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.
© 2020
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.
© 2020
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.
© 2020
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.
© 2020
Global Leadership During COVID-19 With FMD Partner Brian Hunter
As the world continues to adjust to the impact of COVID-19, there is a lot to consider. The Business Development Academy recently interviewed FMD Managing Partner Brian Hunter on a global panel. Brian also serves as the global chair of Integra International, a worldwide association of 130 independent accounting and consulting firms. You can find the full video below, as well as a timeline of when Brian speaks.
Brian’s three biggest takeaways are as follows:
1. The importance of pivoting
These are unprecedented times, requiring businesses of all shapes and sizes to adapt in ways they likely wouldn’t have predicted. Whenever possible, look at this time as an opportunity to get creative and evolve as a business. It can feel frustrating to abandon or rewrite your business plan but approaching it from a creative perspective may provide the boost your business has been looking for.
2. Creatively staying connected
At the end of the day, humans are social creatures, and we are all lacking the level of connection that we are used to. This is an opportunity to reach out to people (virtually) and build and maintain connections. We are all in this together, making it a great opportunity to provide feedback to one another.
3. Balancing compassion and productivity
As Brian put it, “The companies that balance compassion and productivity will be the real winners here”. It’s important to remember that COVID-19 is causing a disruption in almost every business around the world. Instead of worrying about a decline in productivity, use this time to be compassionate, and remember that we are all just people trying to navigate this confusing time. There are things we can’t control right now, but there is also a lot that we can control. By focusing on that, we will get through this unique time together.
Watch the video below for more great insight from Brian and other global leaders. Below is a timeline of when Brian speaks:
2:08 – Brian’s introduction & background on Integra International
6:10 – Brian talks about the importance of pivoting
18:40 – Brian talks about keeping virtual events engaging & continuing building relationships
31:10 – Brian discusses the transformation from accountant to trusted advisor
42:09 – Brian shares the importance of balancing compassion and productivity
48:30 – Brian discusses his outlook on COVID-19 recovery
Assessing productivity as you cope with the pandemic
The COVID-19 crisis is affecting not only the way many businesses operate, but also how they assess productivity. How can you tell whether you’re getting enough done when so much has changed? There’s no easy, one-size-fits-all answer, but business owners should ask the question so you can adjust expectations and objectives accordingly.
Impact of remote work
Heading into the crisis, concerns about productivity were certainly on the minds of many in leadership positions. In March, research firm Gartner conducted a snap poll that found 76% of HR leaders reported their organizations’ managers were concerned about “productivity or engagement of their teams when remote.”
Many of these fears may well have been alleviated after a month or two. News provider USA Today collaborated with researchers YouGov and social media platform LinkedIn to conduct a poll in April that found 54% of respondents (professionals ages 18-74) said that working remotely has positively affected their productivity. They cited factors such as time saved by not having to commute and fewer distractions from co-workers.
The bottom line is that allowing — or, in recent months, requiring — employees to work remotely shouldn’t drastically alter your expectations of their productivity. Every employee must continue to fulfill his or her job duties and meet annual performance management objectives (as perhaps adjusted in light of the pandemic and altered economy).
However, it’s unrealistic to expect anyone to accomplish markedly more just because he or she is no longer subject to a long commute and regular office hours. In fact, when assessing productivity, business owners should bear in mind the dual challenge of work-life balance while working remotely (childcare obligations, etc.) and the mental health component of living through a pandemic.
Solid metrics
If remote work isn’t a major concern for your company — either because your employees were already doing it, adapted to it readily or simply cannot work from home — there remain some tried-and-true ways to evaluate productivity. Metrics can be useful.
For example, one broad measurement of productivity is revenue per employee. To calculate it, you’ll need to check your financial statements to see how much revenue your business brought in during a defined period. Then, you divide that dollar figure by your total number of employees. The idea is that every worker should generally bring in enough revenue to rationalize his or her paycheck.
It’s not a “be all, end all” metric by any means, but revenue per employee can help accurately shape your understanding of productivity and cash flow. And, as mentioned, you’ll need to think about how this year’s economic conditions have altered your productivity needs and what employees can reasonably accomplish.
