Larry's Tax Law

As we reported last week, the Oregon Department of Revenue (“DOR”) scheduled a public hearing on June 23, 2020 to discuss the second set of temporary administrative rules relative to the Oregon Corporate Activity Tax (the “CAT”) that it intends to make permanent.  The show (held telephonically) occurred as scheduled.  Peter Evalds from our firm attended the hearing.  A summary of the key comments and concerns raised by attendees from the business and tax community, as well as our own guidance with respect to the rules, is set forth below.

The Small Business Administration (“SBA”) continues its quest to provide guidance relative to the Paycheck Protection Program (“PPP”) enacted as part of the CARES Act and the Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) enacted by Congress to provide clarification and remove some of the rigidity surrounding the PPP.   

The PPP legislation and much of the guidance PPP borrowers have received to date is fraught with complexity and inconsistency.   The SBA is doing its best, as Paul McCartney and John Lennon expressed in their hit song We Can Work It Out, to help PPP borrowers get through these trying times: 

Try to see it my way
Only time will tell if I am right or I am wrong
While you see it your way
There’s a chance that we might fall apart before too long
We can work it out
We can work it out

In that vein, the SBA recently issued interim final rules (“IFRs”) focused on PPP loan forgiveness.  Additionally, last week the SBA published a revised PPP loan forgiveness application (“Form 3508”), and a new short-form forgiveness application (“Form 3508EZ”).

Up until this past Wednesday, the Paycheck Protection Program (“PPP”) loan forgiveness application issued by the Small Business Administration (“SBA”) had not been updated since May.  New guidance was issued in the interim (and anyone who has been following this area knows that guidance is constantly evolving).  Most taxpayers have some breathing room before they must file their forgiveness applications; so, it may behoove them to wait to file their applications until they digest the most recent guidance.

In a new temporary rule, the Oregon Department of Revenue (“DOR”) formalized its prior informal guidance relative to the assessment of penalties for failing to make sufficient estimated payments under Oregon’s Corporate Activity Tax (“CAT”).  The temporary rule provides some relief to CAT taxpayers whose businesses are adversely affected by COVID-19. 

Background

Pursuant to ORS 317A.137(2), a taxpayer must make estimated quarterly CAT payments.  As discussed previously, ORS 317A.161(2) imposes a penalty on taxpayers who fail to make estimated payments equal to at least 80 percent of their CAT liability for any quarter during 2020. 

The DOR announced in April that it would not assess penalties against a taxpayer for failure to make estimated CAT payments during 2020 if the taxpayer did not have the financial ability to make the estimated payments.  The DOR further stated that it would honor a taxpayer’s good faith compliance efforts if the taxpayer documents those efforts. 

Unfortunately, the DOR pronouncement about penalty abatement was contained in an email blast.  Consequently, many taxpayers and tax practitioners were concerned about whether such an informal announcement could be relied upon, what actually constitutes “good faith compliance efforts” and how to document the efforts.

In News Release 2020-107, issued Thursday, May 28, 2020, the IRS announced that taxpayers will soon be able to electronically file Form 1040-X, Amended U.S. Individual Income Tax Return.  This is welcome news for taxpayers and tax practitioners!

Background

According to the IRS, more than 90 percent of individual taxpayers electronically file their U.S. Federal Income Tax Returns (Form 1040) each year.  Likewise, approximately three million amended U.S. Federal Income Tax Returns (Form 1040-X) are filed each year.

Currently, a large number of tax forms may be filed electronically, including U.S. Federal Income Tax Forms 1040, 1065, 1120 and 1120S.  Additionally, taxpayers may electronically amend U.S. Federal Income Tax Forms 1065, 1120 and 1120S.  They may not, however, amend U.S. Federal Income Tax Form 1040 (Form 1040-X) electronically.  

Despite repeated pleas by tax practitioners for the ability to file Form 1040-X electronically, the IRS has not been able to accommodate practitioners.  That is about to change! 

On Friday, May 22, 2020, the Small Business Administration (“SBA”), in conjunction and consultation with the U.S. Department of the Treasury (“Treasury”), published an interim final rule (“IFR”) containing new guidance on the treatment of bonuses, prepayments, and the loan forgiveness application and process for Paycheck Protection Program (“PPP”) loans.

