The Treasury Department and Small business Administration’s (SBA) Latest Guidance, Loan Forgiveness Application and the WVC Forgiveness Calculator
May 26, 2020
On May 15, the SBA released its Loan Forgiveness Application for the Paycheck Protection Program. The application outlines the computation for debt forgiveness. While there are still many questions that need to be addressed, the guidance helped clarify some larger items:
- The first day of the Covered Period for your PPP loan must be the same as the PPP Loan Disbursement Date and extends over the 56-day Covered Period. Borrowers with biweekly or more frequent payroll periods may elect to use the Alternative Payroll Covered Period that begins on the first day of their first pay period following the date when you receive the loan proceeds.
- Payroll costs that have either been paid or incurred in the 56-day Covered Period are both eligible for forgiveness. If a cost is incurred and paid in the Covered Period, it will only be counted one time toward the forgiveness calculation.
- Eligible Nonpayroll for forgiveness consist of:
- covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”);
- covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and
- covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).
- Under the SBA’s guidance, the total amount of cash compensation eligible for forgiveness for each individual employee cannot exceed an annual salary of $100,000, as prorated for the Covered Period; that is, it cannot exceed $15,385.
All guidance on the Loan Forgiveness Application can be found here. While we are expecting more guidance from the SBA, we advise our clients to keep careful and detailed records and documentation throughout this process to maximize forgiveness.
WVC Calculator
William Vaughan Company is working diligently to update our Forgiveness Calculator to meet the latest SBA guidance. We will be sending you the latest version as soon as possible. Keep an eye out for our email. If you do not already receive our timely communications, please subscribe to WVC Insights here.
Categories: Other Resources
Economic Impact Payments Received by Deceased or Ineligible Recipients
May 18, 2020
The CARES Act stimulus package passed by Congress in late March provided Economic Impact Payments to eligible recipients which been remitted throughout the last month. According to the Act, eligible individuals include U.S. citizens and qualifying resident aliens who are not a dependent of another taxpayer and have a work-eligible Social Security number with adjusted gross income (AGI) up to the following:
- $75,000 for individuals filing single or married filing separately
- $112,500 for the head of household filers
- $150,000 for married couples filing jointly
These eligible recipients have received or will receive payments of $1,200 to individuals and $2,400 to married couples, plus $500 per dependent child. Taxpayers will receive a reduced payment if their AGI is between:
- $75,000 and $99,000 for individuals filing single or married filing separately
- $112,500 and $136,500 for the head of household filers
- $150,000 and $198,000 for married couples filing jointly
As with any new program, glitches have been identified. Eligibility was determined using 2018 or 2019 tax returns. Discrepancies between information on these previously filed returns and current status have led to deceased taxpayers, trusts, and other ineligible individuals mistakenly receive funds. Those ineligible to receive Economic Impact Payments include:
- Individuals who were deceased before the date of payment
- Individuals or married taxpayers filing separately with AGI greater than $99,000
- Taxpayers filing head of household with AGI greater than $136,500
- Married taxpayers filing jointly with AGI greater than $198,000
- Individuals who can be claimed as a dependent on another person’s return (For example, a child or student claimed on a parent’s return
- Individuals who do not have a valid Social Security number
- Nonresident aliens
- Individuals who filed Form 1040-NR, 1040NR-EZ, 1040-PR, or 1040-SS for 2019
- Individuals who are currently incarcerated
How do I determine if I received misappropriated funds?
The IRS has set up an Economic Impact Payment Information Center that includes information about which taxpayers are eligible and how to return payments received by those disqualified by the factors above.
In many instances, the family or beneficiaries of a deceased individual or trust have received payment on behalf of the deceased. This is particularly common in situations where the individual had passed away in late 2019 or 2020, and a 2019 tax return had not yet been filed on their behalf. By definition, these payments to trusts or family of a deceased individual are considered payments to an ineligible recipient.
What should I do if I received funds for a deceased or an ineligible recipient?
