Our Office will be closed Nov.21 – Nov.25 in observance of Thanksgiving. We will return to regular business hours on Monday, Nov. 28.
Our Office will be closed Nov.21 – Nov.25 in observance of Thanksgiving. We will return to regular business hours on Monday, Nov. 28.
The forgivable loan program known as the Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide financial resources to small and mid-size businesses to enable them to maintain payroll and cover certain expenses during the coronavirus pandemic. PPP loans may be forgiven upon application. Although loan forgiveness typically creates a taxable event, under the CARES Act, PPP loan proceeds are specifically excluded from taxable income. However, PPP loan recipients should be aware that forgiveness of the loan, in whole or in part, may cause 2020 qualified research expenses (QREs) to become ineligible for the research and development (R&D) tax credit. Under Internal Revenue Code Section 41(d)(1)(A), a taxpayer cannot claim an R&D tax credit on expenditures (employee wages tend to be a large component of the qualified research expenses) that are not deductible, and based on guidance issued by the IRS in March 2020 (Notice 2020-32), expenses paid using forgiven PPP loan funds will be nondeductible for tax purposes even if they would otherwise be deductible. Consequently, any wages paid to employees using forgiven PPP loan proceeds are not eligible as QREs, thus, decreasing federal and state R&D credits.
Understanding PPP Loan Forgiveness
It is important to understand how forgivable PPP loan funds must be allocated among a taxpayer’s costs so that eligible R&D expenses incurred might still qualify for the R&D tax credit. Current guidance provides that PPP forgivable loan funds must be applied to the following expenses:
PPP loan forgiveness application forms include a requirement that the borrower maintain all records relating to the borrower’s PPP loan (including documentation necessary to support the borrower’s loan forgiveness application, such as the names of individual employees and wages). However, there is no requirement on how the PPP loan funds have to be allocated to individual employees, which allows the borrower to make its own determination as to which employees the PPP forgivable loan funds should be applied.
Mitigating the Effect of PPP Loan Forgiveness on the R&D Costs
By applying the PPP forgivable loan funds to nonpayroll costs (up to 40% of the PPP loan funds) and employees that do not perform qualified research activities, borrowers could preserve the wages paid to employees involved in qualified research activities as deductible, thus mitigating the impact of the forgiven PPP loan funds on their R&D credit.
Companies claiming R&D tax credits and that have filed or have yet to file for PPP loan forgiveness should consider analyzing the eligible costs and allocating the forgivable funds in the following order (up to the certain limitations):
The following example shows how PPP forgiven loan funds used for QREs can reduce the amount of R&D tax credit available to borrowers.
|Alternative Simplified Credit||2020 Credit||Reduction for PPP Loan Forgiveness||Adjusted 2020 Credit|
|Rental or Lease Cost of Computers|
|Qualified Contract Research||$225,000||$225,000|
|Base Amount (Sum of Prior 3 Years QREs Divided by 6)||$1,870,333||$1,870,333|
|Incremental Qualified Expenses||$2,354,167||($1,050,000)||$1,304,167|
|Total Gross Research Credit||$329,583||($147,000)||$182,583|
PPP loan recipients should review their PPP eligible costs to determine whether they can reduce the impact on the R&D tax credit by allocating some or all of their forgivable PPP loan funds to expenses other than research-related expenses. Key items to review include whether and to what extent the loan recipient:
Future IRS guidance may create additional requirements relating to the allocation of the PPP forgivable loan funds to costs, so it is important for taxpayers with PPP loans that want to qualify for the R&D tax credit to monitor developments carefully.
 Form 3508 Schedule A Worksheet requires borrowers to list the names of individual employees to whom the requested PPP forgivable loan funds were applied. Form 3508 Schedule A Worksheet must be maintained by the borrower but is not required to be submitted with the PPP loan forgiveness application to the lender.
 For each individual employee, the total amount of cash compensation eligible for PPP loan forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period.
The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) (PPP Flexibility Act), enacted on June 5, 2020, makes welcome changes to the forgiveness rules for Paycheck Protection Program (PPP) loans made to small businesses in response to the novel coronavirus global pandemic (COVID-19). The PPP Flexibility Act greatly increases the likelihood that a large percentage of a borrower’s PPP loan will be forgiven. PPP loans (and related forgiveness) were created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Public Law 116-136), which was enacted on March 27, 2020. The PPP Flexibility Act also eliminates a provision that made recipients of PPP loan forgiveness ineligible to defer certain payroll tax deposits.
