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LATEST ON STIMULUS BILL AND PPP AS OF FEBRUARY 28 2021

STIMULUS BILL

The House of Representatives passed President Biden’s $1.9 trillion stimulus package. The bill now moves to the Senate where Democrats hold a slim majority 50/50 with Vice-President Harris as the tie breaking vote. The fact that the majority is so close in the Senate will most likely lead to some amendments to the House version.

The major provisions, as I’ve read so far (I have not seen the actual bill passed by the House) are as follows:

Democrats are pushing to have the bill become law by March 14th. This is the date that current federal unemployment benefits are set to expire.

Direct stimulus payments of $1,400 for individuals earning less than $75,000, phasing out between $75,000 and$100,000. For couples, these figures would be less than $150,000, phasing out between $150,000 and $200,000. It is to be based on either 2019 or 2020 income and would include adult dependents (including college students and disabled adults).

The House package extends federal unemployment benefits until August 29, 2021 and increases the weekly amount from the current $300, to $400.

The child tax credit which is currently $2,000 for children under the age of 17 would be increased to $3,000 and would be available for children under the age of 18. There would be a higher credit for children under the age of 6 ($3,600). One more change to this credit is the credit would be fully refundable. Currently the credit is 70% refundable. If a family has a child eligible for the current $2,000 credit but has no income tax liability, they will only receive $1,400 (70% of the $2,000 credit). If the family had an income tax liability of $500, they would be allowed a $1,900 credit ($500 vs. income tax and $1,400 refundable). If the tax liability were $600 or more, then this family would receive the full $2,000 credit. Under the new House bill the family would receive the full $3,000 (or $3,600) regardless of whether or not they had an income tax liability.

The item causing the most controversy is the provision that raises the federal minimum wage from its current level of $7.25 an hour to $15 an hour by 2025. Senate parliamentarian Elizabeth MacDonough ruled that Democrats could not include this provision under budget reconciliation. If it would have been allowed, the Democrats could have passed the provision with a simple majority, meaning no Republican votes would be necessary.

Currently the positions of each side are Democrats feel that raising the minimum wage is necessary to help families, while Republican leaders believe the raise to $15 per hour will hurt small businesses and cost jobs. The Senate version of the Stimulus bill will likely contain a raise to either $10 or $11 an hour. I expect we will be hearing more about this from both sides of the political aisle in the coming days.

There are also provisions in the bill that cover the following items:

• Assistance for struggling families to help with rent, mortgages, utilities, property taxes and homelessness.
• Employer incentives to offer paid sick and family leave.
• Increased subsidies of premiums for individuals and families covered by Obamacare.
• Economic Injury Disaster Loans to small businesses and grants for bars and restaurants.
• Money for state and local governments.

I will cover some of these provisions once the final version of the bill becomes law. This writing is just to give you an idea of what is currently going on.

LATEST ON PPP

Guidance is expected to come as early as Monday March 1st on provisions aimed at assisting the smallest businesses eligible for PPP.  The overall changes that were made last week and require guidance are as follows:

14-day period that began Wednesday February 24th and extends to March 9th and allows only businesses with fewer than 20 employees to apply.

Sole proprietors, independent contractors and self-employed individuals will receive higher loans as their maximum will be based on their gross income instead of their net income. Guidance is required on whether borrowers who have already received loans are able to apply for additional funds. In addition, lenders will need to update their systems to comply with these changes.

Elimination of restriction that borrowers with a felony arrest or conviction in the last year, other than one related to financial assistance fraud, are eligible for a PPP loan. No business with a 20 percent or more owner that has an arrest or conviction for a felony related to financial assistance fraud within the last five years is eligible for a PPP loan.

Under the original rules of PPP, businesses with individuals of at least 20% ownership that are currently delinquent or have defaulted on student loans within the last seven years were not eligible for PPP loans. This restriction is eliminated.

Access to the program will be granted for non-citizen business owners that have Individual Taxpayer Identification Numbers (ITINs) instead of social security numbers. This would include Green Card holders and those here on a visa.lat

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

VIRTUAL CURRENCY – BE WEARY OF HIDDEN TRAPS

As many have you may have read the IRS is attempting to crack down on what they believe to be a large number of unreported transactions revolving around virtual currency.

Virtual currency, as explained in IRS Notice 2014-21 “is a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value.” It may be used as legal tender in some instances but does not have legal tender status.

Convertible virtual currency, according to the same notice, has an equivalent value in real currency. The most popular convertible virtual currency is Bitcoin.

Why am I discussing this now?

The IRS added the following question to the 2019 income tax return Schedule 1:

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency?”.

• You must answer yes to this question if you received cryptocurrency (crypto)
• Sold crypto.
• Traded one crypto for another crypto (for example Bitcoin for Ethereum)
• Used crypto to buy goods and services.

Selling, trading, or using crypto (the last three bullet points listed above) results in taxable gains and/or losses and must be reported on your income tax return.

You may answer no to this question if you merely held crypto, during the year, in a wallet or transferred it between wallets you own.

Schedule 1 was not a schedule required to be filed by all taxpayers. In 2019, it was filed for taxpayers that had income from sources other than wages, interest, dividends, capital gains/losses, retirement, or social security. These would include, but not be limited to, taxable state refunds, earnings from a business reported on either Schedule C or F, income from rental real estate, royalties, partnerships, S corporations or trusts and unemployment income.

Schedule 1 was also used to report reductions to a taxpayer’s Adjusted Gross Income (AGI). These adjustments would be from educator expenses, self-employed health insurance, 50% of self-employment tax paid, retirement fund deductions, alimony paid, student loan interest, tuition, and fees to name a few.

In 2020 the question was moved form Schedule 1 to page 1 of the return where every taxpayer will now see it. The question must be addressed to the best of your ability. There are penalties for intentionally lying on your income tax return.

As I stated earlier, the IRS clearly sees virtual currency as a vastly underreported area and is going to crack down on these transactions.

Without getting too detailed part of the allure of virtual currency is that once recorded and time stamped, transactions cannot be altered and are therefore available forever.

IRS Notice 2014-21 was written in March of 2014 and outlined the IRS position on virtual currency. The notice treats virtual currency as property, and not currency. While most taxpayers understand that if they purchase a virtual currency, for example Bitcoin at a value (let’s say $20,000) and sell it at a later date, income or loss will be recorded. There are some other situations addressed by this notice.

If taxpayers receive virtual currency as payment for goods or services, it must be included in income at it’s Fair Market Value (FMV) at the time of receipt. The taxpayer would then have a basis in the currency equal to the amount reported in income. For example, if I prepare a business tax return and receive payment in the form of virtual currency with a value of $3,000, then I report $3,000 as income and my basis in the currency is $3,000. If I sell or trade the currency for more than $3,000, I recognize a gain and if I sell or trade the currency for less than $3,000 then I recognize a loss.

