The latest from OFP attorneys regarding the impact of COVID-19 on commercial lease agreements.
Commercial Leases and COVID-19: Force Majeure, Frustration of Purpose, and Impossibility under the Laws of Virginia, Maryland, and the District of Columbia
As landlords and tenants in the DC Metro region navigate the COVID-19 climate and an unprecedented dip in the economy, provisions within commercial leases related to excusing nonperformance are being tested, and in some cases, for the first time. Force majeure clauses are front and center in the debate over excuses for nonperformance, opportunities for termination, and the allocation of liability. However, the common law doctrines of frustration of purpose and impossibility may also be applicable. This set of articles explores the defenses that may be available to commercial tenants in Virginia, Maryland, and the District of Columbia during the coronavirus pandemic, keeping in mind that in these unprecedented times, case law on the impact of the crisis is developing.
As has been much discussed, loan forgiveness is a key feature of the CARES Act’s Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA), but there has been little guidance regarding the process and criteria for seeking forgiveness. Late Friday, May 15, 2020, the SBA and Department of Treasury released the PPP loan forgiveness application and related instructions, providing some clarity. Additionally, the Treasury Department indicated in an associated press release that the SBA will issue regulations and guidance to further assist borrowers in the completion of their applications for forgiveness, and provide lenders with guidance on their responsibilities. Learn more from OFP Shareholder Michelle DiCintio.
On May 13, 2020, the Small Business Administration (SBA) again updated its guidance regarding the safe harbor provision for loans disbursed under the Paycheck Protection Program (PPP), the lifeline extended to small businesses under the financial relief package known as the CARES Act. Learn more from OFP Shareholder Michelle DiCintio.
OFP’s COVID-19 Commercial Leasing Playbook
Although Northern Virginia, Maryland and DC are not fully ready to begin easing COVID-19 restrictions, business leaders are preparing now. What can landlords and tenants do today to survive a challenging second quarter, prepare for reopening, and emerge strong for the rest of 2020?
On July 1, 2020, the Virginia Values Act (VVA) will become effective as law and introduce new legal protections designed to make the Commonwealth a more accepting workplace for all members of society. In doing so, the VVA is expected to produce a sweeping overhaul of employment discrimination litigation in Virginia by prohibiting employment discrimination on the basis of sexual orientation, gender identity, and veteran status. These changes, unprecedented thus far in southern states, will significantly impact employers while providing additional protections and remedies to employees. Learn more from OFP Attorney Cameron Green.
The US Department of Labor (“DOL”) issued a notice that covered employers are required to share regarding the recently passed paid sick leave provisions. At present, the DOL is soliciting questions from employers and employees as the agency prepares to draft enabling regulations to address how to implement these paid-leave provisions. As shown by this solicitation for comments and questions, there are many open questions about how an employer is to respond to requests for coverage. Learn more here.
The Small Business Administration has relaxed requirements for small businesses whose operations have been disrupted by COVID-19. SBA Disaster Relief loans may be used to “…pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.” Read more here.
COVID-19 is creating unprecedented business disruptions around the globe, and it is important to take this situation seriously. Acting with urgency is crucial, but having a plan of attack will mitigate confusion down the road. Click here to learn more.
In an attempt to mitigate the unfolding COVID-19 public health emergency, state and local governments have started issuing “lockdown” or “stay-at-home” orders. Generally, the state lockdown orders have directed that all businesses utilize telecommuting or work-from-home procedures to the maximum extent practicable. Where telework is impractical, some states are only permitting essential businesses to remain open. Companies with operations in these jurisdictions must understand the scope of applicable restrictions and whether their operations are essential and should continue during the lockdown. Learn more from attorney Michelle DiCintio.
OFP Shareholder Shiva Hamidinia provides a run-down to help businesses determine whether they are deemed essential as the country works to maintain social distancing protocols to help stem the spread of COVID-19. Click here to learn more.