Economic Impact Payments given to deceased or otherwise ineligible recipients previously listed must be returned to the IRS. For payments received by joint filers where only one spouse is deceased or ineligible, only the portion of the payment made for the ineligible spouse must be returned ($1,200 unless the AGI exceeds $150,000). Ineligible recipients of the payments, or those who received payment on behalf of an ineligible or deceased recipient, should follow the IRS repayment instructions to return the payments.
If the payment was a paper check:
1. Write “Void” on the endorsement section on the back of the check.
2. Mail the voided Treasury check immediately to the appropriate IRS location.
3. Do not staple, bend, or paper clip the check.
4. Include a note stating the reason for returning the check.
If the payment was a paper check and you have cashed it, or if the payment was a direct deposit:
1. Submit a personal check, money order, etc., immediately to the appropriate IRS location.
2. Write on the check/money order made payable to “U.S. Treasury” and write “2020EIP,” and the taxpayer identification number (Social Security number, or individual taxpayer identification number) of the recipient of the check.
3. Include a brief explanation of the reason for returning the payment.
Appropriate IRS mailing addresses can be found in the IRS repayment instructions located on the Economic Impact Payment Information Center.
If you feel you have received funds for an ineligible individual but are unsure how to proceed, contact your William Vaughan Company advisor and they can guide you through the appropriate process for your given circumstance.
Categories: Other Resources
IRS Denies Tax Deductions for Expenses Related to Payroll Protection Program Loan Forgiveness
May 11, 2020
What happened?
On April 30, 2020, the IRS released Notice 2020-32 (the Notice) answering a major tax question involving the Paycheck Protection Program (PPP). It ruled that any deductible expenses that result in forgiveness of a PPP loan will not be deductible in computing the taxpayer’s income. This conclusion contradicts the language in the CARES Act (the Act) under Section 1106(i) which states the cancellation of indebtedness of a PPP loan, under the provisions of Section 1106(b), “shall be excluded from gross income” in computing the taxpayer’s taxable income.
The IRS points out in the Notice that while the Act provides that PPP loan forgiveness is not taxable income, no provisions of the Act address the ability to deduct eligible expenses paid from such loan proceeds.
What’s Next?
Stay tuned! It is unlikely the end of this controversy. First, it is possible a taxpayer may decide to challenge this position in court. Whether they would or would not prevail is open to question, and the other big problem is being able to afford the litigation. The more likely scenario is that Congress would reverse the notice by simply enacting an amendment in the next Coronavirus bill (if there is one) to make clear expenses used to justify PPP loan forgiveness are deductible, regardless of any provision by the IRS.
Visit the WVC COVID-19 Resource Center for more insights by clicking here.
Categories: Other Resources, Tax Compliance, Tax Planning
Making the Most of Your PPP Loan
Apr 10, 2020
You have applied for your Paycheck Protection Program (PPP) loan through one of the 1,800 participating SBA approved 7(a) lenders and you are awaiting the exciting news of your approval. In the meantime, have you considered how you will make the most of the funds? Here are a few recommendations as you consider how to best utilize the cash for your business.
Track Your Business Impact
For purposes of not only following the PPP loan certification guidelines but also to help you prioritize your immediate needs, we recommend keeping track of the pandemic’s impact on your business. A hard or electronic log noting the daily/weekly effects on your employees, vendors, and business cash flow will ultimately help you plan ahead and maximize your benefit. Furthermore, at the end of the eight weeks following your loan approval date, this will also help maximize your loan forgiveness.
Develop A Plan
If your operations are currently on hold or reduced, begin to outline varying scenarios of how operations may resume. To obtain full loan forgiveness, at least 75% of the proceeds will need to be used for payroll and you must have at least the same number of employees as of June 30, 2020, as you did as of February 15, 2020. Think about those employees currently on furlough, and when you will bring them back. Calculate various scenarios of operational levels, payroll amounts, and resulting loan forgiveness to guide your decision-making.
Maintain Detailed Records
The covered period of the PPP loan is eight weeks from the date you receive your proceeds. When you receive the proceeds, make note of the receipt date and determine your covered period. We also recommend that you deposit them into a separate account to allow for easier tracking of their use on eligible expenses. Additionally, if your bank activity is requested as part of the loan forgiveness considerations, you will only need to provide activity from this account rather than all operating activity.
