Wealth Transfer Strategies to Consider This Election Year

With the Democratic Party pushing to return federal estate taxes to their historic norms, taxpayers need to act now before Congress passes legislation that could adversely impact their estates. Currently, the federal estate and gift tax exemption is set at $11.58 million per taxpayer. Assets included in a decedent’s estate that exceed the decedent’s remaining exemption available at death are taxed at a rate of 40 percent (Note: Maryland adds an additional state estate tax for estates over $5 million). However, each asset included in the decedent’s estate receives an income tax basis adjustment so that the asset’s basis equals its fair market value on the date of the decedent's death. Therefore, beneficiaries realize capital gain upon the subsequent sale of an asset only to the extent of the asset’s appreciation since the decedent’s death.

If this year’s election results in a political party change, it could mean not only lower estate and gift tax exemption amounts, but also the end of the longtime taxpayer benefit of stepped-up basis at death. To avoid the negative impact of these potential changes, it would be prudent to consider a few wealth transfer strategies before the year-end.

Strategy #1: Intra-family Notes and Sales

In response to the COVID-19 crisis, the Federal Reserve lowered the federal interest rates to stimulate the economy. Accordingly, donors should consider loaning funds or selling one or more income-producing assets, such as an interest in a family business or a rental property, to a family member in exchange for a promissory note that charges interest at the applicable federal rate. In this way, a donor can provide a financial resource to a family member on more flexible terms than a commercial loan. If the investment of the loaned funds or income resulting from the sold assets produces a return greater than the applicable interest rate, the donor effectively transfers wealth to the family members without using the donor’s estate or gift tax exemption.

Strategy #2: Swap Power for Basis Management

Assets like real estate, stocks, and mutual funds gifted to an irrevocable trust do not receive a step-up in income tax basis at the donor’s death. Gifted assets instead retain the donor’s carryover basis, potentially resulting in significant capital gains realization upon the subsequent sale of any appreciated assets. Exercising the swap power allows the donor to exchange one or more low-basis assets in an existing irrevocable trust for one or more high-basis assets currently owned by and includible in the donor’s estate for estate tax purposes. In this way, low-basis assets are positioned to receive a basis adjustment upon the donor’s death, and the capital gains realized upon the sale of any high-basis assets, whether by the trustee of the irrevocable trust or any trust beneficiary who received an asset-in-kind, may be reduced or eliminated.

Example: Jim purchased real estate in 2005 for $1 million and gifted the property to his irrevocable trust in 2015 when the property had a fair market value of $5 million. Jim dies in 2020, and the property has a date-of-death value of $11 million. If the trust sells the property soon after Jim’s death for $13 million, the trust would be required to pay capital gains tax on $12 million, the difference between the sale price and the purchase price. But, let’s assume that before his death, Jim utilized the swap power in his irrevocable trust and exchanged the real estate in the irrevocable trust for stocks and cash having a value equivalent to the fair market value of the real estate on the date of the swap. Now, at Jim’s death, the property is part of his gross estate, resulting in the property receiving an adjusted basis of $11 million. If his estate or beneficiaries sell the property for $13 million, they will only pay capital gains tax on $2 million, the difference between the adjusted date-of-death basis and the sale price. Under this scenario, Jim’s estate and beneficiaries avoid paying capital gains tax on $10 million by taking advantage of the swap power.

Strategy #3: Installment Sale to an Irrevocable Trust

This strategy is similar to the intra-family sale, except that the income-producing assets are sold to an existing irrevocable trust instead of directly to a family member. In addition to selling the assets, the donor also seeds the irrevocable trust with assets worth at least 10 percent of the assets sold to the trust. The seed money demonstrates to the Internal Revenue Service (IRS) that the trust has assets of its own and that the installment sale is a bona fide sale. Without this seed money, the IRS could re-characterize the transaction as a transfer of the assets with a retained interest instead of a bona fide sale, which would result a very negative outcome: the entire interest in the assets are includible in the donor’s taxable estate. This strategy not only allows donors to pass appreciation to their beneficiaries with limited estate and gift tax implications, but also gives donors the opportunity to maximize their remaining gift and generation-skipping transfer tax exemptions if the assets sold to the trust warrant a valuation discount.

Example: Sally owns 100 percent of a family business worth $100 million. She gifts $80,000 to her irrevocable trust as seed money. The trustee of the irrevocable trust purchases a $1 million dollar interest in the family business from Sally for $800,000 in return for an installment note with interest calculated using the applicable federal rate. It can be argued that the trustee paid $800,000 for a $1 million interest because the interest is a minority interest in a family business and therefore only worth $800,000. A discount is justified because a minority interest does not give the owner much, if any, control over the family business, and a prudent investor would not pay full price for the minority interest. Under this scenario, Sally has removed $200,000 from her taxable gross estate while only using $80,000 of her federal estate and gift tax exemption.