As COVID-19 continues to stir economic uncertainty, businesses are concerned about possible defaults under their credit facilities and some businesses may want to consider how they are using credit vehicles to support ongoing operations. Click here to learn more.
Businesses and individuals now will have until July 15th to file and pay their Federal income taxes. This means that you have an additional three months to plan and prepare your returns without having incurring penalties on up to $1 million in tax owed. Businesses will have the same period to pay amounts due on up to $10 million in tax owed. Learn more from attorney Catherine Schott Murray.
On March 18, 2020, the Families First Coronavirus Response Act was signed into law and will become effective not later than 15 days later, April 2, 2020. There are some differences between what was ultimately passed and what was summarized in our early article from March 16, 2020. Learn more from attorney Marina Blickley.
Construction and many other contractors who cannot telework may be receiving stop-work orders or facing other unique challenges on their government contracts in the face of COVID-19. Impacts may be exacerbated for personnel working in the field who may not be receiving guidance from the government due to unavailability of their Contracting Officers (CO) or Contracting Officer Representatives (COR). Learn more from attorney Shiva Hamidinia.
(h/t to my colleague,David A. Lawrence, Esq. who recently attended the Annual Virginia Tax Roundtable and provided the summary below.)
It’s time, once again, to share some of the tidbits that I gleaned from
the Annual Virginia Tax Roundtable. Each year, a small group of
Virginia tax lawyers convenes to meet with the Virginia Tax
Commissioner, his staff, and the Attorney General’s staff to talk about
what the Tax Department is thinking, the challenges that they are
facing, and ideas for improved tax administration in Virginia.
In addition to responding to changes ushered in by the 2017 Tax Act, Virginia taxpayers and tax preparers should take note of several new and existing factors that could complicate your tax filing efforts.
Identity Theft & Refund Fraud Continues at High Levels
rise in fraudulent refund filings remains a big issue for the Tax Department,
and the additional scrutiny required to identify those cases continue to slow
processing of Virginia tax returns. The
good news: the Department believes it is
catching more of these fraudulent filings before checks are issued; it denied
more than $32 million in fraudulent 2017 refunds just through October 21, 2018
of this year.
More Retirements & Staffing Challenges
State is continued to be challenged by the retirements of long experienced tax
examiners, and they are trying to hire new examiners as quickly as
possible. Particularly hard hit has been
compliance field audit personnel in Northern Virginia and Tidewater.
of audits, the Tax Department engaged an outside consultant to help it be more
proactive in its compliance and audit activities. It is considering expanding reviews of
Schedule A deductions and Schedule C deductions. Further, the agency has lots of federal
return data, as well as data from other federal programs. Now, according to the Commissioner, the state
just needs a better, more efficient way to use that data for compliance and
audits. Note that fewer appeals are
coming to the Tax Department, and the Tax Department particularly hates dealing
with tax appeals from local jurisdictions.
2017 Tax Act – A Great Revenue Windfall for Virginia
changes made by the federal 2017 Tax Legislation are projected to give a
windfall of additional tax revenue to Virginia from individual filers. The General Assembly loves the extra revenue,
as long as it is not blamed for raising taxes.
There may be some proposals this year in the General Assembly to
increase Virginia’s standard deduction, increase the personal exemption, and/or
permit Virginia itemizing for an individual even if that individual took the federal
standard deduction. There have not been
many inquiries from the Legislature to the Tax Commissioner on the business
side of the 2017 Tax Act. It is expected
that some type of federal conformity, with exceptions, will be in place by mid-February
2019 effective for 2018 and onward.
of the biggest windfalls for the State is the fact that if more individuals use
the federal standard deduction, they are currently required to use the Virginia
standard deduction, which is very low.