Start a tally of your eligible expenses. As a reminder, these include payroll, benefits, retirement, rent, utilities, and mortgage interest payments. Your bank may ask you for a preliminary loan forgiveness calculation around the seven weeks into your eight-week covered period.
- For payroll, keep records of wages, healthcare costs, and retirement plan employer contributions.
- Keep separate records for rent, utilities and any mortgage interest paid
- Keep documentation of the number of employees you have as of June 30, 2020
- Pay particular attention to any payments made to employees under the Families First Coronavirus Response Act for Emergency Sick Pay or Emergency FMLA. Maintain records for any such payments, as they will reduce the PPP loan forgiveness amount to avoid “double-dipping”.
Note that PPP loan recipients cannot participate in the following CARES act benefits: Employee Retention Credit (provides for a tax credit equal to 50% of payroll taxes) or Delay of Employer Tax Payments (allows for the deferral of payment of employer payroll taxes until 50% due December 31, 2021, and 50% due December 31, 2022).
Categories: Other Resources, Tax Compliance, Tax Planning
Act Now to Take Advantage of SBA Loans & Payroll Tax Incentives
Apr 03, 2020
In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium-sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty. To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cash flow as well as tax savings. Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.
SBA Paycheck Protection Program
This $350 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.
What can the loan be used for?
The loan can cover costs including payroll, the continuation of health care benefits, employee compensation (excludes compensation in excess of $100,000 on an annual basis), mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred before the covered period.
Who is eligible for the program?
To qualify for the program, businesses must have either fewer than 500 employees (including full time, part-time and “other” employees), meet the SBA’s size standards, or have less than $15 million of tangible net worth and less than $5 million of average net income in the last 2 years. There are some special eligibility rules for businesses in the hospitality and dining industries.
How much can a business borrow?
The maximum amount for these loans is two times the average total monthly payroll costs, or up to $10 million. The interest rate may not exceed 4%. Businesses can also defer payment of the principal, interest, and fees for six months to one year.
Is there loan forgiveness?
Yes, provided your business meets certain conditions. Your business will be eligible to apply for loan forgiveness equal to the amount you spent during an eight-week period after the loan closing date on:
- Payroll costs
- Interest on mortgages
- Payments of rent
- Utility payments
Principal payments of mortgage payments will not be eligible for forgiveness.
How do you apply?
Applications and underwriting are handled by SBA-approved banks. While documentation requirements will vary between institutions, we would expect them to include the following:
- Current personal financial statement
- Latest available personal tax return
- Latest available business tax return
- Latest available internal 2019 YE financials
- YTD internal 2020 financials
- A spreadsheet detailing the following:
- List of all full-time employees with eight weeks salary + payroll taxes
- Cost of two months of rent with copies of leases
- Cost of two months of mortgage interest with a copy of loan payments
- Cost of two months of utility costs with a copy of utility payments
What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:
- The loan is needed to continue operations during the COVID-19 emergency.
- Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
- The applicant does not have any other application pending under this program for the same purpose.
- From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.
Are there any other considerations to be aware of?
- Given these very limited requirements for borrowers, we may see additional guidance from the SBA on how banks should be underwriting these loans.
- Additionally, the CARES Act does not appear to have overridden the SBA’s “affiliation” rules. Entities are considered “affiliates” when they are controlled by or under common control of another entity. This classification generally includes private equity owners. Business cannot exceed the size thresholds for either the primary industry of the business alone or the industry of the business and its affiliates, whichever is greater. For groups of affiliates that operate in different industries—a typical case for private equity portfolio companies—industry code is based on the primary income-producing entity. However, there is some ambiguity in the text of the CARES Act, so additional guidance may be forthcoming.
Employee Retention Credit
The CARES Act provides eligible employers with a refundable credit against payroll tax liability.
How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including the value of health plan benefits).
Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:
- Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
- A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.
For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.
Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.
Delay of Employer Payroll Taxes
The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.
When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.
Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.
How We Can Help
Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity.
In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.
In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid. Contact your William Vaughan Company advisor today!
Categories: Other Resources, Tax Planning