The Paycheck Protection Program Flexibility Act & Treasury/IRS Guidance in Response to COVID-19
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 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included several taxpayer-favorable changes to current tax laws to address the economic impacts of the pandemic. For a summary of these bills, please see our True Alerts at the following links: Tax Issues Addressed by COVID-19 Emergency Legislation,
Congressional Action on the COVID-19 Pandemic: The Coronavirus Aid, Relief & Economic Security Act
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 (PPP) and the $10 billion expansion of the Economic Injury Disaster Loan Program (EIDL Program).
New legislation was recently enacted to make necessary changes to the PPP, and Treasury and the IRS have continued to release guidance to address ongoing questions and concerns related to issues caused by the pandemic. This True Alert will cover the Paycheck Protection Program Flexibility Act and the new regulatory guidance on pandemic-related matters.
The Paycheck Protection Program Flexibility Act
The CARES Act established the PPP to provide small businesses with access to funds to keep their businesses going during the economic shut down by expanding the US Small Business Administration’s (SBA) guaranteed 7(a) lending programs for eligible small businesses. It was initially funded at $349 billion with additional funding of $321 billion approved in legislation that was enacted on April 24th.
The PPP makes loans available to most businesses with fewer than 500 employees and to hospitality industry businesses with fewer than 500 employees per location. The loans are intended to be used primarily for payroll, with a small percentage to be used for non-payroll business expenses such as rent, utilities, and certain other expenses. The PPP is scheduled to expire on June 30, unless Congress decides to extend or expand the program.
After the PPP was enacted, however, some businesses found that the program’s structure prevented them from using it effectively, and that if they had to follow the guidelines, they might end up taking on a significant loan they would have to pay back even if they had not returned to full operations of the business.
The Paycheck Protection Program Flexibility Act (PPPFA), which amends the CARES Act, was approved by the House on May 28th by a vote of 417-1 and then approved by the Senate by unanimous consent on June 3rd with the President signing the bill on June 8th. The provisions of the bill will take effect retroactively as if they had been included in the CARES Act, which was enacted on March 27th.
The PPPFA will provide much needed flexibility for small businesses and non-profit organizations that have received loans under the PPP. It generally would make the PPP more flexible for borrowers by:
- extending current-law deadlines and loan terms,
- adjusting limitations imposed by the SBA on the percentage of loan proceeds that borrowers can use to cover non-payroll expenses, and
- eliminating restrictions that prevented borrowers under the program from also taking advantage of certain other CARES Act tax incentives, such as payroll tax deferral.
Covered Loan Period
The CARES Act provides that the “covered period” under the PPP’s loan forgiveness rules applies to “costs incurred and payments made” within 8 weeks after the loan origination date. Through interim final rule SBA-2020-0032, the SBA provided additional flexibility through an “alternative” test — allowing costs to be “incurred or paid” during the 8-week period. This limitation was viewed as impractical for businesses who were not able to fully reopen (either by choice or by order) and may be operating with reduced staffing. The PPPFA would extend the covered period to include expenses incurred through the earlier of December 31, 2020 or 24 weeks after the loan origination date. Borrowers that received a PPP loan prior to the enactment date of the PPPFA may elect to continue to use the 8-week covered loan period rule.
During Senate Floor debate, certain Senators expressed concern that the language might be interpreted to extend the loan application period under the program, which was not intended. They did not object to the bill, however, once they obtained letters from the Chair and Ranking Member of the Small Business Committee stating the intent was not to extend the application period. In a joint statement from Treasury and the SBA issued June 8th, it was confirmed that the last day for a PPP loan application to be approved continues to be June 30, 2020.