Furthermore, for those who do itemize, the repeal and limitation of
those itemizable deductions also produces more revenue for Virginia. Finally, the limitations on loss deductions,
net interest deductions, and NOL deductions produce additional revenue for
Virginia. On the other hand, Virginia
loses revenue with the increased Section 179 Expensing and the fact that more
“small” businesses will be able to use the cash method of accounting.
Registering with the SCC Triggers Virginia Tax Filings for Businesses
Department confirmed that if a non-Virginia corporation or entity registers
with the Virginia SCC as a foreign entity, it automatically must start filing
Virginia income tax returns, even if it has no income.
Department keeps pumping out lots of rulings on Virginia residents versus
non-residents for taxation purposes.
They are all fact specific, and make it difficult for former residents
to be treated as non-Virginia tax residents when they continue to maintain ties
to Virginia after they have left the state (particularly if they try to leave
the State just prior to the year in which a large sale transaction occurs).
A Brave New World in Collecting Sales Tax from Out of State Businesses – the Wayfair Decision
U.S. Supreme Court’s decision in Wayfair this past year effectively overturned
the requirement for “physical presence” in order for a state to subject nonresident
businesses to collect sales taxes for other states.
a result of the Court’s decision, if a business had a physical presence in a state,
then that state may still require that business to collect and pay sales tax on
sales made into that state. Additionally,
states that have statutes similar to the one at issue in Wayfair, where an out-of-state
business has numerous sales into a state (either in raw numbers of transactions
or in the amount of dollars), then that state may now require those out-of-state
sellers to collect and pay sales tax on sales made into that state.
has not acted yet to implement the Wayfair decision, but most other states have
acted with various thresholds. This
revenue raiser will likely be added to this coming General Assembly’s
legislative calendar. As an example of
taxable nexus, the Wayfair situation subjected a company to collect and pay
sales taxes to a state where the company had either at least $100k in sales or
at least 200 transactions in that State.
This will have a big impact on internet sellers, software sellers, and other “free shipping” product sales. A future question raised by the Wayfair case is whether states will try to use it to expand that ruling into the income tax and local tax area. The Supreme Court used old “income tax” nexus cases as part of its logic in support of the Wayfair decision. So expect more to come.
The IRS recently announced the estate and gift exemption levels for 2018 and they continue to increase as per legislation passed in January 2013. The applicable exclusion amount from Federal estate tax will increase to $5.6 million per person allowing a married couple to shelter $11.2 million from Federal estate tax, the rate for which is currently set at 40%. The lifetime exemption from gift tax remains coupled with the exemption from Federal estate tax, and therefore, this exemption will also increase to $5.6 million per person. The annual gift exclusion amount will also increase for the first time since 2013 and will be $15,000 per person. Virginia continues to not impose a state level estate tax. Maryland’s exemption from estate tax will increase to $4 million while the District of Columbia’s now $2 million exemption will rise to meet the Federal exemption beginning in 2018 so long as there is a revenue surplus.
Additionally, in the last article, the fate of the proposed valuation discounting regulations was still up in the air. However, Treasury issued a second report to the President in which those regulations were withdrawn. Therefore, the availability of valuation discounting on certain transfers of interests held in closely held or family owned businesses remains available and is currently no longer under threat.
