When we last wrote, Congress had just passed the final stimulus bill of 2020. After a short delay, the President signed it on December 27th. So, what should you do now?
- Take a deep breath. Be calm. Yes, 2020 was a year like no other. And 2021 looks to be just as challenging. But, both our last post, and this one, are essentially all good news!
- Be grateful. And optimistic. With very rare exceptions, we are all trying to do the right thing. As tempting as it was to go along with Treasury and deny deductions for PPP funded expenses, Congress didn’t. They could have spent the money in any number of ways. But they chose to keep their promise to small businesses. President Trump has signed several major stimulus bills. We expect that President Biden will as well.
Be patient, but be ready! A second round of PPP loans is coming very soon, perhaps as early as next week.
To qualify, businesses must have suffered a 25% reduction of gross receipts in a 2020 calendar quarter compared to the same quarter in 2019. We believe that gross receipts will be calculated on the same basis as on your tax return. We are hoping for guidance from Treasury and the SBA this week.
Businesses must have no more than 300 employees. Borrowers may have up to 500 employees if this is their first PPP loan.
The loan amount, which is again set at 2.5 times average monthly payroll, is limited to $2 million. A business in the hospitality or food service industries may qualify for a loan amount that is 3.5 times average monthly payroll. Average monthly payroll is calculated based on a trailing 12 months or calendar 2019. Just like the original loans, it includes gross payroll and employer paid health, retirement, and state payroll taxes.
Other terms, including forgiveness, are similar to the original PPP loans with the exception that 501(c)(6) business leagues, chambers of commerce, and visitors’ bureaus also qualify.
In addition, for both future and existing loans, there are several new classes of forgivable expenses such as worker protection, certain accounting costs, and payments to essential suppliers.
- Be informed. The earliest that a PPP loan payment can be required is 10 months after the end of the 24-week covered period. That’s a little more than 15 ½ months after funding. So, if your PPP loan funded on 5/1/2020, the earliest a payment could be due is 8/16/2021.
When you apply for forgiveness, all payments are automatically deferred until both your lender and the SBA have completed their reviews of your loan forgiveness application. This could take up to 5 months.
By the way, you could wait until two years after funding to apply for loan forgiveness, but you might have to make payments or apply separately for a payment deferral.
Even though Congress has reaffirmed your ability to deduct expenses paid with PPP loan funds, California still wants to tax you. AB 1577, signed by the Governor on 9/9/2020, denies these deductions. There are a few issues with the California statute. We can’t predict what the California legislature or the FTB might do in the future. Absent any further guidance, it is reasonable to believe that the statute, as written, may not deny 2020 deductions when the forgiveness application is made and granted in 2021. So, a discussion with your LSL tax advisor and an extension of your California return might be advisable this year.
- Plan for forgiveness. While you may not need to apply for loan forgiveness until July or August, should you wait that long? While other commentators may disagree, for the vast majority of our clients, we say yes.
We believe that the forgiveness process will continue to become more streamlined and more certain over time. We have already seen Congress increase the loan limit for the simplified process from $50,000 to $150,000. We have also seen an expansion of the safe harbors, both legislative and administrative. While we don’t have anything approaching comprehensive guidance, we believe that virtually all California businesses will qualify for the FTE safe harbor based on governmental restrictions. This safe harbor was added by the Paycheck Protection Program Flexibility Act on 6/5/2020.
- Be assertive. Now that you know that it is in your best interests to defer your loan forgiveness application, and that payments can’t be required until at least 15 ½ months after funding, please do not give in to pressure from your banker. Give them this link instead. The timing of loan payments was described by Treasury and the SBA in an IFR originally published on 6/11/2020 and entered in the Federal Register on 6/16/2020. It is not a surprise to your banker.
- Take care of your employees. Consider extending both the Emergency Paid Sick Leave and the Expanded Family Medical Leave that you have already offered your employees through March 31st. While you are not required to offer these benefits beyond 12/31/2020, you will receive a refundable payroll tax credit for benefits paid through 3/31/2021. Depending on how quickly we see results from the vaccine rollout, we expect that these credits might be extended into the second quarter. Note that this is not a new benefit. It is an extension of the time to use the original benefit granted by the FFCRA. For example, if an employee used 50 hours of Emergency Sick Leave in 2020, only 30 hours is available to be used in the first quarter of 2021.
- Take a look back. You might qualify for the employee retention credit. The credit was greatly expanded by the latest stimulus bill. A PPP loan no longer prevents you from claiming the credit in either 2020 or 2021. However, wages forgiven under a PPP loan are not also available for the credit. The credit is a maximum of $5,000 per employee (50% times $10,000) in 2020 and $7,000 per employee (70% times $10,000) for each of the first two calendar quarters in 2021. Amended payroll tax returns may be necessary.
The general eligibility standard remains unchanged for 2020. A business must have fewer than 500 employees. It must also be located where a full or partial lockdown order was in effect or must have suffered a 50% reduction in gross receipts. In 2021, the requirement is reduced to a 20% reduction in gross receipts. For both 2020 and 2021, the test compares a calendar quarter to the same quarter in 2019.
In addition, for 2021, an employee need not be idle to be eligible for the credit. In 2020, this is only true for employers with fewer than 100 employees. In both 2020 and 2021, raises and other special pay are eligible for the credit. And, finally, advance payments of the credit to the employer will be allowed in 2021. Guidance from Treasury should be available soon.
In 2021, the credit limit is larger. It’s paid at a greater rate. And there is no longer a requirement that the employee be idle. The combination means that many more small businesses and their employees will benefit.
- Be proactive and adapt to changing circumstances. Even though we may recommend that your loan forgiveness application is delayed, and your tax returns are extended, that doesn’t mean we should delay preparing either. We can check to see if you qualify for the second round of loans now. It’s not too early to verify that you meet the hourly wage and salary rate safe harbor. You can gather your payroll records. And we can assist you in preparing your loan forgiveness application during the second quarter.
- Consider TaxCaddy. If we are preparing your individual tax returns, please consider using TaxCaddy. This innovative tool really does make gathering your tax information easier. You can read more about it at this link and you can request an invitation with this link.
- Be cautious. Always practice social distancing and wear your mask when appropriate.
- Stay informed. Keep reading our emails. We’re only partly joking. The only thing that we’re certain of is that we haven’t seen the last stimulus news out of Washington, PPP or otherwise. And as always, if you have questions about your specific situation, please don’t hesitate to contact your LSL partner or team member. In any case, more details and guidance on the latest stimulus bill will be coming soon.
- Take care of yourself. Go for a walk. Try a new recipe. Call an old friend. Or just take a deep breath. We will get through this together.
Happy New Year!
Dave focuses on tax compliance and planning in the areas of income and estate tax. He is the tax partner for our automotive group but he’s also tapped for his expertise in real estate, manufacturing and professional services. He’s a whiz at estate and gift taxation and can create a customized approach to designing and implementing a successful exit plan for business owners.
You can reach Dave at 714-672-0022.
Read Dave’s full bio.