Looking for a 2022 safety net for your business? Act on EIDL funding before year end
As the new year approaches, the future of the Build Back Better Act (BBBA) — and the strength of the economic recovery — remains uncertain. One thing that’s not uncertain when it comes to your business is the impending deadline to apply for COVID-19 Economic Injury Disaster Loan (EIDL) funding, some of which needn’t be repaid.
The U.S. Small Business Administration (SBA) expanded eligibility in September 2021. While you may not have qualified or considered EIDL funding necessary previously, you might want to reconsider in light of yet another wave of COVID infections. But you’ll have to do so quickly, as the application deadline is December 31, 2021.
Shaky economic ground ahead?
Sen. Joe Manchin (D-WV) released a statement on December 19 announcing that he “cannot vote to move forward” on the BBBA. The $2.1 billion bill that passed in the U.S. House of Representatives includes numerous provisions related to healthcare, energy initiatives, immigration, education, social programs and taxes.
The Democrats lack the votes to pass the proposed legislation in the Senate without Manchin’s support. Yet Senate Majority Leader Chuck Schumer (D-NY) indicated on December 20 that he nonetheless intends to hold a vote on the bill in early 2022. Schumer’s announcement came hours after Goldman Sachs reduced its predictions for U.S. economic growth in 2022 based on Manchin’s statement.
Types of EIDL relief available
The COVID-19 EIDL program was created to make low-interest fixed-rate long-term loans to provide small businesses (including sole proprietorships and independent contractors) the working capital they need to withstand the effects of the pandemic. Three types of funding are available:
Loans. This funding type features a 30-year term and fixed interest rate of 3.75%. The proceeds can be used for any normal operating expense, including payroll, rent or mortgage, utilities, and other ordinary businesses expenses. Since the recent program expansion (see below), funds also can be used to pay or pre-pay business debt incurred at any time, including after submitting the application, and regularly scheduled payments of federal debt.
Targeted advances. Businesses located in low-income communities, have no more than 300 employees and have suffered more than a 30% reduction in revenue may qualify for a targeted advance up to $10,000. These advances don’t have to be repaid.
Supplemental targeted advances. Businesses in low-income communities that have no more than 10 employees and saw revenue declines of more than 50% may be eligible for an additional $5,000. Supplemental advances also don’t require repayment.
The recent expansion
The SBA has implemented several changes to make it easier for small businesses to access the COVID-19 EIDL loans. Among other things, the SBA:
Expanded eligibility from organizations with no more than 500 employees (including affiliates) to encompass businesses in the hardest hit industries with no more than 500 employees per physical location, as long as the business (with affiliates) has no more than 20 locations,
Increased the maximum loan amount from $500,000 to $2 million,
Extended the payment deferment period to two years after the loan origination date for all loans (interest will accrue during that period, and principal and interest payments must be made over the remaining 28 years of the loan term), and
Simplified the affiliation requirements.
The SBA has also limited entities that are part of a single corporate group to a combined total of no more than $10 million in COVID-19 EIDL loans.
Additional eligibility requirements
Applicants must be physically located in the United States or a designated territory and have suffered working capital losses due to the COVID-19 pandemic. In addition, the businesses must have been in operation on or before January 31, 2020.
Businesses (other than sole proprietorships) must have a valid tax identification number. Each owner, member, partner or shareholder of 20% or more must be a U.S. citizen, non-citizen national or qualified alien with a valid Social Security number.
For loans of $500,000 or less, you must have a credit score of at least 570. For larger loans, the credit score must be at least 625. Personal guaranty and collateral requirements may apply, too, depending on the amount of the loan.
The looming deadline
The SBA will accept applications for loans and targeted advances until December 31, 2021. It will continue to process applications after that date, until the funds are exhausted. While the SBA earlier advised businesses seeking supplemental targeted advances to submit applications by December 10, 2021, it later announced it will accept applications until year end. It can’t process applications after the deadline, though, so applications submitted near the deadline might not be processed.
Note that borrowers can request increases, up to their maximum loan eligibility amount, for up to two years after loan origination or until the program funds are exhausted. In addition, the SBA will accept reconsideration and appeal requests received before December 31, 2021, if received on a timely basis. For reconsiderations, that means within six months from the date the application was declined. Appeals must be received within 30 days from the date the reconsideration was declined.
Don’t dawdle
You can apply online for COVID-19 EIDL relief, but the clock is ticking. We can help you determine if you should go this route and help you collect the necessary documentation.
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EIDL program retooled for still-struggling small businesses
For many small businesses, the grand reopening is still on hold. The rapid spread of the Delta variant of COVID-19 has mired a variety of companies in diminished revenue and serious staffing shortages. In response, the Small Business Administration (SBA) has retooled its Economic Injury Disaster Loan (EIDL) program to offer targeted relief to eligible employers.
A brief history
The EIDL program was in place well before 2020. However, the federal government has ramped up the initiative’s visibility while trying to help small businesses during the pandemic.
With the entire country essentially declared a disaster area, the CARES Act established an enhanced EIDL program for small businesses affected by COVID-19. It offered lower interest rates, longer repayment terms and a streamlined application process.
The American Rescue Plan Act upped the ante, offering eligible companies targeted EIDL advances that are excluded from the gross income of the person who receives the funds. The law stipulates that no deduction or basis increase will be denied, and no tax attribute will be reduced, because of this gross income exclusion.