The PPP Flexibility Act does not address whether employers can deduct the expenses underlying their PPP loan forgiveness. In Notice 2020-32, the IRS announced that employers could not deduct such expenses, but congressional leaders vowed to reverse the IRS’s position in future legislation. On June 3, Chairman of the House Ways and Means Committee, Richard Neal (D-MA), said that in the next COVID-19 stimulus bill he intends to clarify that the loan forgiveness expenses are tax deductible. But negotiations on that bill are still in the early stages.
PPP Loan Forgiveness Expanded
The PPP Flexibility Act makes the following changes:
1. Extends the “covered period” for PPP loan forgiveness from eight weeks after loan origination to the earlier of (i) 24 weeks after loan origination or (ii) December 31, 2020. Borrowers who received their loans before this change can elect to use their original or alternative payroll eight-week covered period.
In connection with passing the PPP Flexibility Act, a Statement for the Record was issued by several Democrats and Republicans in the House and Senate, clarifying that the Small Business Administration (SBA) will not accept applications for PPP loans after June 30, 2020. The statement says: “Our intent and understanding of the law is that, consistent with the CARES Act as amended by H.R. 7010, when the authorization of funds to guarantee new PPP loans expires on June 30, 2020, the SBA and participating lenders will stop accepting and approving applications for PPP loans, regardless of whether the commitment level enacted by the Paycheck Protection Program and Health Care Enhancement Act has been reached.” Given this affirmation, very few loans will have fewer than 24 weeks as a covered period.
2. Replaces the June 30, 2020, date for the rehire safe harbor with December 31, 2020.
Additional guidance is needed to determine if a borrower who elects their original or alternative payroll eight-week covered period would also retain the June 30, 2020, date for the rehire safe harbor.
3. Expands the rehire exception based on the non-availability of former employees and applies that exception when the need for workers is reduced to comply with COVID-19 standards. Specifically, PPP loan forgiveness would not be reduced due to a lower number of full-time equivalent (FTE) employees if:
4. Allows up to 40% of the loan proceeds to be used on mortgage interest, rent or utilities (previously such expenses were capped at 25% of the loan proceeds), while at least 60% of the PPP funds must be used for payroll costs (down from the 75% that was noted in SBA guidance). This applies even if the borrower elects to use the eight-week covered or alternative payroll covered period. If the borrower does not use at least 60% of the loan on payroll costs, then it appears that no forgiveness would be available (i.e., the 60% would be a “cliff,” even though it was previously unclear whether the 75% limit would allow for partial loan forgiveness for payroll costs of less than 75% of loan proceeds).
Some members of Congress are considering a “technical correction” that would provide that the new 60% limit is not a “cliff” (thereby allowing partial loan forgiveness if less than 60% of PPP loan proceeds are used for payroll costs).
5. Provides a five-year term for all new PPP loans disbursed after June 5, 2020. Loans disbursed before that date would retain their original two-year term unless the lender and borrower renegotiate the loan into a five-year term.
6. Changes the six-month deferral period for loan repayments and interest accrual so that payments on any unforgiven amounts will begin on either (i) the date on which loan forgiveness is determined or (ii) 10 months after the end of the borrower’s covered period if forgiveness is not requested.
Although the PPP Flexibility Act doesn’t clearly say as much, it appears that the $100,000 maximum on cash compensation paid to any one employee that is eligible for PPP loan forgiveness would continue to apply, such that the $15,385 cap (for eight weeks) would now be $46,153 (for 24 weeks).
The PPP Flexibility Act does not address whether the loan forgiveness cap for “owner-employees” (i.e., 8/52 of their 2019 compensation) would change to 24/52 of their 2019 compensation.
Notwithstanding some commentary that has been released, the statute does not appear to allow borrowers to request PPP loan forgiveness as soon as they spend all of their PPP funds in the ninth to 24th weeks following receipt of their PPP funds. That is because the CARES Act has been amended to substitute “24 weeks” for “eight weeks,” so absent additional guidance, it seems that borrowers must wait until the end of the 24-week period to request PPP loan forgiveness, unless they elect to use the original eight-week period (regular or alternative payroll covered period).
These changes garnered nearly unanimous, bipartisan support in both the House and Senate because the CARES Act assumed that most businesses would be up and running in a matter of weeks. But more time is needed to incur forgivable costs, because many businesses are at or near the end of their initial eight-week loan forgiveness period, yet they remain partially or fully suspended by governmental orders.
Payroll Tax Deferral Expanded
In addition to PPP loan changes, the bill allows all employers, even those with forgiven PPP loans, to defer the payment of 2020 employer’s Social Security taxes, with 50% of the deferred amount being payable by December 31, 2021, and the balance due by December 31, 2022. Previously, the CARES Act prohibited such payroll tax deferral after a borrower’s PPP loan was forgiven.