The type of gain/loss realized depends on why the currency is exchanged. If I trade one form of virtual currency for another, sell it for a gain or loss or use it to buy goods or services it is going to be a capital gain or loss. If I receive virtual currency for goods or services that I sell that would be recognized as ordinary income. Examples of this would be the $3,000 I received for tax preparation mentioned earlier or if I sold inventory of my business (an example might be clothing from a department or online store).

Other reportable transactions include the FMV of mined virtual currency. Virtual currency is mined using computers to solve complex equations. The FMV of mined coins would be reported as income.

Virtual currency paid as wages must be reported at the FMV at the time of payment.

The one area that taxpayers may not be aware of is when virtual currency is exchanged for goods and services it is taxed. Although I realize investors can purchase and exchange partial shares of currencies my next example will assume that one Bitcoin was purchased. If a taxpayer purchases 1 Bitcoin for $20,000, and later when the Bitcoin is worth $45,000, purchases a car, then the taxpayer recognizes a $25,000 capital gain. It would be either a long-term or short-term gain depending on whether the taxpayer held the asset for more than a year (which would make it long-term) or for a year or less (which would make it short-term).

While most taxpayers understand if they had purchased the Bitcoin at $20,000 and later sold the coin for $45,000 that they would have a recognized capital gain, many do not realize that simply spending the coin will result in a recognized gain or loss. I find the easiest way to understand this concept is to assume each time you spend a virtual currency, think of it as selling the currency first and then using the cash from the sale to purchase the good or service.

To illustrate how crazy this can get let’s look at another example. In this example a taxpayer has purchased 1 Bitcoin for $20,000 and now it is worth $40,000. If the taxpayer buys lunch for $15 using the virtual currency, they recognize a capital gain of $7.50 (the coin had doubled in value). By the same token if a taxpayer purchased the coin at $40,000 and the value dropped to $30,000 and the taxpayer purchased an automobile for $30,000, the taxpayer would recognize a $10,000 loss.

How will the IRS know about my transactions?

I refer back to one of the driving forces of virtual currency. Once transactions are recorded, they are not able to be altered. This means the record of each transaction is available forever.

In 2018 the IRS forced Coinbase, a digital currency exchange, to release the information of any user that had at least $20,000 of transactions in any year between 2013 and 2015. The result was the IRS obtained over 13,000 names and sent letters to over 10,000 individuals to put them on notice regarding these transactions.

My belief is the IRS is going to continue to receive more and improved data on investors by requiring improved reporting by currency exchanges in the future and anyone involved with virtual currency transactions should be aware. Again, if the information remains available forever and cannot be altered, then taxpayers must respect the laws surrounding these transactions or be prepared to pay the consequences.

How quickly is the IRS expected to crack down on these transactions?

From everything I’ve read I believe the IRS intended to start cracking down in 2020 and possibly even in 2019. The effort has been pushed back some because of the Pandemic. The IRS is still reeling from the mountain of paper returns sitting in offices across the country. Additionally, when the new stimulus package eventually becomes law, the IRS will most likely be issuing stimulus checks. Based on these circumstances I don’t expect the IRS to devote the resources necessary to crack down on these transactions in 2020.

With that said, I do believe this is a hot button that is not going away, and I expect the IRS pursuit of these transactions to increase beginning next year.

What should taxpayers do now?

My recommendation is taxpayers start to get their house in order as soon as possible. Again, I do not believe this issue will be going away. If anything, my belief is we will see more uses of virtual currency in the future which will result in additional scrutiny.

This is a very simplified overview of crypto and I have not even discussed the complex areas of when crypto currencies incur hard forks or soft forks or air drops. Just keep in mind that these types of transactions also bring tax consequences. This article was meant to give an overview of the taxation of cryptocurrencies and explanations of these types of transactions are beyond the scope of this writing. They are, however, prevalent and I wanted to mention the terms, so you are aware of them.

It is my opinion that if you are investing in virtual currencies, then you should be speaking with a professional familiar with these rules in order to avoid unintended consequences.

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Jeff Skolnick, CPA, M.S. Taxation

EMPLOYEE RETENTION CREDIT – 2020 AND 2021

The Employee Retention Credit (ERC) was originally part of the CARES Act which was signed into law on March 27, 2020. The ERC allows eligible taxpayers a credit against Form 941 taxes (Federal withholding, Employer and Employee Social Security and Medicare taxes). The Consolidated Appropriations Act 2021 was signed into law on December 27, 2020 and made significant changes to the ERC. I will now outline the latest provisions of both the 2020 ERC and the 2021 ERC.

2020 ERC

Who is eligible for an ERC?

The ERC is available to employers of any size that paid wages and meet one of the two following tests:

The first test is for any business that has its operations fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. As an example, I have a number of hair salons as clients in the New Jersey / New York area. All of these salons were shut down for approximately 3 months from between approximately March 20th through their reopening on June 22nd. These salons would be eligible for the credit for any wages paid during the shutdown period.

The second test is one in which the business had a reduction of its gross receipts of more than 50% when compared to the same quarter of 2019. To use my salons as an example. Each salon was open for 10 days in the 2nd quarter. Gross receipts were down by 80 – 90% in most cases. These salons would be eligible under this second test as gross receipts are clearly less than 50% of the corresponding 2019 quarter. This test allows the taxpayer to count as wages all wages from the first day of the quarter gross receipts fell below 50% up through and including the quarter where gross receipts are at least 80% of the corresponding quarter in 2019.

I will explain this second test by giving an example. Let’s say gross receipts in 2019 were $100,000 in each of the four quarters for an annual total of $400,000. Sales for 2020 were $90,000 in the 1st quarter, $10,000 in the 2nd quarter, $70,000 in the 3rd quarter and $95,000 in the 4th quarter. We now test each quarter. In the 1st quarter sales were down 10%, therefore the taxpayer is not eligible. The 2nd quarter gross receipts are down 90% from the 2019 amount ($100k in 2019 compared to $10k in 2020). The taxpayer is now eligible for the 2nd quarter and the 3rd quarter. The 3rd quarter sales are only 70% of the 2019 figure and therefore since the salon has not reached 80%, it is automatically eligible in the 4th quarter. The 4th quarter is only down 10% compared to the 2019 figure, however, the law states you are eligible up to and including the quarter where gross receipts are restored to at least 80% of the 2019 corresponding quarter. If the 3rd and 4th quarter figures of 2020 were reversed ($95,000 in the 3rd quarter and $70,000 in the 4th quarter), then the salon would not be eligible for a credit in the 4th quarter. The salon reached the 80% threshold in the 3rd quarter which means although it is eligible in 3rd quarter, it is not in the 4th quarter.

The second rule above pertains only to the 2020 ERC credit. The rules change in 2021 and I will get to them shortly.

Please keep in mind the two tests are completely separate. If your business is eligible because you were shut down, and not because your receipts dropped by at least 50%, then you are eligible only during the shutdown period. It is generally more advantageous if a business can qualify under the second test.