Latest enhancements
The SBA’s most recent enhancements to the EIDL program offer “a lifeline to millions of small businesses who are still being impacted by the pandemic,” according to SBA Administrator Isabella Casillas Guzman. (Eligible employers include not only small businesses, but also qualifying nonprofits and agricultural companies in all U.S. states and territories.)
First and foremost, the loan cap has increased from $500,000 to $2 million. Eligible small businesses can use these funds for almost any operating expense, including payroll and equipment purchases. Funds can also be applied for certain debt payments. Specifically, the SBA has expanded the allowable use of EIDL funds to prepay commercial debt and pay down federal business debt.
In addition, the agency has implemented a new deferred payment period under which borrowers can wait until two years after loan origination to begin repaying their COVID-related EIDLs.
Application details
If you believe your small business could qualify and benefit from these newly enhanced EIDLs, first identify how much money you need and how soon you need it. The SBA is offering a 30-day “exclusivity window” to approve and disburse loans of $500,000 or less. Approval and disbursement of loans of more than $500,000 will begin after this 30-day period.
The agency has also rolled out a streamlined application process that establishes “more simplified affiliation requirements” modeled after those of the Restaurant Revitalization Fund. The deadline for applications remains December 31, 2021. As is the case with any government loan, it’s better to apply earlier rather than later in case funds run out.
Help with the process
For further details about the new and improved COVID-related EIDL program, go to sba.gov/eidl. And don’t hesitate to contact us. We can help you determine whether your small business qualifies for one of these loans and, if so, assist with completing the application process.
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IRS issues ERC guidance as Congress mulls early termination
The IRS has published new guidance on the Employee Retention Credit (ERC). The credit was created in March 2020 to encourage employers to keep their workforces intact during the COVID-19 pandemic. Notice 2021-49 addresses various issues, particularly those related to the extension of the credit through 2021 by the American Rescue Plan Act (ARPA).
The guidance comes as Congress weighs ending the ERC early to help offset the costs of the pending infrastructure bill. As of now, the credit is worth as much as $28,000 per employee for 2021, or $7,000 per quarter.
ERC essentials
The CARES Act generally made the ERC available to employers whose:
Operations were fully or partially suspended due to a COVID-19-related government shutdown order, or
Gross receipts dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).
The credit originally equaled 50% of “qualified wages” — including health care benefits — up to $10,000 per eligible employee from March 13, 2020, through December 31, 2020. As a result, the maximum benefit for 2020 was $5,000 per employee.
And initially, businesses couldn’t benefit from both the ERC and the popular Paycheck Protection Program (PPP). Most opted for the PPP, which, among other advantages, put money into their pockets more quickly than the credit.
In December 2020, the Consolidated Appropriations Act (CAA) provided that employers that receive PPP loans still qualify for the ERC for qualified wages not paid with forgiven PPP loans. It also extended the credit through June 30, 2021.
In addition, the CAA raised the amount of the credit to 70% of qualified wages, beginning January 1, 2021, and boosted the limit on per-employee qualified wages from $10,000 per year to $10,000 per quarter — so employers could obtain a credit as high as $7,000 per quarter per employee.
The CAA also expanded eligibility by reducing the requisite year-over-year gross receipt reduction from 50% to only 20%. And it increased the threshold for determining whether a business is a “large employer,” and therefore subject to a more stringent standard when computing the qualified wage base, from 100 to 500 employees.
The ARPA extended the ERC through the end of 2021. It also made some changes that apply solely to the third and fourth quarters of 2021.
Guidance on ARPA changes
The majority of the IRS guidance deals with issues raised by the ARPA’s ERC-related provisions, including:
Applicable employment taxes. Under the CARES Act, employers could claim the ERC only against Social Security taxes. The guidance states that, for the third and fourth quarters of 2021, employers are entitled to claim the credit against their share of Medicare taxes, with the excess refundable.
Maximum amount. The maximum credit of $7,000 per employee per quarter for the first and second quarters of 2021 continues to apply to the third and fourth quarters. A separate limit applies to so-called “recovery startup businesses,” though.
Recovery startup businesses. The ARPA expanded the pool of ERC-eligible employers to include those that:
Began operating after February 15, 2020, and
Have average annual gross receipts for the three previous tax years of less than or equal to $1 million.
These employers can claim the credit without suspended operations or reduced receipts, up to $50,000 total per quarter for the third and fourth quarters of 2021.
The guidance clarifies that a taxpayer hasn’t begun operating until it has begun functioning as a going concern and performing those activities for which it was organized. It also provides that the determination of whether a taxpayer is a recovery startup business is made separately for each quarter.
Qualified wages. The ARPA directs extra relief to “severely financially distressed employers” with less than 10% of gross receipts for 2021 when compared to the same calendar quarter in 2019. These businesses may count as qualified wages any wages paid to an employee during any calendar quarter — regardless of employer size.
Note that the ARPA prohibits “double dipping.” Wages taken into account for several business tax credits (for example, the research, empowerment zone and work opportunity tax credits, as well as credits for COVID-related paid sick and family leave) can’t also be taken into account for purposes of the ERC.
Interplay with shuttered venue and restaurant revitalization grants. According to the guidance, recipients of a Shuttered Venue Operator Grant or a Restaurant Revitalization Fund grant may not treat any amounts reported or otherwise taken into account as payroll costs for those programs as qualified wages for ERC purposes. Such employers must retain documentation that supports the ERCs they claim.
Miscellaneous issues
The guidance addresses several other lingering issues related to the ERC for 2020 and 2021. For example, it clarifies the definition of a “full-time employee.”
