PPP and PATC Developments

Overview

The Paycheck Protection Program (PPP) was enacted into law in late March and has now been statutorily modified by the Paycheck Protection Program Flexibility Act (PPFA).  It is designed to provide short-term financial relief to qualified businesses that have been negatively impacted by the action of state Governors in response to the virus. The Small Business Administration (SBA) administers the law. 

The Premium Assistance Tax Credit (PATC) is a refundable credit designed to offset the higher cost of health insurance triggered by Obamacare for eligible individuals and families that acquire health insurance purchased through the Health Insurance Marketplace.  In recent days important developments have involved the PATC. 

Prior posts have discussed various aspect of the PPP, particularly as applied to farm and ranch businesses.  In today’s post I take a brief look at a couple of PPP court developments and key information involving the PATC.  Recent developments of the PPP and the PATC – it’s the topic of today’s post.

PPP Court Developments

Maine case.  The SBA has promulgated a rule taking the position that an individual PPP applicant that is in bankruptcy is ineligible for PPP funds.  Also, if the applicant is an entity and a majority owner is in bankruptcy, the SBA also denies PPP eligibility to the entity.  In recent days, two more courts have addressed various aspects of the SBA position. 

In a recent case from Maine, the plaintiff had filed Chapter 11 and sought approval of a disclosure describing its Chapter 11 plan.  The statement acknowledged the problems the virus presented to its business, but assured creditors that the plan was feasible.  The plaintiff continued to project that its business would be viable and would continue in business and meet plan obligations.  The statement also described a general effort to get assistance, but did not suggest any likelihood of suffering immediate and irreparable harm in the form of ceasing business if access to the PPP were denied.  The plaintiff’s statement also pointed to a forecasted ability to weather the current economic problems after July 2020 and into 2022, even without receipt of funds under the PPP. 

The court noted the devoid record of any showing of projected receipts and disbursements and determined that it didn’t have enough information to determine if the state Governor’s conduct seriously impaired the plaintiff’s financial projections.  The court denied the temporary restraining order (TRO).  In re Breda, No. 20-1008, 2020 Bankr. LEXIS 1246 (Bankr. D. Me. May 11, 2020).  In a later proceeding the plaintiff claimed that the defendant violated the anti-discrimination provisions of 11 U.S.C. §525.  The court granted the defendant’s motion to dismiss.  In re Breda, No. 18-10140, 2020 Bankr. LEXIS 1626 (Bankr. D. Me. Jun. 22, 2020).

Fifth Circuit case.  As noted above, the SBA created a regulation with respect to eligibility for the PPP that makes an applicant ineligible to receive program funds if the applicant is a debtor in a bankruptcy proceeding.  85 Fed. Reg. 23, 450 (Apr. 28, 2020).  In In re Hidalgo County Emergency Service Foundation v. Carranza, No. 20-40368, 2020 U.S. App. LEXIS 19400 (5th Cir. Jun. 22, 2020), the debtor was in Chapter 11 bankruptcy and was denied PPP funds.  The debtor claimed that such denial violated the anti-discrimination provisions of 11 U.S.C. §525(a) which bars discrimination based on bankruptcy status in certain situations.  The debtor also claimed that the regulation was arbitrary and capricious and an abuse of the SBA’s discretion. 

The bankruptcy court agreed and issued a preliminary injunction mandating that the SBA handle the debtor’s PPP application without considering that the debtor was in bankruptcy.  The district court stayed the injunction and certified the case for direct appeal to the appellate court.  On further review, the appellate court vacated the preliminary injunction noting that federal law prohibits injunctive relief against the SBA. 

Premium Assistance Tax Credit

The IRS recently proposed regulations clarify that the reduction of the personal exemption deduction to zero for tax years beginning after 2017 and before 2026 does not affect an individual taxpayer’s ability to claim the PATC.  The regulations essentially adopt the guidance set forth in Notice 2018-84.  The proposed regulations apply to tax years ending after the date the regulations are finalized as published in the Federal Register.  Taxpayers can rely on the proposed regulations for tax years beginning after 2017 and before 2026 that end on or before the date the Treasury decision adopting the regulations as final regulations is published in the Federal Register.  Prop. Treas. Reg. 124810-19.

On another angle, the self-employed health insurance deduction may allow for a PATC.  In Abrego, et ux. v. Comr., T.C. Memo. 2020-87, the petitioners, a married couple, received an advance premium assistance tax credit under I.R.C. §36B to help offset the higher cost of health insurance acquired through the Health Insurance Marketplace as a result of Obamacare.  The advance credit was received for a tax year during which the wife worked as a housekeeper and the husband worked as a driver for a transport company.  The husband also operated his own tax return preparation business. The IRS determined that the entire advanced credit had to be paid back based on the petitioners’ actual income for the year as reported on the tax return. 

The Tax Court held that the repayment amount was capped under I.R.C. §36B(f)(2) when taking into account the partial self-employment health insurance deduction that lowered the petitioners’ “household income” to just under 400 percent of the federal poverty line.  Thus, the petitioners were eligible for some advance credit amount under I.R.C. §36B(b)(2) rather than being completely ineligible.

Conclusion

These are just a small sample of what’s been happening in the courts that might impact a client’s return.  Unfortunately, it’s still tax season.  Fortunately, the IRS has announced that the end of tax season won’t be postponed again.  You can sign up for two days of continuing education on these and other topics at the National Farm Income Tax & Estate and Business Planning Conference in Deadwood, SD on July 20-21. You may either attend in-person or online.  For more information click here:  https://washburnlaw.edu/employers/cle/farmandranchtax.html