![[UPDATED 6.5.20] Guidance & New Legislation on Forgiveness for PPP Loans](https://www.dodsonparker.com/wp-content/uploads/2019/01/lawblog_link-150x150.png)
[UPDATED 6.5.20] Guidance & New Legislation on Forgiveness for PPP Loans
Since our original post on May 20 (text below), new legislation has addressed some matters regarding the SBA’s guidance on PPP Loan Forgiveness. Some take-aways from the new legislation are:
- Instead of an 8-week covered period for distribution of funds, the period is now 24 weeks or December 31, 2020, whichever is earlier. However, borrowers with existing loans can elect to keep the current eight-week period. Borrowers who received a PPP loan before June 5, 2020 may elect the shorter 8 week period, which would also limit the period for which the headcount and salary-maintenance requirement applies and allow a borrower to avoid carrying unforgiven debt any longer than necessary.
- A borrower is required to spend at least 60% on payroll costs order to qualify for forgiveness. However, if the borrower doesn’t spend at least 60% on payroll costs, then there is no forgiveness for the loan whatsoever.
- Any unforgiven amounts will now be amortized over at least five years instead of two years. This change is effective only for loans disbursed after the statute’s adoption. For loans made prior to the statute’s adoption, borrowers and lenders must mutually agree to modify the maturity of the loan to take advantage of the extended maturity.
- The forgiven amount remains tax-free however; however, there has yet to be a fix concerning the deductibility of the expenses paid with the loan proceeds.
- The changes do not extend the period of time during which loans may be sought. Lenders may not accept or approve loans submitted after June 30, 2020.
Original post from May 20, 2020 is below, with indications of updates
A key component of the Paycheck Protection Program has been the availability of loan forgiveness for certain covered expenses. However, guidelines clarifying the procedures for obtaining forgiveness had not yet been released, resulting in confusion about the process. Late last week, the SBA released the Loan Forgiveness Application for the PPP, providing some clarifying guidance to the implementation of the program but raising additional questions.
Here are some key details to keep in mind and some areas where we hope that more clarification will be issued soon:
- The application requires you to provide copies of Form 941(s) and state unemployment reports. For employers, this means that you shouldn’t plan on filing the application for forgiveness before the middle of June at the earliest.
- Earlier guidance established the presumption that loan amounts below $2 million were in good faith. The loan forgiveness application has a specific box that employers must check if they received a loan in excess of $2 million. Under current guidance, you can expect some sort of audit for those larger loans, but it is unknown whether that will be in the form of an on-site audit, a request for supporting paperwork, a remote proceeding, or some other manner. And, of course, even recipients of smaller loans should be scrupulous with their record-keeping.
The time period for payroll costs is a strict 56 days (for now). For example, if you received your loan on Monday, April 20, the Covered Period ends 56 days later on Sunday, June 14. It does not carry over to Monday. Despite the strict 56-day time period, Employers who pay bi-weekly or even more frequently have some administrative flexibility in choosing when the clock begins running. They are allowed to use either the payroll that is accrued during the eight-week “Covered Period” beginning on the date of the PPP Loan Disbursement Date, or they can elect to calculate payroll costs using the eight-week period that begins the first pay period following the PPP disbursement—the “Alternative Payroll Covered Period.”See updates above.- Self-employed taxpayers must “pay” themselves during the eight-week period to get forgiveness. How this is accomplished is not explained in the application, so there are some open questions as to whether there are requirements about the manner and timing of payment by a self-employed person to herself.
- It appears that only cash (versus in-kind) compensation will qualify for forgiveness. This means that commodity wages do not qualify unless further guidance it given. If an employer applied for an original PPP loan using commodity wages, this may result in an adjustment to the allowed loan amount. This is an area where further guidance is needed.
- The costs appear to be based on “earned” amounts during the
eight-weekcovered period. This allows the employer to pay certain items after the covered period ends, however, it does not allow the employer to prepay any costs including extra labor. It is silent as to whether raises or bonuses during the covered period are allowed. Further guidance on this is needed. - It appears that fuel for vehicles is not an expenditure for a business utility. However, this is not specifically addressed in the application.