Aggregation Rules

I want to point out that related employers (generally companies that share greater than 50% common ownership) must be looked at in total to determine the gross receipts test. Additionally, if just one entity has its operations partially or fully suspended, then all related entities are considered to be partially or fully suspended. Aggregation rules can be complicated and are beyond the scope of this writing. I just want to say if you have companies that may be related discuss it with a professional to ensure that you apply the law correctly.

What wages specifically can be included in the computation?

Qualified wages for eligible employers with greater than 100 full-time employees are wages paid to employees not providing services during the period of eligibility. Full time employees are employees working at least 30 hours per week. If you employ more than 100 full time employees than only wages for employees being paid that are not working are counted. There is a limitation on these employees based on the amount such employees would have been paid for working an equivalent duration during the 30 days immediately preceding the coronavirus crisis. All this last sentence means is that employers were not allowed to boost someone’s pay rate during a period of eligibility in order to increase the credit.

Qualified wages for eligible employers with no more than 100 full-time employees are all wages paid whether or not the employee is working or not during the period of eligibility.

While the 100-employee test focuses on full time employees, the actual computation counts full and part time employees. If a company employs more than 100 full time employees than the wages of all full and part time employees that are being paid but not providing services are counted.

If a company has 100 or less full-time employees than all the wages of the full and part time employees are counted.

Group health benefits of employees are considered qualified wages.

Are there any other limits on eligible wages?

Wages of more than 50% owners and related parties to a more than 50% owner are not eligible wages. In addition, there is a limit of $10,000 per individual in 2019.

There are also exclusions for pre-existing paid time off, severance pay and wages where other credits have been taken such as paid family and medical leave credit.

What is the amount of the credit?

The credit is a 50% credit of qualified wages, or up to $5,000 per individual in 2019. Let’s say an employer has two employees, Employee 1 that earns $2,000 each quarter and Employee 2 that earns $15,000 each quarter. This includes the employee’s wages and health benefits. Lastly, I will assume the entity was eligible for the ERC in the 2nd, 3rd, and 4th quarters of 2019. Employee 1 will earn $6,000 while Employee 2 will have compensation of $45,000 in 2019. The ERC would be 50% of $6,000, or $3,000 and 50% of $10,000 (remember there is a $10,000 limit per employee), or $5,000. The business has an $8,000 credit. In actuality the 2nd quarter would show a $6,000 credit ($1,000 credit on Employee1 and a $5,000 credit on the Employee 2). The 3rd and 4th quarters would each have a $1,000 credit (all on Employee 1 and none on Employee 2 because the limit had been reached). These credits will be taken on Form 941 for each quarter.

If this is such a great credit, why haven’t I heard of it before?

The original law had a provision which stated any employer that received a PPP loan was not eligible. PPP was a better deal and that’s why PPP was in the news every day and there was little mention of the ERC.

The new law passed December 27th, 2020 changes the rules and allows employers that received a PPP loan to also receive an ERC. You must be careful.  Wages considered for PPP loan forgiveness may not be used for ERC purposes.

Further, the law states that we are to assume this was always the law. Eligible taxpayers are able to file amended payroll tax Forms to claim the 2019 ERC. If you are filing an amended Form 941-X solely for the change in the law pertaining to the allowance of PPP borrowers to also obtain an ERC, then you can file one amended 4th quarter 2019 Form 941-X to correct all quarters of 2019.

Reduction in income tax deductions by the amount of ERC

The law requires taxpayers that obtain an ERC to reduce their tax deductions by the amount of the ERC. In my example of the employer that obtained an $8,000 credit, that same employer would be required to reduce the deductions on their 2019 income tax return by $8,000.

2021 ERC

While the shutdown test remains in place in 2021, the second test has changed. Employers are eligible on a quarter-by-quarter test. If the gross receipts for the 1st or 2nd quarter of 2021 are less than 80% of the gross receipts of the corresponding 2019 quarter the employer is eligible. Additionally, employers have the option of using the prior quarter for the test. Let’s say the 1st quarter of 2021 was only down 15% compared to the 1st quarter of 2019, but the 4th quarter of 2020 was 25% lower than the 4th quarter of 2019. The taxpayer may choose to use the 4th quarter of 2019 for the computation instead of the 1st quarter of 2020. The same would hold true for an employer calculating the 2nd quarter of 2021. The employer could choose to use the 1st quarter for the computation. This is only for purposes of qualifying under the gross receipts test. If an employer is eligible the actual computation of the quarterly ERC would be based on wages on the appropriate quarter (not the prior quarter used for the gross receipts test).

What other changes were made for 2021?

In 2019 there was a limitation of $10,000 of wages per employee for the year. In 2021 this figure has changed to $10,000 per quarter for both the 1st and 2nd quarters of 2021. The last quarter eligible for the ERC is the 2nd quarter of 2021.

The credit has been increased in 2021 from 50% in 2019 to 70% in 2021. This means that while the limit was a $5,000 credit per employee in 2019 ($10,000 multiplied by 50%), it is now up to $14,000 per employee in 2021.

Let’s look at another example. An employer has two employees, Employee1 and Employee 2. Employee 1 makes $6,000 in the 1st quarter and $12,000 in the 2nd quarter. Employee 2 makes $15,000 in each of the quarters. The credit in the 1st quarter would be $6,000 X 70% ($4,200) + $10,000 X 70% ($7,000) or $11,200.

The 2nd quarter would be $10,000 X 70% for both employees or a total of $14,000. The employer is limited to $10,000 of wages on Employee 1 even though that employee did not use the full $10,000 amount in the 1st quarter. In other words, the employer cannot carry over any amount under the $10,000 threshold.

The test of full-time employees was changed from 100 to 500 full time employees; therefore, it is a much easier eligibility test for employers to reach. The advantage of meeting this test is that all wages, not just wages of those being paid and not working, are eligible for the credit.

Reduction in income tax deductions by the amount of ERC

The law requiring taxpayers that obtain an ERC to reduce their tax deductions by the amount of the ERC remains in place for an ERC taken in 2021.

How this might affect PPP loan forgiveness

We know from the new law that employers that obtained a PPP loan can now also obtain an ERC but cannot use the same wages for both. We also know that borrowers of PPP loans must utilize 60% of the loan proceeds for payroll in order to obtain forgiveness.

Without the passage of the new law, we might just use 100% of wages for PPP forgiveness and be finished. Now it may be beneficial to utilize some of the other allowed expenses (in 2020 it was rent, mortgage interest and utilities) in order to maximize the ERC. Let’s take an example where an employer obtained a $100,000 PPP loan. Let’s also assume the employer had $40,000 of rent during the covered period of the PPP loan. If the employer applies for forgiveness using $60,000 of payroll and $40,000 of rent, then they now have $40,000 of payroll that may be eligible for the ERC. I say may be eligible because there are additional rules ($10,000 cap per individual and/or wages of individuals owning more than 50% of the entity).

