As the year-end approaches, we want to make you aware of some of the potential changes to business taxes which President-elect Joe Biden campaigned on. These are not concrete policy proposals as yet, but they are suggestive of the direction a new Administration might take.

These possible changes include:

  • An increase to the corporate income tax rate from 21% under current law to 28%. This would apply to C Corporations only.
  • The imposition of a minimum tax on corporations showing book profit of $100 million or more. This would be an effective “Alternative Minimum Tax” (AMT) on businesses, under which a corporation would be required to pay the greater of 15% minimum tax or the regular corporate rate, while allowing for net operating loss (NOL) and foreign tax credits.
  • The creation of a Manufacturing Communities Tax Credit, the purpose of which would be to reduce the tax burden on businesses experiencing workforce layoffs or the closure of a major government institution.
  • Expanding and making permanent the New Markets Tax Credit (established in 2000).
  • Providing tax credits to small businesses which offer retirement savings plans to employees.
  • Several renewable-energy-related tax credits would be expanded as well, including carbon capture, use, and storage, and the Energy Investment Tax Credit and Electric Vehicle Tax Credit would be reinstated.

Some other changes proposed on the campaign trail, but with little detail, include:

  • A potential 10% surtax on corporations who offshore jobs to foreign nations in order to sell goods or services back to the U.S. market.
  • An advanceable 10% “Made in America” tax credit for restoring production, revitalizing existing facilities which are either closed or in the process of closing, retooling facilities in order to increase manufacturing jobs, or to expand manufacturing payroll.

Whether any or all of these proposed changes will be addressed legislatively in 2021 is a question, and whether they would pass in Congress is another. A third question is, if enacted, when would the changes take effect? We simply cannot know yet – the crystal ball is very cloudy.

Stay tuned, though – we will be delving into more of the tax changes Biden is proposing in the coming weeks and months.

If you would like to discuss how possible tax increases in 2021 could potentially impact your business income tax liabilities, please click here to email me directly.

Until next Wednesday – Happy Thanksgiving!

Peace,

Eric

Last Wednesday, November 18, 2020, the IRS issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which formalize the guidance in Notice 2020-32, issued in late April of 2020 – see our May 6, 2020 blog post on the subject.

The PPP program was supposed to make the lives of business owners easier during the pandemic, but after 11 pages of FAQs and 26 Interim Final Rules, it has just added to their burden.

The IRS holds that businesses which paid eligible expenses with the proceeds of Paycheck Protection Program (PPP) loans – may not deduct such expenses on their income tax returns, contrary to Section 1106 of the CARES Act. In other words, you get the benefit of the money, but you can’t deduct payments for expenses such as payroll, rent, interest on covered mortgage obligations and any covered utility payments. That effectively increases your net business income.

By way of illustration, the IRS presents two scenarios in which a business owner received a PPP Loan during 2020:

Scenario 1

Business Owner A paid expenses listed in IRS Code Section 161, and are noted in the CARES Act as “eligible expenses,” which include qualified payroll costs, as well as qualified mortgage interest, utility, and rent payments.

In November of 2020, Business Owner A applied to its lender bank for forgiveness of the PPP loan, supporting its application with documentation of its eligible expenses. Based upon the expenses paid, Business Owner A had satisfied all requirements under the CARES Act (section 1106) for the loan to be forgiven.

However, the lending bank does not say whether the loan will be forgiven before the end of 2020.

Nonetheless, Business Owner A knew that its eligible expenses qualified for full forgiveness of the PPP loan, and had a reasonable expectation of such forgiveness, which is in effect a foreseeable reimbursement of those expenses via tax-exempt income. Therefore, Business Owner A may not deduct these eligible expenses from the 2020 tax returns. Alternatively, IRS Code Section 265(a)(1) “disallows a deduction of A’s otherwise deductible eligible expenses because the expenses are allocable to tax-exempt income in the form of reasonably expected covered loan forgiveness.”

Scenario 2

Business Owner B paid the same types of eligible expenses during 2020 as Business Owner A, but did not apply for forgiveness of the PPP Loan before year-end. However, based upon the eligible expenses paid, Business Owner B had every reasonable expectation that an application for forgiveness of the PPP loan would be granted.