We will continue to update our blog as additional information becomes available, and, of course, the Business Services Group at DPBC is ready to assist you with your specific needs.
Post by Paul S. Parker.
Paul provides tax and trust expertise to individual and institutional clients, including corporations, business owners, charitable institutions, and private foundations.
What You Need to Know about Your Retirement Accounts as a Result of the Pandemic
Federal legislation was recently enacted which affects your retirement accounts–such as IRAs, 401ks, 403(a)s, 403(b)s, and governmental 457(b) plans. This post is a summary of important changes.
I. Changes for All Individuals
All Required Minimum Distributions (RMDs) are waived for the calendar year 2020. If you have already received a RMD for 2020, you may either roll it over into a qualified retirement account (including the account from which you made the distribution) and defer paying taxes. You must make this rollover within sixty (60) days of your receipt of the RMD. If you decide to take an RMD for 2020 instead of the waiver, the RMD is an eligible rollover distribution and subject to the mandatory 20% income tax withholding.
II. COVID-19 Specific Relief
A. “Qualified Individuals” Have Additional Options
If you are a “Qualified Individual,” you may access additional funds from your retirement accounts through two options: procedures for COVID-19 Related Distributions or distribution or COVID-19 Loan Relief.
You are a Qualified Individual if you are a retirement account participant who:
- Is diagnosed with a coronavirus illness (COVID-19 or SARS-CoV-2) through a CDC-approved test;
- Has a spouse or dependent diagnosed with a coronavirus illness; or
- Experiences “adverse financial consequences” because:
- You were laid off, furloughed, quarantined, or had hours reduced as a result of the pandemic;
- You cannot work due to the unavailability of child care as a result of the pandemic; or
- Your own business has had to close or reduce hours as a result of the pandemic.T
These withdrawals must be made by the end of 2020 and are limited to $100,000 per participant, whether in the form of a loan or distribution or both. These withdrawals can only be made if the retirement plan has been amended to allow these withdrawals. Your plan will likely ask you to certify that you meet the above conditions.
B. Rules for COVID-19-related Distributions
Before you take a distribution, it is important to know that distributions have different tax treatment than found under ordinary rules.
(1) The distribution is not subject to the 10% early withdrawal penalty that is generally applicable when you withdraw from the account at age 59 ½ or younger.
(2) The distribution is taxable if it is not repaid, but you have three years from the day after you receive the distribution to repay. The payback is treated as a rollover, so the annual plan contribution limits do not apply. Additionally, you avoid the mandatory 20% income tax withholding on the distribution, if it is timely repaid.
(3) If you do not repay the distribution, you can choose to include the distribution in your 2020 taxable year, or have the distribution taxed over a period of three (3) years (i.e., over years 2020, 2021, and 2022).
C. Rules for COVID-19-related Loans
Qualified Individuals can borrow the lesser of $100,000 or 100% of your retirement account balance, instead of the loan limitation of the lesser of $50,000 or 50% of your retirement account balance. This increase expires September 23, 2020 (i.e., 180 days after the enactment of the CARES Act, or March 27, 2020).
If you have an outstanding or new loan for which payments are due between March 27, 2020 and December 31, 2020 and are a Qualified Individual, then each payment due during such time period is extended for one year. The loan repayments, including interest, are to be re-amortized to reflect this one-year extension.
D. Notes for Plan Sponsors
1. Electing Withdrawal Expansions
Plan sponsors can adopt plan amendments allowing the withdrawal expansions as late as the end of the plan year beginning on or after January 1, 2022, or January 1, 2024 for governmental plans. The rules allow you to rely on the certification of your participant with respect to eligibility, but, as always, you should ensure careful record-keeping.
2. Minimum Required Contributions for Single-Employer Defined Benefit Plans
Any minimum required contribution for single-employer defined benefits plans that is due in the calendar year of 2020 can be postponed until January 1, 2021. Interest will be included in the minimum required contribution and will accrue between the original due date and the postponed payment date.