Loan Forgiveness Process 

Loan forgiveness under the PPP is not automatic.  Rather, borrowers must apply for forgiveness using the SBA’s Loan Forgiveness Application (SBA Form 3508) or their lender’s equivalent form, if any.  The process is somewhat streamlined:

• • The application is submitted to the lender for review and approval.
  • The lender will review the application and make a decision regarding loan forgiveness.
  • The lender has 60 days from receipt of a complete forgiveness application to issue a decision to the SBA.
  • The lender is responsible for notifying the borrower of the amount approved for forgiveness.
  • The lender will then request that the SBA repay the amount forgiven.
  • Within 90 days from the lender’s request for payment, the SBA will pay the lender the amount forgiven, plus any accrued interest. (If applicable, the SBA will deduct the amount of advances under the Economic Injury Disaster Loan program from its payment to the lender.) 

In addition to worrying about keeping their business afloat these days, businesses are focusing on whether their Paycheck Protection Program (“PPP”) loan will be forgiven.  Without loan forgiveness, many of these businesses will not survive.  Consequently, the stakes are high! 

The eligibility requirements for PPP loan forgiveness are complex.  As we discussed previously, in large part, loan forgiveness is based on the borrower using the loan proceeds within the eight-week period immediately following receipt of the loan on specified expenses, including payroll and rent. 

Some landlords have been generous enough to reduce or even abate rent for a period (e.g., three months) to assist the tenant in salvaging its business.  Consequently, these businesses may have little or no rent to pay during the eight-week period.  If a business owner asks the landlord for advice on what to do in this situation, the landlord will likely say: 

Love thy landlord – pay me anyway!

Whether the prepayment of rent (or the payment of rent for a period preceding the eight-week period) applies for purposes of the loan forgiveness computation under the PPP is likely a question being pondered by many businesses and their advisors.

As we recently reported, the Oregon Department of Revenue (“ODOR”) issued written guidance concluding that the receipt of funds pursuant to PPP loans (whether or not forgiven), EIDLP advances and SBA debt relief for certain business loans do not constitute commercial activity under Oregon’s new gross receipts tax, the Corporate Activity Tax (the “CAT”).  Accordingly, taxpayers subject to the CAT do not include these items in their computation of commercial activity. 

Washington state enacted its Business and Occupations Tax (“B&O Tax”) almost 90 years ago. The B&O Tax, like the CAT, is a gross receipts tax.  Unlike the CAT, however, taxpayers subject to the B&O Tax are generally not allowed to deduct any of their costs, including materials and labor, from gross revenues.   

The Washington Department of Revenue (“WDOR”) issued written guidance last week, possibly joining the ranks with the ODOR.  Better late than never!

The WDOR concludes that taxpayers subject to the B&O Tax should not include the receipt of funds pursuant to COVID-19 relief programs for purposes of computing their tax liability under the B&O Tax regime.

New guidance from the Oregon Department of Revenue (the “DOR”) with respect to Oregon’s Corporate Activity Tax (“CAT”) was issued yesterday.

Specifically, the DOR announced that: 

• • Certain forgivable federal loans and advances, including Paycheck Protection Program (“PPP”) loans, are excluded from the definition of commercial activity under the CAT;
  • The DOR is scheduling a public hearing to discuss the first set of permanent rules promulgated under the CAT; and
  • The DOR released a draft temporary rule regarding the sourcing of commercial activity for financial institutions.

In Notice 2020-32, issued yesterday, the IRS emphatically pronounced that taxpayers receiving Paycheck Protection Program (“PPP”) loans do not get to have their cake and eat it too!

As we discussed in a recent blog post, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the PPP under which the Small Business Administration is authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments.  On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.

The CARES Act expressly excludes from gross income any amount forgiven under the PPP.  The question left unanswered by the CARES Act is whether the amounts forgiven that were spent by borrowers on otherwise allowable business expenses (i.e., payroll costs, rent, utilities, transportation and interest) are deductible under Code Section 162.

Notice 2020-32 quickly points out to taxpayers and tax advisers – not so fast – there are no free lunches.  In essence, if the loan is forgiven and, as a result of the CARES Act, a taxpayer has no cancellation of debt income as he/she/it would otherwise have under Code Section 61(a)(11), the taxpayer certainly does not get to deduct the business expenses for which it used the forgiven loan proceeds.