Strategy #4: Spousal Lifetime Access Trust

With the threat of lower estate and gift tax exemption amounts, a Spousal Lifetime Access Trust (SLAT) allows donors to lock in the current, historic high exemption amounts to avoid adverse estate tax consequences at death. The donor transfers an amount up to the donor’s available gift tax exemption into the SLAT. Because the gift tax exemption is used, the value of the SLAT’s assets is excluded from the gross estates of both the donor and the donor’s spouse. An independent trustee administers the SLAT for the benefit of the donor’s beneficiaries. In addition to the donor’s spouse, the beneficiaries can be any person or entity including children, friends, and charities. The donor’s spouse may also execute a similar, but not identical, SLAT for the donor’s benefit. The SLAT allows the appreciation of the assets to escape federal estate taxation and, in most cases, the assets in the SLAT are generally protected against creditor claims. The SLAT is a powerful wealth transfer tool because it transfers wealth to multiple generations of beneficiaries and provides protection against both federal estate taxation and creditor claims.

Example: Mary and Bill are married, and they are concerned about a potential decrease in the estate and gift tax exemption amount in the upcoming years. Mary executes a SLAT and funds it with $11.58 million in assets. Karen’s SLAT names Bill and their three children as beneficiaries and designates their friend, Gus, as a trustee. Bill creates and funds a similar SLAT with $11.58 million that names Mary, their three children, and his nephew as beneficiaries and designates Friendly Bank as a corporate trustee (among other differences between the trust structures). Mary and Bill pass away in the same year when the estate and gift tax exemption is only $6.58 million per person. Even though they have gifted more than the $6.58 million exemption in place at their deaths, the IRS has taken the position that it will not punish taxpayers with a “clawback” provision that pulls transferred assets back into the taxpayer’s taxable estate. As a result, Mary and Bill have saved $2 million each in estate taxes assuming a 40 percent estate tax rate at the time of their deaths.

Contact an MM&C Estate Planning Attorney

If any of the strategies discussed above interest you, or you feel that potential changes in legislation will negatively impact your wealth, we strongly encourage you to call Miller, Miller & Canby at your earliest convenience and definitely before the end of the year. We can review your estate plan and recommend changes and improvements to protect you from potential future changes in legislation.  

David A. Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.
Contact David at 301.762.5212 or send him an email.

To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  


Estate Planning Tip: Be Aware of a Recent Tax Court Ruling that “Loan” Is Actually a Gift

In a recent tax court case, Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, 119 T.C.M. (CCH) 1502 (June 1, 2020), the court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan. Many people use trusts and gifts as estate planning tools. Be aware of the requirements of “loans” v. “gifts” when using lending as an estate planning tool.

Mary Bolles made numerous transfers of money to each of her children from the Bolles Trust, keeping a personal record of her advances and repayments from each child, treating the advances as loans, but forgiving up to the annual gift tax exclusion each year. Mary made numerous advances amounting to $1.06 million to her son Peter, an architect, between 1985 and 2007. Peter’s architecture career initially seemed promising, and during his early career, it seemed that Peter would be able to repay the amounts advanced to him by Mary. However, his architecture firm, which had begun to have financial difficulties by the early 1980s, eventually closed. Although Peter continued to be gainfully employed, he did not repay Mary after 1988. By 1989, it was clear that Peter would not be able to repay the advancements.

Although Mary was aware of Peter’s financial troubles, she continued to advance him money, recording the sums as loans and keeping track of the interest. However, she did not require Peter to repay the money and continued to provide financial help to him despite her awareness of his difficulties. Although Mary created a revocable trust in 1989 excluding Peter from any distribution of her estate upon her death, she later amended the trust, including a formula to account for the loans made to him rather than excluding him. Peter signed an acknowledgment in 1995 that he was unable to repay any of the amounts Mary had previously loaned to him. He further agreed that the loans and the interest thereon would be taken into account when distributions were made from the trust.

Upon Mary’s death in 2010, the IRS assessed the estate with a deficiency of $1.15 million on the basis that Mary’s advances to Peter were gifts. Mary’s estate asserted that the advances were loans. Both parties relied upon Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997).

Requirement for Advances to be Considered a Loan
The case of Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997) spells out the traditional factors that should be considered in determining whether an advance of money is a loan or gift. To establish that an advance is a loan, the court should consider whether:
(1) there was a promissory note or other evidence of indebtedness,
(2) interest was charged,
(3) there was security or collateral,
(4) there was a fixed maturity date,
(5) a demand for repayment was made,
(6) actual repayment was made,
(7) the transferee had the ability to repay,
(8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and
(9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.

Court Ruling
In the Estate of Bolles case, the tax court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan.

The court found that the evidence showed that although Mary recorded the advances to Peter as loans and kept records of the interest, there were no loan agreements, no attempts to force repayment, and no security. Because it was clear that Mary realized by 1989 that Peter would not be able to repay the advances, the court held that although the advances to Peter could be characterized as loans through 1989, beginning in 1990, the advances must be considered gifts. In addition, the court found that Mary did not forgive any of the loans in 1989, but merely accepted that they could not be repaid. Thus, whether an advance is a loan or a gift depends not only upon the documentation maintained by the parties, but also upon their intent or expectations.

Lending as an Estate Planning Tool
As the Estate of Bolles case demonstrates, intra-family loans can be a smart estate planning tool for many families IF properly structured and well-documented. Lenders (usually grandparents or parents) can essentially give access to an inheritance without any immediate gift or estate tax problems, generate a better return on their cash than they could with bank deposits, and borrowers (usually children or grandchildren) can take out loans at interest rates lower than commercial rates and with better terms. In fact, the Internal Revenue Service allows borrowers who are related to one another to pay very low rates on intra-family loans. Furthermore, the total interest paid on these types of transactions over the life of the loan stays within the family. These loans may effectively transfer money within the family, for the purchase of a home, the financing of a business, or any other purpose.