Careful calibration
When the subject of productivity arises, many business owners’ instinctive answer is “more, more, more!” Carefully calibrating your expectations and goals, however, can lead to more sustainable results. We can help you choose and calculate the right metrics and set realistic productivity objectives.
© 2020
SBA reopens EIDL program to small businesses and nonprofits
SBA reopens EIDL program to small businesses and nonprofits
Just last week, the Small Business Administration (SBA) announced that it has reopened the Economic Injury Disaster Loan (EIDL) and EIDL Advance program to eligible applicants still struggling with the economic impact of the COVID-19 pandemic.
The EIDL program offers long-term, low-interest loans to small businesses and nonprofits. If your company hasn’t been able to procure financing through the Paycheck Protection Program (PPP) — or even if it has — an EIDL may provide another avenue to relief.
Program overview
Applicants must be businesses with 500 or fewer employees, sole proprietors, independent contractors or certain other small entities. EIDL funds come directly from the SBA and provide working capital up to certain limits.
The loans have terms of up to 30 years and interest rates of 3.75% for businesses and 2.75% for nonprofits. The first payment is deferred for one year. Plus, the Coronavirus Aid, Relief and Economic Security (CARES) Act has temporarily waived requirements that applicants must have been in business for one year before the crisis and be unable to obtain credit elsewhere. A borrower of $200,000 or less doesn’t need to provide a personal guarantee.
Recipients must use EIDL proceeds for working capital necessary to carry a business until resumption of normal operations and for expenditures needed to alleviate specific economic hardships related to the pandemic. These may include fixed debts (such as rent or mortgage), payroll, accounts payable and other bills that could’ve been paid had the disaster not occurred and aren’t already covered by a PPP loan.
EIDL proceeds may not be used to refinance indebtedness incurred before the COVID-19 crisis or to pay down loans owned by the SBA or other federal agencies. Loan funds also cannot be used to pay federal, state or local tax penalties, or any criminal or civil fine or penalty. (Other limitations apply.)
Emergency grants
Under the CARES Act, EIDL applicants may request an Emergency Economic Injury Grant, also referred to as an “EIDL advance,” of up to $10,000. The grant is to be paid within three days and must be used to:
Provide paid sick leave to employees unable to work because of COVID-19,
Retain employees during business disruptions or substantial shutdowns,
Meet increased costs to obtain materials unavailable because of supply chain disruptions,
Make rent or mortgage payments, or
Repay other obligations that cannot be met because of revenue losses.
Recipients of an emergency grant don’t have to repay it — even if the business is eventually denied an EIDL. However, in April, the SBA announced that it has implemented a $1,000 cap per employee on EIDL advances up to the $10,000 maximum. Thus, an applicant with three employees would receive an advance of only $3,000.
Equally valuable
The EIDL program may not have received as much attention as the PPP, but it’s equally valuable to small businesses and nonprofits striving to remain operational during the ongoing public health and economic crisis. We can help you determine whether you’re eligible and, if so, complete the application process.
© 2020
Overview of the CARES Act and Paycheck Protection Program with Partner Vincent Gotko
Overview of the CARES Act and Paycheck Protection Program with Partner Vincent Gotko
Recently, our partner Vincent Gotko presented to the Birmingham Bloomfield Chamber about legislation passed due to COVID-19. Gotko’s presentation focused on the CARES Act recently signed in to law.
Viewers can learn more about how the CARES Act impacts businesses and individuals, as well as get more information on the Paycheck Protection Program. This program was passed on March 27, 2020. The intended purpose of the fund is to continue paying employees. Loan forgiveness options are available. More information and an overview of the program can be found here:
https://www.youtube.com/watch?v=javRS5uO5r8
Another important topic impacting many businesses is employee tax credits for employers. This includes the employee retention credit, credit for required paid sick leave, and credit for required paid family leave. The last two are part of a separate act passed just before the CARES Act. More information about these credits and how to use them can be found here: https://www.youtube.com/watch?v=FGta8BfFsow
You can find a summary of COVID-19 legislation here: https://www.youtube.com/watch?v=EPnFl5GP58I
This video goes over individual provisions regarding special rules for the use of retirement funds: https://www.youtube.com/watch?v=Oy0uKCovJj8
This video provides more information on the changes to charitable contribution deduction rules: https://www.youtube.com/watch?v=grls5L5csPQ
If you want to learn more about the modifications for net operating losses impacting businesses, click here: https://www.youtube.com/watch?v=-m4PGZvFOBE
This video covers the delayed payment of employer payroll taxes:
https://www.youtube.com/watch?v=SbZftbeD-0k
For more information about the importance of hiring a CPA and how CPAs can help during this time, click here: https://www.youtube.com/watch?v=vZqw-QzO67c
More information about Fenner, Melstrom & Dooling, PLC can be found here: https://www.youtube.com/watch?v=4e5Rysy4Vrg
For more information and to better understand the full picture, Mr. Gotko’s full presentation can be viewed here: https://www.youtube.com/watch?v=iOsJnfEh8dQ.