This information was prepared by the Business Services Group at Dodson Parker Behm & Capparella, PC.
April 15 is NOT Tax Day. Here are 5 Things You Need to Know about Taxes This Year
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Addressing COVID-19: What Employers Need to Know
The COVID-19 pandemic has placed employers in the difficult position of trying to navigate financial losses while addressing employee matters and health concerns. This fact sheet is intended to provide some critical information that employers need to know during this uncertain time, including highlights of the federal legislation enacted in recent weeks in response to the COVID-19 pandemic.
While not an exhaustive list, key concerns that employers should keep in mind during this time include:
- Leave for employees, especially under the recently-enacted FFCRA
- Available tax credits to assist with compliance with the new paid leave laws
- Compliance with state and federal law in terminating or furloughing employees or reducing the pay of employees
- Implications for employer-provided benefits, such as health insurance and retirement plans
- Employee privacy matters
- Immigration Matters and Temporary Changes to I-9 Form requirements
Below, we’ll address each of these topics. Or, you can click on the topic above to be sent directly to that content.
The new paid leave laws are complex, and they must be applied alongside other leave laws.
Here are some basics.
The Families First Coronavirus Response Act (FFCRA) covers employers with 500 or fewer employees and applies from April 1, 2020 to December 31, 2020. In determining the number of employees, regulations indicate that employers should include the following in their count: full-time and part-time employees, employees on leave, temporary employees who are jointly employed by the employer and another employer, and day laborers supplied by a temporary placement agency. Employees who have been furloughed do not count, nor do independent contractors.
Employers with fewer than 50 employees may seek a waiver from the Department of Labor if complying with the leave provisions of the FFCRA would place the viability of the business at risk.
There are two components to this new law that affect employee leave taken in connection with COVID-19. This leave exists in addition to other rights to leave granted by statute or employer policy. As with other statutes regarding leave entitlement, employers are prohibited from taking any adverse action against an employee for taking leave under FCCRA.
- Emergency Paid Sick Leave Act
This section of FFCRA provides that employers provide paid sick leave for full- and part-time employees unable to work or telework because they are experiencing symptoms of COVID-19 or are required or advised to self-quarantine and also those who are unable to work who are unable to work or telework because they must care for another individual who is quarantined or because of school or child care closures.
Full-time employees are entitled to 80 hours of paid sick time.
Part-time employees are entitled to paid sick time for the average number of hours the part-time employee works during a two-week period. If the part-time employee’s hours vary, a six-month average of their work can be used to determine their average hours.
Note: the rate of pay depends on the circumstances of the leave the employee takes.
- Employers must pay employees their regular rate of pay (capped at $511 per day and $5,110 in the aggregate) for an employee who takes leave because that employee experiences symptoms of COVID-19 or is required or advised to self-quarantine.
- Employers must pay employees 2/3 of their regular rate of pay (capped at $200 per day and $2,000 in the aggregate) if the employee takes leave to care for another individual.
Employers must post a conspicuous notice of employees’ rights under this law. A copy of this poster is available here. Employees are not required to give advance notice of their intention to take leave under this law, and an Employer can only require notice of an Employee’s intent to take the leave after they take their first day of leave.
- Emergency Family and Medical Leave Expansion Act
This section of FFCRA provides a temporary expansion of the FMLA such that employers of fewer than 500 workers must provide up to 12 weeks paid leave for an employee who cannot work or telework because the school or child-care provider of that employee’s child is closed as a result of a public-health emergency.
Note: Employees are eligible for this leave if they have been employed for at least 30 days.
How Pay Is Structured
- Employers are not required to pay employees for the first 10 days of such emergency leave. Note: during those first 10 days of leave, however, an employee is permitted to use any paid vacation or sick leave accrued under the employer’s leave policy.
- After the first 10 days of leave, employers must pay at least 2/3 of an employee’s regular pay for the number of hours per week the employee normally works (capped at $200 per day and $10,000 in the aggregate).