There are several points to keep in mind regarding these types of loans: the loan must be well-documented, lenders should usually ask for collateral, the lender should make sure the borrower can repay the loan, and the income and estate tax implications should be examined thoroughly.

Express Intent in Estate Documents
While you were kind enough to help a member of your family by lending him or her money, do not let this become a legal dilemma in the event of your incapacity or after your death. Instead, use your estate plan to specifically express what you want to have happen regarding these assets. Before lending money, it is important to carefully consider how the loan should be structured, documented, and repaid.

We are Here to Help
If you or someone you know has lent money and has questions about how this affects your estate plan, contact MM&C estate planning attorney Dave Lucas today to discuss the options.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  


New Guidance on PPP Flexibility Act and New 3508EZ Forgiveness Application

On June 5, 2020, the Payroll Protection Program Flexibility Act (Flexibility Act) was signed into law, amending the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  Central to the Flexibility Act was expanding the 8-week forgiveness period under the CARES Act for which businesses must spend their PPP loan proceeds to qualify for loan forgiveness.  Now, under the Flexibility Act, businesses may opt to spread their forgiven period over twenty-four (24) weeks, beginning on the date the PPP loan proceeds was disbursed.

Payroll Compensation Thresholds
Upon enactment of PPP loan program, it was unclear how to spread payroll costs out over the new 24-month period for individuals earning more than $100,000 per year.  Under the CARES Act, businesses are capped at $100,000 of annualized pay per employee, with a maximum amount paid to such employee capped at $15,385.  The SBA had arrived at that maximum amount by dividing the $100,000 amount by 52 weeks and multiplying by 8 weeks (100,000/52 x 8).  Last week, the Small Business Administration (SBA) released an Interim Final Rule (IRF) to address the confusion for whether the maximum amount under the 24-month forgiveness period would be the same as the 8-week forgiveness period.  Per the IFR, payroll costs are still capped at $100,000, but the maximum amount jumps to $46,154 per employee. In doing so, the SBA swapped the 8 weeks with 24 weeks (100,000/52 x 24).  Accordingly, businesses that opt for the 24-week forgiveness period are permitted to allocate almost 3 times as much PPP loan proceeds to employees making over $100,000 than they would under the 8-week forgiveness period.

The IFR also clarified owner compensation.  Now, under the Flexibility Act, owners may pay themselves either 1) 8 weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an 8-week forgiveness period; or 2) 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week forgiveness period.  The IFR stated that, for self-employment income earners opting for the 24 week forgiveness period, the SBA limited the forgiveness of owner compensation to 2.5 months’ worth of 2019 net profit (up to $20,833) since the maximum loan amount is generally based on 2.5 months of the borrower’s total monthly payroll costs during the one-year period preceding the loan.

PPP Loan Forgiveness EZ Application
On June 17, the SBA released an EZ version of the forgiveness application, Form 3508EZ, that applies to borrowers that:

•    Are self-employee with no employees; or
•    Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
•    Experienced reductions in business activity as a result of health directives relating to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

The EZ application requires fewer calculations and less documentation, and can accessed here.

SBA Guidance on Loan Forgiveness
On June 22, 2020, the SBA issued a clarification to its IFR whereby it detailed, among other things, when a borrower may apply for loan forgiveness.  Per this new guidance, borrowers may submit their forgiveness application any time on or before the maturity date of the loan, including before the end of the covered period, if the borrower has used all the PPP loan proceeds for which the borrower is requesting forgiveness. However, if the borrower applies for forgiveness before the end of the covered period, and the borrower has reduced any employee’s salaries/wages in excess of twenty five percent (25%), the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.  In addition, in the event the borrower does not apply for loan forgiveness within ten (10) months after the last day of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (whether in whole or in part), the PPP loan will no longer be deferred, and the borrower must begin paying principal and interest.

For businesses interested in learning more about the loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

Good News for PPP Borrowers: The New Paycheck Protection Program Flexibility Act of 2020

The landmark COVID-19 stimulus package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has been a significant tool for assisting struggling small businesses during the current international pandemic. Indeed, it has provided much-needed financial relief and saved countless from closure or bankruptcy. However, the centerpiece of this legislation, the Paycheck Protection Plan (PPP), has been a source of confusion and frustration for many business owners seeking this aid. In an attempt to alleviate frustrations and stay true to the original intent of the bill—providing cash flow to keep people employed and businesses afloat—a new bipartisan bill was passed by the Senate and signed by President Trump on June 5, 2020. The Paycheck Protection Program Flexibility Act of 2020  modifies and provides additional flexibility to portions of the PPP to address those needs. These are the key changes in the new act:
●    An extension of time to use funds. A major source of concern for PPP loan borrowers has been the limitation of the eight-week covered period. Only expenses incurred during this time frame were eligible for loan forgiveness. Unfortunately, many businesses were anticipating that they would not be able to utilize all of the loan proceeds during this period because of challenges like restricted operations due to mandatory stay-home orders and lockdowns, and unconventional payroll structures. The new act addresses that issue by expanding the covered period from eight weeks to the earlier of twenty-four weeks or until December 31, 2020. By extending the covered period, businesses have the flexibility to use the loan funds in a way that is more consistent with their standard practices without forfeiting their ability to take advantage of loan forgiveness.