The notice explains that employers needn’t include full-time equivalents when calculating the average number of full-time employees for purposes of determining whether an employer is a large or small eligible employer. But, for purposes of identifying qualifying wages, an employee’s status is irrelevant, so wages paid to non-full-time workers may be treated as qualified wages (assuming all other applicable requirements are met).
The guidance also sheds further light on the:
Treatment of tips and the Section 45B credit,
Timing of qualified wage deduction disallowance,
Alternative quarter election for 2021,
Gross receipts safe harbor, and
Exclusion of wages paid to the majority owners of corporations.
The rules regarding the last item above, which attribute ownership to owners’ family members, could significantly reduce the amount of the ERC for family-owned corporations. A footnote in the guidance indicates that even the wages paid to minority owners might end up excluded from the ERC computation.
ERC’s future is uncertain
The U.S. Senate has passed infrastructure legislation that would eliminate the ERC for the fourth quarter of 2021. However, the House of Representatives is on recess until the fall, so the fate of the credit remains uncertain. Contact us for additional information regarding the latest ERC guidance.
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PPP forgiveness and repayment: What businesses need to know now
A critical deadline is approaching for many of the businesses that have received loans under the Paycheck Protection Program (PPP), which was created in March 2020 by the CARES Act. If these borrowers don’t take action before the deadline expires, their loans will become standard loans, and the borrowers could be responsible for repaying the full amount plus 1% interest before the maturity date. In addition, some borrowers could face audits.
PPP basics
PPP loans generally are 100% forgivable if the borrower allocates the funds on a 60/40 basis between payroll and eligible nonpayroll costs. Nonpayroll costs initially included only mortgage interest, rent, utilities and interest on any other existing debt, but the Consolidated Appropriations Act (CAA), enacted in late 2020, significantly expanded the eligible nonpayroll costs. For example, the funds can be applied to certain operating expenses and worker protection expenses.
The CAA also withdrew the original requirement that borrowers deduct the amount of any Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount. And it provides that a borrower doesn’t need to include any forgiven amounts in its gross income and can deduct otherwise deductible expenses paid for with forgiven PPP proceeds.
Forgiveness filings
PPP borrowers can apply for forgiveness at any time before their loans’ maturity date (loans made before June 5, 2020, generally have a two-year maturity, while loans made on or after that date have a five-year maturity). But, if a borrower doesn’t apply for forgiveness within 10 months after the last day of the “covered period” — the eight-to-24 weeks following disbursement during which the funds must be used — its PPP loan payments will no longer be deferred and it must begin making payments to its lender.
That 10-month period is coming to an end for many so-called “first-draw” borrowers. For example, a business that applied early in the program might have a covered period that ended on October 30, 2020. It would need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities.
Borrowers apply for forgiveness by filing forms with their lenders, who’ll then submit the forms to the SBA. The specific type of form needed to be filed is dependent on the amount of the loan and whether a business is a sole proprietor, independent contractor or self-employed individual with no employees.
If the SBA doesn’t forgive a loan or forgives only part of it, the lender will notify the borrower when the first payment is due. Interest accrues during the time from disbursement of the loan proceeds to SBA remittance to the lender of the forgiven amount, and the borrower must pay the accrued interest on any amount not forgiven.
Some businesses may have delayed filing their forgiveness applications to maximize their employee retention tax credits. That’s because qualified wages paid after March 12, 2020, through December 31, 2021, that are taken into account for purposes of calculating the credit amount can’t be included when calculating eligible payroll costs for PPP loan forgiveness. These businesses should pay careful attention to when their 10-month period expires to avoid triggering loan repayment.
Audit action
Borrowers also should be aware of the possibility that they’ll be audited by the SBA’s Office of Inspector General, with support from the IRS and other federal agencies. The SBA will automatically audit every loan that’s more than $2 million after the borrower applies for forgiveness, but smaller loans may be subject to scrutiny, too.
Although the SBA has established an audit safe harbor for loans of $2 million or less, that carveout applies only to the examination of the borrower’s good faith certification on the loan application that the “current economic uncertainty makes the loan request necessary to support the ongoing operations” of the business. The SBA also recently notified lenders that it’s eliminating the loan necessity requirement for loans of more than $2 million. Those borrowers will no longer need to complete a burdensome Loan Necessity Questionnaire.
All borrowers, however, still might be audited on matters such as eligibility (for example, the number of employees), calculation of the loan amount, how the funds were used and entitlement to forgiveness. Borrowers that receive adverse audit findings may be required to repay their loans and, depending on the missteps uncovered, could face civil penalties and prosecution under the federal False Claims Act.
Businesses that received loans of more than $2 million shouldn’t wait to prepare for their audits. They can begin to work with their CPAs now to gather and organize the documents and information that auditors are likely to request, including:
Financial statements,
Income and employment tax returns,
Payroll records for all pay periods within the applicable covered period,
Calculation of full-time equivalent employees, and
Bank and other records related to how the funds were used (for example, canceled checks, utility bills, leases and mortgage statements).
Note that some of this documentation will overlap with that required when filing the application for loan forgiveness.
Act now
Businesses nearly always have a lot on their plates, so it’s not surprising that some might not have been laser-focused on the various dates relevant to their PPP loans. Now is the time to ensure that you file your forgiveness application in a timely manner and have the necessary documentation gathered to survive the SBA audit that may follow. Contact us for assistance.
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Do You Know Your Draw 1 PPP Forgiveness Application Deadline Date?
A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. The maturity date is 10 months after the last day of the covered period following loan disbursement, or 10 months from December 31, 2020. Failure to submit a forgiveness application by the deadline will eliminate any potential forgiveness opportunities, and will trigger the repayment terms of the loan, including all accrued interest from the date of disbursement.
