The IRS released a draft of the instructions for Form 1065 (“Proposal”) for 2020 tax year which contains the IRS’s proposed requirement for reporting partners’ capital on the schedule K-1 on a transactional tax basis.  This requirement is expected to add significant compliance hours unless the partnership has been tracking partners’ capital using tax basis.  The IRS is accepting comments on the draft instructions for 30 days and plans to issue final instructions in December.

According the Proposal, partnerships filing Form 1065 for tax year 2020 must calculate partner capital accounts using the transactional approach for the Tax-Basis Method.  Under the tax-basis method, partnerships report partner contributions, the partner’s share of income or loss, withdrawals and distributions, and other increases or decreases using the tax principles as opposed to GAAP or other hybrid methods previously allowed.  Partnerships that did not prepare schedule K-1 under the tax-basis method for 2019 or otherwise maintained tax-basis capital accounts in their books and records may determine each partner’s beginning tax-basis capital account balance for 2020 using one the following methods:  the modified outside basis method, the modified previously taxed capital method, or the Section 704(b) method.

Modified Outside Basis Method

The amount to report as a partner's beginning capital account under the modified outside basis method is equal to the partner's adjusted tax basis in its partnership interest as determined under the principles and provisions of subchapter K including, for example, sections 705, 722, 733, and 742; and subtracting from that basis (1) the partner's share of partnership liabilities under section 752 and (2) the sum of partner's section 743(b) adjustments (that is, net section 743(b) adjustments). For purposes of establishing a partner's beginning capital account, you may rely on the adjusted tax basis information provided by your partners

Modified Previously Taxed Capital Method

The amount to report as a partner's beginning capital account under the modified previously taxed capital method is equal to the following:

• The amount of cash the partner would receive if you liquidated after selling all of your assets in a fully taxable transaction for cash equal to the fair market value of the assets; increased by
• The amount of tax loss determined without taking into account any section 743(b) basis adjustments (including any remedial allocations under Regulations section 1.704-3(d)) that would be allocated to the partner following such a liquidation (treating all liabilities as nonrecourse); and decreased by
• The amount of tax gain determined without taking into account any section 743(b) basis adjustments (including any remedial allocations under Regulations section 1.704-3(d)) that would be allocated to the partner following such a liquidation (treating all liabilities as nonrecourse). Instead of using the assets' fair market value, you may determine the partnership's net liquidity value, and gain or loss, by using such assets' bases as determined under section 704(b), as determined for financial accounting purposes, or on the basis set forth in the partnership agreement for purposes of determining what each partner would receive if the partnership were to liquidate, as determined by partnership management.

704(b) Method

The amount to report as a partner's beginning capital account under the section 704(b) method is equal to the partner's section 704(b) capital account, minus the partner's share of section 704(c) built-in gain in the partnership's assets, plus the partner's share of section 704(c) built-in loss in the partnership's assets. Property contributed to a partnership is section 704(c) property if, at the time of the contribution, its fair market value differs from its adjusted tax basis. Section 704(c) property also includes property with differences resulting from revaluations (reverse section 704(c) allocations). For more information see sections 704(b) and 704(c) and Regulations sections 1.704-1 through 1.704-3.

PPP 대출 상환 감면 업데이트

임금 보호 프로그램 (PPP, Paycheck Protection Program) 대출 상환 감면을 신청하려면 제출해야하는 서류에는 세가지 양식이 있다. PPP 상환 감면 신청서는 SBA가 아닌 대출 기관에 제출 해야한다. 이 세가지 양식을 설명하기 전에 서류제출기한일에 대해 먼저 검토해 보자.

서류제출기한

대출금은 커버 기간안에 사용이 되어야 한다. 커버 기간은 PPP 대출 지급일부터 시작되는8주치 에서 24주 치로 기간이 연장 되었으며, 2020년 6월 5일 전에 PPP 대출을 받았다면 8주치 커버 기간 사용을 선택 할수 있다. 커버 기간은 절대로 2020년 12월 31을 초과하여 연장 될수 없다.