In a Notice 2020-66 the IRS has extended more tax deadlines to cover individuals, estates, corporations and others. This extension includes a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020, including estimated tax payments due June 15 and the deadline to claim refunds from 2016.
This notice is particularly relevant to nonprofit organizations.
The Notice also suspends associated interest, additions to tax, and penalties for late filing or late payment until July 15, 2020.
President Trump is providing support to healthcare providers fighting the COVID-19 pandemic. On March 27, 2020, the President signed the bipartisan CARES Act that provides $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the coronavirus response. This funding will be used to support healthcare-related expenses or lost revenue attributable to COVID-19 and to ensure uninsured Americans can get testing and treatment for COVID-19.
Recognizing the importance of delivering funds in a fast and transparent manner, $30 billion is being distributed immediately – with payments arriving via direct deposit beginning April 10, 2020 – to eligible providers throughout the American healthcare system. These are payments, not loans, to healthcare providers, and will not need to be repaid.
Yes. The CMS Accelerated and Advance Payment Program has delivered billions of dollars to healthcare providers to help ensure providers and suppliers have the resources needed to combat the pandemic. The CMS accelerated and advance payments are a loan that providers must pay back. Read more information from CMS.
All relief payments are being made to providers and according to their tax identification number (TIN). For example:
The Administration is working rapidly on targeted distributions that will focus on providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans.
The Trump Administration is committed to ensuring that Americans are protected against financial obstacles that might prevent them from getting the testing and treatment they need from COVID-19.
SOURCE: https://www.hhs.gov/provider-relief/index.html; Content created by Assistant Secretary for Public Affairs (ASPA); Content last reviewed on April 13, 2020
The novel coronavirus (COVID-19) has disrupted business continuity across all industries, and retail is already feeling the impact. While retailers’ primary concern is the safety and wellbeing of their professionals and customers, this crisis requires specialized urgency and sensitivity given the widespread impact and uncertainty of the pandemic’s duration.
Unlike other industries, retail is an anomaly in that there is a stark difference between how companies in different sectors are absorbing the COVID-19 shock. For grocers and general merchandisers, supply and demand curves have skewed way off the charts and retailers are struggling to keep up with historic demands for soap, disinfectants, paper towels and shelf-stable food. For example, during the week of February 23-29, hand sanitizer revenue sales increased 420% and both Clorox/Lysol wipes and canned food revenue sales experienced a 183% increase from the week prior, according to Bloomreach.
On the contrary, specialty and luxury retailers are experiencing a dip in demand due the fact that their goods are considered “non-essential”. As a result of social distancing mandates and shifting consumer priorities, COVID-19 is brick-and-mortars’ latest impediment, validated by a recent GlobalData study which states that 12.1% of people admitted to visiting malls less in response to the outbreak. In addition, some retailers including Macy’s, Nordstrom, H&M and Ikea have shut their doors across the U.S. until further notice in an attempt to help contain the outbreak. These developments only compound the trend of declining foot traffic due to e-commerce growth that retailers have been grappling with in recent years.
While it may seem natural for transactions to be diverted to online, e-tailers are not necessarily experiencing smooth sailing either. For example, Amazon is seeing huge surges in demand, and yet, the same GlobalData study shows that Amazon is the least cited destination for stocking up (6.0%) compared with Walmart (21.9%), Costco (8.5%) and pharmaceutical convenience stores such as CVS (7.1%). This could perhaps be explained by e-commerce price gouging, and sheds light on the fact that even during dire circumstances, consumers will still look for that perfect balance between high convenience and low cost. In fact, just over one-third (34%) of consumers list price as their top priority for essential retail purchases today, compared with 20% who rate convenience first, according to a recent BDO survey conducted online by The Harris Poll among over 1,000 U.S. adults ages 18+.
Pre-COVID-19, almost three-quarters (73%) of retail CFOs said their business was thriving and just 22% said a potential economic downturn was their business’s greatest threat, according to BDO’s 2020 Retail Rationalized Survey. Now with the reality of COVID-19 and subsequent stock market decline, continued momentum is threatened, and retailers should prepare to pivot under new constraints. With a market that recently entered into bear territory and the economy’s cyclical nature, the looming recession could be upon us sooner than once anticipated.
Here’s what retailers can do in the interim:
Looking ahead, monitoring announcements from the CDC and WHO can help guide the trajectory in which remedial steps should be taken. The retail industry has time and again experienced hardship and proved its resilience above the turbulence.
To learn more about how your organization can navigate immediate disruptions due to the novel coronavirus and prepare for the future, don’t hesitate to reach out.
Survey Methodology for the Harris Poll: This survey was conducted online within the United States by The Harris Poll on behalf of BDO USA from March 25-26, 2020 among 1,045 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact your trusted advisor.