First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the covered period following loan disbursement:
* Employee and compensation levels are maintained
* The loan proceeds are spent on payroll costs and other eligible expenses; and
* At least 60% of the proceeds are spent on payroll costs
To apply for loan forgiveness:
1. Contact your PPP lender to confirm your forgiveness application deadline, and the correct form to complete
2. Compile your documentation
3. Submit the forgiveness form and documentation to your PPP lender
4. Continue to communicate with your lender throughout the process
Contact your FMD advisor if you have questions or need assistance in the PPP loan forgiveness process.
Pondering the possibility of a company retreat
As vaccination levels rise and major U.S. population centers fully reopen, business owners may find themselves pondering an intriguing thought: Should we have a company retreat this year?
Although there are still health risks to consider, your employees may love the idea of attending an in-person event after so many months of video calls, emails and instant messages. The challenge to you is to plan a retreat that’s safe, productive and enjoyable — and that doesn’t unreasonably disrupt company operations.
Mixing business with fun
First, nail down your primary objectives well in advance. Determine and prioritize a list of the important issues you want to address but include only the top two or three on the final agenda. Otherwise, you risk rushing through some items without adequate time for discussion and formalized action plans.
If one of the objectives is to include time for socializing or recreational activities, great. Mixing business with fun keeps people energized. However, if staff see the retreat as merely time away from the office to party and golf, don’t expect to complete many work-related agenda items. One way to find the right mix is to consider scheduling work sessions for the morning and more fun, team-building exercises later in the day.
Craft a flexible budget
Next, work on the budget. Determining available resources early in the planning process will help you set limits for variable costs such as location, accommodations, food, transportation, speakers and entertainment.
Instead of insisting on certain days for the retreat, select a range of possible dates. Doing so widens site selection and makes it easier to negotiate favorable hotel and travel rates. Keep your budget as flexible as possible, building in a 5% to 10% safety cushion. Always expect unforeseen, last-minute expenses.
The good news is that the hospitality industry is generally trying to rebound from the very difficult downturn it suffered because of the pandemic. So, you may be able to find some special deals offered to “draw out” companies that haven’t held a retreat in a while.
Also, if you wish to truly minimize the health risks, you might want to focus on venues with outdoor facilities, such as farms or golf resorts. You could hold sessions mostly outdoors (weather permitting, of course) where it’s very safe.
Reunite and reenergize
Holding a company retreat this year may be a great way to reunite and reenergize your workforce. As convenient and practical as video meeting technology may be, there’s nothing quite like seeing each other in person. We can help you assess the costs and establish a reasonable budget that supports an enjoyable, productive and cost-effective retreat.
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The Restaurant Revitalization Fund is now live
The COVID-19 pandemic has affected various industries in very different ways. Widespread lockdowns and discouraged movement have led to increased profitability for some manufacturers and many big-box retailers. The restaurant industry, however, has had a much harder go of it — especially smaller, privately owned businesses in economically challenged areas.
In response, the Small Business Administration (SBA) has launched the Restaurant Revitalization Fund (RRF). It was established under the American Rescue Plan Act (ARPA) signed into law in March. The RRF went live for applications on May 3, and the SBA is strongly urging interested, eligible businesses to apply as soon as possible.
Who’s eligible?
Funds are available for restaurants, of course, but also many other similar types of businesses. Food stands, trucks and carts can apply, as well as bars, saloons, lounges and taverns. Catering companies may also file an RRF application.
In addition, the program is available to snack and nonalcoholic beverage bars, as well as “licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products,” according to the SBA.
For some restaurant-like businesses, on-site sales to the public must comprise at least 33% of gross receipts. These include bakeries; inns; wineries and distilleries; breweries and/or microbreweries; and brewpubs, tasting rooms and taprooms.
How much funding is available?
Under the ARPA, the RRF received a total of $28.6 billion in direct relief funds for restaurants and other similar establishments that have suffered economic hardship and substantial operational losses because of the COVID-19 pandemic.
The dollar amount an eligible business can receive under the RRF will equal its decrease in gross revenues during 2020 compared to gross revenues in 2019 — less the amount of any Paycheck Protection Program (PPP) loans received. Other amounts must be excluded from 2020 gross receipts as well, including:
SBA Section 1112 debt relief,
SBA Economic Injury Disaster Loans,
SBA advances (targeted and otherwise), and
Local small business grants.
Overall, the RFF may provide a qualifying establishment with funding equal to its pandemic-related revenue loss up to $10 million per business and not more than $5 million per physical location. Recipients must use funds for allowable expenses by March 11, 2023.
What will we need to apply?
A timely, properly completed application is critical to acquiring this funding. An applicant business must submit documentation of its 2020 and 2019 gross receipts, as well as at least one of the following:
A federal tax return,
A point of sale report, or
Externally or internally prepared financial statements.
Warning: Internally prepared financials could significantly delay SBA review of your application.
You’ll also need to disclose the amount of any PPP loans you’ve received. However, the SBA’s online application system should provide this information automatically.
Get started now
To get started, register for an account at restaurants.sba.gov. The SBA advises applicants to first download a sample version of the application here. Our firm can help you identify necessary documentation and navigate the process.
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EIDL loans, restaurant grants offer relief to struggling small businesses
The American Rescue Plan Act (ARPA), signed into law in early March, aims at offering widespread financial relief to individuals and employers adversely affected by the COVID-19 pandemic. The law specifically targets small businesses in many of its provisions.
