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Month: December 2020

Should Business Expenses Paid by PPP Be Deductible?

Everyone suffered when the coronavirus pandemic hit the entire world. In fact, some are still suffering.

In the U.S., President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law to alleviate the economic burden brought on by the pandemic. One of its provisions is the Paycheck Protection Plan (PPP) addition to the Small Business Act.

What is a PPP?

It is a form of forgivable loan for small businesses. This is necessary so that these businesses could continue paying for the salaries of their employees including health benefits. The PPP could also be used for rent, utilities, mortgage, and interest on other debt.

So, should this loan be subjected to federal income tax? Also, should it be subjected to the Pennsylvania Personal Income Tax and Pennsylvania Corporate Net Income Tax.

CARES Act is silent

The coronavirus-related law doesn’t really explain whether the forgivable loan is taxable. As a rule, payments made are always deductible. Of course, there is always an exception or two to the rules.

On a regular situation, salaries or rent would be tax deductible. These are considered income after all. However, it can be argued that the PPP used to pay salary, rent, etc. is a grant.

To understand the situation, it’s important to go back to 1982. In Monaccio vs. Commissioner, a taxpayer wanted to deduct expenses spent for a course that was actually a grant. The Veterans’ Administration gave the tax-exempt grant through educational assistance.

In that case, the Court ruled that the grant was not deductible based on the Internal Revenue Code (IRC).

To answer the current issue regarding the PPP, the Internal Revenue Service (IRS) issued Notice 2020-32 last May 2. The notice cited Section 265(a) of the IRC, which states: “Where tax-exempt income is used for a specific purpose and expenses are incurred for that purpose, no deduction from adjusted gross income is allowed.”

In essence, the expense payments are not deductible since the taxpayer is actually receiving reimbursement for the costs.

Income tax

The Personal Income Tax doesn’t follow the same route. The last guideline on the matter was the Personal Income Tax Bulletin 2009-04 called the Cancellation of Business Indebtedness. Deductibility and taxability are similar in this matter.

The PIT is essentially different from the taxable income. However, when Notice 2020-32 is put into the equation, the result for the PIT and federal income tax becomes similar.

It has to be noted, though, that this is not similar to how the economic impact payments are treated. The stimulus checks released by the federal government are rebates. Therefore, they are not taxable in Pennsylvania.

The PPP loans under the Corporate Net Income Tax will have the same treatment as noted in the Notice 2020-32. Such is limited to federal income tax purposes.

The COVID-19 effect

Interpretation is necessary to avoid the double-dip effect. The federal and Pennsylvania interpretations are meant to be fair for all persons concerned.

The entire world was affected by the COVID-19 pandemic. Aside from the obvious health problems, the economic difficulty was more pronounced.

This is why Congress passed the CARES Act to aid American taxpayers. However, with every fiscal matter raised, the tax subject follows.

Is There Light in Condominium Investments Amid COVID-19?

President Donald Trump once described New York as a ghost town amidst the COVID-19 pandemic. While it’s not necessarily true, one can see that New York is no longer as densely populated as before.

New York is the ninth most densely populated states in the country. However, during the pandemic it didn’t seem that way anymore.

Many people work in New York because of the opportunities that abound. Some of the people who work in New York don’t necessarily live there. It makes for a viable region for condominium investment.

With COVID-19, though, almost every segment of the society was affected. People’s health is under threat, thousands of people lost their jobs, hundreds of businesses had to fold.

Such economic turmoil resulted in many distressed condominiums. Homeowners who lost their jobs or business could no longer afford paying for their mortgage or other real property-related dues. They might have to give up their homes.

Distressed condominiums

Not only that, real estate developers who have already erected their condominium buildings need to consider another strategy. With families financially affected by the economic effects of COVID-19, the target for the condominium units will surely be reduced.

For people with money, though, this is a good opportunity to make even more money in the future. Real estate investors can surely take stock with distressed condominiums.

One investment opportunity is to buy multiple distressed condominium units in a bulk sale. In numbers, it can be considered a bulk sale when it is a minimum of 10 units or 20% of the units in a condominium building.

Another investment opportunity is putting money in the recapitalization of a project.

There were some condominium buildings that failed to finish due to the fallout from COVID-19. These buildings could be refinanced with new investors coming in. The process is referred to as purchasing an equity interest in a developer-sponsor program.

This means that the investor will be a part owner of the condominium building or all the unsold units but in an indirect capacity.