모든 PPP 대출자들은 커버 기간이 끝난 후 추가 10개월의 시간이 있다. 2020년 8월 4일에 발표된 SBA Q&A에 따르면, 대출자가 커버 기간이 끝난 후 10개월 안에 상환감면신청서를 제출하는 한, SBA가 대출기관에 감면금액을 확정할 때까지는 대출자는 어떠한 대출금도 지급하지 않아도 된다.

예시 1:

Company X가 2020년 5월 1일에 PPP 대출을 받았다면, 더 짧은 커버 기간을 선택하지 않는 한, 커버 기간은2020년 10월 16일 (대출을 받은 후 24주) 에 끝난다. 그렇다면 상환감면신청서는 2021년 8월 15일 전에 대출기관에 제출되어야한다.

예시 2:

Company X가 2020년 5월 1일에 PPP 대출을 받았고, 8주 커버 기간을 선택했다면, 커버 기간은2020년 6월 26일에 끝난다. 그렇다면 상환감면신청서는 2021년 4월 26일 전에 대출기관에 제출되어야한다.

사용가능한 양식

대출자가 사용할 수 있는 신청서 양식은 세가지가 있고, 어떤 양식을 사용할지는 대출의 규모와 대출자의 자격에 따라 달라진다.

• Form 3508S (짧은 양식): Form 3508S는 총 PPP 대출금액이 $50,000미만일 때만 사용할 수 있다. 하지만, 제휴사들과 함께 받은 총 PPP 대출금액이 $2 million이상인 대출자는 이 양식을 사용할 수 없다. 이 2 페이지 양식은 작성이 매우 쉬우며, 대출자의 진술과 확인을 기반으로 상환 감면을 제공하도록 설계되었다. 추가 서류를 필요로 할 수 있기 때문에 이 양식을 작성하기 전에 대출기관에 문의하는 것이 좋겠다.

• Form 3508 EZ (EZ 양식): 대출자가 아래 나열된 세가지 자격 중 적어도 하나를 충족하는 경우, EZ 양식을 사용 할 수있다. 이 3 페이지 양식은 대출자가 복잡한 풀타임 노동시간과 연봉/시간당 임금 삭감을 계산하지 않아도 되기 때문에 Form 3508 (긴 양식) 에 비해 비교적 작성이 간단한 편이다. 추가 서류를 필요로 할 수 있기 때문에 이 양식을 작성하기 전에 대출기관에 문의하는 것이 좋겠다.
  1. 대출자는 자영업자, 독립 계약자, 또는 단독 소유주로 PPP 대출 신청 당시에 직원을 고용하고 있지 않았음.
  2. 대출자는 커버 기간에 직원의 연봉이나 시급을 2020 년 1월 1일과 2020년도 3월 31일 사이 기간과 비교했을때 25% 이상 삭감하지 않았고, 2020년 1월 1일부터 커버 기간이 끝날 때까지 직원 수나 평균 급여 시간을 삭감하지 않았음.
  3. 대출자는 커버 기간에 직원의 연봉이나 시급을 2020 년 1월 1일과 2020년도 3월 31일 사이 기간과 비교했을때 25% 이상 삭감하지 않았고, COVID-19와 관련된 연방, 주 및 지방 정부의 지침을 준수하기 위해 커버 기간에 2020년 2월 15일 전과 같은 수준의 사업 활동을 운영할 수 없었음.

• Form 3508 (긴 양식): Form 3508S 혹은 Form 3508EZ를 사용할 수 없는 대출자는 Form 3508을 사용해야한다. 이 11페이지로 구성된 양식은 각 직원의 풀타임 노동시간과 연봉/시간당 임금 삭감 계산을 해야하며, 자세한 내용과 뒷받침하는 작업시트를 필요로 한다. 이 양식을 작성해야하는 대출자는 충분한 resource를 확보하거나 전문적인 도움을 구하고 관련 작업을 일찍 시작하여 제 시간에 감면 신청 절차를 마무리할 것을 권장한다.

3508 EZ나 3508S 양식을 사용하는 대출자는 내부적으로 충분히 감면 신청이 가능할 것으로 보이나, 3508 (긴 양식) 사용자는 PPP 대출 상환 감면 계산 양식 지침 에 대한 충분한 이해가 필요할 것이며, 적절한 시간과 내부 인력을 준비해두어야 원활하게 감면 절차를 진행할 수 있을것이다. 만약 내부적인 resource가 없다면 전문적인 도움이 필요할 것이다.