If you own a small company, you may want to explore funding via the Small Business Administration’s (SBA’s) Economic Injury Disaster Loan (EIDL) program. And if you happen to own a restaurant or similar enterprise, the ARPA offers a special type of grant just for you.
EIDL advances
Under the ARPA, eligible small businesses may receive targeted EIDL advances from the SBA. Amounts received as targeted EIDL advances are excluded from the gross income of the person who receives the funds. The law stipulates that no deduction or basis increase will be denied, and no tax attribute will be reduced, because of the ARPA’s gross income exclusion.
In the case of a partnership or S corporation that receives a targeted EIDL advance, any amount of the advance excluded from income under the ARPA will be treated as tax-exempt income for federal tax purposes. Because targeted EIDL advances are treated as such, they’ll be allocated to the partners or shareholders — increasing their bases in their partnership interests.
The IRS is expected to prescribe rules for determining a partner’s distributive share of EIDL advances for federal tax purposes. S corporation shareholders will receive allocations of tax-exempt income from targeted EIDL advances in proportion to their ownership interests in the company under the single-class-of-stock rule.
Restaurant revitalization grants
Under the ARPA, eligible restaurants, food trucks and similar businesses may receive restaurant revitalization grants from the SBA. As is the case for EIDL loans:
Amounts received as restaurant revitalization grants are excluded from the gross income of the person who receives the funds, and
No deduction or basis increase will be denied, and no tax attribute will be reduced, because of the ARPA’s gross income exclusion.
In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount of the grant excluded from income under the ARPA will be treated as tax-exempt income for federal tax purposes. Because restaurant revitalization grants are treated as tax-exempt income, they’ll be allocated to partners or shareholders and increase their bases in their partnership interests.
Just like EIDL advances, the IRS is expected to prescribe rules for determining a partner’s distributive share of the grant for federal tax purposes. And S corporation shareholders will receive allocations of tax-exempt income from restaurant revitalization grants in proportion to their ownership interests in the company under the single-class-of-stock rule.
Help with the process
The provisions related to EIDL advances and restaurant revitalization grants are effective as of the ARPA’s date of enactment: March 11, 2021. Contact us for help determining whether your small business or restaurant may qualify for financial relief under the ARPA and, if so, for assistance with the application process.
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COBRA provisions play critical role in COVID-19 relief law
During the COVID-19 pandemic, many employees and their families have lost group health plan coverage because of layoffs or reduced hours. If your business has had to take such steps, and it’s required to offer continuing health care coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the recently passed American Rescue Plan Act (ARPA) includes some critical provisions that you should be aware of.
100% subsidy
Under the ARPA, assistance-eligible individuals (AEIs) may receive a 100% subsidy for COBRA premiums during the period beginning April 1, 2021, and ending on September 30, 2021.
An AEI is a COBRA qualified beneficiary — in other words, an employee, former employee, covered spouse or covered dependent — who’s eligible for and elects COBRA coverage because of a qualifying event of involuntary termination of employment or reduction of hours. For purposes of the law, the subsidy is available for AEIs for the period beginning April 1, 2021, and ending September 30, 2021.
Extended election period
Individuals without a COBRA election in effect on April 1, 2021, but who would be an AEI if they did, are eligible for the subsidy. Those who elected but discontinued COBRA coverage before April 1, 2021, are also eligible if they’d otherwise be an AEI and are still within their maximum period of coverage.
Individuals meeting these criteria may make a COBRA election during the period beginning on April 1, 2021, and ending 60 days after they’re provided required notification of the extended election period. Coverage elected during the extended period will commence with the first period of coverage beginning on or after April 1, 2021, and may not extend beyond the AEI’s original maximum period of coverage.
Duration of coverage
As explained, the subsidy is available for any period of coverage in effect between April 1, 2021, and September 30, 2021. However, eligibility may end earlier if the qualified beneficiary’s maximum period of coverage ends before September 30, 2021. Eligibility may also end if the qualified beneficiary becomes eligible for coverage under Medicare or another group health plan other than coverage consisting of only excepted benefits or coverage under a Health Flexible Spending Arrangement or Qualified Small Employer Health Reimbursement Arrangement.
Other provisions
The ARPA’s COBRA provisions go beyond the subsidy. For example, they stipulate that group health plan sponsors may voluntarily allow AEIs to elect to enroll in different coverage under certain circumstances. In addition, group health plans must issue notices to AEIs regarding the:
Availability of the subsidy and option to enroll in different coverage (if offered),
Extended election period, and
Expiration of the subsidy.
The U.S. Department of Labor is expected to issue model notices addressing all three points.
Further explanation
The COVID-19 crisis has emphasized the importance of health care coverage. Our firm can further explain the ARPA’s COBRA provisions and help you manage the financial risks of offering health care benefits to your employees.
© 2021
New COVID-19 relief law extends employee retention credit
Many businesses have retained employees during the COVID-19 pandemic and enjoyed tax relief with the help of the employee retention credit (ERC). The recent signing of the American Rescue Plan Act (ARPA) brings good news: the ERC has been extended yet again.
The original credit
As originally introduced under last year’s CARES Act, the ERC was a refundable tax credit against certain employment taxes equal to 50% of qualified wages, up to $10,000, that an eligible employer paid to employees after March 12, 2020, and before January 1, 2021. An employer could qualify for the ERC if, in 2020, there was a:
Full or partial suspension of operations during any calendar quarter because of governmental orders limiting commerce, travel or group meetings because of COVID-19, or
Significant decline in gross receipts (less than 50% for the same calendar quarter in 2019).