After the leave has ended, employers are generally required to restore an employee’s former position unless the employer (1) has fewer than 25 workers and (2) has made reasonable efforts to retain the employee’s position, but such position no longer exists due to economic conditions caused by such public health emergency.
An employer may require notice of leave only after the first day of leave, and no advance notice is required where the leave is for health reasons. Employees are required to give notice of their intent to take leave for childcare related reasons where the need to take such leave is foreseeable, but an employer cannot deny their leave if they fail to provide advance notice.
For both acts, employees are required to give the following information to employers when requesting leave: (1) the employee’s name; (2) the date(s) for which leave is requested; (3) the COVID-19 qualifying reason for leave; and (4) a statement representing that the employee is unable to work or telework because of the COVID-19 qualifying reason. Employees may be required to give more information, such as whether a shelter in place order was given. Employers are required to keep this documentation from employees for up to four years.
It is important for employers to consider how the various types of leave available to employees interact with each other, including leave under the Emergency Paid Sick Leave Act, leave under the Emergency Family and Medical Leave Expansion Act, and leave (such as PTO, vacation, or sick days) already in place under the employer’s leave policies. At certain times when exercising leave under one of these new statutory provisions, an employee may elect to take paid leave that is otherwise offered by the employer, and the employer may even require the employee to take such paid leave.
Keep scrolling to read more about what employers should know about COVID-19’s impact on employment law, or click here to see a list of all topics on this page.
Tax Credits to Assist with Paid Leave Requirements
FFCRA provides that employers subject to these leave laws are entitled to fully-refundable tax credits to cover the cost of the leave required to be paid for the periods of time during which employees are unable to work.
- For the Emergency Paid Sick Leave Act, employers have a credit against payroll taxes for 100% of the employer-paid qualified sick leave wages paid each calendar quarter, subject to specified limitation. The amount of sick leave wages taken into account for purposes of the credit may not exceed $200 for any employee and the aggregate number of days taken into account is limited to 10.
- For the Emergency Family and Medical Leave Expansion Act, employers have a 100% payroll tax credit for qualified family leave wages paid for each calendar quarter. The amount of qualified family leave wages that may be taken into account for each employee is limited to $200 per day and $10,000 for all calendar quarters.
Furthermore, this tax credit also includes the employer’s share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period (qualified health plan expenses). The employer is not subject to the employer portion of social security tax imposed on those wages paid during the leave.
Employee Retention Tax Credits
Employers that either suspend their business operations or receive 50% or less gross receipts in a quarter of 2020 compared to the same quarter of 2019 due to the COVID-19 outbreak are eligible for the Employee Retention Tax Credit.
The tax credit is equal to half of the qualified wages paid to employees after March 12, 2020 and before January 1, 2021, to a maximum of a $5,000 credit per employee.
The qualified wages are determined based on how many employees the employer has. If the employer has over 100 employees, qualified wages are the wages paid to employees not providing services because the business has suspended operations or a substantial decline in gross receipts. If the employer has fewer than 100 employees, qualified wages are any wages paid to employees.
The credit is put against the employer portion of social security taxes, but is fully refundable, so if the amount of the credit is larger than the amount owed in social security taxes, employers will be refunded by the IRS. For more information regarding employer tax credits, see this page on the IRS website.
Keep scrolling to read more about what employers should know about COVID-19’s impact on employment law, or click here to see a list of all topics on this page.
Requirements for Furloughs
Many employers are implementing furloughs to save labor costs during this time. There are a few important considerations to keep in mind if implementing a furlough ore reduction in force. In addition to obligations that new federal lending programs (like the Paycheck Protection Act) might have, it is important to keep in mind that other laws may be implicated when you are making staffing changes in response to financial distress.
FLSA Considerations
Under the Fair Labor Standards Act (FLSA) employees are classified as either exempt or non-exempt with respect to whether they are covered by the FLSA. Nonexempt employees are paid for each hour worked, so nonexempt employees who are furloughed are simply paid for fewer hours worked. Furloughs operate differently with exempt employees, as furloughs carry the risk of turning exempt employees into non-exempt employees who then must be paid for hours worked and for overtime hours.
