Congress Approves New Round of PPP and Rules on Deductibility

Dec 22, 2020

What happened?

Congress has been meeting seemingly around the clock in an effort to pass a bill before heading home for the holidays which, among other things, would provide a much-needed second round of Paycheck Protection Program (PPP) Stimulus. As of late Monday, December 21st, they were finally able to agree on negotiations and vote to approve this bill. President Trump is expected to sign this bill into law over the next few days.

What are the details?

Updates to the existing PPP program
First and foremost, the issue regarding the deductibility of expenses used for PPP1 loan forgiveness was finally resolved as Congress agreed, despite the push-back of the Treasury, to include legislation that allows for the deductibility of such expenses. This means that businesses who received a PPP1 loan (application deadline of August 8, 2020) that has been forgiven, or that they expect to be forgiven, can now deduct those related expenses from taxable income. This will result in a tax-free infusion of cash into many small businesses across America, which is in line with the original Congressional intent.

In addition to the deductibility of those expenses, additional items have been added to the list of qualified expenses for loan forgiveness. Among these are operating expenditures related to software or cloud computing that facilitates business operations, property damage costs (due to looting/vandalism that occurred during 2020 and were NOT covered by insurance), certain supplier costs, and covered worker protection expenses related to the adaptation of businesses per regulatory requirements imposed by the CDC, Health and Human Services, etc. These additional expenditures are only allowable for businesses that have not yet applied for forgiveness.

Congress also provided for modified covered periods in relation to PPP1 which gives businesses the option to select a covered period that falls anywhere BETWEEN 8 and 24 weeks after the loan origination date.

The bill repeals the requirement that EIDL (Economic Injury Disaster Loan) advances be deducted from the PPP forgiveness amount, and it allows the Employee Retention Credit to be claimed by PPP Loan recipients.

Finally, also retroactive to PPP1 is a much-desired streamlined application process for loans amounting to $150,000 or less. These applications require qualified businesses only to submit a one-page application that identifies the number of employees the borrower was able to retain as a result of receiving the PPP loan, the estimated amount of loan proceeds spent on payroll costs, and the total amount. Beyond that, borrowers need to simply attest to the fact that they complied with PPP requirements, and they are done. Gone is the need for hours and hours of painstaking calculations and document retrieval.

PPP2 Stimulus
This wave of stimulus will appropriate roughly $900 billion for a host of provisions, but for the purposes of this post, we will focus on new funding for the Paycheck Protection Program (PPP2) specifically. To begin, the maximum loan amount allowed in this round is $2 million, down from $10 million with PPP1, and it will target two groups specifically:

1. A second draw for the hardest hit borrowers from PPP1. Items to consider for qualifications of this group are as follows:

  • 300 or fewer employees; and
  •  25% gross receipts decline in any quarter in 2020 compared with the same quarter in 2019
    • EIDL and PPP proceeds are NOT included in gross receipts
    • Based on calendar quarter (not any consecutive 3-month period)
    • Tiered system where certain loans only require self-certification while others will need supporting documentation
  • Full use of your PPP1 loan amount
  • All loans will be subject to SBA review – congress is appropriating funds to the SBA to support manpower needed to conduct reviews of PPP loan applications so it can be expected that there will in fact be reviews by the SBA

2. First time PPP borrowers. Eligibility is as follows:

  • Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
  • Sole proprietors, independent contractors, and eligible self-employed individuals
  • Accommodation and foodservice businesses that average less than 500 employees per physical location
  • Non-profits, including churches
    NEW in this round is 501(c )(6) and destination marketing organizations with 150 or fewer employees – think economic development, chambers of commerce, tourism, etc. – subject to certain lobbying thresholds

The structure of PPP2, including the loan calculation formula, eligible use of proceeds, and forgiveness feature are very similar to that of the updated PPP1. In general:

  • The loan amount will be computed as 2.5 months of payroll. **Hotels and restaurants can get up to 3.5 times their average monthly payroll costs (subject to the $2 million maximum)**
  • Eligible uses of PPP2 funds will include payroll, rent, utilities, and mortgage interest just as in PPP1 as well as the additional eligible expenses noted in the “Updates to PPP1” section above.
  • PPP2 loan forgiveness will be tax-free and related expenses are deductible.
  • PPP2 loans will follow the new simplified forgiveness process.

