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


SBA Data Exposure Highlights the Need for Cybersecurity Programs

Apr 23, 2020

On April 21, 2020, news sources* revealed the Small Business Administration (SBA) notified 8,000 applicants of the Economic Injury Disaster Loan (EIDL) program of a data exposure on the application website. The exposure, which occurred briefly on March 25, may have permitted applicants to view Personally Identifiable Information (PII) of other applicants. Current reports reveal the disclosure included names, Social Security numbers, tax identification numbers, addresses, dates of birth, emails, phone numbers, marital and citizenship statuses, household sizes, incomes, financial and insurance information.

If you learn you have been impacted by the data exposure, the Federal Trade Commission has provided specific guidance with checklists on their website for Identity Theft. The actions described in their checklists are based on the type of data loss. Please refer to this website on how to protect yourself.

It is unfortunate to have a data exposure during an already stressful time, but it further demonstrates the continued need for cybersecurity programs. WVC Technologies is here to assist you in making sure your company is operating securely whether it be updating your remote working policies, implementing a security practice, or preparing a business continuity plan.

*CNBC was the first to report on the data exposure from the SBA. For a full report, please see this article.

Connect With Us.

Tiffany Pollard, CISA

Risk Services Practice Leader

tiffany.pollard@wvco.com

 

Categories: Risk Services


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


Restaurant Employee Relief Fund

Mar 31, 2020

The National Restaurant Association has created the Restaurant Employee Relief Fund to help aid employees who are experiencing hardship during the COVID-19 outbreak. This fund will offer grants to restaurant industry employees who have experienced financial hardship from either loss of employment or a decrease in wages. The grants will be awarded to individuals on a first-come, first-served basis while funds are available. Restaurant employees can apply for the grants beginning on April 2, 2020.

Employees that are eligible to receive grants must meet the following criteria:

  • Individuals must have worked on a part or full-time basis in the restaurant industry for at least 90 days in the past year; and
  • Individuals must have had their primary source of income be from working in the restaurant industry for the last year; and
  • Individuals must have experienced a decrease in wages or a job loss on or after March 10, 2020; and
  • Individuals must live in the United States, an overseas U.S. military base, or a U.S. territory; and
  • Individuals must be over the age of legal majority in their U.S. state or territory.

The $500 on-time grants are meant to help offset the financial burden that many restaurant employees are experiencing during the COVID-19 outbreak. Listed below are many of these expenses:

  • Home rent or mortgage
  • Car payments or other transportation costs
  • Utility bills
  • Student loan payments
  • Child Care expenses
  • Groceries
  • Medical bills

The National Restaurant Association, in conjunction with Guy Fieri, kicked off this relief campaign on Friday, March 27, 2020. The campaign has already raised $5.5 million for restaurant employees and 100% of the funds will be used to help these employees. There are numerous other founding partners of this relief effort including, PepsiCo and Uber Eats to name just a few. It is estimated between 5 to 7 million restaurant workers may become unemployed as a result of the COVID-19 outbreak. The restaurant industry, with over 1 million restaurants in the U.S., employs approximately 15 million people. Eligible workers can apply for aid by clicking here.

If you want to help make a difference in the lives of these workers? You can donate to the fund here.

Categories: Restaurant & Hospitality