For seniors and those with disabilities, a cost-of-living adjustment (COLA) for Social Security and Social Security Income (“SSI”) will increase monthly benefits by 2.0%. In addition, the cap on the amount of earnings subject to payroll tax will increase to $128,700. Finally, the tax brackets, standard deductions, Pease and PEP limitations, kiddie tax and other credit and deduction levels for 2018 were announced. Many are watching the tax reform debate to see if any of these numbers will change, so stay tuned… #taxreform #estateplanning #estatetax #taxplanning #taxtime #COLA2018 @bgnthebgn
A year ago Treasury proposed new regulations to Section 2704 of the Internal Revenue Code that would significantly reduce or eliminate the ability to use valuation discounting in certain transactions where business interests are transferred. The proposed regulations would mean that the parties to those types of transactions could incur estate or gift tax. Towards the end of last year, a public hearing on the regulations was held in which many expressed concerns about how these proposed regulations would impact small businesses and the like. However, at the time the future of the regulations was unknown given the change of administration,
Earlier this year, the President issued Executive Order 13789 in which the President instructed Treasury to review all “significant tax regulations” and identify those regulations that (a) impose an undue financial burden, (b) add undue complexity to our tax laws, and (c) exceed statutory authority of the IRS. Treasury issued Notice 2017-38 in which the proposed regulations to Section 2704 were identified as meeting these criteria. A comment period followed the issuance of the Order and has now closed. During the comment period, a study was submitted by The S Corporation Association that showed the detrimental impact of such regulations should they be finalized. A final report is due to the President within the next month that is to suggest possible reforms to the identified regulations ranging from modification to the regulations to a full appeal. Until the future is certain, valuation discounting remains available. #valuationdiscounts #2704regulations #businessvaluations #estateplanning #businessplanning @bgnthebgn
(h/t to my colleague, David A. Lawrence, Esq. who recently attended the Annual Virginia Tax Roundtable and provided the summary below. The Roundtable hears from the Virginia Tax Commissioner, his staff, the Virginia Attorney General’s staff, local Commissioners of Revenue and a U.S. Tax Court Judge about current issues and ways to improve tax administration in Virginia.)
Identity Theft – Refund Fraud Dramatically Rising
Identity theft and refund fraud continue to rise dramatically in Virginia & other states. Over $54 million in 2015 & 2016 of refund fraud was caught in Virginia before the state issued the fraudulent refund checks. It’s taking a significant amount of Tax Department resources and time to review more refund returns, collaborate with other states & the IRS, and match data before letting refund checks go out. It sounds like people should continue to try to file their returns as early as possible before others attempt to file fraudulent claims, using information they can find out about you. It seems that federal agency employees who are slow to get their W-2s are at a greater risk for fraud claims.
Staffing Changes & Budget Cuts continue at State & Local Tax Levels
For several years in a row, many long-time employees of state & local tax offices continue to retire. The government is trying to replace the loss of institutional memory with newbies and technology. But continued budget cuts are hitting technology upgrades & the ability to make some new hires.
Appeals of tax cases – particularly income tax – continue to increase 3 years in a row, while sales tax decisions are down significantly in Virginia. But with strained staff, it’s taking a lot longer for appeals to be completed. If a taxpayer doesn’t fully document the appeal, then the Tax Commissioner is dismissing the appeal – so don’t be sloppy out there. Local tax appeals continue to drop – it appears the Tax Department doesn’t like dealing with local tax appeals & the localities don’t like being told they’re wrong by the Tax Department.
Updating Tax Regs; Little Tax Legislation
The Tax Department is in the process of updating its Regulations, especially any which are over 4 years old. Based on the few inquiries from the General Assembly, there doesn’t appear to be a lot of new tax legislation expected this coming legislative session.
Local Taxes Being Pursued
Local tax offices are getting much more active in capturing tax revenue, and using more technology to find taxpayer nexus and tax it. Restaurants are big targets for meals & sales taxes; as well as their owners & managers who are pursued on a responsible officer type of liability. Large businesses, especially multi-state ones, are filing 1-3 years back refund claims. Localities are complaining that those claims are hitting the locality’s budget, and thus are fighting the refunds, making the taxpayers work at those claims. Local tax collectors are documenting their defense, expecting tax appeals. So the taxpayers had better document their claims and arguments as well.
US Tax Court Practice Tips
Beginning in 2017, the Tax Court will have electronic filing. Other practical suggestions were offered involving pretrial memoranda, stipulating facts, objections to IRS experts and post-trial briefs.
