Ref: CA AB 85

On June 29, 2020, Governor Newsom signed into law Assembly Bill 85. There are several tax provisions in the bill, but the one most important to new business is the exemption from the $800 minimum tax for businesses starting on or after January 1, 2021 and before January 1, 2024.

This provision has been around for years for newly formed California corporations, but is new to LLC’s and LLP’s.

Planning point: If you plan on starting a new LLC/LLP near year-end, wait to do so until after January 1, 2021.

Legislative trap: The legislature wrote an “easy out” into the bill… If they don’t fund at least one dollar in the appropriated California budget (each year that the exemption is available), then this new exemption won’t be available that year.

Conclusion: Use the above planning point. Worst case is that the legislature won’t appropriate at least $1 for funding and you’ll owe the $800. Best case is that you’d owe no minimum tax for the given year.

Reference: CARES Act, 2020: Applies 2018 to 2023.

The CARES Act fixed a glitch in the TCJA of 2017 regarding leasehold improvements to nonresidential real estate if the improvement was placed in service after the date the building was placed in service. (Restaurant and retail improvements were left out of the TCJA).

The CARES Act restored Congressional intent that qualified restaurant and retail improvements were to have a 15-year recovery period.

WHAT DOES IT MEAN TO YOU? With a 15-year recovery period, qualified restaurant and retail improvements now qualify for 100% bonus (up front) depreciation through 2023. This means that if you make a qualified leasehold improvement, regardless of whether your business is profitable, that improvement can be depreciated in the year placed in service.

Short answer, for federal tax returns is NO:

Under federal law, loan forgiveness generally counts as taxable income, and states almost invariably incorporate this provision into their own codes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, however, expressly excludes the forgiveness of small business loans under the Paycheck Protection Program (PPP) from this provision. Since states generally follow federal treatment of debt discharge, they would be expected to incorporate this exception as well—but only if they conform to the most recent version of the Internal Revenue Code (IRC), which includes the exception.

California: To be determined as of May 14, 2020. California will have to pass legislation to conform to this part of federal tax law.

Recap: You can take expenses (e.g. payroll) funded by the PPP loan subsequently forgiven and don’t include the income of the forgiven loan on your federal tax returns. (Note that your accounting records will need to show the forgiven amount clearly in “other income” so this item can be segregated when preparing the income tax return).

Source: Enhancement Act (passed by Senate 4/21 and House 4/23)

This Act added $310 billion to the PPP loan program. It also attempted to answer some open questions from the quickly thrown-together CARES Act. (Many questions remain).

Significant is the answer on federal employer payroll taxes: These are not allowed to be considered in the PPP loan applied for. By example, if the employee gross payroll was $4,000 per month, the loan maximum would be $4,000 * 2.5 months = $10,000 without regard to the federal employer tax on that amount.

Can the employer consider these taxes when applying for debt forgiveness: No answer yet, however it is unlikely that it would be allowed. (Under IRC Section 265, deductions are not allowed for expenses relating to tax-exempt income (such as the amount of the PPP loan forgiven)).

Source: Journal of Accountancy, April 14, 2020: New SBA interim final rule issued April 13, 2020.

Sole proprietors: Will have to provide Form 1040, Schedule C from 2019. Net income (subject to self-employment tax) up to $100,000 will be considered.

Partners in a partnership / members of an LLC: Cannot apply separately from the partnership or LLC. Self employment income of partners/members pay be reported as a payroll cost up to $100,000.

As of last Monday, $242 billion of the total $350 billion had been funded to 1 million small businesses… so the funding window is closing.

From Forbes article 13 April 2020

The SBA is concerned that many banks are not taking new customers at this time and therefore not offering PPP loans. Forbes listed in the article several avenues to use.

For traditional banking: American First CU (based on Utah). Website is amerfirst.org. You can become a new customer and apply for the PPP loan online.

Non traditional banking: Both PayPal and Square are accepting PPP applications.

Business clients are starting to have their PPP loans funded.

It’s VERY IMPORTANT when you open your loan that you find out from the bank WHEN , HOW and WHAT the bank wants to see to consider loan forgiveness.

1. How is the documentation to be submitted?
2. Exactly what do they want you to submit?
3. When can you start submitting?

Note that many editorial writers feel that payroll costs must represent 75% (or more) of the use of the loan funds for… with the other 25% used for approved items such as business rent and utilities. AGAIN, CHECK WITH YOUR BANK!

If not forgiven, this is a loan subject to the terms in the loan application that you signed.

As of 4/3/20, Bank of America is the only large bank set up to accept applications. They took in 60,000 applications on 4/3 requesting $6 billion. They will only accept applications from customers who had a business account with them on or before 2/15/20. (According to Yahoo News).

Wells Fargo’s web site has a PPP section but they are not accepting applications yet. The two other large banks, JP Morgan Chase and Citibank should follow soon.

Ref: Borrowers Guide released by SBA April 1, 2020

Highlights:

1. Application opening 4/3/20 for most businesses. 4/10/20 for self-employed.
2. Where: Any SBA approved lending institutions (most banks).
3. How long will application stay open: Until June 30, 2020 BUT when funding runs out, the program will be over. The SBA suggests filing as soon as possible.
4. What amount will be forgiven: SBA says that non-payroll costs cannot exceed 25% of the loan in order to be forgiven.
5. What is payroll costs: salaries and wages PLUS employee benefits such as vacation pay, sick leave, state and local taxes on compensation.
6. What is “payroll” for self employed: The items in number 5, above, plus net earnings from self-employment capped at $100,000.
7. What is the interest rate on the loan: .50% fixed. Payments are deferred for six months.
8. To request forgiveness: Submit a request to the lender servicing the loan. You will be required to submit documents on how the funds were used including payroll forms.
9. Re-hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between 2/15/20 and 4/26/20.

We’re making available a four page client reference letter with more details on the CARE Act. To request a copy, please email laura.dmdcpas@gmail.com.

Payment Protection Program (PPP) loans: Banks will begin accepting PPP loan applications on Friday, April 3. You can find the standard four page application on most bank’s commercial lending web page.