These computations may become complex. Take an example of a borrower that obtained a PPP loan before the PPP Flexibility Act passed on June 5th of 2020. This borrower has the option of using an 8-week covered period or a 24-week covered period. There could be a situation where during the 8-week covered period the employer meets the full-time equivalent requirement of their forgiveness because they maintained all employees during the 8 weeks but subsequently reduced their work force based on economic conditions. Using a 24-week covered period might reduce forgiveness, however being able to use 6 months of rent and freeing payroll for the ERC may result in a bigger benefit from the ERC than the reduction in forgiveness. My point is you must coordinate your PPP loan forgiveness with the ERC in order to maximize your benefit.

Is there anything else we don’t know?

Isn’t there always? Currently we are waiting for guidance on how to coordinate PPP forgiveness and the ERC. For example, if an employer chooses a 24-week covered period it is likely that payroll from that period is far more than required for PPP forgiveness. How do we allocate wages for each? Can an employer pick and choose which employees to count for PPP? Must they use a certain percentage of each? Can employers exclude up to $10,000 for each employee to be used for ERC?

There are also questions regarding borrowers that have already filed for forgiveness and submitted payroll in excess of their PPP loan. Can the excess be used for the ERC? What if a borrower used 100% payroll but had other eligible expenses that could have been used? The law does state that if a borrower has applied for forgiveness, but the SBA has not rendered a final decision or reimbursed the lender for forgiven PPP funds, then the borrower may amend their forgiveness application.

I do expect guidance to be issued fairly soon as many borrowers are going to have to file for forgiveness soon.

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

If you’d like to book an appointment with me, please click on the link below:

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

JANUARY 13, 2021 – FIRST DRAW PPP LOAN INCREASES

This procedural notice lays out instances where a First Draw PPP Loan that was approved on or before August 8, 2020 is eligible for a loan increase on that First Draw loan. None of the borrowers listed below are eligible for an increase if the SBA has remitted a forgiveness payment to the lender. The borrower may still be eligible for a Second Draw loan. The borrower must provide documentation to the lender.

Partnerships

If the partnership excluded amounts for partner compensation, then the loan may be increased.

Seasonal Employers

Seasonal employers are allowed to use “the average total monthly payments for any 12-weeek period selected by the employer beginning February 15, 2019 and ending February 15, 2020”. Previously, seasonal employers had to use an average between May 1, 2019 and September 15, 2019, as an alternate method to using 2019.

Farmers and Ranchers

Farmers and ranchers are now allowed to use gross receipts as opposed to net profit to calculate their maximum loan.

Other Eligible Borrowers

There is also increase relief for the following categories of borrowers:

• Borrowers that fully repaid the loan
• Borrowers that partially repaid the loan
• Borrowers that did not accept the full amount of the loan.

JANUARY 15, 2021 – PPP EXCESS LOAN AMOUNT ERRORS

This procedural notice states “An excess loan amount error is a borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act. An excess loan amount error does not include a knowing misstatement. Knowing misstatements may result in additional action, such as charges for fraud.”

A borrower cannot receive forgiveness on any amount above their maximum whether the error was a borrower or lender error.

JANUARY 15, 2021 – PPP RESUBMISSIONOF LOAN FORGIVENESS USING FORM 3508S

Form 3508S is a simplified 1-page forgiveness form for borrowers with original loan balances of $150,000 or less. Form 3508S requires virtually no documentation to be submitted with the application. Borrowers must retain payroll records for 4 years and other expense records for 3 years in case the SBA decides to audit the forgiveness application. Eligible borrowers that applied for forgiveness using the more complicated Forms 3508EZ or 3508 may resubmit using the simplified form if the SBA has not notified the lender of a final loan decision or remitted payment to the lender.

January 17, 2021 – MAX FIRST DRAW LOANS AND DOCUMENTATION REQUIRED

This guidance reiterates the maximum loan calculations and documentation required by the following borrowers:

• Self-employed individuals with no employees
• Self-employed individuals with employees
• Farmers and Ranchers
• Partnerships
• S corporations
• C corporations

Documentation Required

• You must provide proof of payroll by furnishing Forms 941 (or other tax forms containing similar information), state unemployment insurance forms along with evidence of any retirement and health insurance contributions. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided as evidence that you were in business as of February 15, 2020.
• Self-employed individuals must provide Form Schedule C for either 2019 or 2020 as well as a 2020 invoice or bank statement to establish you were in business as of February 15, 2020. Self-employed individuals will also have to provide Forms 941, state unemployment insurance forms and evidence of retirement or health insurance contributions if they have any employees.
• Farmers and ranchers furnish the same information as self-employed individuals except they use Schedule F instead of Schedule C. Keep in mind they can use the gross receipts, not the net profit (self-employed individuals must use net profit) plus the same expenses for employees as listed above. If farmers and ranchers have employees, they must provide the same information as mentioned above.
• Partnerships would provide the same information as above for employees (Forms 941, state unemployment insurance forms and retirement and health insurance contributions). Additionally, they add the net earnings from self-employment reduced by section 179 expenses claimed, unreimbursed partnerships expenses claimed and depletion on oil and gas properties multiplied by 92.35%, up to a maximum of $100,000 per partner. Partnerships must provide Form 1065 (including K-1s) in addition to the required documents for employees.
• Keep in mind more than 2% shareholders of S corporations have their health insurance added to their payroll and the maximum allowed is $100,000. Any other employee is allowed a $100,000 maximum payroll amount plus health and retirement benefits. Self-employed individuals, farmers and ranchers and partners in partnerships or LLCs are not allowed an additional amount for health benefits or retirement plan contributions.

JANUARY 19, 2021 – CALCULATING REVENUE REDUCTION FOR SECOND DRAW LOANS

This guidance is to assist businesses in calculating their revenue reduction and payroll costs (and the relevant documentation required) for determining eligibility of Second Draw Loans.

Gross receipts are defined as:

For-Profit Business

“Gross receipts generally are all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.

Gross receipts do not include the following:

• taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the concern or its employees).
• proceeds from transactions between a concern and its domestic or foreign affiliates; and
• amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.” In other words, cost of goods sold does not reduce gross receipts.

Not-for-Profit Businesses

“Gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986, which is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes, but is not limited to:

• the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts,
• the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts,
• gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T),
• the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and
• the gross amount received as investment income, such as interest, dividends, rents, and royalties.

Gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.”

PPP Loan Proceeds Forgiven and EIDL Advances

Neither of these items is included in gross receipts for purposes of the 25% revenue reduction calculation.

Periods Allowed for 25% Revenue Reduction

Borrower may use any 2020 quarter where they can show at least a 25% drop in revenue compared to the same quarter in 2019. The borrower may also compare annual gross receipts of 2020 to 2019 if they were in business in 2019.

