Pub. 19 2020-2021 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 25 new jersey auto retailer W W W . N J C A R . O R G AUTOMOTIVE ADVISORS PROFESSIONALISM • QUALITY • RESPONSIVENESS Our team has over 30 years of extensive knowledge and experience with the automotive industry. Our firm provides individual attention to each client, helping to maximize their bottom line. • Financial Reporting • Tax Planning • LIFO Inventory Application • Performance Benchmarking Please contact one of our partners. Daniel J. Ferrari, CPA Amy M. Dillon, CPA John J. Entz, CPA 2755 Philmont Avenue, Ste 210 Huntingdon Valley, PA 19006 215-914-1400 www.danferrari.com PAYCHECK PROTECTION  continued on page 26 on April 15, 2020, regarding the application of SBA’s affiliation rules. Under these rules, the PPP affiliation rules do not apply to any business operating as a franchise that is assigned a fran- chise identifier code ( FIC ) by SBA. Dealers operating new car franchises fall under this waiver and do not need to aggregate individual PPP loans to determine if the completion of form 3509 is required. Change in Ownership On October 2, 2020, the SBA issued a notice explaining re- quired procedures when an entity that has received a PPP loan has a change in ownership. Borrowers must notify their PPP lenders in writing prior to the closing of any change in owner- ship, which occurs when at least 20% of common stock or other ownership interest in a PPP borrower is sold or transferred, or when the borrower sells or transfers at least 50% of its assets or when the borrower merges with or into another entity. The lender may approve a change in ownership without prior SBA approval for changes structured as a sale or transfer of common stock or other ownership interest as a merger or asset sale. Sales or transfers of ownership interest and mergers are exempt from SBA approval provided the transfer or sale is 50% or less of the ownership interest or the borrower submits a PPP forgiveness application. The borrower may escrow funds equal to the outstanding PPP loan balance. Asset sales of 50% or more of the borrower’s assets ( measured at fair market value ) requires the filing of a forgiveness application and funds escrowed equal to the outstanding PPP loan balance. In all other cases, the PPP lender must submit a request for SBA approval to the appropri- ate SBA Loan Servicing Center. A selling dealership will notify their lender and be prepared to escrow funds equal to the PPP loan balance. After the forgive- ness process is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest; the balance is returned to the selling dealership. Taxation Is the forgiveness of the PPP loan taxable? The answer is im- portant and will affect the year-end taxation for dealers. For Federal purposes, PPP loan forgiveness shall be excluded from gross income. However, the IRS issued Notice 2020-32 in April 2020, stating that the tax-free income expenses are nonde- ductible. This guidance was consistent with historic IRS guid- ance regarding nontaxable income and related expenses. This had the net effect of essentially reversing the tax-free benefit of excluding the loan forgiveness from gross income. In late December 2020, the Consolidated Appropriations Act, 2021 ( CAA ) became law. CAA clarifies auto dealers whose PPP loans are forgiven are allowed deductions for otherwise deduct- ible expenses paid with the proceeds of a PPP loan, restoring the loan forgiveness’s federal tax-free benefit. Is forgiveness taxable in New Jersey? Absent any legislation being passed or guidance being issued by the State of New Jersey, PPP loan forgiveness is nontaxable for New Jersey auto dealers. Many auto dealers operate as a New Jersey S corporation, Partner- ship or Limited Liability Company ( LLC ). The aforementioned are entities that pass-through the tax attributes to their shareholders, partners or members. For New Jersey gross income tax purposes, a loan and forgiveness of that loan, are not taxable income for the in- dividuals as net profits from the business. Additionally, business costs or expenses related to business income exempt from tax under the Gross Income Tax Act, or which are partly or wholly nondeductible for Federal income tax purposes, may be deduct- ible ordinary business costs or expenses under the Gross Income Tax Act. Therefore, the PPP loan forgiveness is not taxable and the expenses incurred to obtain PPP loan forgiveness are deductible, making the PPP loan forgiveness nontaxable for NJ pass-through entities. New Jersey C corporations follow Federal guidance. With the CAA passage, the PPP loan forgiveness is nontaxable for auto dealers that operate as New Jersey C corporations. Timing of Forgiveness Application Dealers have until the maturity date of the loan to apply for forgiveness. However, 10 months after the end of their Covered Period, the borrower must make principal and interest payments to their lender unless an application for forgiveness has been submitted. The Covered Period is the 24-week ( 168 day ) period beginning on the PPP loan disbursement date. The lender has 60 days to review the forgiveness application and forward it to the SBA for review. The SBA has 90 days to approve the forgiveness amount. Any portion of the PPP loan that is not forgiven will be treated as a loan, payable with interest at 1% from the loan issu- ance date, with a maturity of two years for loans issued before June 5, 2020, or five years for loans issued after June 5, 2020.