If you need more assistance determining how these new laws and programs impact you and your business, a trusted Fenner, Melstrom & Dooling, PLC advisor would be happy to answer your questions. Fill out the form on our contact page or give us a call, and we will help you determine your plan moving forward. These are unique times, but we are getting through it together!
FMD is monitoring the progress of this bill closely and we will post and update as soon as we know more. In the meantime, please continue to visit our website for continuing updates on all COVID-19 related matters.
H.R. 7010 Passes U.S. Senate Without Revision - Paycheck Protection Program Flexibility Act of 2020 (PPPFA)
H.R. 7010 Passes U.S. Senate Without Revision - Paycheck Protection Program Flexibility Act of 2020 (PPPFA)
Late in the day on June 3, 2020, the U.S. Senate passed H.R. 7010 by unanimous consent with virtually no changes to the bill passed six days earlier by the U.S. House of Representatives. It is anticipated the President will sign the bill into law as soon as possible.
As we highlighted in our previous post, the most significant provisions of this new bill are as follows:
1. Extends the covered period from 8 weeks to 24 weeks from date of loan origination or December 31, 2020, whichever comes first. (Loan recipients who received a PPP loan prior to the enactment of this bill may elect to retain their original 8-week covered period.)
2. Replaces the June 30, 2020 “safe harbor” rehire date with the December 31, 2020 date.
3. Eliminates the proportional reduction of forgiveness if:
A. an employer can document in good faith they are unable to re-hire the same, or equally qualified, employees they had on February 15, 2020 on or before December 31, 2020, or
B. the employer is able to document an inability to return to their same level of business activity at or before February 15, 2020 due to compliance with guidance issued by the Secretary of Health & Human Services, the Director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration during the period March 1, 2020 to December 31, 2020, related to the COVID-19 pandemic.
4. Reduces the amount of PPP Loan proceeds required to be spent on payroll related costs from 75% down to 60%.
5. Establishes the repayment deferral period for unforgiven PPP loan proceeds to end when the amount of loan forgiveness is remitted to the lender (presumably by the SBA).
6. Extends the repayment period of any unforgiven PPP loan amounts from 2 years to a minimum of 5 years.
7. Requires loan repayments to begin 10 months after the last day of the covered period if no application for forgiveness is filed with the lender.
8. Allows PPP loan recipients to be eligible to participate in the payroll tax payment deferral provisions of the CARES Act.
Although the bill was not changed by the Senate, we have seen the U.S. Small Business Administration make many interesting interpretations of various provisions of the PPP Loan Program and the proposed forgiveness calculations since the CARES Act was passed. It is anticipated we will see a new round of Frequently Asked Questions (FAQs) and Interim Final Rules to provide additional guidance on this bill.
FMD is monitoring the progress of this bill closely and we will post and update as soon as we know more. In the meantime, please continue to visit our website for continuing updates on all COVID-19 related matters.
U.S. House of Representatives Passes H.R. 7010 to Modify PPP Loan Forgiveness Calculation (Paycheck Protection Program Flexibility Act of 2020)
U.S. House of Representatives Passes H.R. 7010 to Modify PPP Loan Forgiveness Calculation (Paycheck Protection Program Flexibility Act of 2020)
On May 28, 2020, the U.S. House of Representatives passed H.R. 7010 that provides several modifications to the calculation of PPP loan forgiveness and repayment terms. The bill passed with an overwhelming 417 to 1 vote.