There are additional rules outlined for businesses that opened subsequent to January 1, 2019 and for those that opened subsequent to January 1, 2020 but prior to February 15, 2020.

Documentation Required to Substantiate 25% Revenue Reduction

• Quarterly financial statements for the entity. If the financial statements are not audited, the Applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.
• Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
• Annual IRS income tax filings of the entity (required if using an annual reference period). If the entity has not yet filed a tax return for 2020, the Applicant must fill out the return forms, compute the relevant gross receipts value, and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax return.

When to Furnish Documentation

For loans greater than $150,000 documentation must be provided with the Second Draw application. Loans of $150,000 or less must provide documentation on or before applying for forgiveness but can provide it with it’s application.

Maximum Loan Amount

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $2 million. (Remember that First Draw PPP loans could be up to $10 million.) The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll or $2,000,000.

The reason for the additional payroll of hotels, motels and restaurants is because these groups of businesses were some of the hardest hit economically by the pandemic.

JANUARY 19, 2021 – ADDITIONAL ITEMS RELEASED

Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act

This is a long (62 pages) Interim Final Rule that does just as the name suggests. It provides a more detailed look at the forgiveness requirements and procedures and is beyond the scope of this writing.

Revised Forgiveness Forms are Released.

Form 3508S – for borrowers with original loan balances of $150,000 or less

Form 3508EZ – for borrowers of more than $150,000 that meet one of the two following conditions:

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. (For purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.).

AND

The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.

• Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the Covered Period).
• Also ignore reductions in an employee’s hours that the Borrower offered to restore, and the employee refused.

OR

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. (For purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000,).

AND

The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the Covered Period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Form 3508 – for borrowers not eligible to file Form 3508S or 3508EZ.

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Jeff Skolnick, CPA, M.S. Taxation

Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act

The Payroll Protection Program (PPP) became law as part of the CARES Act on March 27, 2020. Once it became law the SBA and/or the Treasury published 25 interim final rules providing guidance. The Economic Aid Act became law on December 27, 2020 and on January 6, 2021 the first interim rule was published by the SBA and Treasury. I am stating this history in order to explain why I am sure there will be more on both the First Draw PPP program and the PPP Second Draw program (which I cover later in this article).

This latest interim rule is not intended to make changes but in order to consolidate the many changes that have occurred since the program was first implemented.

General

Congress authorized a total of $806.45 billion for the First Draw PPP and the Second Draw programs.

The new law extends the time to apply for a PPP loan to March 31, 2021.

First Draw PPP

Generally, any business that employs less than 500 employees qualifies. This includes self-employed individuals, nonprofit organizations, veterans organizations, and tribal business concerns. The law specifically includes sole proprietors, independent contractors, and eligible self-employed individuals. You must have been in business as of February 15, 2020.

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $10 million. The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

Stated more simply, an employer calculates their average monthly payroll costs and multiplies that figure by 2.5 and compares that to $10,000,000, and whichever is less will be the maximum amount. Let’s say a company determines their monthly payroll costs to be $40,000. The maximum loan allowed is $40,000 multiplied by 2.5, or $100,000. $100,000 is far less than $10,000,000 and would, therefore, be the maximum. 

Payroll Costs

One of the biggest keys is determining the definition of payroll costs. These are defined in the law as payments of salary, wages, commission, tip or equivalent, payment for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, payment for the provisions of employee benefits consisting of group healthcare or group life, disability, vision, or dental insurance, including insurance premiums, retirement benefits, state or local tax assessed on employee compensation, payments to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment of similar compensation that does not exceed $100,000 in 1 year. Farmers and ranchers are allowed to use gross income of their Schedule F for 2019 or 2020, as opposed to net income.

There are some things that are not allowed as payroll costs, and they include annual salary of an employee in excess of $100,000, which must be prorated. In other words, if we look at a 4-month window, the prorated amount of a maximum $100,000 salary would be $33,333. Also excluded are federal payroll taxes, withholding, and railroad retirement tax as well as payments to individuals whose principal place of residence is outside the United States. Additionally, qualified sick and family leave wages for which a credit was taken under the Families First Coronavirus Response Act.

You must provide proof of payroll by furnishing Forms 941 (or other tax forms containing similar information), state unemployment insurance forms along with evidence of any retirement and health insurance contributions. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided as evidence that you were in business as of February 15, 2020.

Self-employed individuals must provide Form Schedule C for either 2019 or 2020 as well as a 2020 invoice or bank statement to establish you were in business as of February 15, 2020. Self-employed individuals will also have to provide Forms 941, state unemployment insurance forms and evidence of retirement or health insurance contributions if they have any employees.

Farmers and ranchers furnish the same information as self-employed individuals except they use Schedule F instead of Schedule C. Keep in mind they can use the gross receipts, not the net profit (self-employed individuals must use net profit) plus the same expenses for employees as listed above. If farmers and ranchers have employees, they must provide the same information as mentioned above.

Partnerships would provide the same information as above for employees (Forms 941, state unemployment insurance forms and retirement and health insurance contributions). Additionally, they add the net earnings from self-employment reduced by section 179 expenses claimed, unreimbursed partnerships expenses claimed and depletion on oil and gas properties multiplied by 92.35%, up to a maximum of $100,000 per partner. Partnerships must provide Form 1065 (including K-1s) in addition to the required documents for employees.

The loan proceeds are allowed to be used for payroll costs (which we already defined), interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations incurred before the February 15, 2020.

Additional expenses allowed for loans obtained in 2021

The categories I show below are directly from the new law. I know these paragraphs contain a fair amount of legalese, however I included them in their entirety because they also offer many examples which I believe is helpful.

Covered operations expenditures (payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses);

Covered property damage costs (costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation);

Covered supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that—(A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan); and

Covered worker protection expenditures ((A) operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency with respect to the COVID–19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; (B) such expenditures may include—(i) the purchase, maintenance, or renovation of assets that create or expand—(I) a drive-through window facility; (II) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (III) a physical barrier such as a sneeze guard; (IV) an expansion of additional indoor, outdoor, or combined business space; (V) an onsite or offsite health screening capability; or (VI) other assets relating to the compliance with the requirements or guidance described in subparagraph (A), as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (ii) the purchase of—(I) covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; (II) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (III) other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (C) such expenditures do not include residential real property or intangible property).

At least 60% of expenditures must be for payroll costs.

