Archives: News

If you receive our firm’s newsletter then you are aware that the estate/gift lifetime exclusion may be decreasing substantially after the 2020 tax year.  The current lifetime exclusion currently sits at around $11.6M per person, meaning that an individual can transfer up to $11.6M of assets over the individual’s lifetime, without paying any gift taxes (approximately $23.2M for a married couple).

With a change of legislative regime coming in 2021, there has been serious talk of the lifetime exclusion being decreased to $5M per person, quite a substantial decrease.  The possibility exists that the decreased exclusion may happen as soon as for 2021, but, from what we are hearing, gifts made prior to the enactment of the decreased lifetime levels, will not be impacted.  In other words, if an individual has transferred up to the current $11.6M’s worth of assets, let’s say by the end of 2020, then any new laws enacted to decrease the lifetime exclusion (after 2020) will not apply to those transfers made by the end of 2020.

So, it is imperative to consider whether gifting by the end of 2020 is appropriate for your individual situation and circumstances, to use up as much of your current lifetime exclusion as possible, or as appropriate for you and your family.  Direct transfers to family members and transfers to trusts qualify for the use of your current lifetime exclusion.

Example:  An individual has transferred $5M of assets over their lifetime as of today.  The result is, that individual has currently approximately $6.6M of lifetime estate/gift exclusion remaining/available to be used by the end of 2020.

As a reminder, the first $15,000 of gifting per person on an annual basis is not applied to the use of the lifetime exclusion, called “the annual gift exclusion.”  So, parents can transfer up to $60,000 per year to their child and the child’s spouse on an annual basis, without utilizing any part of the parents’ lifetime exclusions.

We just wanted to give you all an update as to the taxability of the PPP loan forgiveness (currently a 2020 tax event regardless of when your PPP loan is forgiven). As of today, it is taxable, however, there is some movement in Congress to override the IRS to make the forgiveness of the PPP loan proceeds not taxable.

Here is how our firm is handling our own situation, assuming that we will not have any definitive answers from Congress by the end of the first quarter of 2021:

• • For 2020 projection purposes, we are assuming that our PPP loan proceeds will be taxable, and we will pay estimated taxes based on that assumption.  Or, at least pay in 2020 estimates to meet the estimated tax “safe harbors” (paying in 110% of 2019’s actual tax liability or 90% of the 2020 projected taxes).
  • We will be putting our firm’s tax returns on extension, to buy some time, with the hope that Congress will finalize this issue prior to September 15 (the extended due date of partnership and S corporation returns) and prior to October 15 (the extended due date of personal tax returns).
  • If clients choose to have their business returns (partnerships and S corporations) filed by the original due date of March 15, then the PPP loan proceeds will be included in income for those filed returns.  If Congress overrides the IRS subsequent to the March return file date, then amended business returns will be required to be filed (and personal returns as well since the income from partnerships and S corporations flow through to the personal returns).  This would also hold true for personal returns originally due April 15 for self-employed clients, who would then have to file amended personal returns if Congress were to override the IRS (if applicable).

 

We have been told that there is a “strong” probability that Congress will act to override the IRS, but we will have to use the laws and the information that exists as of today, in the meantime.

Important tidbit:  FTEs are not a requirement for PPP loan forgiveness for businesses that were mandated by any government health agencies as to the number of customers that they could service during the pandemic (and/or for the businesses that were required to be totally shut down for a long period of time during the pandemic).  This would include restaurants, gyms and related businesses, retail stores, etc.  There is a box to check within the PPP loan forgiveness application that can be checked which would result in the elimination of having to meet the FTE requirement.

 

Guidance by IRS Limits Deductibility for Expenses from PPP Loans

When business owners first applied for loans from the Paycheck Protection Program (PPP), they did so with the expectation that they could seek forgiveness for some or all of it. In effect, this would make it a “free” loan, allowing businesses to continue functioning despite the economic impact of the coronavirus pandemic. Unfortunately, the IRS has decided to deliver some bad news to PPP recipients right before the holidays, announcing that expenses from a PPP loan that a recipient expects to be forgiven cannot be deducted from their taxes. The latest IRS ruling will most likely make this taxable event occur for 2020.

What does this guidance say?

Normally, many of the expenses that are intended to be paid by PPP loans would be considered tax-deductible under IRS regulations. However, the IRS has ruled that, due to the wording of the CARES Act, the expenses used to claim forgiveness under the PPP program cannot also be claimed for tax deductions. This is because the debt forgiveness from a forgiven PPP loan is not considered “gross income” under the wording of the CARES Act, and thus does not benefit from typical tax deductions.

The IRS also noted that this applies to PPP loans even where a recipient has yet to apply for loan forgiveness. Instead, it applies in all cases where someone has a “reasonable expectation” of forgiveness. In other words, even people who have yet to apply for forgiveness for their PPP loans do not get to benefit from tax deductions for applicable business expenses, so long as they have good reason to believe they will receive loan forgiveness.

How does this impact PPP recipients?

This is potentially a significant financial blow for PPP recipients, who may have expected to be able to deduct these business expenses as normal, in addition to the benefit of receiving loan forgiveness for their PPP loans. As a result, many of these business owners are now potentially facing significantly higher taxes than they may have been expecting when tax season rolls around.

If you have received a PPP loan and have either received forgiveness or believe you will receive forgiveness, you should contact the tax advisers at KVLSM LLP. Our team will work with you to minimize your tax liability, and work with you to protect your financial interests. For more information Download the IRS Guidance or call us (516) 294-0400. As always, should you have any questions or concerns regarding your situation please feel free to call.