Bloomberg Tax
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Tax
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

Businesses Fearing Exclusion From Fed Loans Push for Change

April 21, 2020, 8:46 AM

A substantial number of businesses may be barred from the $2.3 trillion business-loan program created by Congress and operated by Treasury and Federal Reserve.

The latest economic relief law (Public Law 116-136) authorizes the Fed to extend low interest loans to a variety of businesses. But because of a wrinkle in the law, some businesses organized as S corporations may be excluded from accessing that assistance, highlighting the political tightrope the Trump administration and Congress have to walk in making aid accessible to large employers while ensuring those funds aren’t abused.

Companies that receive assistance under the program must agree “not to pay dividends or make other capital distributions with respect to the common stock of the eligible business.” Congress wrote the provision to prevent companies that receive assistance from repurchasing stock or providing other compensation to shareholders.

Share buybacks and dividends for companies requesting federal assistance to continue operations are seen as politically unpalatable.

But some S corporations—pass-through entities that have fewer than 100 shareholders and can range widely in size of revenue and number of employees—make regular payments to cover their shareholders’ income tax payments. That has spurred concerns that those businesses might be excluded from the relief, and they are already making their fears known.

“These owners are going to have to be paying taxes on the business if it’s profitable regardless of whether the S corp is making payments or not,” said Brian Reardon, president of the S Corporation Association.

A Matter of Interpretation

Reardon wrote to Treasury earlier this month to ask that the program eligibility requirements include an exception for companies that have a contractual agreement to pay shareholders on a quarterly basis. Reardon argued that companies do so in order to allow owners to pay quarterly taxes.

“In many cases, these distributions are required under the S corporation’s ownership agreement,” Reardon wrote.

Reardon argues that Treasury could unilaterally create the exception, but he told Bloomberg Tax the department has yet to say whether it will do so.

The scope of the impact of that preclusion remains hazy, because the exact number of businesses affected by the limitation depends on the contractual agreement for payments between an S corporation and its shareholders. Reardon said it would exclude most S corporations, some of which are also too large for the stimulus law’s Paycheck Protection Program that offers forgivable loans to small businesses.

An October 2019 EY report commissioned by the S Corporation Association estimated that S corps with more than 100 people employed about 13.1 million people in 2016.

Legislative Pressure

Several business associations—including the S Corporation Association, National Federation of Independent Business, Associated Builders and Contractors, and Independent Community Bankers of America—have asked Congress to step in. On April 16 the group of associations, under the letterhead Parity for Main Street Employers, wrote to lawmakers asking them to lend their voices to the chorus asking Treasury for a change.

“Many of these businesses have been shut down by the health response to COVID-19—their doors are closed and their workers are idle,” the coalition wrote. “The loans offered under the Main Street Loan Facilities could provide them with a lifeline, but only if the rules are adjusted to allow them to pay their taxes without violating the loan’s terms.”

Rep. Warren Davidson (R-Ohio), a member of the House Financial Services Committee, has agreed to lead a letter from Congress asking Treasury to make the change requested by those businesses.

Political Blowback

Lawmakers could vote as soon as this week on another relief package, with negotiations focused on replenishing the small business loan program and providing more funding for hospitals. But political backlash to parts of the previous relief law potentially makes legislative efforts to change eligibility tricky.

Rep. Lloyd Doggett (D-Texas) and Sen. Sheldon Whitehouse (D-R.I.) are among the Democratic lawmakers who have criticized the emergency aid law for temporarily rolling back the 2017 tax law’s limit on the use of net operating losses as tax breaks. They argue that provision will primarily benefit wealthier individuals, many of whom make their money from pass-throughs entities—the category of closely held businesses called such because their income passes through to the owners, who report it as personal income.

Recent negative reaction to franchise restaurant chains like Ruth’s Chris and Shake Shack receiving relief money through the separate but related Paycheck Protection Program accentuates the delicacy of the situation.

“I’m 100 percent confident they have the authority to do it and I’m reasonably confident that they’re going to fix this,” he said. “There’s no reason for them not to.”

To contact the reporter on this story: Colin Wilhelm in Washington at cwilhelm@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com