●    A reduction in the amount required to be directed to payroll. Under guidance provided by the Small Business Administration (SBA) and the Department of the Treasury regarding PPP loans, in order to qualify for loan forgiveness of the total amount borrowed, small businesses had to spend at least 75 percent of their loan amount on payroll expenses. The new law reduces that requirement to 60 percent. This change affords business owners the opportunity to allocate the funds toward other eligible expenses such as utilities or rent without fearing the loss of loan forgiveness. However, there is a caveat: Under the language of the new law, which may be clarified by future SBA guidance, businesses must be careful to meet the lower 60 percent threshold because failure to do so will apparently result in the total loss of loan forgiveness. Previously, the forgiveness amount would have merely been reduced.

●    A change in the loan period from two to five years. The new law also changed how repayment of loans ineligible for loan forgiveness is handled. Rather than requiring the funds to be paid back within two years, the new act requires them to be paid back within five years. This amendment was effective immediately upon the law’s enactment. For businesses that have already obtained funds from lenders, the act leaves room for the lenders to make adjustments to the maturity terms for existing loans in order to comply with these improvements. Additionally, the timeline for deferring repayment has been extended. Lenders can defer all payments—principal, interest, and fees—until the loan forgiveness amount is determined.

●    Greater flexibility for rehiring employees or returning to typical workforce size. As was the case under the original PPP Act, businesses are still required to attempt to maintain or return to their prepandemic average number of full-time equivalent (FTE) employees in order to avoid a reduction in their loan forgiveness amount. However, the new law has provided more flexibility to businesses that seek to restore their workforce to previous levels. First, businesses have been given additional time—until December 31, 2020—to restore their workforces before incurring a reduction in their loan forgiveness amount. Next, small businesses that are still unable to meet the requirement due to challenges in rehiring for post-COVID-19-related reasons may be eligible for additional exemptions under the new legislation. To benefit from the exemptions, businesses must show that because of COVID-19-related orders from the federal government, they have been unable to restore their average number of FTE employees despite having made good-faith efforts to (1) restore the workforce and (2) restore the business to normal business functions. Documentation showing these good-faith attempts is required in order to avoid a reduction in the loan forgiveness amount.

●    Deferment of payroll taxes. The new act expands the number of businesses allowed to defer payroll taxes. Previously, small businesses were given the opportunity to defer payroll taxes, but businesses that had obtained PPP loans were not allowed to take advantage of this option if they also planned to seek forgiveness of their loans. Now, even borrowers who seek and receive PPP loan forgiveness can defer the Social Security tax and 50 percent of the tax on self-employment income from March 27 until December 31, 2020.

Ultimately, the PPP Flexibility Act alleviates many of the pressures small business owners were facing in an attempt to comply with the original PPP requirements under the CARES Act. In light of the changes in the new PPP Flexibility Act, an updated loan forgiveness application is anticipated. Nevertheless, one thing that has not changed is that documentation will still be a critical component of applying for loan forgiveness.

June 17 Update:  SBA and Tresury issued a press release announcing a new EZ PPP Loan Forgiveness Application and a Revised Full PPP Loan Forgiveness Application

For businesses interested in learning more about the loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

PPP Loan Forgiveness Clarified: Borrowers May Begin Calculating How Much, If Any, Must be Repaid

The CARES Act was enacted in late March with the goal of saving the economy from collapse or depression.  Central to the CARES Act’s goal is the Payroll Protection Program (PPP) with its design of saving small businesses from bankruptcy or closure.  As enacted, Congress offered complete loan forgiveness so long as borrowers met certain requirements relating to employee retention and spending limitations.  However, even for unforgiven PPP loan amounts, borrower-friendly terms such as a one percent (1%) interest rate and a six (6) month repayment deferral are offered.  Accordingly, the PPP was immediately and overwhelmingly popular.  Indeed, the pool of PPP money ran out in a few weeks, requiring Congress to replenish the funds.  

The Small Business Administration (SBA) recently published its long-awaited loan forgiveness application and offered some clarity on unanswered questions and outstanding concerns.  Specifically, borrowers now have the benefit of designating their loan proceeds and imputing those figures into a worksheet to determine which amounts would likely be forgiven, and which amounts would revert to the original PPP loan terms and be required to be repaid.

As you likely recall, loan forgiveness will focus on a borrower’s expenditures during an eight (8) week, or 56 day, period, commencing on either:

  1. the day on which the borrower received the PPP loan, or

  2. for borrowers with a biweekly (or more frequent) payroll schedule, the first day of the borrower’s first pay period following the PPP loan disbursement date.  

Given the PPP’s namesake, its focus is on preserving payroll and retaining employees.  As such, expenses that fit within the definition of “payroll costs” will eligible for loan forgiveness – such as compensation, employer contributions to group health care coverage and retirement plans, and certain state and local taxes assessed on employee compensation, among other costs.  Eligible compensation is capped at $15,385 per employee during the 8-week period (which is the 8-week equivalent of $100,000 per year).  In addition to such payroll costs, there are non-payroll costs that are likewise eligible for forgiveness.  These non-payroll costs include:

  1. mortgage interest payments on both real and personal property obligations incurred prior to February 15, 2020;

  2. lease payments on real and personal property leases executed prior to February 15, 2020; and

  3. utility payments for electricity, gas, water, transportation, telephone or internet access that was in service prior to February 15, 2020.  

