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SEC Guidance Encourages PPP Loan and Tax Refund Disclosures

Posted on June 24, 2020

SEC staff has provided guidance encouraging companies to disclose information about the effects of COVID-19 on their operations, liquidity, and capital resources, including information on tax benefits expected from the coronavirus stimulus relief package.

In the SEC’s June 23 Division of Corporation Finance disclosure guidance, Topic No. 9A, supplementing earlier guidance, the staff stressed the importance of companies providing “robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment.”

“While we have observed companies making some of these disclosures in their earnings releases, we encourage companies to evaluate whether any of the information, in light of its potential materiality, should also be included” in the firms’ management discussion and analysis section of their SEC filings.

Additional disclosures that should be considered include the effects of government financial assistance received from the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) in the form of loans and tax relief, such as deferred or reduced payments and potential refunds.

The staff provided a broad range of questions for companies to consider addressing in their disclosures, including information on the Paycheck Protection Program, which generally provides loans to businesses with fewer than 500 employees that are forgiven on a tax-free basis if a specified portion of the loans is spent on payroll costs over a covered period and employee levels are retained.

For example, in determining disclosure obligations, companies should assess the loan’s effect on the company’s financial condition, liquidity, and capital resources.

Other information that companies might need to consider for disclosure includes the material terms and conditions of assistance received, whether they anticipate being able to comply with them, and whether the terms and conditions limit their “ability to seek other sources of financing or affect [their] cost of capital,” according to the guidance.

Also, does the company “reasonably expect restrictions, such as maintaining certain employment levels, to have a material impact on [its] revenues or income from continuing operations or to cause a material change in the relationship between costs and revenues?”

Generally, for any government assistance — loans or tax relief — companies should assess whether it involves “new material accounting estimates or judgments that should be disclosed or materially changes a prior critical accounting estimate.”

Other items to consider include the accounting estimates made, “such as the probability a loan will be forgiven, and what uncertainties are involved in applying the related accounting guidance.”

Material Tax Relief

Companies should also disclose whether they expect a material tax refund for prior periods, the guidance said, pointing to examples of relief that may result in tax refunds, such as the provisions concerning net operating losses, alternative minimum tax credits, and business interest deductions.

The CARES Act modified section 172 to address liquidity issues arising from the COVID-19 pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021.

The new law also allows companies to carry back losses arising in tax years from 2018 through 2020 for up to five years before the year of the loss and claim a refund for those years with taxable income.

With the repeal of the corporate AMT by the Tax Cuts and Jobs Act, Congress allowed companies to offset their regular tax liability by the AMT credit. Under section 53(e), credits remaining at the end of tax years 2018 to 2020 are refundable in an amount equal to 50 percent of the excess of the minimum tax credits over the regular tax liability for the tax year. Remaining amounts of AMT credits are fully refundable for tax years beginning in 2021.

The CARES Act accelerated the recovery of the AMT credits by allowing companies to claim a refund on the remaining credits in 2018 or 2019.

The TCJA amended section 163(j) to limit the business interest expense deduction to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. Under the statute, taxpayers may indefinitely carry forward business interest expense disallowed as a deduction for any tax year. That amount of disallowed interest expense is treated as business interest paid or accrued in a subsequent year.

The CARES Act temporarily modifies the net business interest expense deduction limit from 30 percent of ATI to 50 percent for tax years beginning in 2019 and 2020, with special rules provided for partnerships.

For tax years beginning in 2020, businesses may elect to compute the interest expense limitation based on their 2019 ATI — a benefit for taxpayers expecting lower income this year from the effects of the pandemic or otherwise.

SEC staff suggested that when determining their disclosures, companies consider whether they “are taking advantage of any recent tax relief, and if so, how does that relief impact [their] short- and long-term liquidity.” 

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