Limitations on Payroll vs. Non-Payroll Expenses
The PPP allows for forgiveness of payroll expenses, as well as certain designated non-payroll expenses, including mortgage interest, covered rent, and covered utilities. The statute did not require a certain percentage of the borrower’s loan be spent on payroll costs, but regulations issued by Treasury and the SBA did, with the SBA stipulating that at least 75 percent of the loan forgiveness amount be spent on payroll expenses. This restriction was identified as very problematic for several business sectors, including restaurants, where mortgage, rent or utilities may constitute a large portion of fixed monthly expenses. Under the PPPFA, borrowers would be able to spend up to 40 percent of their loan proceeds on non-payroll business costs and still remain eligible for loan forgiveness.
During Senate Floor debate, some Senators suggested that the wording of the new statute may unintentionally increase the percentage of the loan forgiveness amount that must be spent on payroll expenses by referring to the “covered loan” amount instead and by appearing to require that the full 60 percent must be used (rather than some lesser amount). Although the Senators did not object to the legislation which would have prevented its approval, they have stated that they intend to work with Treasury to resolve the issues or, in the alternative, pursue a legislative fix. In the June 8th statement from Treasury and the SBA, it was confirmed that borrowers using less than 60 percent on payroll costs will still be eligible for partial loan forgiveness.
Interaction with Payroll Tax Deferral
The PPPFA provides that employers participating in the PPP would also be allowed to take advantage of the payroll tax deferral provisions of the CARES Act. Under the CARES Act, employers (and self-employed individuals) are allowed to defer payment of the 6.2 percent employer-side Social Security payroll tax for wages paid between March 27th and December 31, 2020 with remittance due in equal installments by December 31, 2021 and December 31, 2022. The IRS had published an FAQ (Question 4) that PPP loan recipients can defer payment on wages paid up until the point of loan forgiveness but not beyond that date.
The PPPFA provides that recipients of forgiven PPP loans are able to continue to defer payment of payroll taxes on wages paid through the end of 2020.
Deadline for Rehiring Employees
The original rules required that an employer participating in the PPP must rehire employees by June 30, 2020 to be eligible for loan forgiveness. The PPPFA extends that deadline to December 31, 2020 and includes a new safe harbor for certain employers that are required to reopen at reduced capacity due to certain specified government rules or guidance related to COVID-19. Guidance from the SBA will be needed to fully understand the new rules in this area.
The PPP provided that the loan term could not extend beyond ten years, but the statute did not set a minimum loan term. The SBA then provided through interim final rule SBA-2020-0015 that PPP loan terms would be two years. The PPPFA sets loan terms at a minimum of five years, so borrowers will have an additional three years to pay off loans amounts that are not forgiven.
Longer Deferment of Interest
The PPP provided for interest deferment of not less than six months and not more than one year. In interim final rule SBA-2020-0015, the SBA determined that interest would only be deferred for six months. The PPPFA extends that six-month period until the date on which the amount of loan forgiveness is remitted to the lender.
Updated FAQ on SBA Review Process of Borrowers’ Good-Faith Certifications of Loan Necessity
Treasury and the IRS updated their FAQ page on the PPP to explain how the SBA will review borrowers’ required good-faith certification concerning the necessity of their loan request. Question 46 now explains:
- Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
- Borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.
- A reminder to borrowers that the SBA has previously stated that it will review all PPP loans in excess of $2 million, and other PPP loans as appropriate and explains the consequences if the SBA determines that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request.
PPP Loans & the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was enacted in the CARES Act and provides a refundable tax credit to eligible employers for certain employment taxes equal to 50 percent of up to $10,000 in qualified wages paid to employees, effective March 12, 2020 through December 31, 2020. Under the CARES Act, employers that access PPP loans are not eligible for the ERTC. In early May, Treasury announced that companies that repay loans mistakenly received under the PPP may be eligible to access the ERTC if they repaid the PPP loan by the safe harbor deadline of May 14, 2020.
Also, Treasury reversed itself in response to a letter from SFC Chair Grassley, SFC Ranking Member Wyden, and W&M Committee Chair Neal on the issue of whether the definition of “qualified wages” includes certain qualified health benefits. Revised Questions 64 and 65 reflect the change to allow the inclusion of such health benefits in the definition for purposes of the ERTC.
