This summary includes:
- Small Business Administration (SBA) Paycheck Protection Program (PPP) Updates and Strategies
- Tax Planning Observations:
- Overcoming the Federal $10,000 state and local tax deduction cap through use of state entity-level income tax elections for Pass Through Entities (PTEs) such as Limited Liability Companies (LLCs); Limited Partnerships (LPs); and Sub-Chapter S Corporations
- Long-Term Capital Gain (LTCG) tax rate timing
- December Federal Applicable Rates (FAR)
- PA Tax Deduction for 529 Plan reminder
- Donor Advised Funds (DAFs) reminder
SBA PPP Updates and Strategies:
The U.S. Treasury/IRS issued Revenue Rule 2020-27 on November 18 which states that the Revenue Procedure 2020-51 holds that a taxpayer may not deduct the expenses in 2020 if the taxpayer “reasonably expects” to receive forgiveness of the PPP Loan. This puts a higher burden on the tax strategy of filing 2020 tax returns and claiming a deduction for those expenses, and then filing a PPP Loan Forgiveness Application in 2021 after that return is filed for the gross income exclusion.
Several practitioners are adamant that this new Revenue Rule is contrary to the tax law, and in conflict with the intent of Congress. The American Institute of Certified Public Accountants (AICPA), 50 state CPA societies, and hundreds of organizations signed a December 3, 2020 letter addressed to Speaker Pelosi, Majority Leader McConnell, Minority Leader McCarthy, and Senate Democratic Leader Schumer highlighting this issue. They point out that this Rule can effectively raise a surprise tax increase of up to 37% on recipients, which was not suggested in the March 2020 CARES Act. In fact, the loan forgiveness was specifically legislated to be excluded from gross income, and at a time when entrepreneurs were being asked to retain employees even if they did not have enough work to keep those employees fully employed.
There have been numerous unsuccessful attempts to extend the language of the CARES Act which would allow the full deductibility of expenses claimed for PPP Loan Forgiveness.
Many, but not all, banks are now processing PPP Loan Forgiveness Requests.
There have also been many unsuccessful attempts to raise the simplified “short-form” threshold to $150,000, which remains at $50,000 or less.
When completing your Loan Forgiveness Applications, remember that most of your payroll providers are supplying the required supporting worksheets for these SBA PPP Loan Forgiveness Schedules.
Keep in mind the optional FTE calculation method if you were able to take advantage of the planning technique we first outlined in our May 5 update https://blbb.com/blog/paycheck-protection-program-loan-forgiveness-application-update/
Many states are following the federal tax treatment of the PPP Loan Forgiveness, and states which impose a tax on the PPP Loan Forgiveness generally allow expenses to be deducted.
The new administration comes into office on January 20. As discussed in our earlier PPP materials, this program has undergone significant interpretation beyond the March 27 Cares Act statue, and the new administration may see things differently which might result in additional changes. With the combination of November’s Revenue Rule 2020-27, and a new administration, including a new Secretary of the Treasury and new SBA Administrator with differing priorities, now might be a good time to file a PPP Loan Forgiveness Request.
Tax Planning Observations:
- New Jersey, and several other states, have amended their existing tax laws to allow for federal tax law PTEs, such as LLCs, LPs and Sub-Chapter S Corporations, to be taxed for state tax purposes at the entity level instead of passing that income through to the individual owner, and the owner being taxed on that income. This allows for a federal deduction for the passthrough entity not limited by the $10,000 state and local tax deduction cap limitation implemented in December 2017. The tax planning benefit allows itemized deductions to offset taxable income up to a 37% top federal marginal tax rate. As New Jersey’s marginal tax rates are 8.97% over $500,000, and go up to 10.75%, federal tax savings could be meaningful.If Pennsylvania were to implement a similar amendment, a similar technique would be beneficial.
- If both of Georgia’s two senate run-off elections were to go democratic, there would be potential near-term federal tax law consequences. With the federal government debt-funded stimulus and structural government social program funding challenges, it seems unlikely that long-term capital gains rates would decline from today’s rates, and many may increase. Today’s long term capital gains tax rates of 0% for Married Filing Jointly with incomes up to $78,750; 15% for incomes up to $496,600; and 20% for incomes over $496,600, might be viewed as attractive in retrospect.
Taxpayers may wish to consider triggering some of those capital gains before year-end if they expect to be in higher tax brackets for some period and wish to reallocate some of the capital held in those specific investments. The 3.8% Affordable Care Act mandated Net Investment Income applies to incomes over $250,000 for Married Filing Jointly.
- The December IRS Federal Applicable Rate (FAR) rates are: Short Term (<3 years) 0.15%; Mid-term (3 – 9 years) 0.48%; and Long-term (>9 years) 1.31%.
- Consider setting up a 529 Plan, if you have not done so already. Pennsylvania allows for a state tax deduction for contributions to (Federal) IRC Section 529 Qualified Tuition Programs equal to the annual federal gift exclusion (found at IRC Sec. 2503(b)) per beneficiary, per taxpayer. For example, each spouse that contributes $15,000 to a 529 Plan would generate a savings of $555 at Pennsylvania’s 3.07% tax rate. The deduction is limited to $30,000 per beneficiary, therefore the tax savings would be greater with more children. The tax planning technique recommended here would be to contribute to your child’s 529 Plan to get the state tax deduction, and then make the tuition payment out of the 529 Plan. If you pay the college directly, you do not get the benefit of the state tax deduction because it was not a contribution to a 529 Plan. You can contribute to your 529 Plan one day and make a tuition payment out of that Plan the next day. Your BLBB Advisor can further educate you in these rules.
- The use of DAFs is a useful technique to aggregate charitable deductions in higher income years in an administratively efficient manner. Your BLBB Advisor can explain these further.
- Prior BBLB Entrepreneurial Financial Management publications: https://blbb.com/entrepreneurial-management/
- The SBA General SBA PPP general landing page: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
The SBA PPP program requirements are constantly changing, so the Borrower should periodically check to see whether there is new guidance before submitting their PPP Loan Forgiveness Application to their Lender.
BLBB does not provide tax advice nor practice law. Please see your licensed tax or legal professional who can advise you based on your particular facts and circumstances