Do Your Tax Planning for PPP Loan Forgiveness

November 6, 2020 by Leave a comment

Many of ASA’s members obtained PPP Loans, which had been authorized under the CARES Act. One important feature of the loans is the ability to seek loan forgiveness.

Last month the Small Business Administration posted new guidance on PPP loan forgiveness. The new guidance is still incomplete, and leaves a lot of questions unanswered; but it is meant to allow banks to start the process of accepting loan forgiveness applications.

Many banks are still not yet accepting loan forgiveness applications. The Small Business Administration just posted an updated application package for PPP loan forgiveness on Saturday, October 31. So we should expect movement in this area, very soon.

But the question for the ASA Community is. “should I file for loan forgiveness when my bank says it is ready, or should I wait until I am ready?” Filing for loan forgiveness may have tax consequences, and the precise nature of those consequences is still unclear because IRS guidance has suggested a complicated tax treatment for loan forgiveness (in their defense, the complicated tax treatment is based on pre-existing complicated tax laws).

With this in mind, we recommend that you take a strategic approach to the process of PPP loan forgiveness.

STEP ONE: Identify your Covered Period

For PPP loan forgiveness purposes, the Covered Period is a period that starts on the day you received the PPP loan. For example, if you received your PPP Loan on June 25, 2020, then that is the first day of the Covered Period.

The Covered Period lasts for either 8 weeks or 24 weeks. This is because the CARES Act set the Covered Period as an eight week period, but then Congress amended the law so that the Covered Period became a 24-week period. Those who got PPP loans before the change were allowed to choose either option:

  • If you got your PPP loan on or before June 4, 2020, then you get to choose whether your Covered Period is 8 weeks or 24 weeks (whichever one is more optimal for you).
  • If you got your PPP loan on or after June 5, 2020, then your Covered Period is 24 weeks.

For example, if your PPP loan was distributed on June 25, 2020, then you would be subject to a 24-week Covered Period which would end on December 10, 2020.

STEP TWO: Identify the date that is ten months after the last day of the Covered Period

The date that is ten months after the last day of the Covered Period is your deadline for filing the loan forgiveness application. Note that this date is likely to be in 2021 for most recipients. A 2021 deadline typically means that you can file for loan forgiveness in 2020, or you can file in 2021.

If we continue to use the same example period, above, and your Covered Period starts on June 25, 2020 and ends on December 10, 2020, then you will need to submit your loan forgiveness application within ten months, by October 10, 2021.

STEP THREE: Start assembling the loan-forgiveness documentation now.

On August 4th, we advised the community to start thinking about assembling their loan-forgiveness documentation. That blog post links to a PPP loan forgiveness video that ASA produced to help guide members as to the documentation that they should be assembling to support the PPP loan forgiveness application.

Even if your bank is not yet accepting loan forgiveness applications, by assembling the appropriate documentation you can give yourself more flexibility to file the application when you want to do so. You will be able to make a decision about filing optimal dates and then immediately be able to follow-through on the application.

STEP FOUR: Watch for more details!

The law and guidance in this area continues to change. As previously mentioned, there is a conflict between Congress’ apparent tax-free intent and the IRS’ guidance on the matter (which makes the consequence of loan forgiveness to be substantially the same as if the loan forgiveness was treated as income).

New guidance continues to be issued by the SBA and Treasury. So it makes sense to contonue to watch that new guidance (and watch this blog) to identify how the changes in policy might affect your decisions

STEP FIVE: Make an intelligent decision about when to file your loan forgiveness application

An important part of making the intelligent decision is to consult with appropriate tax lawyers and accountants about the tax-effect your decision might have.

Unless the law is changed, the loan forgiveness will not be taxed as income, but the wages paid by the loan will not be allowed to be deducted as ordinary-and-necessary business expenses. For most businesses, this should yield a result that is equivalent to treating the loan forgiveness as income, but also treating the permitted expenses that were paid out of that loan as deductible expenses (the way that PPP loan forgiveness works is more complicated from a tax accounting perspective).

Normally (for accrual taxpayers) the loan forgiveness would not count as income until you file for forgiveness, and the forgiveness application is accepted. Similarly, the deduction for the wages paid from the loan would not be accrued as a deduction until three elements are met:

  • all the events have occurred that establish the fact of the liability,
  • the amount of the liability can be determined with reasonable accuracy, and
  • economic performance has occurred with respect to the liability

This is called the “all-events test.” If it is uncertain whether the wage payment might be deductible, then it is possible that the all-events test could prohibit someone from accruing a deduction for the payment until it was clear that the deduction could be accrued (which might have the effect of postponing accrual of the deduction for 2020 wages paid from the PPP loan until 2021 if the PPP loan forgiveness is not established until 2021. This is something that you should review with your tax accountant to see whether it might apply to your own tax situation.