The bill is now in the U.S. Senate for review and debate, so it is not law yet; however, it is clear from the House vote that the legislature is listening to small business owners who are struggling to meet the 8-week covered period spending and re-hire provisions. This 8-week period is particularly challenging for businesses located in states where mandatory stay at home orders are still in place and for those industries that operate where customers and employees interact in close physical proximity (i.e. restaurant/bars, gyms, salons, tattoo shops).
The significant provisions of the new bill are as follows:
1. Extend the covered period from 8 weeks to 24 weeks from date of loan origination or December 31, 2020, whichever comes first.
2. Extend the June 30, 2020 “safe harbor” rehire date to December 31, 2020.
3. Eliminate the proportional reduction of forgiveness due to an employer’s inability to re-hire enough full-time equivalent (FTE) employees due to shutdown orders on or before December 31, 2020.
4. Reduce the amount of PPP Loan proceeds required to be spent on payroll related costs from 75% to 60%.
5. Extend the repayment deferral period of unforgiven loan proceeds from 6 months to 1 year.
6. Extend the repayment period of any unforgiven PPP loan amounts from 2 years to a minimum of 5 years.
7. Require loan repayments to begin 10 months after the last day of the covered period, if no application for forgiveness is filed.
8. Allow PPP loan recipients to be eligible to participate in the payroll tax payment deferral provisions of the CARES Act.
The above provisions will likely be modified by the Senate but are a good indication of where the actual final law may end up.
FMD is monitoring the progress of this bill closely, and we will post an update as soon as we know more. In the meantime, please continue to visit our website for continuing updates on all COVID-19 related matters. www.fmdcpas.com
FMD Team Returns to Office June 1
Fenner, Melstrom & Dooling, PLC is happy to welcome back the FMD team to its Birmingham office. We are using a phased approach to reopen in compliance with the State of Michigan and Oakland County return-to- work rules. FMD is committed to upholding social distancing and other safety guidelines upon returning to the office.
Although the FMD professionals have been busy at home providing our normal Strategic, Experienced, and Connected level of service, we are excited to bring the team back together this week.
At this time, the FMD office will remain closed to the public. Should you need to make an appointment with your FMD advisor, please contact them directly to schedule this accordingly.
U.S. Small Business Administration Publishes PPP Loan Forgiveness Application
U.S. Small Business Administration Publishes PPP Loan Forgiveness Application
Late in the day Friday, May 15, 2020 the U.S. Small Business Administration published SBA Form 3508 – Paycheck Protection Program Loan Forgiveness Application.
This 11-page document provides a series of instructions, worksheets, and borrower representations/certifications for borrowers to complete and submit to their lender to receive partial or full forgiveness of their PPP Loan proceeds.
This document provides additional clarity on some, but certainly not all, PPP loan forgiveness issues and is designed to reduce compliance burdens and simplify the forgiveness application by including the following:
An alternative option for calculating payroll costs using an “alternative payroll covered period” that aligns with a borrower’s regular payroll cycle.
Flexibility to include eligible payroll and non-payroll expenses paid or incurred during a borrower’s eight-week covered forgiveness period.
Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness.
Borrower-friendly implementation of the statutory exemptions from loan forgiveness reductions, including a “safe harbor” based on rehiring employees by June 30, 2020.
Addition of a new exemption from the loan forgiveness reduction for borrowers who have made good-faith, written offers to rehire workers and were declined or, who have other former employees who departed under certain conditions.
A description of many of the documents that will need to be submitted in support of a forgiveness application.
Some of the More Significant Provisions are Highlighted Here
Alternate Payroll Covered Period
For administrative convenience, borrowers with a biweekly, or more frequent payroll schedule, may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (Alternative Payroll Covered Period).
Borrowers who elect to use the Alternative Payroll Covered Period MUST apply the Alternative Payroll Covered Period wherever there is a reference in this application to the Covered Period or the Alternative Payroll Covered Period.
Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to the Covered Period only.
Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.
Eligible Non-Payroll Costs
Non-payroll costs must be paid during the Covered Period (or incurred during the Covered Period and paid on or before the next regular billing date) even if the billing date is after the Covered Period.
Eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.
Count non-payroll costs that were both paid and incurred only once.
The applicant is not required to report payments that the applicant does not want to include in the forgiveness amount (i.e. To avoid violation of the 75%/25% ratio of payroll to non-payroll expenditures).
