Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.

Had a PPP loan in 2020? Your tax returns will probably be delayed

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  • mike   

The Consolidated Appropriations Act (CAA), 2021 enacted on December 27, 2020 included some great tax breaks. Some of them are retroactive and will result in delays when preparing 2020 income tax returns, especially when a business had a Paycheck Protection Program (PPP) loan during 2020.

For example, the Employee Retention Credit (ERC) applies to employees retained by employers impacted by the COVID-19 pandemic.

In order to qualify to claim the credit, an employer must have carried on a trade or business during calendar year 2020 and EITHER

  1. the operation of the employer’s trade or business was fully or partially suspended during a calendar quarter in 2020 under orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 (note: reducing inside dining of a restaurant to 25% of capacity qualifies as a partial suspension), OR
  2. The employer’s calendar quarter is within a period during which the employer is experiencing a significant decline in gross receipts. The period of significant decline in gross receipts (a) begins with the first calendar quarter beginning after December 31, 2019 for which the employer’s gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year; and (b) ends with the first subsequent calendar quarter for which the employers gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year.

In the CARES Act, enacted on March 27, 2020, any business that had a PPP loan was ineligible for the Employee Retention Credit (ERC).

The CAA changed that rule and allows PPP loan borrowers to claim the ERC, retroactively effective March 13, 2020. Instead, any wages that qualified for PPP loan forgiveness aren’t eligible as payroll costs for computing the ERC.

The IRS is directed to issue regulations for how a taxpayer elects to exclude wages when computing the ERC, so the wages may be used to qualify for a PPP loan exclusion. That guidance hasn’t been issued as a I write this alert.

The CAA also modifies how health plan expenses are added to employee wages for computing the ERC, making more employers eligible to include them.

For 2020, the ERC is 50% of up to $10,000 wages for each employee, or a maximum of $5,000 per employee.

The credit is refundable and is claimed on Form 941, the quarterly Federal payroll tax return. The first payroll tax return on which it could be claimed was for the second quarter, 2020.

The ERC is subtracted from the tax deduction for wages on the federal income tax return. For example, if the employer only had one employee with $10,000 of wages, the deduction for wages would be $10,000 – $5,000 = $5,000.

Some banks haven’t issued procedures for applying for cancelling a PPP loan yet.

In order to have the information to prepare an employer’s or owner’s income tax return the following things will be required.

  1. The bank that processed the PPP loan will have to issue the procedures to apply for loan cancellation.
  2. The employer will have to determine which wages will be used to qualify for PPP loan cancellation.
  3. The IRS will have to issue guidance on how to elect to exclude wages when computing the ERC and possibly issue guidance allowing the entire credit for 2020 to be claimed on the fourth quarter federal payroll tax return.
  4. The employer will have to submit amended 2020 Federal payroll tax returns (Form 941X) to claim the credit, and elect for wages used to qualify for PPP loan exclusion to not be used for computing the ERC.
  5. The employer will have to apply for PPP loan cancellation.
  6. The employer and/or the employer’s owners should then have this part of the information needed to prepare 2020 federal income tax returns.

For employers that file California income tax returns, there is also an issue about which expenses to reduce for cancellation of a PPP loan. Legislation has been introduced to conform to the federal rule allowing the deduction of those expenses, but whether it will pass is uncertain.

Many businesses have been suffering during the pandemic and are anxious to file net operating loss carryback claims. Tax return preparers might decide to file preliminary income tax returns and net operating loss carryback claims and correct them later. This will probably result in additional expense and inconvenience for their clients, and potential fee collection problems. There might not be much choice under the circumstances.

I’ve intentionally left many details out of this explanation for brevity, including which payroll expenses qualify for the credit for employers with more than 100 full-time employees. Employers will probably need professional help preparing amended payroll tax returns to claim additional Employee Retention Credits.

If your business received a Paycheck Protection Plan loan during 2020 that you expect to be cancelled, discuss this issue with your tax consultant.

Tax highlights of the Consolidated Appropriations Act, 2021

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  • mike   

President Trump changed his mind and signed The Consolidated Appropriations Act, 2021 on December 27, 2020.  The Act is more than 5,000 pages.  There were not very many tax law changes in the Consolidated Appropriations Act compared to the CARES Act enacted during March 2020. Here are a few highlights

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Does waiting to apply for PPP loan forgiveness change the time for the expense offset?