As you can see, tax treatment of the amounts subject to the PPP is a complicated situation – while we await further IRS guidance about this, it is important to chose whether loan-forgiveness in 2020 or 2021 is preferable The availability of IRS guidance could be a factor that impacts this decision.

STEP SIX: File your loan forgiveness application when it makes the most sense to do so, for your business

Once you’ve consulted with your tax accountant on the optimal way to approach loan forgiveness, and once you’ve reviewed all of the latest guidance from the US government, then you will select a date range that makes sense in which to file your application. Don’t forget to file within ten months after the end of your Covered Period!

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US Updates the List of Anti-Boycott Countries – Are You Doing Business There?

February 14, 2013 by 1 Comment

Under the U.S. Anti-Boycott rules, U.S. persons are probited from complying with certain aspects of unsanctioned foreign boycotts.  The anti-boycott rules include elements in both the Export Administration Regulations (EARs) and the Internal Revenue Service (IRS) regulations.

EAR Rules

The antiboycott laws were adopted to forbid U.S. companies from participating in foreign boycotts that the United States does not sanction. They preventing U.S. businesses from being used to implement foreign policies of other nations which are contrary to U.S. foreign policy.  Currently, the most prevalent boycotts that are contrary to foreign policy are the boycotts of Israel.  Under the EARs, prohibited conduct includes:

  • Agreements to refuse or actual refusal to do business with or in Israel.
  • Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality.
  • Agreements to furnish or actual furnishing of information about business relationships with or in Israel or with blacklisted companies.
  • Agreements to furnish or actual furnishing of information about the race, religion, sex, or national origin of another person.

The EAR requires U.S. persons to file quarterly reports to disclose any requests to advance an unsanctioned foreign boycott.  If you have been asked to participate in, or take an action in support of, an unsanctioned foreign boycott then you should file a quarterly report on BIS form 621-P for a single transactions or BIS form 6051P for multiple transactions experienced in the same calendar quarter.  The forms are available on-line in a fillable pdf format, or you can also obtain paper copies of the reporting forms by calling the Office of Antiboycott Compliance in Washington, DC at (202) 482-2448.

Tax Reporting Rules

A lesser known aspect of the U.S. antiboycott rules is that any person or business that has operations in, or related to, a country that is known for violating the U.S. anti-boycott rules must report those operations to the Treasury Department.  Such reports are filed with tax returns on IRS form 5713.  This form is also available online.

How do you know whether you are doing business (“operations in or related to”) in such a country?  First of all, the Department of the Treasury publishes a current list of countries which require or may require participation in, or cooperation with, an international boycott.  The current list is:

  • Iraq
  • Kuwait
  • Lebanon
  • Libya
  • Qatar
  • Saudi Arabia
  • Syria
  • United Arab Emirates
  • Yemen

In addition, the anti-boycott provisions also require reporting if you are asked to participate in an unsanctioned boycott, even if the source of the request was from a country other than the above-listed countries.

Second, you must assess whether you have operations in or related to one of these affected countries.  The IRS guidance on the subject explains it like this:

The term “operations” means all forms of business or commercial activities and transactions (or parts of transactions), whether or not productive of income, including, but not limited to: selling; purchasing; leasing; licensing; banking, financing, and similar activities; extracting; processing; manufacturing; producing; constructing; transporting; performing activities related to the activities above (for example, contract negotiating, advertising, site selecting, etc.); and performing services, whether or not related to the activities above.

Operations in a boycotting country. You are considered to have operations “in a boycotting country” if you have an operation that is carried out, in whole or in part, in a boycotting country, either for or with the government, a company, or a national of a boycotting country.Operations with the government, a company, or a national of a boycotting country. You are considered to have operations “with the government, a company, or a national of a boycotting country” if you have an operation that is carried on outside a boycotting country either for or with the government, a company, or a national of a boycotting country.

Operations related to a boycotting country. You are considered to have operations “related to a boycotting country” if you have an operation that is carried on outside a boycotting country for the government, a company, or a national of a nonboycotting country if you know or have reason to know that specific goods or services produced by the operation are intended for use in a boycotting country, or for use by or for the benefit of the government, a company, or a national of a boycotting country, or for use in forwarding or transporting to a boycotting country.

If you cooperate with or participate in an international boycott, you may lose a portion of the following:

  • The foreign tax credit (section 908(a)),
  • Deferral of taxation of earnings of a CFC (section 952(a)(3)),
  • Deferral of taxation of IC-DISC income (section 995(b)(1)(F)(ii)),
  • Exemption of foreign trade income of a FSC (section 927(e)(2), as in effect before its repeal), and
  • Exclusion of extraterritorial income from gross income (section 941(a)(5), as in effect before its repeal).

