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Foreign Taxpayers and the CARES Act: NOL Carrybacks,

PPP Loans, Permanent Establishment, FTCs

TUESDAY, JUNE 2, 2020, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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June 2, 2020

Foreign Taxpayers and the CARES Act: NOL Carrybacks, PPP Loans, Permanent Establishment, FTCs

Kyle Dawley, J.D., CPA, Principal, Global Tax

Services

CliftonLarsonAllen

[email protected]

Patrick J. McCormick, J.D., LL.M., Partner

Culhane Meadows Haughian & Walsh

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Foreign Taxpayers and the CARES Act: NOL Carrybacks, PPP Loans, Permanent Establishment,

Foreign Tax Credits

Patrick J. McCormick, J.D., LL.M.

[email protected]

215.630.0861

Kyle Dawley, J.D., CPA

[email protected]

Mobile: +1 952 905 4082



Disclaimers

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by the presenters to the user. The user also is cautioned that this material may not be applicable to, or suitable for, the user’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The user should contact his or her tax professional prior to taking any action based upon this information. The presenters assumes no obligation to inform the user of any changes in tax laws or other factors that could affect the information contained herein. This presentation considers guidance provided through May 26, 2020. Additional guidance is being provided on a regular basis, please refer to the US Department of the Treasury website ( https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses ) for current updates.

6

https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

Agenda

• Overview of Covid-19 pandemic tax regulatory environment

• Permanent Establishment/Trade or Business

• U.S. Corporate Tax changes

• Payroll Protection Program

7

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Create Opportunities

Kyle Dawley

Kyle has a diverse set of experiences of helping Fortune 50 companies to individuals with their global tax issues. Before joining CliftonLarsonAllen to help lead their Global Tax Services group, Kyle spent time in Big 4 accounting firms developing strategies and managing complex international business and tax projects which also included transfer price implementation. In addition to having expertise in international tax matters, Kyle has a deep appreciation of technology commercialization and monetization as he spent time in-house helping run a gene editing company. He has served clients in a wide-range of industries with both foreign ownership of U.S. businesses and U.S. ownership of foreign businesses.

Kyle teaches the Advanced International Tax Topics class at the University of Minnesota Carlson School of Business.

Kyle Dawley, JD, CPAPrincipalCliftonLarsonAllen LLP220 South Sixth Street, Suite 300Minneapolis, MN 55402Mobile: +1 952 905 [email protected]://www.claconnect.com/services/international/international-tax-servicesEducation University of North Dakota (2007) J.D.University of North Dakota (2004) B.B.A. AccountingAdmissions IncludeMinnesota

8

Patrick J. McCormick

• Patrick J. McCormick is a partner with Culhane Meadows. He earned his J.D. from Vanderbilt University Law School in 2008, and his LL.M. from New York University School of Law in 2009.

• Patrick exclusively handles matters covering international taxation, frequently publishing articles and giving presentations on assorted areas of international tax law. Patrick works with accountants located throughout the United States and internationally on matters faced by their clients.

Patrick J. McCormick, J.D., LL.M.

[email protected]

215.630.0861

9


Introduction

• COVID-19’s overarching societal impact has created ripples in virtually all areas of life

– Tax consequences – particularly in the multinational realm – are primarily focused on adaptations to a changed society

◊ Some considerations – i.e. altered tax filing deadlines – are temporary

◊ Others, however – like COVID-19 related residency changes and correlated risk of permanent establishment/trade or business creation – are existing issues now requiring heightened focus

– Issues requiring more focus during pandemic are ones also likely to require greater attention in a post-COVID-19 world

– Governments’ reactions – focused on helping preserve cash flow

10

U.S. Federal Legislation- Coronavirus Pandemic

1st Bill

Initial Support and Vaccine Development

•H.R. 6074- Coronavirus preparedness & Response Supplemental Appropriateness Act

•$8.3B in COVID-19 Response Funding

•Became Law 3/6/20

2nd Bill

Paid Leave, Unemployment and Food assistance

•H.R. 6201- Families First Coronavirus Response Act (FFCRA)

•$100B in Worker Assistance, including emergency paid sick leave, food assistance and unemployment payments

•Became Law 3/19/20

3rd Bill

Coronavirus Aid, Relief and Economic Security Act (CARES)

•H.R. 748 Stimulus Packages

•Major Stimulus Package ($2 Trillion)

•Loans and support to major industries- broken down by industry and Scale of Business