PPP Loan Forgiveness Update

There are three different forms that need to be submitted to the lenders, along with other documentations and supports the lenders may require, in order to apply for forgiveness of PPP loan amount.  Note that application for PPP loan forgiveness is made with the lenders, not the SBA.  Before discussing these forms, let’s first understand when the borrowers need to apply.

Deadline

Loan proceeds must be spent within the covered period.  Covered period was extended from 8-week period to 24 week period immediately following disbursement of the loan or by December 31, 2020, whichever is earlier.  If you received the loan prior to June 5, 2020, you may choose the 8-week period covered period.  In other words, unless you choose to use 8-week period covered period, the covered period ends earlier of 24 weeks from the loan disbursement date or December 31, 2020.

Additionally, all PPP loan borrowers have additional 10 months after the last day of each borrower’s loan covered period.   SBA, in its Q&A published in August 4, 2020, provided that as long as a borrower submits its loan forgiveness application within 10 months of the completion of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA.

Example 1:

Assume that Company X received PPP loan on May 1, 2020.  The covered period for this loan ended on October 16, 2020 (24 weeks after receiving the loan), unless Company X elects to use a shorter covered period.  Then the application for the forgiveness must be filed with the lender before August 15, 2021.

Example 2:

Assume that Company X received PPP loan on May 1, 2020 and chooses to use 8-week period covered period.  The covered period for this loan ended on June 26, 2020.  Then the application for forgiveness must be filed with the lender before April 26, 2021.

Applicable Forms

There are three different forms borrowers can use and which form needs to be used is depended on the size of the loan and borrowers’ eligibility.

• Form 3508S (Short Form): A borrow may use Form 3508S only if the total PPP loan amount received was $50,000 or less.  However, a borrow that, together with its affiliates received PPP loan totaling $2 million or more may not use this short form.  This 2-page form is very easy to complete, and it is designed to provide forgiveness mainly based on borrowers’ representations and certifications.  Contact your lender before completing the form as they may require additional documentations and supports.

• Form 3508 EZ (EZ Form): A borrower may use the Form 3808EZ if the borrower meets one of the three qualifications listed below.  This 3-page form is relatively less complex to complete then Form 3508 (Long Form) because borrower does not need to compute the complex fulltime equivalent and salary/hourly wage reductions.   Contact your lender before completing the form as they may require additional documentations and supports.  The three qualifications are:
  1. Borrower is a self-employed individual, independent contractor, or sole proprietor with no employees at the time of the PPP loan application;
  2. Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to the Q1 of 2020, AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered period; OR
  3. Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to the Q1 of 2020, AND the borrower was unable to operate during the covered period at the same level of business activity due to compliance with requirements established or guidance issued by federal, state and local governments related to COVID-19.

• Form 3508 (Long Form): A borrower who is not eligible to use forms 3508S or 3508EZ is required to use the Form 3508.  This 11-page form requires computation of fulltime equivalent and salary/hourly wage reductions for each employee and require detail disclosures and supporting worksheet.  We recommend that borrowers who are required to use this form set aside adequate resources or seek for professional assistance and commence the related work early to timely submission for application.

2020 YEAR-END TAX PLANNING FOR BUSINESSES

As we are approaching the year-end, implementing strategic tax planning now is key to lowering tax liability that businesses will be soon paying.  Here are some key planning opportunities and considerations businesses should consider:

• GILTI & FDII– The 2017 tax reform introduced several international tax rules which may impact the international businesses. GILTI (Global-Intangible Low Tax Income) taxes U.S. shareholders of controlled foreign subsidiaries on income earned by the subsidiaries.  FDII (Foreign-Derived Intangible Income) provides a deduction for certain U.S. corporations with certain types of foreign source income.  Businesses should consult with their tax advisors to identify ways to minimize the tax impact of GILTI and consider the potential tax benefit of FDII.

Additionally, final relations were published in 2020 allowing a “high-tax exception” which may potentially exclude from GILTI income of a controlled foreign corporation that incurs a foreign tax at a rate greater than 90% of the US corporate rate, currently 18.9%.