Other Loan Provisions

• These loans are made without any personal guarantees of shareholders, members, or partners.
• There is no collateral required.
• No SBA fees
• No requirement to prove that the small business is unable to obtain credit elsewhere.
• The interest rate will be 1%

Borrower Certifications

The major certifications are:

• Applicant was in operation on February 15, 2020.
• That the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient; There is a safe harbor rule that states PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan in good faith.
• Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage interest payments, rent, utility, covered operations expenditures, covered supplier costs, and covered worker protection expenditures.
• That the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan. 
• When applying for loan forgiveness at least 60% of the loan proceeds were used for payroll costs.
• That the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan. In other words, you cannot obtain two PPP loans. There is a Second draw loan allowed (covered later in this writing), which is not the same as two PPP loans.
• Applicant has not and will not receive a Shuttered Venue Operation grant from SBA.
• The fact that information provided is true and accurate and making a false statement is punishable under the law by imprisonment of not more than five years and a fine of up to $250,000.

Loan Forgiveness

This is probably the coolest part of the Paycheck protection program. The amount of the loan that will be forgiven is the actual amount spent during the 8-week or 24-week covered period following the loan origination date for payroll costs (defined above), interest on any covered mortgage obligation, rent, utilities, covered operations expenditures, covered supplier costs, and covered worker protection expenditures. The 8-week covered period only applies to loans obtained before June 5, 2020. All loans obtained subsequent to June 4, 2020 use a 24-week covered period. Borrowers who secured their loans before June 5, 2020 have the option of an 8-week or 24-week covered period. This election is made on the application for forgiveness.

The amount of loan forgiven may not exceed the principal borrowed. There are reductions to the forgiveness amount if the employer reduces the average number of full-time employees. There is also a reduction of forgiveness if there is a substantial reduction (in excess of 25%) in compensation of an employee. These rules do not apply to loans of $50,000 or less.

The SBA had stated that EIDL advances received by a borrower were to be deducted from the loan forgiveness amount. This provision has been repealed.

Loan forgiveness must be applied for within 10 months after the end of the covered period.

Borrowers must submit documentation to the lender when seeking forgiveness. The lender has 60 days to issue its decision on forgiveness.

Simplified Loan Forgiveness for loans of $150,000 or less

Borrowers will sign and submit a one-page form with the loan amount and number of employees retained.

Estimate loan amount spent on payroll.

Attest to complying with PPP requirements and record retention.

While no documentation is required with the application, borrowers must retain records of employment records, for the 4-year period following submission of loan forgiveness application and 3-years for other eligible expenses. The SBA has the right to audit these records.

Tax Impact of Forgiven Loans

Normally when a taxpayer receives cancellation of a debt, it is considered taxable income; however, these loans are considered an exception and are not taxable income!

In addition, any expenses paid with forgiven PPP funds are deductible.

There is an issue to be aware of for Partnerships (including LLCs that file as partnerships) and S corporations (including LLCs that file as S corporations). In order to deduct losses a taxpayer must have basis in the entity. Although forgiven PPP funds are not considered taxable income, they do increase the basis of a taxpayer. The issue is while companies incurred PPP expenses in 2020 if they do not receive forgiveness of the loan until 2021, then it is not considered income until 2021 and they may not be able to deduct losses in 2020. In that case the loss would be suspended in 2020 and taken against 2021 income.

For example, let’s look at an S corporation with a single shareholder. We’ll assume the shareholder has a $0 basis at the beginning of 2020. We’ll further assume that the S corporation received $200,000 in PPP funds and has a $200,000 loss and has not received forgiveness of its PPP loan in 2020 but will in 2021. The last assumption is the $200,000 loss occurred because the corporation was at a break even and the $200,000 loss was generated by using PPP funds to pay for expenses. Since the $200,000 loan is not forgiven in 2020 the shareholder does not have basis to deduct the loss. The $200,000 loss would be suspended and carried to 2021.

Loan Provisions for Loans not Fully Forgiven.

Any portion of a loan not fully forgiven will have an interest rate of 1% and a maturity date of five years. Borrowers that obtained a loan before June 5, 2020 will have signed a loan agreement that states there is a two-year maturity. These borrowers would have to amend their loan agreement with the lender in order to take advantage of the five-year maturity. For most borrowers this should not be a major problem as most if not all loan proceeds will typically be forgiven if funds were used for eligible expenses.

Other Provision

As I stated earlier there were many changes in the PPP rules. If a borrower received less than the maximum amount of their loan because of the changing provisions or if they returned all or part of their original loans, then they may reapply for the difference if thy have not received forgiveness.

PAYCHECK PROTECTION PROGRAM SECOND DRAW LOANS

This interim rule addresses the implementation of the Economic Aid to Hard-Hit Businesses, Nonprofits and Venues Act (the Economic Aid Act).

The purpose of this program is to “provide assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic.”

These loans must be applied for by March 31, 2021.

Loan Provisions

Second Draw PPP Loans are generally subject to the same terms as First Draw PPP loans. I will now discuss the differences between these two types of loans.

Eligibility

• While First Draw loans allowed businesses that employ less than 500 employees the second draw program reduces this figure to 300 employees.
• Borrower must have received a First Draw Loan and have used or will use the full amount of the initial PPP loan for authorized purposes before the disbursement of the Second Draw PPP Loan.
• The borrower must have experienced a revenue reduction of at least 25% in one of the quarters of 2020 when compared to the 2019 corresponding quarter. The example given in the rule states a borrower with gross receipts of $50,000 in the second quarter of 2019 and $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40% and is therefore eligible. A business may also choose to compare all of 2020 against 2019 to show a 25% reduction. This threshold is more difficult to reach because you only need one quarter of at least a 25% reduction, however some entities do not prepare financial statements and if the entire year is down by at least 25% the entity can simply supply its tax returns as proof. If the borrower was in business for only part of 2019, then there are some different rules used to measure the 25% decline.

The ruling states forgiveness of a First Draw PPP loan is excluded from the gross receipts calculation.

Maximum Loan Amount

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $2 million. (Remember that First Draw PPP loans could be up to $10 million.) The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll or $2,000,000.

The reason for the additional payroll of hotels, motels and restaurants is because these groups of businesses were some of the hardest hit economically by the pandemic.

Application and documentation requirements

While the provisions are basically the same as First Draw PPP loans there is no additional documentation required if the applicant used calendar 2019 figures to determine its First Draw PPP loan amount, uses the 2019 figures for the Second Draw amount and has the same lender for both loans.

For loans greater than $150,000 documentation of the 25% revenue reduction must be provided. Acceptable forms of documentation include annual tax forms, quarterly financial statements, or bank statements.

For loans of $150,000 or less this documentation is not required until on or before the date the borrower applies for forgiveness.

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Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

TAX PROVISIONS OF CONSOLIDTAED APPROPRIATIONS ACT, 2021

Last week I covered the following provisions of the recently adopted stimulus legislation:

• Unemployment Benefits
• Recovery Rebates
• Payroll Protection Program
• Economic Injury Disaster Loans and;
• Payroll sick and family leave

This writing covers what I believe to be the more important income tax provisions contained in the new law.

EXTENSIONS OF EXPIRING PROVISIONS

EXTENSIONS MADE PERMANENT

Reduction in Medical Expense Deduction Floor. The new law permanently changes the floor from 10% to 7.5%. In order to count medical expenses as itemized deduction they must exceed 7.5% of your Adjusted Gross Income (AGI).