•Direct Payments to Individuals

•Became Law on 3/27/20

Cares Act- Second Funding

•$310 billion increase (total of $659 billion) for Paycheck Protection Program

•$10 billion increase (total of $20 billion) for EIDL Grants and an additional $50 billion to support EIDL Loans

•$75 billion increase (total of $175 billion) for reimbursement to hospitals and healthcare providers

•$25 billion for COVID-19 tests

Main Street Lending

•Treasury Secretary charged to build a program to help midsized businesses and not for profits with between 500-10,000 employees

11

Compliance Relief

• Numerous compliance deadlines have been changed as a

result of COVID-19

–Notice 2020-18: federal income tax payments or returns originally

due April 15, 2020 automatically postponed until July 15, 2020

•Covered by Notice 2020-18 relief – 2019 tax year filing

requirements for domestic individuals/entities

–Information filing requirements (i.e. Forms 8938, 5471, etc.)

largely covered by Notice 2020-18 postponement

12

Compliance Relief

• Not covered by Notice 2020-18 relief – 2019 tax filings

requirements for non-April 15 filers

–Nonresidents – April 15 filing deadline for individuals receiving

wages subject to withholding/corporations or trusts with a U.S.

office

•Filing deadline otherwise is normally June 15

–Also uncovered – 2016 tax year April 15 filers who wished to

amend tax returns/claim refunds

• Notice 2020-20: gift tax return filing/payment deadline

extended to July 15

13

Compliance Relief

• Notice 2020-23: tax payments and tax filing obligations due

between April 1, 2020 and July 15, 2020 are automatically

postponed until July 15, 2020

–More expansive relief (explicitly including both nonresidents and

Form 3520)

•Also included – citizens/green card holders living abroad on April

15

–Relief available for all “time-sensitive actions” required between

April 1, 2020 and July 15, 2020

•Return amendments fall within covered scope (as do Tax Court

petitions)

14

Multinational Individuals – Specific Relief

• Revenue Procedure 2020-20: up to 60 days of American

presence arising from travel disruptions caused by COVID-19

will not be counted for purposes of determining U.S. tax

residency/tax treaty benefits for personal services income

–Standard treaty provisions: if a nonresident performs personal

services in the United States, she can exclude the income from

American tax unless she

•(1) has a fixed base regularly available in the U.S. (in the case of

independent personal services) or

•(2) spends sufficient time (more than 183 days) in the United

States working for a nonresident employer

15


• Revenue Procedure 2020-20: for relief to apply, must be a

nonresident for 2019 (and ultimately for 2020!)

– Individual also cannot be in the process of becoming a green card

holder

–Covered relief period – February 1-April 1, 2020

•Relief scope is narrow, based both on covered period and

requirement of 2019 nonresidency

–Relief obtained by filing Form 8843 with individual’s income tax

return

•Not required to be filed if individual has no tax return filing

requirement

16


• Revenue Procedure 2020-27: availability of the foreign

earned income exclusion (and exclusion for foreign housing

costs) not impacted by certain COVID-19 related departures

–Breaks in bona fide residency from December 1, 2019 (in the case

of China) or February 1, 2020 (in the case of all other countries)

until July 15, 2020

•COVID-19 classified as an event precluding the “normal conduct

of business” (per Sec. 911(d)(4))

17


• IRS FAQ: Information for nonresident aliens and foreign businesses impacted by COVID-19 travel disruptions

–https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions

–Nonresidents not subject to risk of creating United States permanent establishment/trade or business by virtue of activities of specified individuals from February 1-April 1, 2020

• CARES Payments: payments available to US taxpayers who have filed tax returns (irrespective of physical residence)

–Payments not received by U.S. taxpayers filing jointly with nonresident spouses

•U.S. taxpayer spouse can obtain credit for amount by filing separately in 2020

18

https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions

Permanent Establishment/Trade or Business Consequences

• During COVID-19, a growing trend towards remote

work/digitized services has been dramatically accelerated

–After COVID-19, digitized services are likely to be more prevalent

than pre-COVID-19

•Employees/agents of business enterprises who work in new

jurisdictions create risk of permanent establishment/United

States trade or business

–United States trade or business – statutory rule; standard is

profit-oriented activities which are regular, continuous, and

substantial

–Permanent establishment – treaty provision; standard is a

fixed place of business within the United States

19


• Why does existence of a permanent establishment/U.S. trade or business matter for a nonresident?