• 199A Deduction – The section 199A deduction, otherwise known as Qualifying Business Income Deduction, may reduce business income of individuals, including pass-through income, up to 20%. The rule provides complex qualification criteria and limitations, and documentation requirement in the case of pass-through income.  The IRS issued Revenue Procedure 2019-38 that provides a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A. Therefore, we recommend that the individual taxpayers with business and pass-through income should consult with their tax advisor before the year end to do planning in advance.

• Interest Deduction Limitation – Section 163(j) imposes a significant limitation on ability to deduct business interest. In nutshell, the section 163(j) limits interest deduction to 30% of business taxable income before interest deduction, depreciation, amortization and taxes.  Highly debt-financed businesses may be subject to substantial limitation if a proper planning is not done in a timely manner.

Please note that the CARES Act increased interest deduction limit of 30% to 50% for 2020.

• Bonus Depreciation- Expanded bonus depreciation rules allow taxpayers full expensing of both new and used qualifying property placed in service before 2023, creating significant incentives for making new investments in depreciable tangible property and computer software.  Bonus depreciation allowances increased from 50 to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before 2023 (January 1, 2024, for longer production period property and certain aircraft). Plan purchases of eligible property to assure maximum use of this annual asset expense election and bonus depreciation, as the 100-percent bonus depreciation deduction ends after 2023.

Please note that the CARES Act redefined qualified improvement property (QIP) as improvements placed in service in 2018 and after and is 15-year property, such cost is eligible for 100% bonus depreciation.

• Excess Business Loss Limitation - Non-corporate taxpayers are now subject to a new limitation on the deductibility of business losses from pass-through entities (such as partnership, S-corporation and sole-proprietorship).  A taxpayer’s loss from trade or business in total is now limited to $500,000 for joint filers (or $250,000 for single filer) for the tax years 2018 through 2026.  Disallowed excess business losses will be treated as net operating loss and carried forward. Year-end tax planning is crucial for individuals with business(es) expect to generate loss for the year.

• R&D Credit - R&D tax credit is not just for large technology, medical device or drug companies.  It also applies to manufacturers of all sizes.  If a company, in the manufacturing industry, recently introduced new or improved products or manufacturing lines, there may be a good chance that the company would be entitled to the benefit of R&D tax credit. Some of the R&D credit qualifying activities that relate to manufacturers include, but not limited to, designing and developing cost-effective and innovative operational processes; improving product performance and manufacturing processes; evaluating and determining the efficient flow of material; designing and evaluating process alternatives; developing process to meet regulatory requirements or to reduce labor costs; developing and implementing new or improved safety enhancements; increasing operating and economic efficiencies; designing tools, molds, certification testing, environmental testing and automated manufacturing processes and so on.

The benefit of the R&D tax credit could range from 14% to 20% of qualifying expenditures that could be used to offset the company’s tax liabilities.  In addition, many states have their own means of incentivizing in-state R&D activities.

• Inventory Revaluation - A taxpayer that has established a book Lower of Cost or Market (LCM) reserve to reduce the cost of inventory to the net realizable value could possibly use the book LCM reserve to write down the cost of subnormal goods or normal goods to the net realizable value for tax purposes if the goods have been offered for sale below cost within the requisite time frame. Accordingly, a taxpayer with a book LCM reserve that is not deducting the LCM reserve for tax purposes might consider changing its tax method of accounting to use the book LCM reserve to write down inventory from cost to net realizable value.

For taxpayers in retail business, generally for tax purposes, a taxpayer that determines actual inventory shrinkage by taking a physical inventory may deduct the shortage. Section 471(b) allows a taxpayer to deduct estimated inventory shrinkage for tax purposes when the taxpayer does not take a physical inventory at year end. For certain retailers, Rev. Proc. 98-29 provides a safe harbor method of estimating inventory shrinkage. Taxpayers may use another method of accounting for estimating inventory shrinkage if it is reasonable and clearly reflects income.

We advise taxpayers to do a comprehensive year-end tax planning, considering all opportunities and updates, to assess their impact and develop tax planning strategies in advance.