The definition of “qualified wages” depends on staff size. If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those paid to employees who aren’t providing services because operations were suspended or due to the decline in gross receipts. Qualified wages may include certain health care costs and are capped at $10,000 per employee. These employers could count wages only up to the amount that the employee would’ve been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, also including health care costs and capped at $10,000 per employee, paid to any employee during the period operations were suspended or the period of the decline in gross receipts — regardless of whether employees are providing services.
Expansion and extensions
Under the Consolidated Appropriations Act (CAA), signed into law at the end of 2020, the ERC was extended through June 30, 2021. The CAA also expanded the ERC rate of credit from 50% to 70% of qualified wages. The law further expanded eligibility by:
Reducing the required year-over-year gross receipts decline from 50% to 20%,
Providing a safe harbor that allows employers to use previous quarter gross receipts to determine eligibility,
Increasing the limit on creditable wages from $10,000 in total to $10,000 per calendar quarter (that is, $10,000 for first quarter 2021 and $10,000 for second quarter 2021), and
Raising the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees (meaning wages qualify for the credit even if the employee is working).
Most recently, the ARPA further extended the ERC from June 30, 2021, until December 31, 2021. The 70% of qualified wages is also extended for this period, as is the allowance for up to $10,000 in qualified wages for any calendar quarter. This means an employer could potentially have up to $40,000 in qualified wages per employee through 2021.
Valuable break
We can help you determine whether your business qualifies for the ERC and, if so, how much the credit may reduce your tax bill.
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The latest on COVID-related deadline extensions for health care benefits
The U.S. Department of Labor (DOL) recently issued EBSA Disaster Relief Notice 2021-01, which is of interest to employers. It clarifies the duration of certain COVID-19-related deadline extensions that apply to health care benefits plans.
Extensions to continue
The DOL and IRS issued guidance last year specifying that the COVID-19 outbreak period — defined as beginning March 1, 2020, and ending 60 days after the announced end of the COVID-19 national emergency — should be disregarded when calculating various deadlines under COBRA, ERISA and HIPAA’s special enrollment provisions.
The original emergency declaration would have expired on March 1, 2021, but it was recently extended. Although the agencies defined the outbreak period solely by reference to the COVID-19 national emergency, they relied on statutes allowing them to specify disregarded periods for a maximum of one year. Therefore, questions arose as to whether the outbreak period was required to end on February 28, 2021, one year after it began.
Notice 2021-01answers those questions by providing that the extensions have continued past February 28 and will be measured on a case-by-case basis. Specifically, applicable deadlines for individuals and plans that fall within the outbreak period will be extended (that is, the disregarded period will last) until the earlier of:
One year from the date the plan or individual was first eligible for outbreak period relief, or
The end of the outbreak period.
Once the disregarded period has ended, the timeframes that were previously disregarded will resume. Thus, the outbreak period will continue until 60 days after the end of the COVID-19 national emergency, but the maximum disregarded period for calculating relevant deadlines for any individual or plan cannot exceed one year.
Communication is necessary
The DOL advises plan sponsors to consider sending notices to participants regarding the end of the relief period, which may include reissuing or amending previous disclosures that are no longer accurate. Sponsors are also advised to notify participants who are losing coverage of other coverage options, such as through the recently announced COVID-19 special enrollment period in Health Insurance Marketplaces (commonly known as “Exchanges”).
Notice 2021-01 acknowledges that the COVID-19 pandemic and other circumstances may disrupt normal plan operations. The DOL reassures fiduciaries acting in good faith and with reasonable diligence that enforcement will emphasize compliance assistance and other relief. The notice further states that the IRS and U.S. Department of Health and Human Services concur with the guidance and its application to laws under their jurisdiction.
Challenges ahead
Plan sponsors and administrators will likely welcome this clarification but may be disappointed in its timing and in how it interprets the one-year limitation. Determinations of the disregarded period that depend on individual circumstances could create significant administrative challenges.
In addition to making case-by-case determinations, plan sponsors and administrators must quickly develop a strategy for communicating these complex rules to participants. Contact us for further information and updates.
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Can your business benefit from the enhanced Employee Retention Tax Credit?
COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.
Background on the credit
The CARES Act, enacted in March of 2020, created the ERTC. The credit:
Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
Was subject to an overall wage cap of $10,000 per eligible employee, and
Was available to eligible large and small employers.
The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.
In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).
Interaction with the PPP
In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven.
What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
We can help
These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax saving opportunity.
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Consolidated Appropriations Act, 2021: PPP Loan Related Expenses Tax Deductible and Round Two
Late on Sunday, December 27, 2020 President Trump signed into law a piece of legislation called the Consolidated Appropriations Act, 2021. This 5,500-page bill carried a budget of $900 billion including $300 billion of additional relief to small businesses, another round of direct cash stimulus payments, expanded unemployment insurance benefits, and a variety of funding dedicated to COVID-19 testing and tracing. A signature piece of the CARES Act was the PPP Loan Program. The Consolidated Appropriations Act, 2021 has several provisions that address both the original loan program and rolls out a second round of PPP Loans to certain qualifying small businesses and other organizations.
Taxability of PPP Loan Forgiveness and Deductibility of Related Expenses:
The CARES Act provided that any PPP Loan forgiveness was non-taxable to the recipient. The Internal Revenue Service, however, later issued Notice 2020-32 that indicated that any expenses related to the forgiven PPP Loan were non-deductible, thereby essentially making the PPP Loan forgiveness a taxable event. This new law clarifies both the original position of the CARES Act as to non-taxability of the forgiven loan and makes it clear that all qualifying expenses related to the forgiveness of the original PPP Loan are fully deductible by the business.