As tax season is upon us, if you have questions regarding your taxes, please feel free to reach out to your professional advisor. #taxplanning #estateplanning #taxseasonishere @bgnthebgn
Happy New Year! Very often the New Year brings all sorts of ‘changes’ for individuals, particularly after having spent any time with family members and friends over the holiday season. Here is a quick list of five resolutions to consider for your estate plan.
Is it time to update your plan? If a plan is in place, when was the last time you reviewed it? Is it simply a binder of documents you received several year ago when you finished the estate planning process and you haven’t looked at since? Have circumstances changed that are not captured in the documents? Who are the fiduciaries (i.e., executor, trustee, healthcare power of attorney, financial power of attorney, guardian, etc.) listed? Are the fiduciaries still capable of serving? Does the plan do what you want it to do? There have been a lot of changes to estate tax laws in recent years, is your plan from before 2013? In some cases, does ‘updating’ your plan, actually mean finishing the process? Or does it mean starting the process so that your theoretical plan is memorialized?
Are there beneficiary designations? When was the last time you checked beneficiary designations on life insurance, retirement accounts (i.e., 401(k), IRAs, 403(b), 457, etc.) and annuities? What about any payable on death (POD) or transfer on death (TOD) designations you have on bank accounts or brokerage accounts…do those designations reflect your wishes? For government employees, are beneficiary designations up-to-date on your Federal, state or local benefits?
Families come in all shapes and sizes -Family Fiduciaries. Are you named as a fiduciary in any family member’s or friend’s plan? Have you touched base with that person recently to see how they are doing both health-wise and financially? Do you understand what your role is as the fiduciary? Do you know the family member’s or friend’s goals and objectives? Are you able to still serve, that is, are you distracted by a health event or financial crisis and perhaps you should not take the role? Have you considered options for a care manager if you are caring for an elderly family member or friend? How about looking at assisted living or skilled nursing or home health aides, if the circumstances warrant such considerations?
Are you charitably inclined? Do you have a charitable giving plan for this year? For future years? For at your death? Have you researched your options including direct giving, donor advised funds, private foundations and/or charitable trusts? Is there a planned gift that you would like to consider? Is now the time to investigate annual giving?
Succession planning occurs at many levels. Who will be in charge of any business whether it is a limited liability company, partnership or corporation? Are shareholders’ agreements and operating agreements up-to-date? And beyond a business interest, who will be in charge of your pets? Are there monies set aside for their care? What about digital assets? Have you ensured a smooth transition of online accounts to a successor? What about your tangible personal property? Is there an inventory? Appraisals? Designated recipients?
True, there are a lot of questions and not a lot of answers here, but that is the planning process. One has to begin with the questions to reach the answers. Working with a professional advisor can both provide you with the guidance needed to navigate these questions and ensure that you complete the process. #planyourjourney #lifeplanning #legacyplanning #estateplanning @bgnthebgn
Earlier this month, a long awaited hearing was held on the proposed regulations that would reduce the availability of valuation discounting when transferring closely held business interests. Close to forty individuals testified at the IRS hearing and all but one individual opposed the proposed regulations. Among several of the reasons why critics opposed the regulations included the following: (a) the potential for a ‘deemed put right’; (b) the creation of a three-year look back period; (c) the forced use of the ‘investment value’ standard for determining fair market value versus the ‘willing buyer – willing seller’ standard; and (d) the use of family attribution rules that could extend the reach of the proposed regulations. An attorney-advisor from the Treasury Office of Tax Legislative Council tried to assuage some of the concerns and even commented that it would be surprising if the regulations were finalized given the new administration.
What does the hearing mean for planning? It means that planning is still very much up in the air. For some, there has been a push to complete transactions by the end of year before the regulations are finalized. For others, any potential transactions are now on hold. Either way, the issue is not dead, but may be tabled until the next election and individuals and their advisors would be wise to monitor the situation to avoid getting caught without having planned. #valuationdiscounts #2704regulations #businessvaluations #estateplanning #businessplanning @bgnthebgn