– Where a trade or business/permanent establishment exists, nonresident is taxed as if she had separately incorporated (in terms of direct income inclusion)

• Gains/business profits indirectly associated with the trade or business/permanent establishment – such as capital gains – are taxable

– Where a nonresident not engaged in a United States trade or business, she is taxed only on income sourced to the United States (rather than on worldwide income sourced to her U.S. trade or business)

• Tax scope can be drastically reduced – with capital gains generally excluded from tax (outside real estate) and treaty provisions often excluding income from covered items (like certain royalties)

–Only taxable on FDAP income if no permanent establishment/trade or business

21


• Nonresidents taxable in the United States on income

effectively connected with a United States trade or business

(“ECI”) on a net basis

–“Trade or business” undefined in the Code/regulations – but profit-

oriented activities carried on in the United States which are

regular, substantial, and continuous are properly classified as a

trade or business for these purposes

•Activities of an agent normally are imputed to the agent’s

principal for determining whether the principal is engaged in a

United States trade or business

–Generally, the performance of personal services within the United

States constitutes a (statutory) United States trade or business

22


Treaties substantially modify default United States rules; one primary

alteration is replacement of the “U.S. trade or business” standard

with an elevated standard of a “permanent establishment”

•Provisions are treaty-specific, but usually provide that business

profits of a resident of one country may be taxed by the other

country only where a permanent establishment exists in that

country and the profits are attributable to such a permanent

establishment

•Where no permanent establishment exists, nonresident only

subject to U.S. tax on U.S. sourced income (rather than all

income attributed to the permanent establishment,

irrespective of source)

23


• Does level of activity in the United States create a U.S. trade or business/U.S. permanent establishment?

–Differences in how modern businesses are conducted add layers to U.S. tax analysis, with ambiguity complicating transactions

•Longstanding U.S. (and foreign) guidance in the cross-border tax area weighs physical presence heavily

–United States trade or business determination dictated by whether profit-oriented activities are regular, continuous, and substantial

•Agent activities can be imputed based on facts and circumstances – often focusing on agent independence

–In COVID-19 context –whether individual’s American activities constitute a U.S. trade or business looks to (1) activities undertaken and (2) income “effectively connected” with them

24


• For permanent establishments, standard is elevated

–Standards evolving to properly address digital considerations –

machinery/servers an example of ambiguity

–COVID-19 considerations – “permanence” element critical

•Where physical space is utilized (directly or indirectly) to

generate significant income for a business enterprise, risk of a

permanent establishment results

•Treaties (and their technical explanations) consistently

emphasize that permanent establishments must be non-

temporary

25

Taxpayer Classification

• Which individuals are U.S. taxpayers?

–Classified as a “resident” for United States income tax purposes under default rules if:

•Lawfully admitted for permanent residence (green card holder); or

•Meet substantial presence requirements

–Substantial presence – 31 days in the current year in the United States and the sum of days in the last three years (after applicable multipliers) exceeds 183

•Number of days present in the U.S. in the current year multiplied by 1, days present in the first preceding year multiplied by 1/3, and days present in the second preceding year multiplied by 1/6

2626


• Substantial presence test: individual classified as a U.S.

resident if she spent more than 31 days in the current year in

the U.S. and the sum of her days spent in the U.S. over the

past three years exceeds 183 after the use of applicable

multipliers

• Number of days present in the U.S. in the current year multiplied

by 1, days present in the first preceding year multiplied by 1/3, and

days present in the second preceding year multiplied by 1/6

• Individuals can meet substantial presence requirements without

spending 183 days in the U.S. in any year!!

27


• Who is a U.S. taxpayer?

– Exceptions exist to resident classification: (1) closer connection to another country and (2) treaty tiebreaker provisions

•Closer connection exception: look to whether individual’s facts and circumstances show a closer connection to another country

–Available only for substantial presence residents!

• Income tax treaties – individuals classified as residents of both treaty party countries are reclassified as a resident of only the one which contains their permanent adobe or (if a permanent abode available in both) their “center of vital interests”

–Available to both substantial presence residents and green card holders – but not citizens!

•Treaty reclassification only for income tax liability purposes –information reporting requirements largely unmodified

28

Select CARES Act Tax Provisions

Net Operating Losses (“NOLs”)

5 year carryback for NOLs from 2018, 2019, or 2020

80% of taxable income limitation suspended

through 2020

Interest Deductibility Limitation

Limit increased from 30% of adjusted taxable income to 50% of

adjusted taxable income for 2019 and 2020

Qualified Improvement Property

Favorable change to tax depreciation rules for

building property

29

NOL Carryback – Overview

30

• 5-year carryback period creates significant rate benefit opportunity, as carryback NOLs can offset incomesubject to higher pre-TCJA tax rates.