In addition, with regard to eligible payroll costs, such costs that are incurred during the 8-week period, but not paid during the last pay period of such 8-week period, are eligible for forgiveness so long as they are paid on or before the next regular payroll date.

Once all eligible payroll and non-payroll costs have been identified and added together, borrowers must then determine the portion of their maximum loan forgiveness amount that will be reduced, if any.  Specifically, borrowers must reduce their maximum loan forgiveness amount by the following:

  1. Salary/hourly wage reduction.  For employees that were employed by the borrower in 2019, and had an annual salary of $100,000 or less, the borrower must have maintained that employee’s average pay during the 8-week period at a rate of at least 75% of the employee’s average pay from January 1, to March 31, 2020.  A borrower’s loan forgiveness will be reduced by the amount of any reduction in pay.  However, there is a safe harbor whereby borrowers can avoid such reduction if, by June 30, 2020, the borrower restores the employee’s salary to an amount equal to or greater than the employee’s annual salary as of February 15, 2020.

  2. Full-time equivalency (FTE) reduction.  Borrowers are required to maintain the number of employees and the average paid hours of employees during the 8-week period.  If there is a reduction in the average number of weekly full-time FTEs during the 8-week period compared to the period covering either (i) February 15 to June 30, 2020; (ii) January 1 to February 29, 2020; or (iii) for seasonal employers, a consecutive 12-week period between May 1 and September 15, 2019, the loan forgiveness will be reduced unless the borrower qualifies for the safe harbor or one of the exceptions.  Specifically, borrowers will not be penalized for an FTE reduction if (i) the borrower made a good-faith written offer to rehire the employee during the 8-week period, or (ii) the employee was terminated for cause, voluntarily resigned or voluntarily requested a reduction of hours.  For the FTE safe harbor, for borrowers that reduced their FTEs between February 15 and April 26, 2020, there will be no FTE reduction if the FTEs are restored by June 30, 2020.

Additionally, borrowers are subject to the 75% requirement whereby a borrower’s non-payroll costs cannot exceed 25% of all forgivable costs.    The application has a mechanism for determining whether at least 75% of the potential forgiveness amount was used for payroll costs.

The SBA application also requires borrowers whose PPP loans exceed $2 million to disclose that fact by checking a specific box.  It had been previously been announced that all such loans would be automatically subject to audit, and this feature allows the SBA to easily identify such borrowers.

While the application is complicated in places and confusing in others, organized borrowers should be able to navigate it.  In addition, there are already rumors relating to changes to the structure of PPP loans as well as what will be eligible for forgiveness.  Currently, the loan forgiveness application must be filed by October 31, 2020.

A copy of the SBA loan forgiveness application may be found here.

For businesses interested in learning more about the loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.


Main Street Lending Program: How to Save Your Business Without Relying on Congress or the CARES Act

As most small businesses have likely heard, the CARES Act’s Payroll Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program both ran out of money last week. While there is pending federal legislation to replenish both with several billions of dollars, given how the first round of funding went, it is all but certain that any second-round funding will be depleted in a matter of days. As such, there are going to be businesses that lose out on CARES Act funding altogether, especially considering how much money has already been injected into it and the uncertainty surrounding the duration of the pandemic. For those unlucky businesses, there are other CARES Act programs and mechanisms as well as state and local relief programs that they can take advantage of; or they can look to a less-publicized Federal Reserve program. Indeed, the Main Street Lending Program (the “Program”) is Federal Reserve creation and is an alternative to the PPP and EIDL and other CARES Act programs (it is unaffiliated with the Small Business Administration (SBA)).

Main Street Lending Program
The Program is designed to assist banks with loaning money more freely by requiring the Federal Reserve to purchase ninety five percent (95%) of the loans, while the lender assumes the remaining five percent (5%). As such and similar to the PPP, local banks serve as the lender for economically stressed businesses. In addition, businesses that have already received PPP loans may also take advantage of the Program.  

The Program operates in two (2) facilities:

  1. Main Street New Loan Facility (MSNLF)

  2. Main Street Expanded Loan Facility (MSELF).

For both facilities, repayment on these loans are four (4) years, amortization of principal and interest is deferred for one (1) year, and the interest rate is an adjustable rate of secured overnight financing rate (SOFR) plus 250-400 basis points. The minimum loan under both is $1 million, but the maximum under the MSNLF is generally $25 million, and for the MSELF it is generally $150 million. However, a key distinction between the two facilities is that, under the MSNLF, the loans are unsecured.

The Program is aimed to help small and medium-sized businesses. Accordingly, eligible borrowers must have either:

  • 10,000 or less employees; or

  • 2019 revenues of $2.5 billion or less.  

In addition, eligible borrowers must be created or incorporated in the United States, with a significant portion of their operations and employees based here. Borrowers must also make several attestations when submitting a loan application and depending on which particular facility it applies to, including, among other things, that the borrower will not use loan proceeds to pay preexisting loans or lines of credit; it will not cancel or reduce existing lines of credit; that it requires this financing due to COVID-19 pandemic and it will make reasonable efforts to use the loan proceeds to maintain its payroll during the term of the loan; and that it will follow stock repurchase, compensation and capital distribution restrictions set forth in the CARES Act.