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  • mike   

the IRS clarifies that when a taxpayer satisfies all of the requirements (having qualified expenses during 2020) and expects to apply for forgiveness of the related PPP loan, those expenses aren't tax-deductible for 2020, even when the application for forgiveness isn't made until 2021.

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Paycheck Protection Loan application deadline extended

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  • mike   

President Trump signed legislation (S.4116) on July 4, 2020 extending the application deadline for Paycheck Protection Program (PPP) loans from June 30, 2020 to August 8, 2020.

Paycheck Protection Program loans were enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act.)

Certain businesses can apply for up to $10 million.  If certain requirements are met, the loan principal will be forgiven, tax free.  At this time, expenses paid using the loan proceeds are not tax deductible.

At this time $130 billion of $660 billion allocated hasn’t been committed for loans, yet.

If you haven’t been approved for a PPP loan and would like to apply, see your banker.

Paycheck Protection Program Loan relief passed by Congress

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  • mike   

The Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was previously passed by the House of Representatives on June 3, 2020.  President Trump is expected to sign the legislation.

Here is a URL for the text of H.R. 7010.  https://www.congress.gov/bill/116th-congress/house-bill/7010/text

The legislation relaxes the requirements to qualify for forgiveness of Paycheck Protection Program (PPP) loans.

Here is a summary of key points:

  • The time in which businesses that receive a PPP loan may count their expenses that qualify for loan forgiveness is extended from 8 to 24 weeks, and the period ends no later than December 31, 2020.
  • Businesses that received a PPP loan before the date of enactment may elect to keep an eight-week period to count expenses that qualify for loan forgiveness.  (A borrower might want to make this election because it paid the required expenses and can apply for forgiveness sooner.)
  • The portion of the loan proceeds used to pay payroll costs is decreased from 75% to 60%.  Under the language in the Act, if the business doesn’t use at least 60% of the loan funds for payroll costs, the loan doesn’t qualify for forgiveness.  Congress is expected to pass a technical correction later to permit a sliding scale forgiveness if the 60% threshold isn’t met.  This means up to 40% of loan proceeds may be used to pay rent expenses, qualified mortgage interest and utilities and still qualify for full loan forgiveness.
  • Borrowers may use the earlier of the date 24-weeks after receiving the loan or December 31, 2020 to meet the requirement to restore their workforce and wages to pre-pandemic levels required for full forgiveness.
  • Two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce were included in the legislation.  (1) The borrower was unable to find qualified employees.  (2) The borrower was unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions.
  • New borrowers have five years to repay the unforgiven portion of the loan instead of two.  Those who received loans before the date of enactment may extend the repayment term of the unforgiven portion of their loans from two to five years, if the lender and borrower agree.  The interest rate remains 1%.
  • Under the CARES Act, businesses that received a PPP loan didn’t qualify for delayed payment of employer taxes.  That prohibition is repealed under the Paycheck Protection Program Flexibility Act.

This legislation should enable many more PPP loan borrowers to qualify for loan forgiveness.  The Small Business Administration will have to update the forms that it just issued to apply for loan forgiveness.

Loan Forgiveness Application Form issued for Paycheck Protection Loans

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  • mike   

If your business is one of the fortunate ones that received a PPP (Paycheck Protection Program) loan, now you need to deal with the next challenge:  qualifying for forgiveness of the loan.

The SBA (Small Business Administration) has issued Form 3508, Paycheck Protection Program Loan Forgiveness Application, and Schedule A, Worksheet.

Here is a URL to download the application.  https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application

The purpose of the form is to report the expenses actually incurred that qualify for loan forgiveness.

The form is submitted to the lender where you got the loan, NOT the SBA.

There is no due date listed to submit the form.  Since the rules relating to PPP loans may be amended based on developments for “opening up” the U.S. economy relating to the COVID-19 pandemic, I suggest not hurrying to submit the form.

For example, a Salary/Hourly Wage Reduction is computed on Schedule A for a reduction in full-time equivalent employees that isn’t restored by June 30, 2020.  I think there is a good chance the June 30, 2020 date will be extended if the reopening is slower than Congress initially expected.