➢ Consider use of timing strategies, e.g. accounting method changes, to shift income to earlier tax years.

• NOL carrybacks could require recalculation of carryback year items affected by NOL, including 163(j) limitation,section 250 deduction for GILTI/FDII, and AMT.

• Election is available under section 172(b)(3) to forego NOL carryback.➢ Consider waiver if carryback would result in loss of permanent benefit such as FDII deduction or

Foreign Tax Credit.

Pre-TCJA

NOLs

Post-TCJA NOLs –

Pre-CARES Act

2-year carryback 20-year carryforward

Post-TCJA NOLs –

Post-CARES Act

No carrybackUnlimited carryforward subject to 80% taxable income limitation

5-year carryback for post-2017, pre-2021 NOLsUnlimited carryforward subject to 80% taxable income limitation starting in 2021

NOL Carryback – Mechanics

31

• In determining the amount of NOL carryback utilized in each carryback year, taxable income ismodified for items listed in section 172(d), including 199A and section 250 deductions.

• Absent a special election (described below), NOL carrybacks to section 965 inclusion years result in adeemed election under section 965(n) being made by the taxpayer.

➢ Section 965(n) election enabled taxpayers, on their original 965 inclusion year returns, toavoid being “whipsawed” on NOLs by electing to avoid offsetting 965(a) income by currentyear NOLs or NOL carryforwards. Whipsaw occurs where, absent a section 965(n) election,section 965 inclusion absorbs NOL which in turn limits FTCs that would otherwise reducesection 965 tax.

➢ Clients should consider election under section 172(b)(1)(D)(v)(i) to “skip” section 965 inclusionyears as part of the carryback period. This would be beneficial in cases where:

1) NOL carryback to section 965 inclusion year reduces section 904 FTC limitation incarryback year.

2) Section 965 inclusion year begins in 2018 (e.g., due to 1-month deferral elections undersection 898(c)(2) being made).

NOL Carryback – Mechanics (Cont’d)

32

• For tax years beginning in 2018 and ending on or before June 30, 2019, form 1139 isconsidered timely if filed within 18 months after close of tax year.➢ Applies only to NOLs – refund claims resulting from AMT credits, FTCs, etc. are

made via filing amended returns on forms 1120-X or 1040-X.➢ Refund claims for section 965 inclusion year cannot use form 1139 – must use

amended return.

• Waiver of 5-year carryback must be filed on timely filed, original return and isirrevocable.➢ Election to exclude section 965 inclusion year from carryback period must be

included in timely filed return for first tax year ending after March 27th, 2020.

NOL Carryback – Foreign Tax Credit Issues

33

• NOL carryback may “release” FTCs claimed in a carryback year, thus subjecting such FTCs first to 1-yearcarryback, then to 10-year carryforward under Treas. Reg. §1.904-2(b).

➢ Need to file 1040-X or 1120-X to claim newly released FTCs in carryover year.➢ GILTI FTCs do not carryover.➢ Example – A calendar year C Corporation carries back NOL incurred in 2020 to 2019, in which the

taxpayer claimed FTCs in both the General source and 951A (GILTI) baskets. The resulting reduction to2019 taxable income could reduce or eliminate the 2019 FTC Limitation, resulting in the General basketFTCs being eligible for 1-year carryback or 10-year carryforward and the GILTI FTCs being permanentlylost.

• NOL carryback may also alter attributes used in calculating the FTC limitation under section 904.➢ NOL subject to carryback may be partially “US-source” and “foreign-source,” and could therefore

change FTC limitation in carryback year by changing Overall Foreign Loss (“OFL”), Overall Domestic Loss(“ODL”), or Separate Limitation Loss (“SLL”) whose recapture is subject to ordering rules under Treas.Reg. §1.904(g)-3.

➢ In the above example, the NOL carryback could increase the 2019 OFL, which could limit futureutilization of the 2019 FTCs now subject to carryforward.