For businesses looking for liquidity to carry them through the health emergency the Program offers a possible alternative on borrower-friendly terms, even though it does not provide for loan forgiveness like the PPP.  Likewise, the automatic $10,000 grant of the EIDL program, or the non-repayable aspect of the Employee Retention Credit, are additional options for businesses looking to obtain much needed-cash while they are under economic distress.

The Federal Reserve is currently working to create and implement the Program’s infrastructure. Final terms and conditions have not yet been released. For businesses interested in learning more about the Program, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

The CARES Act: Mechanisms for Avoiding Bankruptcy and Not Requiring a Loan Application

Now that the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has been around for several weeks, we know what has worked and what has caused confusion and frustration. The most popular aspects of the CARES Act has arguably been the Payroll Protection Program (PPP), which is designed to assist businesses with retaining employees through federally-backed and forgivable loans (provided certain requirements are met), and the Economic Injury Disaster Loans (EIDL) program, which is intended to provide small businesses with similar relief as the PPP. However, on April 16, 2020, the $349 billion that had been allocated to the PPP and the EIDL program ran out, and the Small Business Administration (SBA) immediately stopped accepting applications for both. As such, businesses that did not submit their application prior to the depletion of this CARES Act funding may have missed out on what became a “cash grab.”  While there is talk of another round of federal funding, any details pertaining to such talks amount to mere speculation. However, the CARES Act provides other mechanisms that provide more indirect economic relief as opposed to cash injections through the loan programs.

Employee Retention Credit
Specifically, the Employee Retention Credit is a fully refundable tax credit for employers equal to fifty percent (50%) of qualified wages that “eligible employers” pay their employees. “Eligible employers” are businesses and non-profits that carry on a business or trade during calendar year 2020 and that either (1) fully or partially suspend operations during any quarter of 2020 due to a governmental order, or (2) experience a significant decline in gross receipts during such quarter. This credit is only available to eligible businesses and non-profits, self-employed individuals are not eligible for the credit for self-employment services or earnings. This credit applies to qualified wages paid after March 12, 2020 and before January 2021, and the maximum amount of qualified wages taken into account for each employee for all quarters of calendar year 2020 is $10,000 – so the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. 

For purposes of the Employee Retention Credit, “qualified wages” include qualified health plan expenses, and is primarily dependent on the average number of full-time employees employed during 2019. Specifically, for eligible employers with more than 100 full time employees in 2019, qualified wages are wages paid to an employee that is not providing services to such employer due to (1) a full or partial suspension of operations by a governmental order due to COVID-19, or (2) a significant decline in gross receipts. For eligible employers with 100 or fewer employees in 2019, qualified wages are wages paid to any employee during either period described above where the employer experiences an economic hardship.

Employers may begin claiming the credit as early as March 13, 2020. The IRS has instructed all eligible employers to begin claiming the credit on Form 941 for the second quarter of tax year 2020. For qualified wages paid between March 13, 2020 and March 31, 2020, the IRS has released guidance that instructs eligible employers claim the credit on those wages on Form 941 for the second quarter of 2020. The credit cannot be claimed on a Form 941 for the first quarter of 2020.

The Employee Retention Credit is allowed against the employer portion of social security taxes and taxes imposed on railroad employers; and it is treated as an overpayment to the extent the credit exceeds the employer portion of employment taxes due. However, employers that received a PPP loan are not eligible to receive the Employee Retention Credit. For small businesses that claim the credit on its Form 941, and also receive a PPP loan, this credit is recaptured and must be repaid to the IRS.

The CARES Act also permits employers to defer the employer portion of the social security tax on wages that are paid from March 27, 2020 through December 31, 2020, with fifty percent (50%) due on December 31, 2021, and the other fifty percent (50%) due on December 31, 2022. However, this deferral is also unavailable to employers that have received a PPP loan.

Net Operating Loss Carryback
In addition, the CARES Act waives the carryback period for net operating losses (NOLs) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021.  Following the Tax Cut and Jobs Act of 2017 (TCJA), NOLs generated in tax years beginning in 2018 and later years were disallowed from being carried back, and could only be carried forward to offset up to eighty percent (80%) of taxable income. Under the CARES Act, NOLs from 2018, 2019 and 2020 can be carried back to the previous five (5) tax years (beginning with the earliest tax year first), and it suspends the aforementioned eighty percent (80%) limitation through the entire 2020 tax year.

As a result of this waiver, taxpayers may take advantage of previously unusable losses to offset taxable income generated in prior tax years. Furthermore, prior to the TCJA, the federal corporate tax rate was as high as 35%. Taxpayers may now carry back losses to offset income generated in higher tax years, rather than carry it forward to tax year 2021, when the federal tax rate is currently set at 21%. Taxpayers desiring to take advantage of this provision will need to consult with their tax advisors, and amend tax returns to potentially generate refunds to assist with their business operating costs. 

Montgomery County Public Health Emergency Grant
From a local perspective, Montgomery County, Maryland has released the online application for the Public Health Emergency Grant (PHEG) program. The application may be found here.

Please contact Chris Young at 301-762-5212 with any questions you may have about the CARES Act, the PPP, the Employee Retention Credit, the NOL carryback waiver, or with Montgomery County, Maryland’s PHEG program.

