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July 1, 2020

Client Advisor July 2020

Taxation Aspects of Stimulus Programs

{Editor's note: Debbie Dickson was featured in the recent Orange County Business Journal "Accounting Firms Special Report," excerpted from the article below.}

Three months ago, at the inception of the stay-at-home orders, we heard from clients who ceased operations overnight: international rock concert/sporting events producers; owners of a downtown Los Angeles parking tower management company; many lawyers due to court closures; and well-known touring rock bands. To help each of these businesses and many others to survive, we worked with them to secure PPP loans. The allure at the inception of these loans was eligibility for loan forgiveness if the proceeds were used on qualified business expenses, and the loan forgiveness amount was marketed as non-taxable.

A month after the PPP program was implemented, the IRS issued Notice 2020-32 which prohibited a tax deduction for expenses incurred and ultimately forgiven. The IRS ruling effectively made the forgivable part of the loan taxable which did not appear to be Congressional intent in the CARES Act. The American Institute of Certified Public Accountants immediately challenged the surprise ruling. Congress has not yet passed legislation to override this decision.

Subsequent to this IRS news, some positive changes were legislated. As of this date, to apply for loan forgiveness, 60 percent (down from 75 percent) of PPP proceeds must be used to cover payroll or specific benefits, including 401-K employer contributions and health insurance. The remainder of the business costs must include rent, mortgage interest, or utilities. These costs may be incurred any time within 24 weeks of the loan origination date. This is exciting news for many clients who are hoping to bring back their employees and jumpstart operations when the economy stabilizes.

In addition to PPP loans, there are many other ways to qualify for government funds or loans. These include the employee retention credit up to $5,000 per employee for companies that did not receive PPP funds. These are for wages paid between March 27 and December 31, 2020 if there is a significant decline of gross receipts of 50 percent or more due to adherence to government orders. Another example is the deferral of the employer portion of Social Security taxes at 50 percent to December 31, 2021 and 50 percent to December 31, 2022. Net operating loss carrybacks are now available for losses earned in tax years ending 2018, 2019, and 2020.

Regardless of the taxation aspects of these programs, many companies are grateful for government assistance received to carry them through these unprecedented times.

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