NOL Carryback – Example

34

12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020

Taxable Income before Interest Expense 30,000,000 30,000,000 30,000,000 30,000,000 (75,000,000)

Interest Expense (10,000,000) (10,000,000) (10,000,000) (10,000,000) (10,000,000)

Section 965 Inclusion 5,000,000

Section 965 Inclusion - 78 Gross-Up 1,000,000

GILTI Inclusion 1,000,000 1,000,000 1,000,000

GILTI Inclusion - 78 Gross-Up 200,000 200,000 -

Section 250 Deduction - GILTI (600,000) (600,000) -

Section 250 Deduction - FDII (1,000,000) (1,000,000) -

163(j) Adjustments - - -

Adjusted Taxable Income 29,600,000 29,600,000 (74,000,000)

Applicable Percentage 30% 50% 50%

163(j) Limitation 8,880,000 14,800,000 -

Taxable Income before FTC 20,000,000 26,000,000 20,720,000 19,600,000 (74,000,000)

Tax Rate 35% 35% 21% 21% 21%

Tax Liability before FTC 7,000,000 9,100,000 4,351,200 4,116,000 -

Less: FTC (1,000,000) (1,000,000) - (800,000) -

Net Tax Liability 6,000,000 8,100,000 4,351,200 3,316,000 -

Tax Year

NOL Carryback – Example (Cont’d)

36

12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020

Taxable Income before Interest Expense 30,000,000 30,000,000 30,000,000 30,000,000 (75,000,000)

Interest Expense (10,000,000) (10,000,000) (10,000,000) (10,000,000) (10,000,000)

Section 965 Inclusion 5,000,000

Section 965 Inclusion - 78 Gross-Up 1,000,000

GILTI Inclusion 1,000,000 1,000,000 1,000,000

GILTI Inclusion - 78 Gross-Up 200,000 -

Section 250 Deduction - GILTI -

Section 250 Deduction - FDII -

163(j) Adjustments - - -

Adjusted Taxable Income 31,000,000 31,200,000 (74,000,000)

Applicable Percentage 30% 50% 50%

163(j) Limitation 9,300,000 15,600,000 -

163(j) Excess Interest Carryback (5,600,000) 5,600,000

Taxable Income before FTC and NOL Carryback 20,000,000 26,000,000 21,700,000 15,600,000 (74,000,000)

Less: NOL Carryback (20,000,000) (20,000,000) (21,700,000) (12,300,000) 74,000,000

Taxable Income after NOL Carryback - 6,000,000 - 3,300,000 -

Tax Rate 35% 35% 21% 21% 21%

Tax Liability before FTC - 2,100,000 - 693,000 -

Less: FTC - (2,000,000) - (160,000) -

Net Tax Liability - 100,000 - 533,000 -

NOL Carryback Refund Claim 6,000,000 8,000,000 4,351,200 2,783,000 -

FTC Carryover 1,000,000 - - - -

Tax Year

Process for Corporate Refund Claims & Filing Procedures

37

IRS Service opening

Recommended procedural changes, when possible:

» Electronically file

» Consider waiting to file paper returns

» Electronic Signatures

» Fax Refund Claims (less than 100 page)

» Monitor IRS Website

Filing Procedures:

Internal Revenue Service

Amended Tax Return in Carryback Year, or

Tentative Refund Claim – Form 1139, IRS has 90 Days to Process

Note: Deadlines to file expedited refund claims and amended returns

Check State Conformity

Check filing attachments and procedures carefully

Expedited Refund Claim or

Amended Return

Already have NOL’s in tax years 2018-2020?

Create NOL’s in tax year 2018-2020 using:

» Qualified Improvement Property Change

» Interest Deductibility

Determine taxable income and taxes paid in the 5-year period preceding the loss year? (Tax Years 2013-2017)

Elect to waive the loss carryback if opting out

Determine Loss Years

(2018-2020)

COVID-19 - Customs and Supply Chain Update

• Customs– New entry filing and information transmission guidelines for PPE subject to an

Emergency Use Authorization (EUA) (e.g., diagnostic tests, masks/respirators) or where an enforcement discretion policy has been published in guidance (e.g., non-invasive remote monitoring devices, ventilators and accessories or other respiratory devices).

– Additional Section 301 tariff exclusions granted by USTR for certain medical devices covered by List 3.

– USTR has requested comments on further modifications to remove duties from additional medical devices. Due by June 25.

– 90-day deferment of Customs duties, taxes and fees for importers facing significant financial hardship due to COVID-19.

– Companies must understand country of origin, classification, and valuation of imported merchandise in order to minimize impact of Customs duties, taxes, and fees.