Round Two of the PPP Loan Program:
The new Act also creates a $284.5 Billion fund to re-open the PPP loan program for first and second-time borrowers. This program runs through March 31, 2021 and adds some additional restrictions on eligibility.
Business Eligible for New Loans:
Small businesses with less than 300 employees
Business has been in operation on or before February 15, 2020
Business has used, or will use, all the original PPP loan proceeds
Sole-proprietors, independent contractors, self-employed individuals
NEW: Borrowers that returned all or part of a previous PPP loan can reapply for the maximum loan amount
NEW: Borrowers that did not receive the maximum eligible loan can reapply for the additional loan proceeds
NEW: Qualifying 501c6 non-profit organizations, destination marketing organizations, housing cooperatives, local newspapers, and TV & Radio broadcasters
NEW: Businesses must have experienced a 25% or more reduction in Gross Receipts in any one quarter of 2020, as compared to the corresponding quarter in 2019. If not in business during the first three quarters of 2019, the business can compare the first three quarters of 2020 to the fourth quarter of 2019
Maximum Loan Amount:
Most businesses can borrow up to 2.5 times the business average monthly payroll costs incurred in the 12 months preceding the loan or the calendar year
NEW: Hospitality Businesses (Using the NAICS Code 72) can borrow up to 3.5 times the business average monthly payroll costs incurred in the 12 months preceding the loan or the calendar year
NEW: Max Loan amount under this program is capped at $2 Million
Payroll costs include:
Normal gross wages,
Vacation, parental, family, medical & sick leave
Group health care benefits
Retirement benefits
Total payroll costs cannot exceed $100,000 per employee annually
Allowable Uses of Loan Proceeds:
Employee Salaries, excluding compensation in excess of $100,000 per employee
Paid Sick or medical leave
NEW: Group health care benefit costs and insurance premiums, including medical, dental, vision, disability, and life insurance
Mortgage payments
Rent payments
Utility payments
Interest on debt in existence on February 15, 2020
NEW: Covered operations expenditures (Software, cloud computing and other human resources and accounting needs)
NEW: Covered property damage costs (Damage caused by vandalism or looting due to public disturbances in 2020 not covered by insurance)
NEW: Covered supplier costs (Essential operational costs paid to a supplier of goods pursuant to a contract or purchase order in effect prior to or during the covered period)
NEW: Covered worker protection expenses (Operating or capital expenditures necessary to adapt the business activities to comply with DHHS, CDC or OSHA rules to protect employees)
Loan Terms:
Sets a maximum interest rate of 4%
No prepayment fees will apply
Waives both borrower and lender fees
Waives collateral and personal guarantee requirements
Waives credit elsewhere test
Allows complete deferment of loan payments for 6 months but not more than 1 year
Loan Forgiveness Provisions:
Borrowers are eligible for loan forgiveness in the amount spent during either an 8- or 24-week covered period after the origination of the loan on the eligible costs listed above
The borrower must maintain a 60/40 payroll to non-payroll expenditure ratio to receive full forgiveness
This Act repeals the CARES Act provision that requires PPP borrowers to deduct their EIDL Advance from their PPP loan forgiveness amount
Eligible forgiven amounts will be reduced proportionally by the reduction in employees retained as compared to the prior year and reduced by the reduction in pay for any employee beyond 25% of their prior year compensation (i.e., You must maintain the same number of employees and pay them at least 75% of their prior year comp to be eligible for full debt forgiveness)
Any debt forgiven under the terms of this program will be excluded from taxable income and all related expenses will be deductible
Any loans not forgiven or repaid in full after one year will maintain a max term of 10 years at a rate of 4%
This act also creates a new simplified loan forgiveness application for loans under $150,000
This second round of loans will also be administrated by banks, rather than directly through the U.S. Small Business Administration. If you are interested in applying for one of these loans, please contact your local bank representative as soon as possible to discuss the application and funding process
As always, if you have any questions or require any assistance with completing the loan application process, please reach out to your FMD professional advisor at any time.
New law doubles business meal deductions and makes favorable PPP loan changes
The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.
Business meal deduction increased
The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.
As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.
The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.
The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.
Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.
Therefore, to be deductible:
The food and beverages can’t be lavish or extravagant under the circumstances, and
You or one of your employees must be present when the food or beverages are served.
If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.
PPP loans
The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:
Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).
Much more
These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation.
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Tax responsibilities if your business is closing amid the pandemic
Unfortunately, the COVID-19 pandemic has forced many businesses to shut down. If this is your situation, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.
Of course, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.
Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.
Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”
All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.
C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.
S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.
Employees and contract workers
If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.
If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
Other tax issues
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.
We can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.
We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.
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Employers have questions and concerns about deferring employees’ Social Security taxes
The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit and payment of certain payroll tax obligations.
The three-page guidance in Notice 2020-65 was issued to implement President Trump’s executive memorandum signed on August 8.
Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it doesn’t forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred.)
Deferral basics
President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit and payment of certain payroll tax obligations.
For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020, and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000, or the equivalent amount with respect to other pay periods.
The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.
“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. But it doesn’t specify how.
Be aware that under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.
Many employers opting out
Several business groups have stated that their members won’t participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral “unworkable.”
The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.