Since the reasonable expectation of forgiveness exists, applied for or not, and thereby the foreseeable reimbursement via tax-exempt income of the eligible expenses, Business Owner B may not deduct these expenses from the 2020 tax return. Alternatively, IRS Code Section 265(a)(1) applies in this scenario as well as the first.

Note that, should the application for PPP loan forgiveness be denied in whole or in part for either Business Owner A or Business Owner B, to the extent that eligible expenses are not reimbursed, they will revert to tax-deductible status. See Revenue Procedure 2020-51, linked above.

U.S. Treasury Secretary Steven T. Mnuchin encourages PPP borrowers to apply for loan forgiveness as quickly as possible. It will be interesting to see what position Janet Yellen, if confirmed as the new Treasury Secretary, will take regarding deductibility of PPP eligible expenses with respect to forgiven PPP loans.

It is still possible that the IRS’ rule will be nullified by Congressional action; a number of Senators and Representatives have affirmed that disallowing the tax-deductibility of eligible expenses was not their intent in writing the CARES Act.

Stay tuned – we will have more on PPP loans – that much, at least, is certain. And next week we will address the tax changes the Biden Administration is proposing for businesses.

If you would like guidance on whether or not you should apply for forgiveness of your PPP loan in 2020, please click here to email me directly.

Until next Wednesday – Happy Thanksgiving!

Peace,

Eric

Assuming that current predictions are accurate, on January 20, 2021, we will see the 46th President of the United States inaugurated.

During his campaign, Joe Biden promised tax increases – only on the wealthiest individuals and corporations – over the next decade of some ~$3.5 trillion.

On the campaign trail, Biden’s platform on individual tax changes included:

  • Restoring the top rate on ordinary income for individuals to 39.6%. The Tax Cuts and Jobs Act of 2017 (TCJA) reduced this top rate to 37%.
  • Taxing long-term capital gains and dividends at ordinary income rates for filers with taxable income over $1 million. Under current law, long-term capital gains and qualified dividends are taxed at a top rate 20%, with an additional 3.8% net investment tax applicable to single filers with income over $200,000 and joint filers with income over $250,000.
  • Passthrough income is currently taxed at the owner’s individual rate with a 20% deduction (under section 199A, set to expire after December 31, 2025) for business profit earned domestically. Biden proposes to phase out the 199A deduction for filers with income of over $400,000.
  • The TCJA repealed the “Pease limitation,” whereby many itemized deductions were subject to a reduction for those with income above a certain threshold for their filing status. Biden plans to restore the “Pease limitation” for those earning over $400,000, capping the credit for itemized deductions at 28%, rather than the percentage at which the taxpayer’s adjusted gross income is taxed.
  • For 2021, the Social Security tax under current law would be 12.4% on an individual’s first $142,800 of earnings; the tax is split equally between employers and employees. Biden would like to expand the Social Security tax to apply to incomes over $400,000. This would create a “doughnut hole” in the form of untaxed earnings falling between $142,800 and $400,000. This is perhaps one of the most overlooked tax increases – it could represent an enormous tax hike on high income earners, especially businesses owners.
  • Under the current tax code, estates are taxed at 40%, with an estate exclusion amount of $11.58 million per individual for 2020. Biden has called for returning the estate tax treatment 2009 levels, which would indicate a 45% top rate on estates and the estate exclusion amount dropping to $3.5 million per person.
  • Inherited assets, for purpose of capital gains taxation, are valued at the time of death, or the alternative valuation date, with a step-up in basis. Biden would repeal this provision, with heirs potentially paying capital gains tax based upon the valuation of the assets at their initial purchase date by the decedent.

It is unclear, at this point, whether a President Biden would in fact push for all of these changes in 2021. Some of the proposals, including the change to Social Security taxes, would face procedural challenges as well as potential Congressional opposition.

It is also uncertain whether any proposed tax increase would pass, given that control of the Senate will remain a mystery until after Georgia’s two runoff elections on January 5, 2021. Both of Georgia’s Senate incumbents are Republican; if even one wins, the Senate remains under Republican control, and they are unlikely to look favorably on tax hikes. If both seats flip to the Democrats, however, then the parties are effectively tied, with the Senate President (presumably a Vice President Kamala Harris) able to cast a tie-breaking vote.

Stay tuned – next week we will address the tax changes Biden is proposing for businesses.

If you would like to discuss how possible tax increases in 2021 could potentially impact your own income tax liabilities, please click here to email me directly.