If you suspect that your business relationships may affect your tax liability, then you should consult with a qualified tax advisor for more details.

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IRS Delays Applicability of the Special “Rotable Accounting Rule” until 2014

December 19, 2012 by Leave a comment

Last December, the IRS announced new regulations concerning the distinctions between expenses and capital expenditures related to improvements to articles, like overhauls of rotable aircraft parts.  The title of the rulemaking was “Temporary Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property;” although at the same time, they had announced a proposal to make that temporary guidance permanent.  Recently, the IRS announced that taxpayers may rely parts of the guidance for tax year 2012, but will not be allowed to use the optional method for accounting for rotable parts until 2014 (when the guidance become required for all).

The rules in question are the IRS accounting rules for “Materials and Supplies.”   These regulations provide that a taxpayer may capitalize and depreciate any expenditure for materials and supplies (with certain exceptions), but they impose some limits on when those expenditures can be treated as expense (which can be immediately deducted in the present tax year and are not required to be depreciated).

The new regulations were generally meant to help companies distinguish between expenses related to property, and capital expenditures related to property.  Other guidance in the new rule did the following:

  • Provided advice on depreciating materials and supplies (guidance that could affect the tax treatment of some inventory held by your customers).
  • Clarified that if an expenditure merely restores the property to the state it was in before the work (like a repair), and the restoration does not make the property more valuable, more useful, or longer lived than it was when new, then such an expenditure is usually considered a deductible repair. In contrast, an activity that more permanently affects the longevity, utility, or worth of the property is to be considered capital expenditure (for example, a software upgrade to avionics that provides additional functionality that did not exist before).
  • Addressed the tax treatment of materials and supplies.
  • Clarified that an exception exists for materials and supplies that are not considered inventory.

Tax Accounting for Rotables

Finally, last year’s rule specified that rotable and temporary spare parts are used or consumed in the taxpayer’s operations in the taxable year in which the taxpayer disposes of the parts.  26 C.F.R. § 1.162–3T(a)(3).  This is important for air carriers because they may use a rotable part for many years before disposing of the part.  This could make tax accounting for such parts rather difficult, because the finance department will have to track the disposal of the part in order to know when to treat it as a deductible expense.  As matter of real-world practical application, this probably means that such parts have to be depreciated.  This guidance could affect recordkeeping practices among air carriers that carry rotable inventory, as well as distributors that carry rotables for use in their own equipment (like forklifts, etc.).

The rules provides an optional alternative for tax accounting of rotables.  Under the optional provision, an air carrier would deduct the amount paid to acquire or produce the part in the taxable year that the part is first installed on an aircraft in the air carrier’s operations.  26 C.F.R. § 1.162–3T(e)(2)(i).  Upon removal, the air carrier would then treat the fair market value of the part as income, and treat the fair market value and also the cost incurred to remove the part as part of the part’s basis.  26 C.F.R. § 1.162–3T(e)(2)(ii).  The repair cost would also be treated as part of the part’s basis.  26 C.F.R. § 1.162–3T(e)(2)(iii).  Then, when (if) the part is reinstalled in an aircraft, the basis, as well as the cost of installation, would be deductible in the tax year in which the part is installed.  26 C.F.R. § 1.162–3T(e)(2)(iv).

Under this optional provision, there is a distinct tax advantage to being able to show that you are using rotables in the same year that they are purchased/repaired (so they can be treated as ordinary and necessary business expenses in the year that they are purchased/repaired, instead of carrying-over that deduction to a later year in which they are installed/re-installed).  Air carriers with sensitivity to tax issues may keep fewer rotables in their inventories, relying more heavily on distributors to provide rotables on a just-in-time basis, in order to better take advantage of these tax accounting provisions.

The optional rotable accounting provision seems to make sense for rotables with longer lives such as those which may be found in many aviation products.  Under the recent announcement by IRS, though, this optional provision may not be used by the industry until tax years beginning on or after January 1, 2014.  This delay means that the air carriers and others must continue to use the primary rotables accounting language, which forbids a taxpayer from expensing a rotable until it is disposed-of (and thus likely fores most taxpayers to depreciate their rotables).

Rotable aircraft parts in a distributor’s inventory will usually be treated as inventory, rather than under the tax-accounting-for-rotables rule, because the rules defines rotables as things that are acquired for installation on the taxpayer’s own property:

“rotable spare parts are materials and supplies under paragraph (c)(1)(i) of this section that are acquired for installation on a unit of property, removable from that unit of property, generally repaired or improved, and either reinstalled on the same or other property or stored for later installation”

Distributors typically do not use rotables in this way, so their rotables will be treated as inventory; however repair stations may find some of their parts inventory being treated as rotables under the new rule, particularly if they are purchasing rotables for use on exchange units of loaner units that they own themselves.

