Are My Employees Telecommuting Right Into a New State Income Tax Liability?

A phenomenon of the ongoing COVID-19 healthcare pandemic is the exponential expansion of telecommuting. Whether stemming from an epiphany or simply the opportunity to escape to a more appealing place to live, many members of the workforce have opted to relocate. In many instances, relocation has meant crossing state borders, all the while continuing to work for the same employer. While the relocation may be temporary, it can have significant tax consequences — notably creating a nexus in a new taxing jurisdiction.

Physical presence of an employee in a state can create the requisite nexus to cause the employer to be subject to state corporate income taxes. An employer offering workforce flexibility can come back with a tax bite. In light of this quandary, several states have issued guidance — both formal and informal — addressing the nexus question.

The states which have issued guidance have typically taken the position that the state will not assert income tax nexus if the employee telecommuting is only due to COVID-19 healthcare pandemic. States indicating that corporate nexus will not be asserted due to COVID-19 include Arizona, California, Georgia, Indiana, Massachusetts, Maryland, Minnesota, New Jersey, Pennsylvania, and South Carolina.

Other states, such as Michigan, have affirmatively stated it will not waive nexus requirements due to COVID-19 related telecommuting. Yet other states have not issued any guidance. This latter category of states includes Florida, Illinois, New York, Tennessee, and Virginia.

For further information, please contact Peter Kulick in our Lansing, Michigan office at 517-487-4729 or any other attorney in our Tax Practice Group.

Down With PPPs? The Continuing Saga of the Payment Protection Program

No good deed goes unpunished. Aimed at providing a financial lifeline during the “stay home” world of the COVID-19 pandemic, the federal government flung the Paycheck Protection Program (“PPP”) to the “small business” community. The PPP was one of several programs in the $2 Trillion CARES Act stimulus bill. President Donald J. Trump quickly signed the CARES Act into law. In the weeks after enactment, the PPP has been fraught with large statutory gaps and confusing, and often conflicting, guidance.

Many small businesses are nearing the end of the all-important 8-week “covered period” (which generally begins when the business receives the PPP loan – but see discussion below). The covered period is the testing period for determining, for loan forgiveness, whether a recipient has expended an appropriate quantum of loan proceeds and spent those proceeds on eligible purposes. Many practical questions had been unanswered with respect to what payments to employees were eligible for loan forgiveness and how to calculate the forgiveness amount. Importantly, the CARES Act provides that the amount of the PPP loan that is forgiven will not cause the borrower to have to include the amount of forgiveness in its income (i.e., the amount of forgiveness will not be taxed).

Over the Memorial Day holiday, the U.S. Department of the Treasury and the Small Business Administration issued new interim final rules which offer helpful guidance. Copies of all of the interim final rules related to the PPP are available here. Some helpful tidbits from the new guidance include:

  • “Payroll costs” paid or incurred during the covered period (or “alternative payroll covered period” discussed below) are eligible for forgiveness.
  • The introduction of an “alternative payroll covered period,” which allows borrowers, if elected, to measure the 8-week covered period beginning with the first day of the first payroll cycle in the covered period (for amounts paid or incurred on payroll costs, but not amounts paid or incurred on other eligible purposes which still must be expended during the covered period).
  • Treating payroll costs as “paid” either on the day checks are distributed or ACH transfers are initiated.
  • Allowing payroll costs incurred, but paid on the first regular payroll date after the covered period (or alternative payroll covered period), to be counted towards forgiveness.
  • Clarifying that “hazard pay” or bonuses paid to employees during the covered period (or alternative payroll covered period) are eligible “payroll costs.”
  • Specifying that advance payments of interest on otherwise eligible mortgage obligations are ineligible for loan forgiveness.
  • Adding helpful guidance on calculating the reduction in the forgivable amount for rehiring employees.

In addition to the recent helpful guidance, word has circulated that the Enforcement Division of the U.S. Securities and Exchange Commission has begun to ask copies of PPP loan applications from public companies that have secured PPP loans. The eligibility of public companies to receive a PPP loan has been the subject of intense scrutiny, particularly focused on the “necessity” certifications. Many public companies opted to return PPP loans once the Department of the Treasury released a safe harbor allowing for repayment without consequence.