Until next Wednesday –

Peace,

Eric

While the results of the 2020 general election are still in question, with several states yet to complete vote-tallies, every major news organization has called the win for Democrat Joe Biden, and I think we must take the view, at this point, that he is the likely winner.

Joe Biden has promised a tax increase over the next decade of some ~$3.5 trillion, but that may – or may not – be difficult for him to achieve. The United States House of Representatives (House) will remain under Democrats’ control, despite the loss of several seats; it is unlikely that a President Biden would encounter significant opposition there to raising taxes.

The Senate make-up, however, is far from certain. At present, 49 seats will remain in Republican hands, with North Carolina having called its Senate race for Republican incumbent Thom Tillis, and Democratic challenger Cal Cunningham conceding last night. Democrats will have at least 46 Senate seats. Maine’s Senator Angus King and Vermont’s Senator Bernie Sanders are independents, but both caucus with the Democrats, effectively giving the party 48 Senate votes.

In Alaska, votes are still being counted. As of this morning, Alaska’s Senator Dan Sullivan, a Republican, had 57.5% of recorded votes against 37.5% for Democratic challenger Al Gross, with ~74% reporting. Should Sullivan hold his seat, as seems likeliest, that will give Republicans 50 Senate votes, and Democrats 48, including the two independents.

Georgia’s election, with both its Senate seats up for grabs, while fully reported, did not produce a clear winner in either race, Georgia election law requiring a majority of votes which no candidate garnered. A runoff election will be held on January 5, 2021, which should determine the winners. Both incumbents, Senators Kelly Loeffler and David Purdue, are Republicans.

Why it Matters

For most bills making their way through the legislative process, passage in the Senate requires 60 votes. Assuming for the moment at least one of the Georgia Senate seats is held by its Republican incumbent, that would mean 11 Republican Senators would need to be on board for any Biden-proposed tax increase; this is an extremely unlikely event, though not absolutely impossible.

However, we have in recent decades twice witnessed the use of a procedure known as “Budget Reconciliation;” a process only applicable to bills affecting governmental spending or revenue, and requiring only a simple Senate majority – 51 votes – for passage of the bill in question.

Should the two Georgia Senate seats remain in Republican hands, that would leave Democrats without the simple majority, absent Republican defections, to pass a tax increase under the rules governing Budget Reconciliation bills.

However, if both those seats flip to Democrats, the Senate votes would then be tied at 50 each for Democrats and Republicans, with any tie-breaking vote to be cast by the President of the Senate, which would, under President Biden, be Vice President Kamala Harris. She, one presumes, would not be likely to vote against a Biden Budget Reconciliation.

Under that scenario, President Biden could potentially enact tax increases without a single Republican vote. But he might not have to – some moderate Republican Senators have broken ranks in the past. Nor, in fact, can Biden be guaranteed that every Democratic Senator would vote for his tax policies. Members of both parties have “crossed the aisle” in the past, and may well do so in the future.

So, control of the Senate is still up in the air as of today, and the election remains a nail-biter for those concerned with U.S. tax policy going forward. We will have to wait until after January 5, 20201 to see the final make-up of the Senate.

Stay tuned – in the coming weeks, we will be delving deeper into some of the tax changes Biden proposed during his campaign, as he is likely to craft at least a tax policy statement prior to inauguration on January 20, 2021.

If you would like to discuss how possible tax increases in 2021 could potentially impact your own income tax liabilities, please click here to email me directly.

Until next Wednesday –

Peace,

Eric

We keep saying the fat lady hasn’t sung yet on guidance concerning loans disbursed pursuant to the Paycheck Protection Program (PPP), and we keep being proved right.

The U.S. Small Business Administration (SBA) announced on October 26, 2020, that it would be sending out mandatory questionnaires to borrowers, both for-profit and non-profit, whose loans were in amounts greater than $2 million, for them to complete and submit to their lenders.

Once a borrower receives the questionnaire from the SBA, 10 days only are allowed for completion and submission of the form to the lender, so we recommend you start amassing your information now, if you don’t have it ready to hand.

In this blog post, we discuss the SBA’s Loan Necessity Questionnaire For-Profit Borrowers Form 3509.