Certifications Required by Borrower
The Borrower must certify that they received PPP Loans in Excess of $2 Million (including affiliates), if applicable.
An affiliate is an entity which is owned or controlled 50% or more by a person or entity.
Control is met by ownership or determined by common management.
Control is also met through family attribution including:
married couples
parents
children
siblings
Control is also met when there are members with common investments or entities which are economically dependent to each other through contractual relationships (common contracts, employee’s, or facilities).
As with all other provisions of PPP Loan Program there are many other details that apply to effectively manage the Paycheck Protection Program Loan Forgiveness application that we are not able to cover here. Please reach out to your FMD professional advisor as soon as possible to discuss this process so that you are prepared when it is time to make your application for forgiveness.
Please visit our website for continuing updates on all COVID-19 related matters. www.fmdcpas.com
Business charitable contribution rules have changed under the CARES Act
Business charitable contribution rules have changed under the CARES Act
In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions. Here are two changes that affect businesses:
The limit on charitable deductions for corporations has increased. Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes). Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).
What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.
The deduction limit on food inventory has increased. At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities. In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy or infants.
“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.
What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations. For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
CARES Act questions
Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals. Contact us if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.
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Budgeting and Money during COVID-19 with FMD Partner Daniell R. Patterson
FMD Partner Daniell Patterson recently had the opportunity share in a discussion with Randall Denha of Denha & Associates, PLLC and Jonathan Dwoskin of The JONDwoskin Experience. In this segment, Patterson provides insight and advice for getting through the current market and uncertainty of the Coronavirus pandemic era.
Below are some key takeaways from the discussion.
How should the average American be budgeting during this crisis especially if they are living paycheck-to-paycheck, now and for the next six months?
COVID-19 has caused everyone to re-evaluate fixed costs and overhead structure, personally and professionally.
SLOW DOWN. Clients should take things slow and not make quick decisions just because the crisis is happening fast; stick to your plan.
Each individual and business should do their best to conserve cash and eliminate non-essential expenses.
Take time to put together a simple monthly budget to better understand where your money is going. Look at your recurring charges such as subscription services and consider pausing them. These discretionary costs will often be a quiet drain on your accounts.
Talk to your creditors about deferring payment. It is important to advocate for yourselves and most creditors are being very receptive right now. SBA loans will give a 6-month forbearance automatically, where they are making your loan payment for you, providing some quick relief.
Reframe your mindset. Asking for help or relief from creditors shouldn’t be shameful. This isn’t a reflection on you as an individual, this is the situation that COVID-19 has created.
Many people have fear about money and a crisis like this spurs that fear and keeps people from an abundant mindset. In a market like this, how do you advise clients to grow their relationship with money?
It’s important to realize that every situation is unique, and so everyone will react differently. Some people may feel that this is a time to be aggressive and take advantage of opportunities, while others will slow down and re-evaluate the situation.
We all want to be able to see a horizon at the end of all of this. It is challenging to live with the uncertainty of not knowing what will happen or how long this situation will last.
The Importance of a CPA
It is important to have trusted mentors in your life. CPAs often find themselves as the quarterback in their client relationships. A large part of the value a CPA provides to their clients comes from the network of qualified and trusted individuals that they bring to the relationship as well as the real-world experience of working with clients.
CPAs are able to help clients understand the nuances of this time such as how to complete the PPP loan application and request for forgiveness.
CPAs help you do the work up front so that your business can be as profitable and successful as possible. This helps produce a strong financial statement at the end of the year.
By examining your financial statements, CPAs are able to help you retain as much as you can through saving money on taxes, and structuring your business properly for the highest ROI. Often it’s not necessarily how much money you make, it’s how much you retain and invest in the future.
Subchapter V: A silver lining for small businesses mulling bankruptcy
Subchapter V: A silver lining for small businesses mulling bankruptcy
Many small businesses continue to struggle in the wake of the coronavirus (COVID-19) pandemic. Some have already closed their doors and are liquidating assets. Others, however, may have a relatively less onerous option: bankruptcy.
Although bankruptcy obviously isn’t an optimal outcome for any small company, there may be a silver lining: A new bankruptcy law — coupled with an under-the-radar provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act — has made the process quicker and easier. It may even allow you to retain your business.