What should I do now?
It is expected that the SBA will begin accepting PPP2 loan applications sometime in January, so now is the time to begin considering the need for a second PPP loan and whether your business satisfies the requirements outlined above. With the PPP forgiveness expense deductibility question answered, you may need to revisit your tax projections. We also recommend that you consider taking advantage of the Employee Retention Credit if you are newly eligible.

Watch for additional WVC resources including blog posts and webinars with more details on PPP2 and other items included in this round of stimulus. Contact your WVC advisor to discuss the nuances of this new stimulus package and how it will impact your business.

Categories: COVID-19

PPP Forgiveness Simplified

Dec 15, 2020

The plethora of reporting requirements created by the PPP loan forgiveness process has left many pulling their hair out trying to assemble the necessary documentation. For some, this is an unfortunate reality. However, for those with smaller PPP loans or relatively straight-forward qualifying expenses, the extra stress may be avoidable. Before spending hours tearing apart your company records, review the considerations below to identify if you are eligible for a more streamlined application process.

#1. If you obtained a loan of $50,000 or less, you are eligible to use forgiveness application Form 3508S which requires fewer calculations and less documentation for borrowers. Borrowers using this form are exempt from reductions in loan forgiveness due to Full-Time Equivalent (FTE) employee reductions and/or salaries and wages. There is also no requirement to show calculations used to determine loan forgiveness amounts. Please use the following links to access the form and instructions.

*There are currently discussions in Congress to implement a similarly streamlined application process for loans up to $150,000. Until a decision on this is made, we generally advise holding off on submitting forgiveness applications if your loan amount falls between $50,000 and $150,000

#2. See if you qualify for the 3508EZ loan forgiveness application – A brief, high-level summary of qualifications is as follows:

  • the borrower is self-employed with no wages at the time of PPP application, OR
  • the borrow did not reduce wages more than 25% during the covered period AND did not reduce the number of employees or average paid hours between January 1, 2020, and end of the covered period, OR
  • the borrow did not reduce wages more than 25% during the covered period AND was unable to operate during the covered period at pre-COVID levels of business activity due to compliance with established governmental requirements.

Please see the following links for more in-depth detail on these qualifications as well as exceptions.

#3. When gathering supporting documentation for your loan forgiveness application, it may not be necessary to gather ALL of the applicable expense information. For example, for a loan amount of $200,000, compile enough expenses to cover that $200,000 with some cushion to account for any unforeseen disallowance, i.e., submit and document around $220,000-$240,000 of expenses although you may have actually spent $500,000 of eligible expenses during your covered period. Additionally, if loan forgiveness will be covered with entirely payroll expenses, something as simple as a report for the covered period from your third-party payroll provider should be sufficient from a documentation standpoint

#4. Lastly, please keep in mind that if your business qualifies for the §199A qualified business income (QBI) deduction and/or the tax credit for research and development (R&D) expenses, there are certain caveats to consider when using payroll expenses for qualified loan forgiveness. Absent relevant guidance, use of these types of expenses could result in a reduction of said expenses available to be allocated toward QBI and R&D.

Please consult your WVC adviser to further evaluate the most beneficial allocation and use of qualified expenses for PPP loan forgiveness. We also encourage you to check-out our PPP Roadmap here.

By: Jon Floering, CPA

 

Categories: COVID-19

CARES Act Payroll Tax Deferral Provision Due To Expire December 31

Dec 14, 2020

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law earlier this year, businesses were provided the option to delay paying the employer portion of the Social Security payroll taxes on wages paid for the period from March 27, 2020, through Dec. 31, 2020. As we close on 2020, now is the time to set reminders for the following as this provision is set to expire:

Updating your payroll deductions for 2021 – If you elected to defer your payroll taxes, you will want to ensure your employer portion of withholdings has been reset for the new year. If you work with a payroll provider, connect with them to make sure you have stopped deferring. For those organizations who manage payroll internally, again, double check your deferral has ceased. In addition, you will want to make sure your fourth-quarter Form 941 (due January 31, 2021) reflects what you deferred.

