New Issues Related to COVID-19

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New PPP Loan Guidance Addresses Partnerships
and Independent Contractors

 

Last week the Small Business Administration issued additional Paycheck Protection Plan (PPP) loan guidance with details on how the loan program will apply to persons who earn self-employment income. This includes independent contractors and sole proprietorships who file Schedule C, and partnerships, including LLCs treated as partnerships for tax purposes.

 

Partnerships

 

With regard to partnerships, the guidance clarifies that although an active partner/LLC member may receive self-employment income from his or her partnership (as either an allocated share of income or as a guaranteed payment), the partner may not apply for a PPP loan. The PPP loan may only be requested at the partnership level.

 

Self-employment income of an active partner during the first 8 weeks following the disbursement of the partnership's loan, up $15,385 per partner (i.e., $100,000 annualized over 8 weeks), is treated as payroll costs of the partnership in its loan application. As payroll costs, this amount may be included in the amount of the loan requested. It is also eligible for loan forgiveness and is not subject to the 25% limitation applied to non-payroll costs.

 

Schedule C Filers

 

The new guidance clarifies that independent contractors who file Schedule C must include a 2019 Schedule C with the loan application. Contractors who have not yet filed a 2019 return must still prepare and include Schedule C. The maximum loan available to a contractor without employees is the 2019 Schedule C net profit, limited to $100,000, times 20.833% (2.5 months over 12 months), or a maximum of $20,833 (for $100,000 or more net income).

 

Schedule C filers with employees perform the same calculation, then add eight weeks of employee payroll costs based on 2019 amounts as reported on Forms 941. These costs are limited to $15,385 of W-2 income for any one employee, plus health insurance premiums, retirement contributions, and certain state payroll taxes paid by the employer during the eight weeks.

 

July 15 Extension Applies to Like-Kind Exchanges, Opportunity Zones

 

A recent Alert discussed guidance the IRS issued extending many tax-related deadlines to July 15, 2020 due to the COVID-19 pandemic. The IRS guidance does not specifically address deadlines related to pending deals under IRC section 1031 (like-kind exchanges of real estate) or opportunity zones enacted under 2017's Tax Cuts and Jobs Acts (TCJA). However, these actions fall under the guidance's general rule that tax-related time sensitive actions falling between April 1, 2020 and July 15, 2020 are automatically extended to July 15, 2020.

 

Like-Kind Exchanges

 

If the end of the 45-day identification period and/or 180-day exchange period for completing a like-kind exchange period under IRC section 1031 falls between April 1, 2020 and July 15, 2020, that period is automatically extended to July 15, 2020. Taxpayers may choose to opt out of this extension. This relief applies to both deferred exchanges and safe-harbor reverse exchanges under section 1031.

 

Identification periods or exchange periods that ended prior to April 1 are not extended by the IRS guidance, nor are transactions currently in progress with an identification period or exchange period that ends after July 15, 2020. Commentators have raised other potential issues related to how the special extension will apply to like-kind exchanges, including whether a special 120-day extension the IRS has allowed in the past regarding locations in designated disaster areas may be applicable. These issues have not yet been addressed. We will update you of any additional developments.

 

Opportunity Zones

 

TCJA established the opportunity zone program to stimulate economic development in distressed low-income communities by offering significant tax benefits to investors that make long-term investments in these areas. Among other benefits, an unrelated capital gain realized by a taxpayer may be deferred until 2026 for tax purposes if it is invested in a qualified opportunity zone within 180 days of the trade.

 

Taxpayers now have until July 15, 2020 to elect to invest capital gains into a qualified opportunity fund if the original 180-day period expired on or after April 1, 2020.

 

Stimulus Checks for Non-Filers

 

The CARES Act enacted last month provides economic impact payments of up to $1,200 to individuals that have a valid Social Security number, cannot be claimed as a dependent by another, and have income under certain thresholds. Individuals with qualifying children under age 18 will receive an additional $500 payment per child. Taxpayers who filed a 2018 or 2019 federal income tax return will automatically receive these payments and need not to take any action.

 

Individuals not required to file an income tax return who receive Social Security or Railroad Retirement benefits will automatically receive their $1,200 payment. No action is or application required to receive this $1,200. However an application must be filed to apply for the additional $500 payment if they have qualifying children under age 17.

 

Other individuals not required to file an income tax return, because their income was below the filing threshold or for other reasons, are also entitled to a $1,200 payment (plus $500 for any qualifying child under age 17). These individuals will not receive the payment automatically and must file an application to receive their economic impact payment.

 

Here is the link if you want to check on the status of your payment.  

 

During this crisis, your LMC professional is available if you have questions related to the latest updates on this topic.  All our prior Alerts are available on the Updates page of our website.

 

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