Legislation to Require Public Disclosure of PPP Loan Recipients
The House also considered legislation that would require the government to publicly disclose information about approved PPP loans, such as the identities of loan recipients and the lenders or intermediaries providing the funds. The bill was considered under “suspension of the rules” which required a two-thirds majority vote approval but was defeated by failing to reach that vote threshold with a vote of 269-147. It may be reconsidered on the House Floor.
Recent COVID-19 Related IRS Guidance
Treatment of “otherwise deductible expenses” not addressed in the PPPFA
See True Alert – IRS Guidance on Expenses Paid with PPP Loans for a discussion of Notice 2020-32 that states the IRS’s position that otherwise deductible business expenses paid with PPP loan proceeds are not deductible if the loan is forgiven. The PPPFA does not address this issue.
FAQs on NOL Carrybacks under the Alternative Minimum Tax
The IRS issued new guidance in the form of six FAQs on corporate net operating loss (NOL) carrybacks and the Alternative Minimum Tax (AMT) reflecting changes made by the CARES Act. This informal guidance is for C corporations that can carryback losses to tax years in which the AMT applies.
The CARES Act allows taxpayers to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years, and also allows NOLs incurred in these years to fully offset prior-year taxable income. The Act also allows corporations to claim 100% of AMT credits in 2019 as fully refundable and provides an election to accelerate claims to 2018, with eligibility for accelerated refunds. The IRS issued temporary procedures for faxing certain Forms 1139 and 1045 to the IRS.
These new FAQs cover issues such as computation of the alternative tax net operating loss (ATNOL), rules on filing amended returns in light of new guidance, filing rules for Form 1139, how to make the refundable Minimum Tax Credit (MTC) election, and the due date for making a §53(e)(5) election.
Access and Flexibility for Cafeteria Plans
The IRS issued Notice 2020-29, which extends the period for filing claims and provides greater flexibility regarding mid-year elections under a cafeteria plan during calendar year 2020 related to employer-sponsored health coverage, health flexible spending arrangements (FSAs), and dependent care assistance programs. Notice 2020-33 increases the limit for unused health FSA carryover amounts from $500, to a maximum of $550, as adjusted annually for inflation. It also clarifies the ability of a health plan to reimburse individual insurance policy premium expenses incurred prior to the beginning of the plan year for coverage provided during the plan year.
Employee Benefit Plans, Employment Taxes & Exempt Organizations
The IRS issued Notice 2020-35, which postpones deadlines for “certain employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs) that, with certain exceptions, are due to be performed on or after March 30, 2020, and before July 15, 2020,” according to the IRS. The Notice also temporarily waives the requirement that Certified Professional Employer Organizations (CPEOs) file certain employment tax returns and accompanying schedules electronically.
Guidance for Opportunity Zones
The IRS issued Notice 2020-39, providing relief for qualified opportunity funds (QOFs) and their investors, responding in part to a letter from several Republican Senators to Treasury and the IRS requesting “additional time and flexibility to meet Opportunity Zone requirements, timelines, and thresholds.” The IRS also issued updated FAQs on Opportunity Zones.
The guidance addresses these issues:
- testing dates for assets held by Qualified Opportunity Funds (QOFs);
- timeframes for taxpayers to invest eligible gains in QOFs, and reminding taxpayers of additional time under the working capital safe harbor for projects undertaken by qualified opportunity zone businesses; and
- the re-investment of certain proceeds received by QOFs from qualified opportunity zone property.
Although current opportunity zone investors welcomed the relief that has been provided, some still express concerns about remaining issues. For example, the law requires that at least half of employees’ hours at an opportunity zone business need to occur within the opportunity zone, and that may be complicated by work-at-home orders or practices. Also, relief was provided for the timeline on substantial improvements which helps current projects or those in the works, but may not aid projects that have not yet been started.