New law made better
The law in question is the Small Business Reorganization Act of 2019. That’s right, it was passed just last year and took effect on February 19, 2020, about a month before the pandemic hit the country full force.
The Small Business Reorganization Act added a new subchapter to the U.S. bankruptcy code: Subchapter V. Its purpose is to streamline the reorganization process for smaller companies and, in some cases, improve their odds of recovery.
When signed into law, Subchapter V applied only to companies or proprietors with less than about $2.7 million in debt. However, under the CARES Act, this amount has been temporarily increased to $7.5 million in debt. (Additional details apply; contact a bankruptcy attorney for a full explanation.)
Potential improvements
For small-business owners, Subchapter V could improve the bankruptcy process in several ways:
You may be able to keep your company. Under a Chapter 11 reorganization, business owners typically don’t receive an equity stake in the reorganized company until all debts are repaid. Subchapter V creates a pathway for owners to retain their equity if their disposable income is distributed to creditors over a certain period (generally three to five years) in a “fair and equitable” manner.
You may not need creditors’ approval to proceed. Small-business bankruptcies have long been stymied when one group of creditors object to the reorganization plan. Under Subchapter V, once a bankruptcy court approves the plan, the reorganization may proceed without creditors’ approval.
You may incur fewer costs and get it done more quickly. Subchapter V offers the opportunity to reduce the documentation and level of detail required under a traditional Chapter 11 proceeding. In turn, this can make the process less costly and more expeditious.
Prudent path
Given the extreme and sudden nature of this year’s economic downturn, bankruptcy has unfortunately become an option that many embattled small businesses will need to consider. Our firm can help you assess your company’s financial position and choose the most prudent path forward. Contact a trusted FMD advisor today.
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The CARES Act liberalizes net operating losses
The CARES Act liberalizes net operating losses
The Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminates some of the tax-revenue-generating provisions included in a previous tax law. Here’s a look at how the rules for claiming certain tax losses have been modified to provide businesses with relief from the novel coronavirus (COVID-19) crisis.
NOL deductions
Basically, you may be able to benefit by carrying a net operating loss (NOL) into a different year — a year in which you have taxable income — and taking a deduction for it against that year’s income. The CARES Act includes favorable changes to the rules for deducting NOLs. First, it permanently eases the taxable income limitation on deductions.
Under an unfavorable provision included in the Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 and later and carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the NOL deduction. As explained below, under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years. These unfavorable changes to the NOL deduction rules were permanent — until now.
For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. So NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years.
For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of:
100% of NOL carryovers from pre-2018 tax years, plus
The lesser of 100% of NOL carryovers from post-2017 tax years, or 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years.
As you can see, this is a complex rule. But it’s more favorable than what the TCJA allowed and the change is permanent.
Carrybacks allowed for certain losses
Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally couldn’t be carried back to earlier years and used to offset taxable income in those years. Instead, NOLs arising in tax years ending after 2017 could only be carried forward to later years. But they could be carried forward for an unlimited number of years. (There were exceptions to the general no-carryback rule for losses by farmers and property/casualty insurance companies).
Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years.
Important: If it’s beneficial, you can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years. In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.
Past year opportunities
These favorable CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return. Contact us to learn more.
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IRS extends some (but not all) employee benefit plan deadlines
The IRS recently issued Notice 2020-23, expanding on previously issued guidance extending certain tax filing and payment deadlines in response to the novel coronavirus (COVID-19) crisis. This guidance applies to specified filing obligations and other “specified actions” that would otherwise be due on or after April 1, 2020, and before July 15, 2020. It extends the due date for specified actions to July 15, 2020.
Specified actions include any “specified time-sensitive action” listed in Revenue Procedure 2018-58, including many relating to employee benefit plans. The relief applies to any person required to perform specified actions within the relief window, and it’s automatic — your business doesn’t need to file any form, letter or other request with the IRS.
Filing extensions beyond July 15, 2020, may be sought using the appropriate extension form, but the extension won’t go beyond the original statutory or regulatory extension date. Here are some highlights of Notice 2020-23 specifically related to employee benefit plans:
Form 5500. The relief window covers Form 5500 filings for plan years that ended in September, October or November 2019, as well as Form 5500 deadlines within the window as a result of a previously filed extension request. These filings are now due by July 15, 2020. Notably, the relief window does not include the July 31, 2020 due date for 2019 Form 5500 filings for calendar-year plans. Those plans may seek a regular extension using Form 5558.