The questionnaire requires the following:

Business Activity Assessment

This section requires information to document the impact of COVID-19 including:

  • Gross revenues for the calendar second quarter of 2020 versus the calendar second quarter of 2019 (seasonal borrowers may use the calendar third quarters of 2020 and 2019 for comparison). For businesses started in 2020, use the calendar first quarter of this year for comparison with the second quarter.
  • State or locally mandated, or voluntary, business closures, restrictions, or alterations, including the duration of closures and/or restrictions and the cost of alterations borne by the borrower.
  • The disclosure of any capital improvements made between the National Declaration of Emergency made by the President on March 13, 2020, and the end of the PPP loan’s eligible forgiveness covered period.

Liquidity Assessment

This section requires information such as:

  • Cash position of the borrower at the end of the quarter preceding the PPP loan application.
  • Whether borrower has paid any dividends or cash distributions other than pass-through estimated tax payments between March 13, 2020, and the end of the covered period.
  • Whether borrower has paid any dividends or cash distributions other than pass-through estimated tax payments between March 13, 2020, and the end of the covered period.
  • The number of owner and non-owner employees, if any, who were compensated at a rate exceeding $250,000 on an annualized basis, and total compensation for all such employees during the covered period.
  • Whether the borrower was publicly traded in the United States, whether it was a subsidiary of another company, traded either in the U.S. or abroad, and, if so, market capitalization(s) as of the date of the PPP loan application. Borrowers must also disclose whether 20% or more of the business in question is owned by a private equity, venture capital, or hedge fund.
  • If the borrower’s business was not listed on any national securities exchange, what was the shareholders’ equity value of the business as of the last date of the calendar quarter prior to the PPP loan application?
  • Whether the borrower received funds from any program pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act other than the PPP, and how much.

Each section includes a space for additional comments and information, but with a 1,000-character limit, so we suggest you choose your wording carefully.

We strongly urge borrowers with PPP loans greater than $2 million to consult with us to determine how to best present this information to your lender and the SBA.

Please click here to email us directly – we are here to help you!

Until next Wednesday –

Peace,

Eric

We all know better than to use our cellphones while driving – the distraction it represents has been proven clearly. In many states, including our own, it’s even been made illegal.

But I recently became aware of a more ominous potential effect, as illustrated in a study published in 2017 in The University of Chicago’s Journal of the Association for Consumer Research.

For this study, researchers Adrian F. Ward, Kristen Duke, Ayelet Gneezy, and Maarten W. Bos conducted two experiments on two different sets of undergraduate participants. In both cases, participants were sorted into three groups. All were instructed to silence their smartphones, and turn off vibrations. The first group were told to put their smartphones face down on their desks; the second kept their phones, but had to stow them in pockets or bags; the third left their belongings outside the testing room.

They were then administered two different cognitive tests (the second test varied between the two experiments, the first remained the same for both groups of participants), after which they answered a series of questions as to how much they thought about their smartphones, how their presence or absence affected their performance, and provided demographic information.

In both experiments, the majority of participants’ answers as to how much they thought about their phones and how much their performance on the tests was affected were consistent across all three groups, that they had not thought about their phones much, nor did they believe their performance was affected.

But the test results told a different story. Both experiments showed the best results coming from the group which had left their smartphones outside the testing room, followed by those who’d put them in their bags or pockets. The worst performers were the ones whose phones remained in sight on their desks.

In all groups, performance was lower among those who reported the greatest dependence on their smartphones.

Can our smartphones be a distraction even when our attention is fully focused elsewhere, without our being aware of it? This study seems to indicate they can.

I love my smartphone – it’s an amazing tool, and an amazingly powerful one.

But our phones are incapable of considering what our best interests are. We’re the ones who have to do that. And I think this study is a sobering reminder to think long and hard about how dependent we are on them.

How dependent are you on your smartphone, and how often do you turn to it for other purposes than calls and texting?

Please click here to email me directly – I would love to hear from you on this!

Until next Wednesday –

Peace,

Eric

It’s time to plan for our 2020 taxes – remember, many deductions and tax credits must be in place by December 31, 2020, to take advantage of them for this tax year.

The provisions of the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in December of 2017, are mostly still in force. There are additional changes for 2020, as provisions included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law on December 20, 2019, and in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020.