Due dates for repayment – Any 2020 deferred payroll tax amounts are due to the federal government in two installments.

  • One-half at the end of December 31, 2021.
  • The remaining half at the end of December 21, 2022.

While employers are not required to submit their first payment of deferred taxes until December 2021, the CARES Act does not prohibit employers from early payment.

Income tax deduction – Employers who have opted to defer may be surprised to learn that these accrued payroll taxes, while in the books for 2020, may not be deductible from their taxable income until later. Accrual basis taxpayers seeking to claim deductions on their 2020 returns for deferred payroll tax liabilities incurred prior to Dec. 31, 2020, may be able to do so if they pay their deferred payroll taxes by Sept. 15, 2021. This may be particularly appealing to taxpayers generating losses in 2020 that will be carried back to higher tax years.

Planning ahead is key! To learn more about how this payroll tax deferral may impact your business, please contact your William Vaughan Company advisor today.

Categories: COVID-19, Tax Compliance

New Guidance Released on Deductibility of Expenses Paid with PPP Funds

Nov 19, 2020

Yesterday, the U.S. Treasury Department and Internal Revenue Service (IRS) released guidance clarifying the deductibility of expenses paid with paycheck protection program (PPP) loan funds.

The two significant rulings can be found here: Revenue Ruling 2020-27 and Revenue Procedure 2020-51. Both address issues related to the deductibility of expenses paid with PPP funds.

What is the significance of the new guidance?
Previously, it was unclear what would happen if a taxpayer incurred the expenses in one year (2020), but received forgiveness in the next year (2021).

Rev. Rul. 2020-27 states if a business reasonably believes a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Meaning, if you used all of your PPP funds in 2020 and expect to receive full forgiveness, those expenses are not deductible, regardless of whether or not you have applied for or have received forgiveness notification as of the end of 2020.

What happens if loan forgiveness is partially or fully denied in 2021 after one has filed their 2020 return?
Revenue Procedure 2020-51 establishes a safe harbor for taxpayers whose loan forgiveness applications are partially or fully denied, or who decide not to apply for forgiveness after filing their 2020 tax return.

While these expenses may ultimately become deductible with a future act of Congress, we encourage you to connect with your William Vaughan Company advisor to assist you in determining the best path forward for you and your business.

Need further PPP guidance? Check out our COVID-19 Resource Center.

Categories: COVID-19, Other Resources, Tax Planning

SBA Issues Loan Necessity Questionnaire

Nov 03, 2020

The Small Business Administration (SBA) has issued new loan necessity questionnaires which all businesses with PPP loans greater than $2 million will be required to complete. These questionnaires are intended to help the SBA determine whether the Borrower’s certification of economic uncertainty made the loan request necessary to support ongoing operations was appropriate. SBA has developed two distinct versions of the loan necessity questionnaire: one for for-profit borrowers, and one for non-profit borrowers.

To refresh, during the initial PPP Loan application, borrowers had to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, at no point did the SBA provide any material guidance as to what this certification meant, leaving many borrowers anxious. The limited guidance during the loan application phase only stated borrowers must take into account their current business activity and their ability to access other sources of liquidity.

Please note, at this time these forms are not available on the SBA or Treasury website. It is anticipated these questionnaires will come directly from the lender and/or servicer. Lenders who have submitted loan forgiveness on behalf of impacted borrowers will receive a request from the SBA for completion of the form. While the instructions indicate the receipt of the questionnaire does not necessarily mean the SBA is challenging the good-faith certification, impacted borrowers are required to submit the completed forms within 10 business days of receipt from the lender.

Given the short turn-around time, we recommend that all borrowers with aggregated PPP loans of $2 million or more familiarize themselves with these forms now, and begin to gather related documentation

We encourage impacted PPP borrowers to reach out to their WVC advisor for assistance with the completion of the form, as detailed financial information is required.

Categories: COVID-19

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