38

COVID-19 - Customs and Supply Chain Update

• Supply Chain– Short term, companies must:

◊ Reduce product variety, engage early and often with suppliers, revise purchasing and staffing plans to focus on high-demand categories

◊ Focus staffing and logistics on strategically located distribution centers and push suppliers to deliver directly to DCs for staging and final mile delivery or directly to customers or retail locations

◊ Optimize routing, extend deliver terms, and enforce order maximums

◊ Deal with impact on freight rates and reduced/modified transportation capacity, port congestion, limited warehousing/DC supply

– Long term, companies must:

◊ Invest in some level of supply chain network mapping and other IT/digitization/automation tools

◊ Consider revenue-assurance metrics, not just cost savings, and use this opportunity to reevaluate suppliers and develop more rigorous supplier evaluation metrics

◊ Reconsider warehousing and DC location strategies, and work with freight forwarders, shippers, and 3PLs to optimize transportation planning

39

Paycheck Protection Program

Forgivable Loan

<500 Employees or up to 1500 based

on Industry

Max Loan amount is $10M

Processed through Banks or non-bank

SBA Lenders

Tiered Forgiveness based on 75% of funds used for payroll cost in

“Covered Period”

Wages per Employee capped

at $100K/ year

Loan amount=

2.5X Monthly Payroll+Benefits +

State Taxes

40

• Must certify that loan is needed

• There are fines and penalties so must understand that Certifications

Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.

• Difference between historical SBA rules and intent of the PPP has created confusion

• Communication on the topic in Interim Final Rule on April 3

• Further clarification provided in FAQs released on April 6:

• Question 3 of the FAQs asked if a business seeking a PPP loan has to qualify as a small business concern under the Small Business Act, to which the answer was:

• No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees “whose principal place of residence is in the United States”, or the business meets the SBA employee-based size standards for the industry in which it operates

• More confusion in FAQs released on May 5:

• Question 44 of FAQs ask how do SBA's affiliation rules apply with regard to counting the employees of foreign and U.S. affiliates?

– Answer: For purposes of the PPP's 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules.

• New Final Interim Final Rule published on May 18 confirms FAQ #44 above and that that an applicant must count all of its employees and the employees of its U.S. and foreign affiliates for purposes of the PPP’s size standard.

• The SBA has mitigated the impact of this new guidance by granting a safe harbor to borrowers who applied for a PPP loan prior to May 5, 2020 based on FAQ #3 above.

PPP Eligibility for Foreign-Owned U.S. Subsidiaries and U.S. headquartered companies

41

PPP Forgiveness

Forgiveness calculated

based on these factors over

covered period

Proceeds used “payroll costs”, mortgage int,

rent, & utilities

Employee headcounts are maintained;

Comp maintained for employees earning

<$100,000;

=>75% must be used for qualified Payroll

Costs

<25% of the loan amount is used for

qualified non-payroll costs.

Forgiveness is Calculated based on these variables and can be 0-100%

Forgiveness is Federally Tax Free

42

Covered Period/ Benefit Period=eight-week period subsequent from Funding Date

Headcount Calc-A reduction in forgiveness if the avgnumber of FTEs per month during covered period is less than AVG number of employees per month during the look-back period (which can be February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020, at the borrower’s discretion).

Form 3508

• Loan Forgiveness Application

• Aggregates Forgivable Costs

• Calculates FTE and Wage Reductions

• 3 Potential Forgiveness Amounts, Select the Lowest

• Information Comes from Supporting Schedules

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Forgiveness – Items to Consider

#2. Did the entity maintain wages at least 75% of prior quarter?

(excludes high earners)

(line 5, Schedule A, line 3)

#3. Did the entity maintain FTEs? (includes re-hires thru 6/30)

(line 7, Schedule A , line 13)

#5. Was enough of that spending on payroll? (25% limit on non-payroll)

(line 10)

#4. What was the PPP loan amount?

(line 9)

#1 How much did the entity spend on allowable costs?

(lines 1 -4)

#6 Did entity receive EIDL advance (up to $10,000)?

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Lowest of the three amounts calculated below

Economic Injury Disaster Loan (EIDL)

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• Existing program which was expanded to cover COVID-19

• Up to $2M, up to a 10 Year Term, with 1 year deferral, 3.75%

• Can have both PPP and EIDL, BUT must be used for different purposes

• No forgiveness, but can take advantage of other credits

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COVID-19 Decision

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