Distributors may have rotable parts that they must account-for under these rules if the rotable are used ofr the distributors own property (like rotable parts for a forklift used in the distributor’s warehouse).

The announcement concerning timing of the guidance (that the guidance becomes fully effective in 2014 but may be used at the discretion of the taxpayer until then) can be found at 77 Federal Register 74583 (December 17, 2012). As always, this article is meant to be informative only and it does not constitute tax advice.

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New IRS Guidance on Tax Treatment of Materials and Supplies (including Rotable Parts)

January 29, 2012 by Leave a comment

The IRS announced in December Temporary Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property.  At the same time, they announced a proposal to make that temporary guidance permanent.

These new rules are meant to help companies distinguish between expenses and capital expenditures related to property.  It also provides guidance on depreciating materials and supplies (guidance that may change the tax treatment of some inventory held by your customers).  Aircraft Parts distributors may find themselves affected by several elements of this rule, including guidance distinguishing “materials and supplies” from inventory, as well as new guidance for the tax treatment of rotable parts.

One purpose of the new (proposed) regulations is to clarify that if an expenditure merely restores the property to the state it was in before the work (like a repair), then situation prompting the expenditure arose and does not make the property more valuable, more useful, or longer lived, then such an expenditure is usually considered a deductible repair. In contrast, a capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property.

For example, if you decide to repair weather-related damage to your warehouse, this should be treated as a repair that does not need to be capitalized.  On the other hand, if you decide to construct a new bay door on your warehouse to accommodate larger trucks, then this adds to the utility of the property and it should be treated as a capital expenditure.

The new rules also address the tax treatment of materials and supplies. They clarify that the costs of acquiring or producing units of tangible property are required to be capitalized.  This means that if a company purchases and /or produces goods for resale, the amount paid to acquire or produce those goods must be capitalized.  So if you are supplying a manufacturer, the manufacturer may not deduct the cost of the inventory that goes into the final product until the product is actually sold.  This provides a firm tax basis for just-in-time manufacturing and discourages manufacturers from carrying a substantial raw materials or parts inventory.

The new rule also clarifies that an exception exists for materials and supplies that are not considered inventory.  Amounts paid for such materials and supplies are deductible in the year in which the goods are used in your company’s operations.  However, incidental materials and supplies for which no records of consumption, or for which beginning and end of year inventories are not taken, may be deducted in the year in which they are purchased (yes, this will provide a tax inventive to avoid keeping metrics on items, but the value of tracking such materials usually exceeds the tax inventive to not track them).  In all cases, the materials and supplies do not need to be capitalized into the value of the larger items on which the materials and supplies are used.

The formal definition of materials and supplies is:

Definitions—(1) Materials and supplies. For purposes of this section, materials and supplies means tangible property that is used or consumed in the taxpayer’s operations that is not inventory and that—

(i) Is a component acquired to maintain, repair, or improve a unit of tangible property (as determined under § 1.263(a)–3T(e)) owned, leased, or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property;

(ii) Consists of fuel, lubricants, water, and similar items, that are reasonably expected to be consumed in 12 months or less, beginning when used in taxpayer’s operations;

(iii) Is a unit of property as determined under § 1.263(a)–3T(e) that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations;

(iv) Is a unit of property as determined under § 1.263(a)-3T(e) that has an acquisition cost or production cost (as determined under section 263A) of $100 or less (or other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter)); or

(v) Is identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) as materials and supplies for which treatment is permitted under this section.

Finally, the guidance specifies that rotable and temporary spare parts are used or consumed in the taxpayer’s operations in the taxable year in which the taxpayer disposes of the parts.  This new guidance may drive some interesting recordkeeping among air carriers that carry rotable inventory.  Under this new rule, there is a distinct tax advantage to being able to show that you are using rotables in the year purchased (so they can be treated as ordinary and necessary business expenses in the year that they are purchased).  This may encourage air carriers to keep fewer rotables in their inventories, relying more heavily on distributors to provide rotables on a just-in-time basis.

Rotables in a distributor’s inventory will usually be treated as inventory, rather than under the new rotable rule, because the new rule defines rotables as

“rotable spare parts are materials and supplies under paragraph (c)(1)(i) of this section that are acquired for installation on a unit of property, removable from that unit of property, generally repaired or improved, and either reinstalled on the same or other property or stored for later installation”

Obviously, distributors typically do not use rotables in this way; however repair stations may find some of their parts inventory being treated as rotables under the new rule.

The temporary regulations can be found online here:

Click to access 2011-32024.pdf

The purpose of the temporary regulations is to implement the rule immediately before going through notice and comment.

The permanent version of the regulation is subject to notice and comment.  The proposed permanent rule can be found online here:

Click to access 2011-32246.pdf

Comments on whether these temporary rules should be made permanent are due by March 26, 2012.

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