Businesses are also worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. And since some employees are asking questions about the deferral, many employers are also putting together communications to inform their staff members about whether they’re going to participate. If so, they’re informing employees what it will mean for next year’s paychecks.
How to proceed
Contact us if you have questions about the deferral and how to proceed at your business.
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CARES Act made changes to excess business losses
The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.
If you hold an interest in a business, or may do so in the future, here is more information about the changes.
Deferral of the excess business loss limits
The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.
The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.
The postponement means that you may be able to amend:
Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).
Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).
Changes to the excess business loss limits
The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.
Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.
Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.
And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:
Capital loss deductions aren’t taken into account in computing the excess business loss and
The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Contact us with any questions you have about this or other tax matters.
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The President’s action to defer payroll taxes: What does it mean for your business?
On August 8, President Trump signed four executive actions, including a Presidential Memorandum to defer the employee’s portion of Social Security taxes for some people. These actions were taken in an effort to offer more relief due to the COVID-19 pandemic.
The action only defers the taxes, which means they’ll have to be paid in the future. However, the action directs the U.S. Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”
Legislative history
On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act. A short time later, President Trump signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act. Both laws contain economic relief provisions for employers and workers affected by the COVID-19 crisis.
The CARES Act allows employers to defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.
New bill talks fall apart
Discussions of another COVID-19 stimulus bill between Democratic leaders and White House officials broke down in early August. As a result, President Trump signed the memorandum that provides a payroll tax deferral for many — but not all — employees.
The memorandum directs the U.S. Treasury Secretary to defer withholding, deposit and payment of the tax on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020. This means that the employee’s share of Social Security tax will be deferred for that time period.
However, the memorandum contains the following two conditions:
The deferral is available with respect to any employee, the amount of whose wages or compensation, as applicable, payable during any biweekly pay period generally is less than $4,000, calculated on a pretax basis, or the equivalent amount with respect to other pay periods; and
Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.
The Treasury Secretary was ordered to provide guidance to implement the memorandum.
Legal authority
The memorandum (and the other executive actions signed on August 8) note that they’ll be implemented consistent with applicable law. However, some are questioning President Trump’s legal ability to implement the employee Social Security tax deferral.
Employer questions
Employers have questions and concerns about the payroll tax deferral. For example, since this is only a deferral, will employers have to withhold more taxes from employees’ paychecks to pay the taxes back, beginning January 1, 2021? Without a law from Congress to actually forgive the taxes, will employers be liable for paying them back? What if employers can’t get their payroll software changed in time for the September 1 start of the deferral? Are employers and employees required to take part in the payroll tax deferral or is it optional?
Contact us if you have questions about how to proceed. And stay tuned for more details about this action and any legislation that may pass soon.
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The possible tax consequences of PPP loans
If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.
PPP basics
The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.
The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.
An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:
Payroll costs;
Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
Payments for covered rent obligations (for leases that began before February 15, 2020); and
Certain utility payments.
An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.
Cancellation of debt income
In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.
Expenses paid with loan proceeds
The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.
However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.
PPP Audits
Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.
Contact us with any further questions you might have on PPP loan forgiveness.
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Reopening concepts: What business owners should consider
Reopening concepts: What business owners should consider
A widely circulated article about the COVID-19 pandemic, written by author Tomas Pueyo in March, described efforts to cope with the crisis as “the hammer and the dance.” The hammer was the abrupt shutdown of most businesses and institutions; the dance is the slow reopening of them — figuratively tiptoeing out to see whether day-to-day life can return to some semblance of normality without a dangerous uptick in infections.
Many business owners are now engaged in the dance. “Reopening” a company, even if it was never completely closed, involves grappling with a variety of concepts. This is a new kind of strategic planning that will test your patience and savvy but may also lead to a safer, leaner and better-informed business.
When to move forward
The first question, of course, is when. That is, what are the circumstances and criteria that will determine when you can safely reopen or further reopen your business. Most experts agree that you should base this decision on scientific data and official guidance from agencies such as the U.S. Department of Health and Human Services and Centers for Disease Control and Prevention (CDC).
But don’t stop there. Although the pandemic is, by definition, a worldwide issue, the specific situation on the ground in your locality should drive your decision-making. Keep tabs on state, county and municipal news, rules and guidance. Plug into your industry’s experts as well. Establish strategies for expanding operations or, if necessary, contracting them, based on the latest information.
Testing and working safely
Running a company in today’s environment entails refocusing on people. If employees are unsafe, your business will likely suffer at some point soon. Every company that must or chooses to have workers on-site (as opposed to working remotely) needs to consider the concept of COVID-19 testing.
Employers are generally allowed to test employees, but there are dangers in violating privacy laws or inadvertently exposing the company to discrimination claims. The CDC has said that routine testing will likely pass muster “if these goals are consistent with employer-based occupational medical surveillance programs” and “have a reasonable likelihood of benefitting workers.” Consult your attorney, however, before implementing any testing initiative.
There’s also the matter of working safely. If you haven’t already, look closely at the layout of your offices or facilities to determine the feasibility of social distancing. Re-evaluate sanitation procedures and ventilation infrastructure, too. You may need to invest, or continue investing, in additional personal protective equipment and items such as plastic screens to separate workers from customers or each other. It might also be necessary or advisable to procure or upgrade the technology that enables employees to work remotely.
Move forward cautiously
No one wanted to do this dance, but business owners must continue moving forward as cautiously and prudently as possible. While you do so, don’t overlook the opportunity to identify long-term strategies to run your company more efficiently and profitably. We can help you make well-informed decisions based on sound financial analyses and realistic projections.
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