Chris Young is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

CARES Act: Corrects a TCJA Drafting Error Providing Relief to Commercial Property Owners and Tenants

The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted last month, and it is designed to provide economic relief to both businesses and individuals hit with financial stress and disaster due to the COVID-19 pandemic. For businesses, among the most publicized and popularized provisions, the CARES Act offers loans on borrower friendly terms, it provides cash grants, and it makes available certain federal tax benefits and incentives. For individuals, the CARES Act gave eligible taxpayers cash rebates depending on their filing status and adjusted gross income, and it offers deferment on mortgage payments and student loans. In addition, private businesses such as insurance companies, media companies, and internet providers have stepped up with assisting taxpayers in a time of health and economic crisis.

However, the CARES Act also provides relief in less publicized provisions. Specifically, the CARES Act revised (or, perhaps, corrected), an unintended consequence of the Tax Cut and Jobs Act of 2017 (TCJA) as it relates to the deductibility of interior property improvements made by commercial property owners and tenants.  Indeed, while drafting the TCJA, Congress had intended to expand the deductibility of qualified improvement property from fifty percent (50%) to one hundred percent (100%). In other words, commercial property owners and tenants making interior capital improvements could deduct 50% of the cost of such improvements – the TCJA intended to provide for the deductibility of the full cost of such improvements. This deduction had applied to both tenant and owner improvements of commercial properties, including retail shops, office buildings, and restaurants. However, due to drafting error, the precise language relating to such building improvements was left out of the TCJA. 

As a result, not only was the 100% deduction was left out of the TCJA, but it even voided the 50% deduction. In place of the 50% deduction, prior law kicked in, and for the past two (2) years, tenants and commercial property owners were instead stuck with a 39-year depreciation period. As a result, owners and tenants did not have much incentive to perform interior commercial improvements.

The CARES Act, however, corrects this drafting error. Now, commercial property owners and tenants can deduct one hundred percent (100%) of their property improvements immediately (there is no longer a depreciation period). In addition, the law is retroactive, allowing businesses to amend prior year’s tax returns to potentially receive a refund. 

Not only will this CARES Act revision provide certain businesses with potential refunds during these tough economic times, but it will also incentivize businesses to invest in their properties in the future.

Please contact Chris Young at 301-762-5212 for more information regarding this CARES Act provision.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

Newly-Released Interim Final Rule and FAQs Provide Clarity for Businesses to Obtain COVID-19 Funding

Independent Contractors and Self-Employed Individuals May Now Apply

This Friday, April 10, independent contractors and self-employed individuals may finally start applying for and receiving loans through the Paycheck Protection Program (PPP), or exactly one (1) week after PPP applications were opened for small businesses and sole proprietorships.  As some may have expected, last week’s PPP loan application opening was a bit chaotic and frustrating to potential borrowers.  Indeed, many applicants have received no loan proceeds yet, and, moreover, most of those applicants have not received a response from the Small Business Administration (SBA) – other than a confirmation email.  Making the loan application process more complicated, the SBA released the Interim Final Rule relating to the PPP on the eve of last week’s loan application opening.  While it was nice to receive clarification on a hastily-passed, and massive spending bill, it sent applicants and banks scurrying to update forms and revise applications. 

While independent contractors and self-employed individuals had a week to digest the developments from the Interim Final Rule, and to use the guidance to get their applications in order and to maximize their potential loan amount, they are also competing with the small businesses and sole proprietorships that have already applied for a finite pot of CARES Act funding.  Indeed, there are currently negotiations on Capitol Hill to inject an additional $250 billion into the already-authorized $349 billion for the PPP.  However, nothing has been passed yet, and there is likely to be opposition to any further federal spending bill – which will lead to delays to its passage and implementation, and which will waste precious days and weeks – all while payrolls, rents, utilities, and other operating costs continue to come due for businesses.

In addition to the Final Interim Rule, the SBA and the Department of the Treasury released a set of Frequently Asked Questions (FAQs) on the PPP on April 6, and have updated them in the subsequent days.  The FAQs have provided further clarity to applicants and banks and have assisted with facilitating the critical funding of small businesses operating expenses through the PPP.

Newly-Released Information

There are several important developments and clarifications from the Interim Final Rule and the FAQs.  Some of such developments and clarifications, as well as important details from the PPP that have not yet been covered in previous posts, include:

  • At least seventy-five percent (75%) of PPP loan proceeds must be used for payroll costs.  Payroll costs have also been clarified to disallow the inclusion of the employer’s share of the Federal Insurance Contributions Act (FICA).  In addition, there is an employee salary limitation of $100,000.00 on an annualized basis – in other words, if an employee’s annual salary exceeds $100,000.00, the maximum allowance that a business may include as part of its payroll cost is capped at $100,000.00.  However, this annual salary limitation only applies to cash compensation and does not include health care, retirement benefits or state and local taxes.

  • The interest rate was raised from 0.5% to 1.0% fixed rate.  Of course, this rate will only applies to any non-forgiven portion of a PPP loan.

  • Prior to the issuance of the FAQs, the CARES Act specified that payroll costs were to be calculated based on the average of the previous twelve (12) months of payroll, but the SBA’s PPP loan application specified that the average was to be based from calendar year 2019.  The FAQs state that either period may be used. 

