CategoryCoronavirus

Don’t Forget the Tax Man: Many Tax Returns and Payments Due Next Week

By: Amanda Wilson

Because of Covid-19, the IRS extended most federal tax filing and payment deadlines otherwise due from April 1, 2020 to July 14, 2020 until July 15, 2020. The postponement is coming to an end and taxpayers must act now.

A list of tax forms with a July 15, 2020 deadline can be found on the IRS website here, but includes many common income tax returns including those for individuals (Form 1040), corporations (Form 1120), and REITs (1120-REIT).

Taxpayers that wish to file for an extension of their tax filing obligation need to do so before July 15.

Estimated tax payments that were original due April 15, 2020 and June 15, 2020 are due July 15, 2020 as well.

IRS Provides Much-Needed Opportunity Zone Relief

By: Amanda Wilson & Ferran Arimon

On June 4, the IRS provided some much-needed relief to opportunity zone investors and qualified opportunity funds (QOFs) in response to the ongoing COVID-19 pandemic. Specifically, the IRS published Notice 2020-39, which extends many of the deadlines found in the opportunity zone provisions of Section 1400Z-2 of the Internal Revenue Code. The Notice contains the following matters of note:

Additional Extension of 180-day Investment Requirement: To qualify for tax deferment, a taxpayer who sells property for an eligible capital gain has 180 days to invest in a QOF in order to defer that gain. Notice 2020-23 previously postponed until July 15, 2020 any deadline for the 180-day investment period that would have ended on or after April 1, 2020 and before July 15, 2020. Notice 2020-39 goes farther and extends until December 31, 2020 the deadline for making a QOF investment for any 180-day investment period which would have ended on or after April 1, 2020 and before December 31, 2020.

90% Investment Standard for QOFs is Relaxed: QOFs are required to hold at least 90% of its assets in qualified opportunity zone property as measured on: (i) the last day of the first 6-month period of the taxable year of the QOF, and (ii) the last day of the taxable year of the QOF. Failure to meet this standard results in a monthly penalty to the QOF for each month it fails to meet the standard. Notice 2020-39 relaxes this standard temporarily. If a QOF fails to meet the 90% requirement on any of the semi-annual testing dates between April 1, 2020 and December 31, 2020, the entity will not be prevented from qualifying as a QOF and will not be subject to the statutory penalties imposed under Section 1400z-2(f).

Extension of 31-Month Working Capital Safe Harbor: QOFs generally cannot hold significant cash on hand. QOFs can invest cash in qualified opportunity zone businesses, which are permitted to hold cash for a period of 31 months if they satisfy the requirements of the working capital safe harbor. The regulations automatically extend this safe harbor by an additional 24 months if the opportunity zone is located in a federally declared disaster area. Notice 2020-39 confirms that, as a result of President Trump’s March 13, 2020 coronavirus emergency declaration, all qualified opportunity zone businesses holding working capital assets that are intended to be covered by the working capital safe harbor before December 31, 2020 qualify for the additional 24-month safe harbor period as long as the other requirements of the working capital safe harbor are otherwise met.

Extension of 30-month Substantial Improvement Requirement: QOFs or qualified opportunity zone businesses that acquire existing tangible property must substantially improve that property within 30 months of acquisition. In Notice 2020-39, the IRS states that the period beginning on April 1, 2020 and ending on December 31, 2020 will be disregarded with respect to the 30-month substantial improvement periods. In other words, all 30-month periods will be tolled during the period beginning on April 1, 2020 and ending on December 31, 2020, giving QOFs or qualified opportunity zone businesses additional time to make the necessary improvements.   .

Extension of 12-Month Reinvestment Period: QOFs who dispose of some or all of their qualified opportunity zone property or received a distribution from such property have 12 months to reinvest to proceeds in a qualified opportunity zone for the purposes of the 90% qualified opportunity zone property investment requirement. If any of the QOF’s 12-month reinvestment period includes January 20, 2020, Notice 2020-39 grants that QOF an additional 12 months to reinvest in a qualified opportunity property some or all of the proceeds received by the QOF for purposes of the 90% investment requirement.

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up-to-date on the latest news.

IRS Clarifies Non-Deductibility of Expenses Paid With Forgiven PPP Loan Proceeds

By: Amanda Wilson

The Paycheck Protection Program (“PPP”) included in the CARES Act allows businesses with 500 or fewer employees to receive loans to pay payroll costs, rent and certain other expenses. PPP loans can later be forgiven if the employer retains its employees and satisfies other requirements (a discussion of these requirements can be found here).

The CARES Act provides that the amount of any PPP loan that is later forgiven does not give rise to taxable income. Without this provision, the forgiveness of the loan would constitute taxable income in the form of cancellation of indebtedness income.

One question that I repeatedly get asked is whether businesses that used PPP loan proceeds to pay deductible expenses (such as payroll or rent) are able to deduct these expenses if the PPP loan is later forgiven. Unsurprisingly, the IRS has answered that question with a resounding no.

In Notice 2020-32, issued yesterday, the IRS states that because the amount of the forgiven loan is excluded from income, the forgiven loan is a class of exempt income under Section 265 of the Internal Revenue Code. As a result, Section 265(a)(1) applies, which disallows a deduction otherwise allowable under the Internal Revenue Code if allocable to one or more classes of exempt income (other than interest income).

Further, the IRS determined that any otherwise deductible expenses funded by PPP loan proceeds that are subsequently forgiven are not deductible. This position is not surprising, as otherwise businesses would have gotten a double tax benefit from the PPP loan forgiveness program.

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up to date on the latest news.

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