Finally, the House of Representatives passed on a 417-1 vote legislation to expand and refine the PPP. The legislation would offer a number of helpful refinements. For example, the House legislation would: lower the amount of PPP loan proceeds that must be used on “payroll costs” to 60 percent; extend the 8-week covered period 24 weeks; extend the repayment period to 5 years; and provide that repayment obligations would not begin until after the SBA determines that all or a portion of a PPP loan is not forgiven. The Senate is expected to act on the House legislation this week.

For more information, please contact Peter Kulick at 517-487-4729, Troy Terakedis at 614-744-2589, or any other attorney in our tax group.


Paycheck Protection Program Flexibility Act Modifies Paycheck Protection Program

On May 28, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) was passed by the U.S. House of Representatives. On June 3, 2020, the Act was passed by unanimous consent by the Senate. The Act now awaits signature by the President. The Act makes significant changes to the Paycheck Protection Program (“PPP”), as enacted as part of the CARES Act, including provisions related to loan forgiveness. The more significant changes introduced by the Act include:

  • The “covered period” for making permissible expenditures (payroll costs, rent, utilities, and mortgage interest) in connection with loan forgiveness has been changed from the original 8 week period following loan origination to a 24 week period following loan origination (or December 31, 2020, if earlier). A borrower can elect to have the original 8-week period continue to apply.
  • The amount that must be expended on payroll costs for loan forgiveness has been reduced from 75% (as provided in SBA guidance) to 60%. However, as drafted, the Act provides that a borrower must spend at least 60% of the loan proceeds on payroll costs (during the covered period). The language of the Act suggests that if a borrower does not meet the 60% threshold, then none of the loan will be forgiven. Under existing SBA guidance, the amount of loan forgiveness is reduced — but not eliminated entirely — if less than 75% of the loan proceeds are used for payroll costs. That is, under existing guidance, loan forgiveness is not completely eliminated if the 75% threshold is not met. Senators had raised concerns about this issue; however, the Senate acquiesced to pass the House version to avoid sending the legislation to a conference committee. At this time, it is unknown if the SBA will issue guidance providing for a reduction in loan forgiveness, rather than eliminating loan forgiveness altogether if the 60% threshold is not met. Senator Marco Rubio has previously requested guidance whether the Department of the Treasury can adopt the more flexible forgiveness standard through administrative regulations.
  • A borrower now has until December 31, 2020 (instead of June 30, 2020) to restore their workforce levels and wages to pre-pandemic levels in order to avoid a reduction in the loan forgiveness amount due to a decrease in such levels during the covered period.
  • The Act provides that the amount of loan forgiveness will be determined without regard to a proportional reduction in the number of full-time equivalent employees if the borrower, in good faith, is able to document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions before December 31, 2020, or (ii) an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020 , due to compliance with requirements or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to COVID-19.
  • Loans made after the effective date of the Act will have a minimum maturity of 5 years (previously, loans had a 2 year maturity). The interest rate on PPP loans remains unchanged at 1%.
  • Under the Act, a borrower that has a PPP loan forgiven will be eligible for the deferral of payroll taxes as provided in the CARES Act. Previously, such deferral was prohibited if a borrower was afforded loan forgiveness.

As of June 4, 2020, approximately $130 billion in PPP funding allocation remained available. Thus, small business that have not previously received a PPP loan can still apply.

For more information, please contact Troy Terakedis at 614-619-2203 or Peter Kulick at 517-487-4729.


UPDATE – SBA Adds Guidance Regarding Necessity Certification Under the Paycheck Protection Program

On April 23, 2020, the Small Business Administration (“SBA”) issued additional guidance (in an update to its previously published FAQs, a current version of which can be found here) regarding whether businesses owned by large companies qualify for a Paycheck Protection Program (“PPP”) loan under Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Specifically, the SBA has indicated that in addition to reviewing other applicable eligibility requirements and rules, a borrower must assess their economic need for the PPP loan under the standard established by the CARES Act and the PPP regulations that existed at the time of loan application.

