and apply.
  • Certify that the current economic conditions make the loan necessary for ongoing operations.
  • Certify that there is not a similar application pending and that the business did not receive a similar loan this year.

What is the timeframe for applying?

Taxpayers should apply as soon as possible now that banks are ready to process applications, but a business must apply by June 30, 2020. There is a limited amount of money available that will be distributed on a first-come, first-serve basis.

Economic Injury Disaster Loan Program

The Economic Injury Disaster Loan Program (EIDL) is a low interest, emergency loan program of $10 billion, designed to enable employers to retain employees and cover overhead costs.

Who is Eligible for the Economic Injury Disaster Loan (“EIDL”) program?

The following businesses are eligible to apply for loans if they are located in a U.S. state, territory or Washington D.C., and they suffered “substantial economic injury” from the COVID-19 crisis:

  • Small businesses or nonprofits with no more than 500 employees
  • Sole proprietors and Independent Contractors
  • Cooperatives, ESOPs or tribal small businesses with fewer than 500 employees

What are the terms of the loan?

  • Maximum loan amount: $2 million (amount keyed to borrower’s actual economic injury)
  • Additional funds: up to $10,000 advance (essentially a grant that borrowers need not repay; funds disbursed within 3 days)
  • Interest rate: 3.75% for small businesses; 2.75% for most private nonprofits
  • Term: Up to 30 years (term keyed to borrower’s ability to repay); deferred for 12 months
  • Loan forgiveness: Not available
  • Personal guarantees: Not required for loans under $200,000; required for larger loans
  • Collateral: Not required for loans under $25,000
  • Approval criteria: Acceptable credit history; ability to repay loan

What can I use the money for?

  • EIDL funds are to enable a business to meet costs that it is unable to meet as a result of COVID-19. These costs include fixed debts, payroll, accounts payable, increased costs due to supply-chain interruption, and other expenses.
  • Some business expenses cannot be paid with these funds, including bonuses, disbursements to owners (except for the performance of services), facilities expansion, and paying down long-term debt.

What do I have to do and when?

  • Apply as soon as possible
  • Certify that the applicant does not fall within the small number of EIDL exclusions (e.g., less than 1/3 of gross revenue from legal gambling; not in the business of lobbying; no principal is >60 days delinquent on child support)
  • Quantify past revenues and COVID-19-related losses
  • Provide any additional documents that may be requested

If you have questions about any of this information, please reach out to your engagement team. Take care and be well!