  • For purposes of calculating a business’ number of employees, businesses may use either of the periods used to calculate payroll costs; or, in the alternative, businesses may opt for the SBA’s usual calculation.  In addition, the FAQs make clear that small businesses do not necessarily need to have 500 or fewer employees to be eligible for a PPP loan.  Indeed, small business may have more than 500 employees so long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act (although it is not required to meet such definition to be eligible).  A business can also qualify for a PPP loan if it meets both tests of the SBA’s “alternative size standard” as of March 27, 2019, which is: (1) the maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding carry-over losses) for the two full fiscal years before the application date is not more than $5 million.

  • For purposes of the amount of loan forgiveness, the measuring amount is the payroll costs over an eight-week period, beginning on the date the lender makes the first disbursement of the PPP loan to the borrower.

  • For businesses and lenders that submitted a loan application based on the Interim Final Rule, they will not need to take any actions to update such applications based on the newly released FAQs.  However, if such loan applications have not yet been processed, they may be revised in accordance with the FAQs.

Information Specific to Montgomery County Businesses

On the local level, Montgomery County, Maryland released guidance of its Public Health Emergency Grants (PHEG) program.  The PHEG program offers grants up to $75,000.00 to businesses of 100 or less employees, independent contractors, non-profits, and sole proprietors; and it requires such businesses to be physically located in the county.  In addition, the business or non-profit must be in good standing with the State of Maryland, and it must have incurred financial losses resulting directly or indirectly from the COVID-19 public health crisis. 

The PHEG program guidance also specifies the information and documents required to apply for the grant.  Among such information and documents are evidence of applications submitted to Federal and State COVID-19 assistance programs, including award or denial letters – the guidance requires applicants to apply for any applicable Federal or State programs to qualify for the PHEG program.  Applicants must also provide a statement of the intended use of county funds, financial documents demonstrating loss of revenue, and a brief explanation of how the public health emergency has affected business operations.

In addition, eligible businesses for the PHEG program must enter into a grant agreement with the county that stipulates that: (1) the county’s right to audit financial records; (2) reporting requirements; (3) the applicant’s obligations to return any unused or improperly used funds to the county; and (4) the grant recipient’s certification, under penalties of perjury, that the grant application and all documentation and statements are true and accurate, and that they may be prosecuted for any false statements. 

Currently, the county has not yet released a copy of the application for the PHEG program, but it has specified that it will be an online application.

The SBA’s Interim Final Rule may be found here and the FAQs here.  Information relating to the PHEG programs may be found here

Please contact Chris Young at 301-762-5212 with any questions you may have about the PPP, or with Montgomery County, Maryland’s PHEG program.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.


Additional CARES Act SBA Loan Programs and Montgomery County Relief to Help Your Business

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law late last week.  As a result, small businesses have spent this past week scrambling and reaching out to their banks and advisors to submit loan and grant applications with the hope of saving their business and avoiding bankruptcy.  On April 3, 2020, the Small Business Administration (SBA) will begin accepting applications for the CARES Act’s Paycheck Protection Program (PPP) (as detailed in a post earlier this week), despite prevailing uncertainty and unanswered questions over the specifics of the law and how they apply to unique and distinct circumstances.

While the PPP offers small businesses a lifeline for surviving the COVID-19 pandemic as well as the subsequent economic fallout, it is not the only option that the CARES Act offers businesses to protect them from this sudden and unexpected disruption. 

How the CARES Act Works

Under the CARES Act, the Economic Injury Disaster Loans (EIDL) program offers loans of up to $2 million to small businesses severely impacted by COVID-19.  Similar to PPP loans, EIDL funds may be used to cover payroll, rent, utilities, health care benefits and other operating expenses.  However, EIDL funds may also be used to pay fixed debts and other bills and accounts payable that cannot be paid as a result of the pandemic.  The APR on EIDLs is 3.75% for small businesses (2.75% for nonprofits), and principal and interest is deferred at the Administrator’s discretion, based on the borrower’s ability to repay. 

The highlight of the EIDL is the immediate advance of $10,000 in emergency relief that is funded within 3 days of submitting an application.  The $10,000 is fully forgiven and not required to be repaid, irrespective of whether the EIDL is approved or not. 

Eligibility is similar to the PPP loans.  Businesses must have less than 500 employees, and they include certain nonprofits, sole proprietorships (whether with or without employees), independent contractors, cooperatives, employee owned businesses, and tribal small businesses. 

How to Apply for Assistance

The SBA is accepting applications now.  Businesses may apply via the SBA’s website, and by clicking “Apply for Assistance.”

Businesses that apply for and receive an EIDL may also apply for a PPP loan.  However, if a business ultimately receives a PPP loan, they will need to roll their EIDL into the PPP, and the $10,000 advance they received would be subtracted from the amount forgiven in the PPP (the details of loan forgiveness under the PPP are detailed in our previous post).  For businesses that have loans from both EIDL and PPP, that business may not use EIDL funds for the same purpose as its PPP loan, and vice versa.

In addition, for businesses located in Montgomery County, Maryland, the County Executive and the County Council have approved the Montgomery County Public Health Emergency Grant (PHEG) program.  The PHEG program sets aside $20 million in funding to support businesses and nonprofits that have suffered an adverse economic impact from COVID-19.  The County Executive is currently developing a system and regulations for the implementation of the PHEG program, but there is no other information available at this time.  When information relating to this program is released, we will provide updates accordingly.

Please contact Chris Young with any questions you may have about the CARES Act, or with assistance in obtaining Emergency Injury Disaster Loan for your business.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

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