Retirement plans. The extended deadlines apply to correcting excess contributions and excess aggregate contributions (based on nondiscrimination testing) and excess deferrals. They also apply to:
Plan loan repayments,
The 60-day timeframe for rollover completion, and
The deadline for filing Form 8955-SSA to report information on separated plan participants with undistributed vested benefits.
The relief for excess deferrals is a change from previous guidance indicating that 2019 excess deferrals still needed to be corrected by April 15, 2020. In addition, while loan relief is already available to certain individuals for specified reasons related to COVID-19, this relief appears to apply more broadly — albeit for a shorter period. The Form 8955-SSA due date is the same as for the plan’s Form 5500, so the extension applies in the same manner.
Health Savings Accounts (HSAs). The notice extends the 60-day timeframe for completing HSA or Archer Medical Savings Account (MSA) rollovers. It also extends the deadline to report HSA or Archer MSA contribution information by filing Form 5498-SA and furnishing the information to account holders. The regular deadline for the 2019 Form 5498-SA would be June 1, 2020, placing it squarely within this relief period.
Business owners and their plan administrators should carefully review Notice 2020-23 in conjunction with Revenue Procedure 2018-58 to determine exactly what relief may be available. For example, the revenue procedure covers various cafeteria plan items, but many deadlines may fall outside the notice’s window. We can provide you with further information about this or other forms of federal relief.
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New COVID-19 law makes favorable changes to “qualified improvement property”
The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.
But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.
In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.
And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.
For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.
If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.
If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.
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COVID-19 Update: Maximizing the Benefit of the Paycheck Protection Program (PPP) Loan
COVID-19 Update: Maximizing the Benefit of the Paycheck Protection Program (PPP) Loan
Congratulations, you made it through the first wave of uncertainty and confusion and have received your PPP Loan Proceeds. Now what? How does your business maximize the benefits of this program?
We have listed a four-step process to follow below. Please reach out to your FMD Advisor for assistance as soon as possible. We have developed some very good tools to assist our clients with achieving the maximum benefits of these loans.
Step 1: Put Employees Back on Payroll
To maximize the loan forgiveness, employers will need to have the same amount of Average Full Time Equivalent (FTE) Employees on Payroll by June 30, 2020 as they had in the “Base Measurement Period” prior to the COVID-19 Crisis.
This “Base Measurement Period” (at the election of the employer) can be either:
February 15, 2019 – June 30, 2019 OR
January 1, 2020 – February 29, 2020
The primary purpose of the PPP program is to provide employers with government assistance funds to keep their employees on the payroll. The amount of loan forgiveness is based substantially on the amount of payroll costs paid during the eight-week period after obtaining the loan proceeds. The Small Business Administration (SBA) has also provided guidance indicating that expectations are that at least 75% of the total loan proceeds must be spent on payroll costs.
Putting employees back on the payroll might mean that you pay them even though they may be unwilling or unable to work due to a quarantine or government mandated Stay Home Order.
Employers may very likely have to coach employees through the process of evaluating the benefits of leaving Unemployment Compensation assistance and returning to the employer’s payroll for at least this eight-week measurement period. Some factors for employees to consider are the ability to retain health insurance benefits and access to other employee benefit programs.
Employers should also consider alternative work their employees may be able to do, either at home or in small groups at their normal workplace, to maintain or make improvements to the business during this unusual time.
Step 2: Schedule the Payment of “Other Qualified Expenses”
In addition to employee salary and wage expenses, there are other costs that the loan proceeds can be used to pay.
These costs include:
Employee Benefit Insurance Premiums (Health, Dental, Optical)
Employer Retirement Benefit Plan Costs (401(K), SEP, Simple IRA Contributions)
Business interest payments on debt related to/collateralized by real and personal property
Rent payments
Utility payments
For these costs to be considered for forgiveness, they must be both incurred and paid in the eight-week period that follows the receipt of the loan proceeds, so scheduling payment of these costs is critical. NOTE: Some of these costs may not normally be paid by employers monthly so advance planning may be required with outside vendors and benefit plan administrators to ensure compliance.