An item that isn’t explained very well is self-employment income.  Self-employment income isn’t a normal “payroll” type item.  That information might not be available until the 2020 income tax return is prepared for the business or the business owner.

The “Covered Period” for covered expenses is the eight-week (56-day) period beginning on the PPP Loan Disbursement Date.  For example, if the borrower received its PPP loan proceeds on Monday, April 20, the Covered Period begins on April 20 and ends on June 14.

Generally, covered expenses are incurred and paid during the Covered Period.

Payroll costs must be paid during the covered period (or Alternative Payroll Covered Period) or paid on or before the next regular payroll date.  The Alternative Payroll Covered Period for borrowers with a biweekly (or more frequent) payroll schedule is the eight-week (56-day) period that begins on the first day for their first pay period following their loan disbursement date.

Remember payroll costs include wages, bonuses, tips, employer-paid health insurance, and employer-paid qualified retirement plan expenses.  (https://www.govinfo.gov/content/pkg/FR-2020-04-15/pdf/2020-07672.pdf)

An eligible nonpayroll cost 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 the billing date is after the Covered Period.  Eligible nonpayroll costs include (1) covered mortgage obligations (interest payments on business mortgage obligations on real or personal property incurred before February 15, 2020); (2) business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and (3) business payments for distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The forgiveness for nonpayroll costs is limited to 25% of the total forgiven amount.

Consider having your CPA help you complete this form.

 

Expenses paid with forgiven PPP loans aren’t tax deductible

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  • mike   

The IRS has issued guidance relating to the tax deductibility of expenses paid with a Paycheck Protection Loan that is forgiven.  (Notice 2020-32.  https://www.irs.gov/pub/irs-drop/n-20-32.pdf)

According to the CARES Act, the forgiveness of indebtedness is not taxable income.  (CARES Act Section 1106(i).)

The CARES Act doesn’t specify whether the expenses are tax deductible.

A Paycheck Protection Loan is eligible for forgiveness when the proceeds are used for the following expenses during the 8-week “covered period” beginning on the the loan’s origination date (CARES Act Section 1106(b)):

  1. Payroll costs
  2. A payment of interest on a covered mortgage obligation
  3. A payment on a covered rent obligation
  4. A covered utility payment

The IRS reminds taxpayers that, according to Internal Revenue Code Section 265(a)(1), no deduction is allowed for any item that is allocable to tax-exempt income.

To receive tax-exempt income from the federal government and to be allowed a tax deduction paid using the income would be a double benefit.

Taxpayers and their tax return preparers should note that these items won’t be tax-deductible on their 2020 income tax returns.

 

Paycheck Protection Loan funding passes in Congress

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  • mike   

On Thursday, April 23, 2020, the U.S. House of Representatives passed the Paycheck Protection Program an Health Care Enhancement Act.

Now that both houses of Congress have passed the legislation, President Trump says he will sign it.

The legislation adds $310 billion to funding for Paycheck Protection Loans, $50 billion for Economic Injury Disaster Loans and $10 billion for Emergency Economic Disaster Grants.

Banks are saying it’s likely these funds will be used for loan applications that are already in the pipeline.

Congress will likely soon revisit whether additional funding should be provided.

Senate passes a proposal to extend funding for PPP loans and EIDL loans

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  • mike   

On April 21, 2020, the U.S. Senate passed the Paycheck Protection Program and Health Care Enhancement Act.  The legislation would increase the authorization level for the Paycheck Protection Program from $349 billion to $659 billion, and increase the appropriation level for the PPP from $349 billion to $670.355 billion.

$30 billion of the increase is earmarked for distribution by community-based lenders.

It also increased the authorization level for Emergency Economic Injury Disaster Grants from $10 billion to $20 billion (maximum $10,000 grant for a business) and adds $50 billion for Economic Injury Disaster Loans.

Certain agricultural enterprises with not more than 500 employees are made eligible for PPP loans.

The House of Representatives is scheduled to pass the legislation on Thursday, April 23, and President Trump says he will sign it.

These funds are expected to be committed as fast as the initial amounts.

Congress will likely be revisiting funding for these loans again.

Here is a URL to the Bill that passed in the Senate.  https://www.trsa.org/wp-content/uploads/2020/04/Bill-Text.pdf

Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.