Energy Efficient Commercial Buildings Deduction. Commercial buildings are allowed a deduction of up to $1.80 per square foot for energy efficient improvements. Energy efficient envelope, HVAC or lighting system can qualify for this deduction. In order to obtain the full $1.80per square foot deduction a building’s total energy and power cost must be reduced by 50% or more in comparison to the minimum standards. If a 50% standard is not reached there may be deductions of up to $0.60 per square foot if there is a 10% reduction in energy and power based on the envelope, 15% reduction based on HVAC or 25% reduction based on lighting.

Benefits provided to Volunteer Firefighters and Emergency Medical Responders. Any reduction in state, local and foreign real property taxes, personal property taxes or income taxes are not counted as taxable income for these workers. Additionally, payments of up to $50 per month are also allowed tax free.

Qualified tuition and related expenses deduction has been eliminated. Although the qualified tuition and related expenses deduction is eliminated the American Opportunity Tax Credit and the Lifetime Learning Credit now both have the same phase-outs. These benefits phase-out for Single, Head of household and Qualifying widowers between $80,000 and $90,000 of Modified Adjusted Gross Income ($160,000 – $180,000 for those married filing jointly). There is no credit allowed for married taxpayers filing separately.

Railroad Track and Maintenance Credit. Allows a 40% credit (formerly 50%) for qualified railroad track maintenance expenditures.

Reduced excise tax rates for beer, wine, and distilled spirits.

PROVISIONS SET TO EXPIRE DECEMBER 31, 2020 EXTENDED THROUGH 2025

New Markets Tax Credit. This is a credit designed to encourage investment in low-income communities. It allows investors to claim credits against their Federal income tax. The credits are 5% of the investment for each of the first 3 years and 6% of the investment for each of the next 4 years.

Work Opportunity Credit. This allows employers a 40% credit on first year wages paid members of a targeted group. Targeted group members are as follows:

(A) a qualified IV–A recipient,(someone receiving Temporary Assistance for Needy Families under the Social Security Act for any 9-month period during the 18-month period ending on the hire date.

(B)a qualified veteran,

(C)a qualified ex-felon,

(D)a designated community resident,

(E)a vocational rehabilitation referral,

(F)a qualified summer youth employee,

(G)a qualified supplemental nutrition assistance program benefits recipient,

(H)a qualified SSI recipient,

(I)a long-term family assistance recipient, or

(J)a qualified long-term unemployment recipient.

Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness. In most instances when a taxpayer discharges indebtedness for less than the full amount of the debt, the taxpayer must report taxable income. If, for example, a taxpayer owes a credit card company $20,000 and settles their debt for $8,000, the taxpayer would have $12,000 of discharge of indebtedness income. There is an exception for Qualified principal residence indebtedness discharged before January 1, 2026. The maximum allowed for discharge is $750,000 ($375,000 for married taxpayers filing separately).

Employer Credit for Paid Family and Medical Leave. Per the IRS website, “the credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.  The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.  In certain cases, an additional limit may apply.”

Exclusion for Certain Employer Payments of Student Loans. Employers may pay up to $5,250 to an employee or to a lender of principal or interest of any qualified education loan and it is not considered to be taxable income to the employee.

Phaseout of Energy Credit. The Federal credit that exists for solar power will remain at 26% for projects started in 2021 and 2022 and placed in service before January 1, 2024. Originally the credit was scheduled to drop to 22%. For projects started after December 31, 2022 and placed in service before January 1, 2024 the percentage drops to 22%. For projects after 2023 the credit drops to 10%.

Treatment of Mortgage Insurance Premiums as Qualified Residence Interest. Mortgage insurance premiums paid by a taxpayer in connection with acquisition indebtedness of a qualified residence is treated as qualified mortgage interest. This deduction phases out 10% for each $1,000 the taxpayer’s Adjusted Gross Income (AGI) exceeds $100,000 ($50,000 for married individuals filing separately).

Credit of Health Insurance Costs of Eligible Individuals. Internal Revenue Code provides a refundable credit (the health coverage tax credit) of 72.5 percent of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance. The credit was set to expire December 31, 2020 but has been extended for 1 year until December 31, 2021.

Extension and modification of employee retention and rehiring credit. The CARES Act contained a provision that an eligible employer would be allowed a 50% credit against the payroll taxes of eligible wages. An eligible employer was one that had its operations fully or partially suspended during the calendar quarter due to a governmental order related to COVID-19 (the “suspension test”) or (ii) during the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019 (the “gross receipts test”).  The provision was changed to a 70% credit and qualified wages originally were not to exceed $10,000 per employee for the year. The $10,000 figure has been changed to $10,000 each quarter. The credit which originally was set to end with wages paid before January 1, 2021. This has been extended to wages before July 1, 2021.

Temporary Allowance of Full Deduction for Business Meals. As a general rule meal expenses are normally 50% deductible. For 2021 and 2022 if food or beverages are provided by a restaurant, they may be deducted at 100%.

Depreciation of certain residential rental property over 30-year period: The law provides that the recovery period applicable to residential rental property placed in service before Jan. 1, 2018 and held by an electing real property trade or business is 30 years if the entity elects out of the limitation on the deductibility of business interest. The business interest limit is 30% of adjusted taxable income (50% in 2019 and 2020) if gross receipts exceed $26 million. Entities with gross receipts under $26 million are not subject to this provision. Normally the depreciable life is 27.5 years.

Temporary Special Rule for Determination of Earned Income. The law allows taxpayers to substitute their 2019 earned income for their 2020 earned income when calculating the earned income tax credit and additional child tax credit for 2020 if it is more beneficial.

Charitable Contributions Deduction by Non-Itemizers. Beginning in 2021 taxpayers are allowed a $300 charitable contribution even if they do not itemize. For married taxpayers filing jointly the limit is $600.

Disaster Tax Relief

The law provides that Presidentially declared disaster areas (not including COVID-19) which were declared disaster areas after December 31, 2019 and before 60 days after the date of the enactment of this law qualify for relief.

Disaster-Related Rules for Use of Retirement Funds. Taxpayers eligible for disaster relief may withdraw up to $100,000 of funds from either an IRA or other retirement plan without incurring a 10% early withdrawal penalty. The income is spread over 3 years for income tax purposes and may be partially or fully repaid within the 3-year time frame.

Increased Loan Amounts from Retirement Plans. The law allows taxpayers qualifying for disaster relief (Non COVID-19 related) are able to borrow $100,000 (normally this figure is $50,000) if the money is borrowed within 180 days of the law’s enactment.

In addition, eligible participants eligible with outstanding loans with a repayment due from the first day of the disaster incident period through the date that is 180 days after the last day of such incident period can delay the loan repayment for up to one year or, if later, until the date that is 180 days after the date of enactment.