Any furlough should be structured in such a way to ensure that preserves the exemption for an exempt employee. Specifically, any furlough of exempt employees should be implemented in full-week increments. Also, if an exempt employee is furloughed for a week or weeks at a time, it is vital that the employee perform no work during those weeks.
Health Benefits
A termination, furlough, or reduction in hours below full-time is usually a qualifying event triggering COBRA obligations. Many employers would like to continue to provide health insurance benefits to furloughed workers. Since health insurance plans generally apply only for full-time employees, however, an employer may need to work with its health insurance carrier to amend plan language to change eligibility terms or minimum hour requirements in order to continue coverage for furloughed employees.
Other Laws and Requirements
Remember that any time employers are considering implementing reductions in force or reductions of pay, it is important to make sure that obligations with respect to WARN acts and Unemployment laws are considered. Employers who sponsor foreign workers for a green card or nonimmigrant visa status may have additional obligations to notify the United States Citizenship and Immigration Services (USCIS) or Department of Labor in the event of a furlough. Information on the federal WARN Act is available here, and information on Tennessee’s WARN Act can be found here. For more information on Unemployment, keep reading, or click here.
Keep scrolling to read more about what employers should know about COVID-19’s impact on employment law, or click here to see a list of all topics on this page.
Implications for Retirement Plans and Health Benefits
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorizes employees to make withdrawals or loans to themselves from their retirement and tax-qualified plans. There are varying conditions based on the type of plan at issue. These new rules are optional for the employer, but employers should be aware of them, as employees may seek to take advantage of this relief. As always, rules regarding the taxation of retirement plans are complex and can have far-reaching consequences. Any steps that either an employer or employee takes should be made in conjunction with the advice of a tax professional.
Many employers are making efforts to continue to provide health insurance benefits to furloughed workers. Most health insurance plans generally apply only for full-time employees, however. Therefore, an employer may need to work with its health insurance carrier to amend plan language to change eligibility terms or minimum hour requirements in order to continue coverage for furloughed employees.
Keep scrolling to read more about what employers should know about COVID-19’s impact on employment law, or click here to see a list of all topics on this page.
Unemployment
Changes have been made to unemployment laws at the federal level that will have various effects for each state.
Employees who are terminated for reasons that are not their fault or who have experienced a temporary lay-off are eligible for unemployment compensation benefits. Unemployment benefits are now also available to individuals who must self-quarantine at the direction of a medical provider or health authority. Usually under Tennessee law, eligible claimants can receive up to $275 per week in unemployment compensation, depending on their typical average wages. The recently-enacted CARES Act makes changes to the benefit amount adding an additional $600 per week in benefits to all unemployment recipients. The CARES Act also increases the length of time a person may be eligible to receive unemployment benefits, providing an additional 13 weeks of benefits.
Employers who are terminating or furloughing several employees at a time are encouraged to report the mass claim on behalf of their employees. Information on how to make a mass claim, or mass partial claim in the event of a furlough, is available on the Tennessee Department of Labor and Workforce Development website here. By filing a mass claim, employers expedite the process for their employees to receive benefits and do not have to respond to individual claims filed individually by employees. Employers who expect to reopen and hope to continue employing their employees after a furlough, but who do not know an exact return date, should list a return to work date sixteen weeks from the layoff date.
The CARES Act gave authority to the states to extend unemployment eligibility to independent contractors and other workers who would be typically ineligible for unemployment benefits. Tennessee has indicated that it intends to extend unemployment benefits to self-employed workers and independent contractors. As of yet, however, the Tennessee Department of Labor and Workforce Development, which administers unemployment compensation, is still in the process of obtaining federal moneys that will allow it to implement these benefits. The Tennessee Department of Labor and Workforce has more information here.
Keep scrolling to read more about what employers should know about COVID-19’s impact on employment law, or click here to see a list of all topics on this page.
Employee Privacy Rights
Employers must take care to preserve their employees’ rights to privacy in matters of personal healthcare while also taking due care for the health and safety of other employees.