Extension of Safe Harbor for Renewable Energy Projects
The IRS issued Notice 2020-41, which provides an extra year (from four years to five years for projects started in 2016 or 2017, the Continuity Safe Harbor) for completing certain renewable energy projects and electricity production from wind, biomass, geothermal, landfill gas, trash, and hydropower. This relief had been requested by several key members of the Senate Finance Committee, including Chair Grassley (R-IA) in a letter sent to Treasury Secretary Mnuchin in April.
The guidance also provides a 3 ½ month safe harbor for services or property paid for by the taxpayer on or after September 16, 2019 and received by October 15, 2020. The press release states that by extending the Continuity Safe Harbor and providing a 3 ½ Month Safe Harbor, the guidance will provide flexibility for taxpayers to satisfy the beginning of construction requirements and limit the impact of COVID-19-related delays on the ability to claim tax credits.
Retirement Plan Participants & Beneficiaries – Remote Signature & Notaries
The IRS issued Notice 2020-42, which temporarily allows certain retirement plan participants and beneficiaries to use remote signatures and notaries for elections. Applicable in 2020, the guidance explains how a person can use remote notarization with live audio-video technology to satisfy the authorizations and consent requirements of participant elections.
FAQs on Retirement Savings Issues
The IRS issued a set of 14 FAQs on pandemic-related relief for retirement plans and IRAs. These FAQs focus on the section of the CARES Act that provides special rules for the use of retirement funds. The IRS also said that it is working on additional guidance on this provision based on the principles issued in Notice 2005-92 after Hurricane Katrina. The guidance covers several issues including: (1) what are the special rules; (2) definition of a qualified individual; (3) definition of a coronavirus-related distribution; (4) when taxes must be paid on those distributions; (5) whether a distribution may be repaid; and (6) loan relief available.
Pandemic-Related Travel Disruptions and the Medical Condition Exception/Other Travel Issues
An FAQ page was published on May 27th by the IRS that discusses how certain alien individuals who intended to leave the US but were unable to do so because of the pandemic or other medical problem may be eligible to claim the medical condition exception to exclude certain days of US presence from the substantial presence test in §7701(b)(3) of the tax code for calendar year 2020. The FAQ page also explains the procedures for claiming the exception on Part V of Form 8843 (Statement for Exempt Individuals and Individuals With a Medical Condition) with respect to a single period of up to 30 consecutive calendar days of presence in the US in calendar year 2020.
The IRS issued Revenue Procedure 2020-30 directing that certain foreign business activity attributable to travel disruptions caused by the pandemic will be disregarded for purposes of determining if a company is operating a Foreign Disregarded Entity or Foreign Branch. The IRS clarified that certain activities that otherwise would give rise to a foreign branch separate unit for purposes of the dual consolidated loss rules under §1503(d) or an obligation to file Form 8858 (Information Return of US Persons With Respect to Foreign Disregarded Entities and Foreign Branches) is not taken into account in the case of individuals who, because of travel restrictions and disruptions resulting from the pandemic, must temporarily conduct activities in a country other than the US or in a territory of the US that would not have otherwise have been conducted there.
Electronic Filing and Signatures for Advanced Pricing Program (APA)
The IRS modified its procedures for filing documents and requests under its Advanced Pricing Program (APA), which is outlined in Revenue Procedures 2015-40 and 2015-41. The IRS is now allowing electronic filing and electronic signatures pursuant to temporary guidance issued on March 27, 2020. The announcement also states that the Advanced Pricing & Mutual Agreement (APMA) Program is actively discussing various substantive and procedural issues with treaty partners, including such technical issues as the application of transfer pricing methods in periods of economic distress and the impacts of current economic conditions on specific industries, types of taxpayer, regions, etc.
Form 1040-X Electronic Filing
The IRS announced that taxpayers will be able to file Form 1040-X Amended US Individual Income Tax Return, electronically this summer. Previously, Form 1040-X was only accepted by mail.