Retirement Plans

The SECURE Act pushed back the date in which required minimum distributions (RMDs) must be taken from the qualified account by the participant. Previously, RMDs had to begin the year the participant turned 70½; under the SECURE Act, participants have until age 72 to begin RMDs. If you are working and healthy, you can allow your retirement savings to grow an additional year and a half, which can produce significant additions to your funds.

In addition, if you are over 70 and still working, you can now continue contributing to a traditional IRA – previously, no contributions were permissible for those 70½ and older. However, should you choose to continue these contributions, your qualified charitable distributions (QCDs) may be affected; if you are 70½ or older, a portion of QCDs may be included in your taxable income, where previously QCDs were 100% excludable.

Those expecting an addition to the family, either through birth or adoption, can take distributions of up to $5,000 per parent from a traditional IRA without incurring the 10% penalty for early withdrawals for participants under age 59½.

The CARES Act waives the above 10% penalty for early distributions from qualified accounts of up to $100,000 if the funds are needed due to coronavirus-related causes. In addition, these distributions can be included as income in equal installments over three years, and, if the distributed funds are replaced in the qualified account within three years, the tax consequences can be reversed.

For 2020, dollar limits on contributions to retirement plans and Simple IRAs are raised – for 2020, the maximum contribution to a 401(k), 403(b), or 457 plan is $19,500; if you were born before 1971, you can contribute an additional $6,500 this year – each of these amounts has risen by $500 over 2019 limits. The 2020 cap for Simple IRA contributions is $13,500, plus an additional $3,000 for those age 50 and over. The cap for traditional IRA contributions remains at $6,000, with an additional $1,000 for the over-50 contributor.

Further, pursuant to the CARES Act and IRS Notice 2020-51, RMDs are suspended for 2020 – meaning, you don’t have to take them – and incur the tax liability – this year. This applies to everyone with defined contribution plans (defined benefit plans are excepted from this suspension) – those with company plans, such as 401(k)s and 403(b)s, those with IRAs, and those who are taking distributions as beneficiaries of an inherited account.

If you don’t need the income, you may prefer not to take these distributions, and to save on your taxes, while you can. The Dow is fluctuating, we remain in uncertain economic times, and this is a general election year – all factors to be considered in making your decision whether to take your RMD(s) or not.

Capital Gains

While tax rates on long-term capital gains have not changed for 2020, income thresholds triggering the next higher bracket have increased – single filers are taxed at 0% if their taxable income is $40,000 or less ($53,600 for heads-of-household, $80,000 for joint returns).

The 20% tax rate kicks in at $441,451 for those filing as single, $469,051 for heads-of-household, and $496,601 for those filing joint returns.

Taxpayers falling between the 0% and 20% income levels incur a 15% tax liability on long-term capital gains.

The 3.8% net investment income surcharge remains at 2019 levels, applicable to those filing singly whose modified adjusted gross income (AGI) is over $200,000, and joint filers with modified AGI over $250,000.

Charitable Deductions

Under the CARES Act, more charitable donations can be deducted this year than in 2019. The former limit on cash donations to charity by those who itemize their deductions (donor-advised funds and private non-operating foundations excluded) of 60% of AGI has been suspended for 2020.

In addition, those who do not itemize can write off up to $300 in charitable cash contributions via a new-for-2020 “above-the-line” deduction.

Coronavirus Relief

The various Acts pertaining to fiscal relief for individuals, employees, and businesses has created a maze of tax credits, opportunities, and potential liabilities for businesses.

Please consult with us to ensure you are taking every credit and opportunity available in your individual situation, and mitigating any liabilities.

If you would like to discuss how the changes for 2020 potentially affects your own income tax liabilities, please click here to email me directly.

Until next Wednesday –

Peace,

Eric

For those whose Paycheck Protection Program (PPP) Loans were under $50,000, there’s some good news! On Friday, October 9, 2020, the SBA released a new Interim Final Rule and a new PPP Loan Forgiveness Application, Form 3508S, specifically for these loans.

These loans are not receiving automatic forgiveness, but there are some simplifications, and some significant changes to the rules governing forgivable eligible expenses.

In particular, loan recipients of proceeds under $50,000 must still calculate forgivable amounts, but as long as payroll and related expenses account for 60% of the total requested forgiveness amount, the requirement that salaries or wages for employees during the covered period (whether 8 or 24 weeks) remain in parity with the first quarter of 2020 for full forgiveness eligibility has been waived for these loans.