In this public health crisis, some employers may wonder about the privacy rights of their employees. The EEOC has issued guidance to assist on this issue available here. Employers are permitted to inquire whether employees are experiencing symptoms of the coronavirus and may even check an employee’s temperature. If an employee reveals that she has a COVID-19 diagnosis or is awaiting a diagnosis, then employers should be mindful that, under the Americans with Disabilities Act, the employer should not reveal the identity of that employee to other employees. But, the employer should take necessary precautions to warn other employees about potential exposure. Any medical information received by an employer should be kept in a file separate from that employee’s personnel file.
Keep scrolling to read more about what employers should know about COVID-19’s impact on employment law, or click here to see a list of all topics on this page.
Immigration Matters and I-9 Forms
Employers who are sponsors of visas may have particular obligations during layoffs. New laws also have temporarily relaxed paperwork requirements for new hires.
Due to the adoption of social distancing protocols, the Department of Homeland Security is permitting some flexibility in the examination of identification documents for the purposes of completing the Employment Eligibility Verification (Form I-9). Until this change sunsets on May 19, 2020 (unless it is later extended), employers will not be required to review a new employee’s identity and employment authorization documents in the employee’s physical presence. Rather, employers should inspect the Section 2 documents remotely (e.g., over video link, fax or email, etc.) and obtain, inspect, and retain copies of the documents, within three business days for purposes of completing Section 2 of the Form I-9. For detailed information as to how to complete the Form I-9, please see this page from the ICE website.
Also, employers that sponsor foreign workers for a green card or nonimmigrant visa status may have additional obligations to notify the United States Citizenship and Immigration Services (USCIS) or Department of Labor in the event of a furlough. More information on furloughs can be found above. Or, click here to see a list of all topics on this page.
This information was prepared by the Employment Law Team at Dodson Parker Behm & Capparella, PC. Learn more about our practice here.
Tennessee Supreme Court Tackles Liquor Tax, School Funding, & Judicial Canons of Construction in Five Related Opinions
Understanding Tennessee’s liquor laws is not for the faint of heart. Some counties are “bone dry.” Some are “dry” but sell beer. Some have “liquor by the drink,” but only if a local referendum has approved that type of sale. Wine in grocery stores is a saga unto itself. The collection and distribution of liquor taxes is no less confusing, as a fascinating set of opinions from the Tennessee Supreme Court shows.
In 2014, five different Tennessee counties (who did not sell liquor by the drink) filed suit against five cities that had received tax revenue from liquor by the drink sales but had not shared that revenue with the county school systems, as required by the statute that provided such revenues were to be distributed “in the same manner as the county property tax for schools is expended and distributed.” Tenn. Code. Ann. § 57-4-306(a)(2)(A) (2013). An additional complicating factor here is that each city had an independent school district that was not part of the county schools–something not mentioned in the statutory scheme.
The five different suits proceeded, with the trial courts involved reaching differing opinions, and each trial court providing a different legal reason for its decision. When the matters reached the Court of Appeals, four appeals were heard by one panel and held in favor of the cities. A different panel of judges ruled for the county. To resolve the conflict, the Tennessee Supreme Court consolidated the five cases for the purposes of oral argument. The resulting opinions provide a deep dive, addressing the inherent problems with deeming a statute ambiguous and embracing the infrequently-encountered concept of legislative adoption of a judicial interpretation.
The Court ultimately determined that the thirty-year status quo was not to be disturbed. Since the cities had their own school districts and the counties didn’t sell liquor by the drink, and the General Assembly had never bothered to amend the statute, the cities didn’t have to share liquor revenue with the counties–even if the language of the statute might suggest otherwise.
The Tennessee Courts website has put together a summary and collection of links to the opinions here.
As Tax Day Approaches, a Reminder about Withholdings
The 2017 federal tax reform legislation is just now beginning to show its impact for many filers. As April 15 approaches, many individual taxpayers may begin to see different totals than they have been used to on their tax returns. The change in the standard deduction has gotten lots of attention, but the new limits on deductibility are also having an effect on the bottom line.