As part of the PPP loan application process, borrowers are required to make certain certifications, including certifying in good faith that “[c] urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. ”

The SBA, in the newly added question #31 of the FAQs, expands on this necessity certification by providing that a borrower must take into account (1) their current business activity, and (2)  their ability to access other sources of liquidity sufficient to support the borrower’s ongoing operations in a way that does not have a significant detriment to their business; notwithstanding the carve-out created by the CARES Act that a borrower not be required to show they are unable to obtain credit elsewhere in order to be eligible for a PPP loan (“no-credit-elsewhere” is an eligibility requirement for other SBA loans).  The new FAQ goes on to state, by way of example, that it is unlikely that a public company with substantial market value and access to capital markets would be able to make the aforementioned certification in good faith.

A borrower that applied for a PPP loan prior to the addition of the new FAQ (April 23, 2020) will be deemed to have made the required necessity certification in good faith, despite such certification not being accurate in light of the additional SBA guidance, if the borrower returns all PPP loan proceeds it received in full by May 7, 2020.

While the example in the new FAQ is directed at public companies, the general guidance set forth in the new FAQ is applicable to all borrowers (including private companies).  As such, all borrowers should evaluate their necessity certification based on this new guidance to determine whether they meet the standards as set forth in the new FAQ and whether such loan proceeds should be returned.

Importantly, making any knowingly false statement in the PPP loan application (which includes the certifications) could subject the borrower (and/or person making such statements) to criminal punishment including imprisonment and substantial fines.

In any event, it is recommended that all borrowers take steps to adequately document that the PPP loan was necessary to support their ongoing operations given economic uncertainty as well as that the borrower did not have access to liquidity (beyond the PPP loan) to support such operations in a way that would not be significantly detrimental to the borrower’s business.

About the Authors:

J. Troy Terakedis is a Member in Dickinson Wright’s Columbus office. He can be reached at 614.744.2589 or

Peter J. Kulick is a Member in Dickinson Wright’s Lansing office. He can be reached at 517.487.4729 or

M. Katherine VanderVeen is an Associate in Dickinson Wright’s Detroit office. She can be reached at 313.223.3098 or


F Drops: It is Not a Profane Concept for S Corporations!

While partnership vehicles (particularly multi-member LLCs) are ordinarily the flow-through entity of choice, many businesses – especially long-standing closely-held businesses and healthcare businesses – opt for S corporations status. S corporations can present tax efficiency challenges, particularly on the exit of a business. Purchasers rarely desire to acquire an historic corporation (which may end up as a C corporation), but rather prefer to acquire assets to receive a step-up in basis for depreciation purposes. The nature of the business activity may also motivate a desire to retain the historic Employer Identification Number (“EIN”). Offering rollover equity in a tax-efficient manner to S corporation shareholders can present further challenges.

Enter the F reorganization. The U.S. federal income tax law permits tax deferred treatment for certain types of mergers or restructuring. Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, is one such provision which affords tax deferred treatment a mere change of identity, form, or place of organization of one corporation, however effectuated. In the context of an S corporation, the F reorganization (colloquially referred to as an “F Drop”!) can offer a planning tool. A typical F Drop involves the following steps: (1) the shareholders of an existing S corporation (which we will refer to as “Target”) contribute all their Target shares to a newly formed S corporation holding company (“NewCo”); (2) effective as of the same day as the contribution to NewCo, NewCo makes an election to treat Target as a qualified subchapter S corporation (a “QSub”); and (3) Target/QSub converts to a single member LLC via applicable state law.

What are the consequences?

First, under Rev. Rul. 2008-18, Target retains its EIN. Thus, the F Drop allows Purchaser to retain Target’s EIN (e.g., which is often important because vendor contracts or purchase orders are tied to the Target’s EIN).

Second, if properly structured, the purchaser can be treated as acquiring assets (or receive a basis step-up in its pro rata share of the Target assets) and the historic Target shareholders can receive tax-free rollover equity interests. Since Target is a single member LLC and treated as a disregarded entity for U.S. federal income tax purposes, the purchaser can either acquire a portion of the membership interests or NewCo can contribute Target to a newly-formed LLC in exchange for cash and rollover equity.

There are several different variations of F Drops in addition to the typical structure outlined above. With any F Drop, the order of the steps and the timing of elections is of paramount importance with respect to whether a tax-efficient result can be achieved. There are several traps for the unwary. Thus, consulting a DW is tax attorney is important to avoid turning an F Drop into a profanity. For more information, please contact Peter Kulick (517-487-4729) or any other DW Tax Practice Group attorney.