In addition, the loan recipient will not be penalized for reducing the number of full-time equivalent (FTE) employees during the covered period. Again, this assumes that actual payroll and related costs represent 60% of the requested forgiveness amount.

For PPP loans disbursed after June 5, 2020, the default covered period is the 24-week period beginning on the day the loan funds were received. If you received your loan disbursement prior to that date, you can still elect an 8-week covered period. We only recommend using an 8-week period if it is beneficial or neutral in fiscal impact (e.g., if you used up your PPP loan funds during the 8-week period and did not reduce salaries, wages, or headcounts during that period as compared with the first quarter of 2020).

However, if your first payroll date falls after the date the loan proceeds are received, you can elect an alternative payroll covered period beginning the date of your first payroll following receipt of your loan disbursement. This period is electable for purposes of payroll and related costs only. For non-payroll expenses eligible for forgiveness, the 8- or 24-week covered period is not adjustable.

Expenses, payroll and non-payroll, are eligible for forgiveness if they are “paid or incurred” during the covered period. For example, if your first payroll is the same date you received PPP loan proceeds, these costs are eligible because they were paid during the covered period. Similarly, if your 24-week period ends October 31, and you have payroll due November 1, those costs are also eligible for forgiveness, insofar as the salaries and wages were earned, and therefore incurred as expenses by the loan recipient, prior to November 1.

Note that, to be eligible as a PPP-covered expense, lease, rental, or mortgage payments must be incurred under a lease or mortgage entered into prior to February 15, 2020.

While calculations of amounts eligible for forgiveness, payroll- and non-payroll related, should be documented and maintained, as the SBA always reserves the right to demand that you “show your work,” the new Form 3508S does not required you to show this work up front, although your lender will require some supporting documentation illustrating eligible payroll and non-payroll costs.

In addition to the new Interim Final Rule released last Friday, on Tuesday, October 13, 2020, the SBA released revised forgiveness FAQs, in response to questions regarding deadline to apply for PPP loan forgiveness – the application forms themselves (3508, 3508EZ, and 3508S) clearly read, “Expiration Date: 10/21/2020.” The SBA has clarified that:

“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, PPP loan recipients should bear in mind that loan payments themselves are deferred only until 10 months following the conclusion of the covered period.

We can be fairly certain we have not heard the SBA’s last word on PPC guidance – stay tuned!

If you have questions on the PPP, please click here to email us directly – we are here to help.

Until next Wednesday –

Peace,

Eric

I love being busy. In fact, there is nothing much more energizing for me than a day of meeting with clients, and helping them achieve their goals.

But I learned long ago that the next meeting tends to go a lot better if I’m not rushing headlong from the meeting before it. So, for quite some time, I made sure to leave at least 15 minutes, and preferably half an hour, between meetings, and made sure that those who handled my calendar knew to do that, too.

More recently, I’ve allocated specific days and hours to client meetings. Other hours to deal with issues my team needs my help with. And time to shut my office door, focus, and think – on client-specific problems to solve, and the trajectory of our firm.

In my opinion, it’s not a good idea to lock ourselves into a full calendar for months in advance – do that, and we can’t say ‘yes’ when a friend offers us concert tickets. And then we will have a lot of schedule-juggling to do when a long-standing client – or a new one, for that matter – comes to us for help with an urgent matter.

Socrates famously said, “The unexamined life is not worth living.” But it was Naval Ravikant, founder of Epinions, who said, “The overscheduled life is not worth living.”

If our days are spent rushing from one task to another, if our calendars look like tennis tournament brackets, we’re rushing too much, taking on more than we ought to in one day. And our mental and physical lives will be poorer for it, although we may have a little more money in the bank – for now.

Rather than letting our calendars running our lives, maybe we should run them. Calendars are our tools, not our masters. As we schedule ourselves, let’s do so reasonably and with mindfulness. Our focus and our work will be all the better for it.

We should also remember the importance of free time, not just for vacations, but every day. We earn our free time with our hard work. If we look at it like that, free time is part of our compensation package, in the larger sense. We wouldn’t work for free, so why should we work for no free time?

How do you avoid overscheduling yourself? What techniques or strategies have worked best for you?

Please click here to email me directly – I would love to hear your stories – and maybe get a few tips!