Last year, the IRS reminded taxpayers to do a “Paycheck Checkup” to ensure that their withholdings were calculated in conjunction with the new tax law. If you skipped your checkup last year, you may be among the many finding unwelcome surprises at tax time. But, it’s not too late to correct course for 2019.
Review our previous write-up on the Paycheck Checkup and other useful resources.
Have you had your “Paycheck Checkup”?
The most recent tax reform laws could have a significant impact on filers who have itemized their deductions in the past. (Many people have historically itemized their deductions to take advantage of mortgage interest deductions and deductions for donations to charity.)
People who’ve itemized deductions on past tax returns should consider doing a “paycheck checkup.” You can use the updated IRS Withholding Calculator to help determine if the right amount of money is being held from your paycheck so that you can minimize surprises at tax time. This is especially important due to tax law changes like:
• A cap on deductions for state and local taxes.
• Limits to the deduction for home mortgage interest in certain cases.
• Elimination of deductions for employee business expenses, tax preparation fees and investment expenses.
You can find out more at IRS.gov/taxreform.
Did you know the IRS is on YouTube? Here are some YouTube videos that discuss some of the tax law changes:
• Paycheck Checkup (ASL)
• Do I Need to Fill Out a New W-4? ( Spanish | ASL )
• IRS Withholding Calculator Tips
State Judicial Reformation of Trust Sufficient to Prevent Asset Inclusion for Federal Tax Purposes
A state law provision that enables a court to reform errors in a trust document was sufficient for IRS purposes under I.R.C. § 2041 to prevent the inclusion of the trust assets in the estate. While letter rulings are, of course, limited to their facts, this is generally good news for the correction of errors and the implementation of tax-planning in Tennessee.
Avoiding Private Foundation 507(c) Termination Tax Means Less Pain for the Gain
Becky Farr Seidel of the Leaffer Law Group wrote a great piece recently for Bloomberg BNA’s Estates, Gifts and Trusts Journal addressing issues in terminating private foundations. Here are some salient points, and you can read the entire article here.
Unlike other 501(c)(3) entities, private foundations are subject to additional stringent regulations under Chapter 42 of the Code. For that reason, organizations that begin as private foundations may wish to terminate that status in the future.
Section 507(c) imposes a termination tax equal to the lesser of 100% of (1) the foundation’s net assets, or (2) all income, estate, and gift tax benefits received by the foundation and its substantial contributors when a foundation terminates its private foundation status either (1) involuntarily, where there have been willful, repeated violations of the private foundation rules; or (2) voluntarily, by notifying the IRS of its intent to terminate, setting forth the amount of the tax due.
There are ways to terminate without paying the tax. All of the net assets can be transferred to an institutional charity such as: a hospital, church, or school, which gets public charity status by virtue of the nature of their activities. The net assets can also be transferred to a publicly supported charity, as long as it meets one of two public support tests demonstrating that a substantial amount of support comes from the general public. Such transferee charity must have been in existence for a continuous period of at least 60 calendar months immediately preceding the distribution. A transfer to a donor advised fund held by a sponsoring organization that qualifies under Section 170(b)(1)(A)(vi) is also permissible without a termination tax.
Post by: Jillian Mastroianni
Guidance Issued for Private Foundations with Foreign Grantees
New guidance for private foundations from the IRS addresses treatment of foreign grantees. The groups may wish to treat grants to foreign grantees as qualifying distributions that satisfy the minimum distribution requirements rather than as expenditures requiring expenditure responsibility.
If a private foundation makes a “good faith determination” that a foreign grantee qualifies as a qualifying public charity, as defined in Revenue Procedure 2017-53, the grant will generally be a qualifying distribution that does not require expenditure responsibility in order to not be a taxable expenditure. A major development is that the new procedure supersedes Rev. Proc. 92-94, which allowed a private foundation to avoid expenditure responsibility if it had an equivalency determination, such as a grantee affidavit.
Post by: Jillian Mastroianni