Step 3: Accumulate the Information Necessary to Verify the Qualified Debt Forgiveness Expenditures
Accumulate copies of the following documents that will be needed when you apply for loan forgiveness:
Detailed Payroll Records for the eight-week measurement period
Payroll tax returns filed for periods inclusive of the eight-week measurement period
Employee Benefit Insurance Billing Invoices and proof of payments
Employee Retirement Plan Documents and proof of funding
Proof of payment of all Utility Bills (Electric/Gas/Water/Telephone/Internet)
Original Mortgage notes and proof of payments
Original Other Notes Payable and proof of payments
Original Lease Documents (Real estate, Equipment, Software) and proof of payments
Make sure related party notes and leases are up to date and executed prior to February 15, 2020
Step 4: Complete the Application for Forgiveness:
PPP Loan recipients can have 100% of the loan proceeds, plus accrued interest, forgiven if they meet the spending criteria above. To add to the benefit, any of the forgiven debt is non-taxable to the borrower.
Specific details for making the application for loan forgiveness are vague currently however, the CARES Act states that applications for forgiveness will be submitted to the lender. The lender then has 60 days to review and approve the application. Given that the PPP program was delayed in getting loans funded and the appropriated funds have been committed very quickly, we are predicting some modifications and more guidance to the program in the very near future.
The list of required documents and planning opportunities above is significant, so it is a good idea to get started on this process sooner rather than later.
There are many other details that apply to effectively manage the Paycheck Protection Program Loan Forgiveness calculation that we are not able to cover here. Please reach out to your FMD professional advisor as soon as possible to discuss this process so that you can effectively plan to maximize the ultimate level of benefit for your company and your employees.
Please visit our website for continuing updates on all COVID-19 related matters. www.fmdcpas.com
What are the key distinctions between layoffs and furloughs?
As businesses across the country grapple with the economic fallout from the novel coronavirus (COVID-19) pandemic, many must decide whether to downsize their workforces to lower payroll costs and stabilize cash flow. If your company is contemplating such a move, you’ll likely want to consider the choice within the choice: that is, should you lay off workers or furlough them?
Basic difference
The basic difference between the two is simple. Layoffs are the ostensibly permanent termination of employees from their positions, though you can rehire some of these individuals when business improves. Meanwhile, a furlough is a mandatory or voluntary suspension from work without pay for a specified period.
In most states, furloughed workers are still considered employees and, therefore, don’t receive a “final” paycheck. Check with an employment or labor attorney, however, to make sure your state’s furlough laws don’t trigger final pay requirements.
Employee benefits are another issue to explore. Reach out to your health insurance provider to see whether a furlough is a triggering event for COBRA health care coverage purposes. In addition, employees can sometimes be dropped from a group health plan if they don’t work enough hours. Ask about potential problems this might cause under the Affordable Care Act.
Applicable laws
If you’re a midsize business, and layoffs or furloughs begin to look unavoidable, it’s particularly important to coordinate the move with legal counsel. Under the Worker Adjustment and Retraining Notification (WARN) Act, employers with 100 or more employees must provide written notice at least 60 days before a plant closing or mass layoff.
To have a mass layoff, at least 50 workers at a single site must be laid off for more than six months (or have their hours reduced by at least 50% in any six-month period). Because furloughs generally last for less than six months, a WARN notice wouldn’t likely be required. But you should still check with your employment attorney regarding applicable state laws and any other potential legal ramifications.
Unemployment benefits
To soften the blow, you can inform furloughed employees that they’re generally eligible for unemployment benefits — assuming their previous year’s wages are enough to qualify. Although a waiting period often applies before an employee can start receiving unemployment benefits, many states have waived these waiting periods because of the COVID-19 outbreak. Again, double-check with your attorney to fully understand the unemployment insurance rules before communicating with employees.
Formulate a strategy
Unprecedented unemployment numbers show that many businesses have had to downsize. It’s worth noting that, if you can hang on to your employees, recently passed tax relief created a refundable credit against payroll tax. (Rules and limits apply.) Our firm can help you assess your employment costs and formulate a strategy for optimally sizing your workforce.
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