Article for May 14, 2020

UPDATE ON PAYCHECK PROTECTION PROGRAM: FEDERAL RESERVE ANNOUNCES NEW CREDIT FACILITIES

The Federal Reserve today announced nine new or expanded lending programs totaling another $2.3 Trillion in loans to sustain the U.S. economy from the economic effects of the Coronavirus pandemic.
Among these, the Fed announced a new Paycheck Protection Program Lending Facility to facilitate continued lending by banks to small businesses under the Small Business Administration’s Paycheck Protection Program (PPP) that went into effect last week pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  Under the new PPP Lending Facility, banks that provide PPP loans to small businesses can now borrow funds from the Federal Reserve Bank in their district on a non-recourse basis, using the PPP Loans as collateral.
The PPP Lending Facility will charge banks 35 basis points (0.35% interest rate) and no fees.  Banks will pledge their PPP Loan principal as collateral, which will equal the principal amount of the loan from the Fed to the bank.  There will be no recourse to the banks, and the PPP Loan will be assigned a 0% risk weight under federal banking agency capital rules, thereby allowing banks to exclude PPP Loans from required capital ratios.  As a result, banks can make more PPP Loans with the liquidity provided by the Fed’s lending facility.
This could be welcome news for small businesses, as banks have been overwhelmed by the volume of PPP applications in the first week of the program, and some were already reaching their quotas.  The deadline to apply for a PPP loan is June 30, 2020, but there has been growing concern that the $349 Billion program will run out well before.  A further expansion of the PPP loan program is expected from Congress by the end of the month.
UPDATE ON PPP ELIGIBILITY FOR FOREIGNERS:
Our advisory of April 3, 2020 stated that the PPP loan eligibility requirements were that any individual shareholder, member or partner owning at least 20% of the business must be a U.S. citizen or resident.  This requirement was eliminated on April 3, 2020.  Therefore, there is no longer a citizenship or residency requirement for owners of small businesses applying for a PPP loan.
For further information on federal assistance for your business, feel free to contact us directly.

 

CLIENT ADVISORY: TAX DEDUCTIONS UNDER THE PAYCHECK PROTECTION PLAN

On April 30, 2020, in its Notice 2020-32, the IRS issued a controversial guidance regarding income tax deductions for taxpayers who receive small business loans under the Small Business Administration’s Paycheck Protection Plan (PPP).  The guidance clarified that tax deductions will not be allowed for expenses that normally would be deductible if the payment of the expense results in forgiveness of a PPP loan.
PPP loans are federal loans meant to help small businesses cover certain operational expenses.  Borrowers can apply for loan forgiveness for up to eight weeks of salary costs, plus mortgage interest, office lease, and utilities (electricity, water, transportation, telephone, internet).  The forgiven amount could equal the principal amount of the loan or be less, depending on whether total expenses equal or exceed the principal loan.  Furthermore, under Section 1106(i) of the CARES Act, the forgiven loan amount is excluded from gross income for tax purposes.  The result was previously understood to mean free money for small businesses experiencing financial stress due to the COVID-19 pandemic.  
 
However, the IRS has taken the position that, if a taxpayer receives a PPP loan that is ultimately forgiven, the covered business expenses that would make the loan forgivable cannot be deducted as well.  If the PPP loan becomes tax-exempt income, then it would be a double tax benefit for expenses paid with the PPP loan to be deductible as well.  For example, for a small business that receives a $1 Million PPP loan and uses the entire amount for wages, employee benefits, rent and utilities, the $1 Million loan will become forgiven tax-exempt income.  However, the wages, employee benefits, rent and utilities paid for with the $1 Million loan will be disallowed as deductible expenses. The end result is that recipients of PPP loans whose loans are forgiven will owe federal income taxes on the forgiven amount, in most cases at least 21% on the forgiven amount.  
 
The IRS’s guidance is based on Section 265 of the Internal Revenue Code.  While it correctly applies the Code, the guidance contravenes the intent and spirit of the CARES Act.  As a result, on May 5, 2020, the Senate introduced Senate Bill 3612 that clarifies that “receipt of coronavirus assistance does not affect the tax treatment of ordinary business expenses.”  If passed and enacted into law, the bill will reverse the IRS guidance and correct what will otherwise become a significant tax burden for many recipients of PPP loans.  However, until the bill becomes law, the IRS’s guidance must be followed.  We will provide updates on this legislation as appropriate. 
 
If you have any questions about your business, please feel free to contact us.  If you would like to schedule a consultation by phone or video-conference, please go to:  https://calendly.com/coradinlaw

CLIENT ADVISORY: COMMERCIAL LEASES DURING COVID-19 PANDEMIC

With the exception of certain essential businesses, such as supermarkets, clinics and banks, most businesses are either temporarily closed or operating partially or remotely.  As a result, many commercial and residential tenants are unable to pay rent, which places financial stress on landlords as well.  The CARES Act enacted a 120 day moratorium on foreclosures of residential mortgages backed by the federal government and on evictions from affordable rental housing, such as Section 8.  Several states, including Florida, have also enacted moratoriums on all residential evictions.  Florida’s moratorium on residential evictions expires on May 17, 2020.  It is yet unclear whether or not it will be extended.
Unlike other states such as New York, in Florida none of the aforementioned relief extends to commercial leases, which has left commercial tenants subject to eviction in addition to coping with lost revenue and employee layoffs.  Many businesses (both tenants and landlords) have yet to receive federal assistance under either the Paycheck Protection Program or the Economic Injury Disaster Loan Program, both of which are expressly meant to assist small businesses.  With both commercial tenants and landlords in legitimate financial distress, it behooves both parties to work together now more than ever to survive the present crisis.
Regardless of whether a lease is triple net, gross or some hybrid form, and regardless of whether the leased premises are retail, office, single or multi-tenant, tenants and landlords should communicate on options arising from a tenant’s temporary or permanent closure due to COVID-19.  Landlord options include seeking immediate enforcement (eviction or a guarantee), taking no action, or negotiating a payment plan with the tenant.  Under current conditions, eviction may be the least desirable option, as courts are operating at reduced capacity.  On March 24, 2020, the Florida Supreme Court suspended the requirement that the clerk issue writs of eviction, which effectively suspended commercial evictions. That order has been extended to May 29, 2020.  Furthermore, many landlords will be hard pressed to find suitable replacement tenants in the near term.  If the lease is guaranteed by an equity owner of the tenant, then in many cases the financial wherewithal of the guarantor will be tied to the financial capability of the tenant, making enforcement of the guarantee a less attractive recourse for the landlord.
If the tenant is unable to pay rent, the tenant should be prepared to make non-monetary concessions to the landlord in return for rent abatement, deferral or forbearance.  Concessions might include waiving certain rights under the lease such as the right to expand or right to renew; or the tenant could agree to an extended term of the lease.  Regardless of a tenant’s particular circumstances, communication and cooperation with the landlord is advisable.
If you have any questions about your business, please feel free to contact us.  If you would like to schedule a consultation by phone or video-conference, please go to:  https://calendly.com/coradinlaw