Until next Wednesday –

Peace,

Eric

It’s time for a new Paycheck Protection Program update courtesy of the SBA.

On August 24, 2020, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury issued a new interim final rule pertaining to owner-employee compensation and the eligibility of non-payroll expenses.

The new guidelines state that an owner-employee in a C- or S-corporation who has less than a 5% ownership stake will not be subject to the owner-employee compensation rule, which caps the amount of loan forgiveness on owner-employee compensation.

Prior to the change, the owner-employee compensation rule stated that anyone with a stake in a company—no matter how small—that took out a PPP loan was eligible for forgiveness of the lesser of $20,833 or 20.833% of their 2019 compensation or $15,385 or 15.385% if the borrower elected to use an eight-week covered period.

The updated guidance means that if you have an equity stake under 5% in your company, you are now eligible for more salary forgiveness—up to $46,154 per individual over 24 weeks. In addition, covered benefits like health care expenses, retirement contributions and state taxes imposed on employee payroll and paid by the employer would also be eligible for forgiveness.

With respect to non-payroll costs, and their eligibility for coverage under the PPP, the SBA and Treasury have made two decisions, promulgated in this new interim final rule (does anyone beside myself think “interim final rule” sounds funny at this point?).

Decision #1:

Non-payroll costs may not include any expenses attributable to the business of a tenant or sub-tenant of the borrower. The new guidance illustrates this with four different examples:

  1. If a borrower had rented space for $10,000 per month, and sub-leases some of the space for $2,500 per month, only $7,500 per month is eligible for forgiveness.
  2. Similarly, if a borrower has purchased a building, which now carries a mortgage, and rents some of the space to a tenant, the mortgage interest is only deductible to the extent of the percentage of fair market value (FMV) attributable to the non-rented-out space. E.g., if the leased-out space represents 35% of the FMV, then only 65% of mortgage interest is eligible for forgiveness.
  3. If two or more businesses have conjoined to be tenants in common in a shared space, a borrower must pro-rate rent and utilities in the same manner as was done on the 2019 tax filings, or as is expected to be done on 2020 tax filings, if this is the business’ first year of operation, to determine eligible forgiveness amounts.
  4. For those working out of a home office: in determining non-payroll cost eligibility, as above, only the portion of covered expenses deducted on 2019 tax filings, or expected to be deducted in 2020, if this is the first year the business is in operation, is eligible for forgiveness.

Note that, to be eligible as a PPP-covered expense, lease, rental, or mortgage payments must be incurred under a lease or mortgage entered into prior to February 15, 2020.

Decision #2

This decision pertains to “relative-party” lease or rental payments and mortgage interest payments:

  1. The new interim final rule provides that lease or rental payments to a related party are eligible for PPP loan forgiveness, as long as 1) the amount of loan forgiveness does not exceed the portion of the mortgage interest paid by the related party for that portion of the mortgaged space which is rented by the business, and 2) both the mortgage and the lease in question were entered into prior to February 15, 2020.
  2. Mortgage interest payments made directly to a related-party are not eligible for forgiveness. The SBA and Treasury clarify in this decision that the purpose of PPP loans is to help businesses meet non-payroll obligations to third parties, not payments made to a business owner because of the business’s structure.

Legislation

Two proposals which would impact PPP loan forgiveness, and the application process, are being considered in Congress:

  1. Most PPP loans issued were in amounts less than $150,000. Congress is considering blanket forgiveness for loans under that threshold, which threshold could itself change as the process moves forward.
  2. Per Notice 2020-32, the IRS has determined that, while the forgiven proceeds of a PPP loan will not count as taxable income, the forgiven eligible expenses are not tax deductible. A number of Congress members are unhappy with that determination, and are considering legislation to explicitly render such expenses fully deductible.

In our considered opinion, since the deadline to apply for PPP loan forgiveness extends 10 months from the end of the 24-week covered period, which for many borrowers has not yet concluded, it makes little sense to rush to apply for that forgiveness according to guidance which may well prove obsolete before year-end.

As has been said, the only certain thing about the PPP, since its enactment, has been the uncertainty surrounding its provisions.

Stay tuned – more PPP updates will be coming – that’s one thing we can be certain of.

If you have questions on the PPP, please click here to email us directly – we are here to help.

Until next Wednesday –

Peace,

Eric

2020

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