Successor-sponsor

When it comes to bulk sale, it should be noted in the offering plan that the investor is the successor-sponsor. This means that they are afforded the rights and liabilities, plus obligations, of a sponsor related to the units sold.

Also indicated in the offering plan is the closing date of the bulk sale. It also states that the original sponsor still has rights over the properties until the closing date.

Usually, there is more than one investor to a bulk sale. If this is the case, a principal among the successor-sponsors should be elected. The principal is the director and shareholder. They will be directly involved in planning the offering.

It is also the principal that signs a certification on the accuracy and honesty of inputs in the offering plan.

On the other hand, the recapitalization process already holds a document detailing the transaction. If the group wants to have a principal, then that will be part of the amendment.

The principal has an important role in bulk sale or even in recapitalization. It is important that the successor-sponsors find someone they trust and someone who knows the trade.

Making future decisions

Does an investor even have a hand in making decisions? In the case of bulk sale, the investor will acquire the rights of the sponsor as well as have the authority to control the offering.

This means that the investor will have the power to modify prices and dictate the market release of the units. They will also have the authority to transform the layout of the units or even resize them. Of course, these would be subject to the regulations of the building and zoning body.

For recapitalization, the investor’s power over the subject property or properties will be subjected to a negotiation. The investor’s rights or obligations in this case are largely dependent on their role as operator or investor.

The rights and power are all stipulated in the transaction details. The rights could be related to setting prices or modifying condominium units.

New York Situation

When the bulk sale closes, there will be transfer taxes that need to be taken care of. The dues will be to both New York City and New York State. Since it’s a bulk sale, transfer tax rate is commercial in nature. This means it’s higher than if one pays for the transfer tax of just one unit.

The State also collects a Mansion Tax. This is a property tax levied upon the closing of residential properties that have a value of more than $1 million.

Taxes for recapitalization are indicated in the transaction document.

There is no right or wrong answer as to how one should invest in distressed condominiums. Should they do the bulk sale or recapitalization? It’s all a matter of preference. There is also no saying which one earns more. What is clear is that both are really great real estate investments.

Tax Deductions for Donations: 2020 Just Made it Easier

This year is tough for everybody. As the world deals with the COVID-19 pandemic, economies shut down and thousands of people lost their jobs. Almost everything made a turn for the worse. The only thing that got better is the tax deduction for donations.

On average, people are worse off this year compared to the last few years. It’s quite evident when one sees the long lines in food banks. This is really the best time to give to charity. For those who are better off, it’s really fulfilling to be able to share their good fortune with other people.

Tax-wise, it’s also beneficial.

The government enacted into the law the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March to help people grapple with the financial effects of COVID-19. A provision in the law states that taxpayers can have a deduction of up to $300 for cash donations. For now, the provision is only limited to donations made in 2020.

Standard deductions

The norm was that a taxpayer can deduct donations if personal deductions are itemized. This, as opposed to the standard deductions. The Tax Cuts and Jobs Act of 2017, though, created adjustments in the tax code.

The changes prompted majority of the tax payers to just take a standard deduction. Many taxpayers no longer itemized their deductions, which resulted in the doubling of standard deductions.

Of all taxpayers in 2018, only 11 percent itemized their deductions.

But this is not just about the process of filing taxes. There was also the implication that financial incentive for people who donate was removed.

Without that incentive, grassroots charity organizations greatly suffered.

With changes in tax credits, hopefully more will donate even if the intention was for the tax benefit.

How to qualify

The universal deduction allows taxpayers to enjoy a benefit as a result of donating. The result is a maximum of $300 deduction to the adjusted gross income.

However, there is also a set of guidelines to follow when donating. These are important in order to enjoy the tax benefit.

For one, the donation must be in cash. Although, credit card and check are also acceptable. The recipient of the donation should also be a qualified public charity based on the provision of the U.S. Internal Revenue Code.

The official website of the Internal Revenue Service has a search tool for taxpayers to use in order to confirm that an organization is a qualified charity group.

The law is silent on whether a couple can be allowed a total of $600 deduction. However, some experts are saying that it is a reasonable conclusion and should be honored.

Temporary

It is important to note that this deduction is temporary in nature. Although, charitable organizations are hoping that this tax benefit can be extended or even made permanent.

For those who are still figuring out where to donate, check out community organizations. The bigger foundations already have big pockets. It’s the smaller ones that really need more resources.

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