Employee Retention Credit for Employers Affected by Qualified Disasters. An employer that conducted an active trade or business in a qualified disaster zone at any time during the declared disaster may take a credit of 40% of wages for up to $6,000 per employee.

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

CONSOLIDATED APPROPRIATIONS ACT, 2021

You have probably heard by now that the new law passed is almost 5,600 pages and covers funding the government as well as many tax provisions. This writing is meant to cover Unemployment, Recovery Rebates, the Payroll Protection Program, Economic Injury Disaster Loans and Payroll sick and family leave. I will address additional aspects of the law in the very near future, but this should be more than enough to digest for today.

CONTINUED ASSISTANCE TO UNEMPLOYED WORKERS

Pandemic Unemployment Assistance

The Pandemic Unemployment Assistance program extends benefits to self-employed individuals, which would include independent contractors and sole proprietors who would not normally qualify for unemployment benefits. These individuals would have to self-certify that they were otherwise able to work but are unable to due to the coronavirus pandemic. It does not include those with the ability to work remotely with pay or individuals receiving sick leave or other paid leave benefits. According to the original law, these individuals would be covered for any weeks; they are unable to work because of the Pandemic between January 27, 2020, and December 31, 2020, limited to a total of 39 weeks. The weekly benefit amount is the weekly benefit amount authorized under the unemployment law of the State, where the covered individual was employed plus $600. The additional $600 is for a period of up to four months.

The new law changes this by extending the unemployment benefit period from December 31, 2020 to March 14, 2021. The $600 has been reduced to $300 for all weeks of unemployment beginning after December 26, 2020. Additionally, for those who have not exhausted their PUA benefits by March 14,2021, PUA will continue until the 50 weeks are exhausted or until any week beginning no later than April 4, 2021.

Recovery Rebates

The CARES Act contained a provision of $1,200 recovery rebates for individuals. These are considered refundable credits against a taxpayer’s 2020 income tax. These payments are limited by the Adjusted Gross Income (AGI) of the taxpayer. For single individuals with AGI under $75,000, they will receive the full $1,200. For single taxpayers with AGI greater than $75,000, the $1,200 amount is phased out by 5% of the amount AGI exceeds $75,0000 with the amount being reduced to $0 for taxpayers with AGI exceeding $99,000. For individuals filing as Head of Household, the $1,200 amount begins its phase out at $112,500 and is reduced to $0 for taxpayers with AGI greater than $136,500. Married taxpayers filing jointly are allowed a $2,400 rebate, which begins to phase out at $150,000 of AGI and is completely eliminated for taxpayers with AGI exceeding $198,000. There is also an additional $500 per child for qualifying dependent children under age 17. The government will electronically deposit or issue checks based on your most recently filed income tax return. If you have filed 2019, they will use 2019; if you have not yet filed, they will use your 2018 return. 

The new law changes the $1,200 payments to $600 ($1,200 for individuals filing a joint return) and $600 per qualifying dependent children under age 17. These payments will be based on your 2019 income tax filing. Individuals not required to file (they receive Social Security, Railroad Retirement or are a Specified Veterans Beneficiary) may provide information themselves or from the Commissioner of Social Security, Railroad Retirement Board or Secretary of Veterans Affairs.

Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.

This was an executive order passed by President Trump in August of 2020 and defers payment of the 6.2% withholding on employees that earn under $4,000 bi-weekly or the equivalent amount with respect to other pay periods. The deferral is applicable to payroll checks from September 1, 2020 through December 31, 2020. The payments were originally to be deferred only and paid back between January 1, 2021 and April 30, 2021.

The new law allows these amounts to be paid beginning on January 1, 2021 through December 31, 2021.

Regulations or Guidance Clarifying Application of Education Expense Tax Deduction

Teachers are allowed up to a $250 tax deduction “above the Adjusted Gross Income (AGI) line on a tax return. An above the line deduction allows taxpayers who do not itemize their returns to benefit from the deduction and also slightly reduces AGI which is used in other areas of the return such as when computing a medical expense deduction (where expenses must exceed 7.5% of AGI before being considered a deduction).

The new law allows personal protective equipment (PPE), disinfectant and other supplies used for the prevention of the spread of COVID-19 to be counted for purposes of this deduction.

PAYROLL PROTECTION PROGRAM (PPP)

Clarification of Tax Treatment of Forgiveness of Covered Loans

The CARES Act provided if certain conditions were met, proceeds received under the PPP would be forgiven. Typically, an extinguishment of debt gives rise to taxable income. Let’s take an example where a taxpayer owes a credit card company $20,000 and settles the obligation for $8,000. The $12,000 extinguished becomes taxable income and the taxpayer would receive Form 1099-C showing the $12,000. Extinguished debt is not considered taxable income if there is an exception in the Internal Revenue Code. The CARES Act contained a provision classifying forgiven PPP funds as not taxable. The IRS issued Notice 2020-32 which stated that since forgiven PPP funds were not considered to be taxable income, then any expenses paid with those funds would not be considered deductions.

This was never the intent of Congress and the new law specifically allows expenses paid with forgiven PPP funds as deductions.

SIMPLIFIED FORGIVENESS APPLICATION

Recipients of loans of not more than $150,000 shall be forgiven by submitting a one-page certification regarding compliance with the loan terms.

PAYROLL PROTECTION PROGRAM (ROUND 2)

The law introduces a second round of PPP funding referred to as Second Draw Loans.

The eligibility requirements differ from the original PPP requirements:

• Entity cannot employ more than 300 people
• Must demonstrate at least a 25% reduction in gross receipts of the entity during any quarter in 2020 when compared to the same quarter in 2019
• There are different rules for entities that were in business for only part of 2019 or were established after 2019 but prior to February 15, 2020

The maximum loan amount is the lower of 2.5 times monthly payroll or $2,000,000. There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll of $2,000,000.

Forgiveness is the same as round 1 of PPP. Payroll costs must be at least 60% of the total forgiven amount.

Additional Eligible Expenses

This second round of PPP will allow the same expenses as the first round (payroll costs, rent, mortgage interest and utilities) but additionally will allow the following:

covered operations expenditure means a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

covered property damage cost means a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation

covered supplier cost means an expenditure made by an entity to a supplier of goods for the supply of goods that—

“(A) are essential to the operations of the entity at the time at which the expenditure is made; and

‘‘(B) is made pursuant to a contract, order, or purchase order—

‘‘(I) in effect at any time before the covered period with respect to the applicable covered loan; or

‘‘(ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.

Emergency Economic Injury Disaster Loans (EIDLs)

EIDLs were part of the CARES Act. The definition of businesses that are eligible for EIDLs is the same as entities eligible for the Paycheck protection program. These loans are intended to provide small businesses with funds to cover costs in response to the coronavirus crisis. Borrowers request up to a $10,000 emergency advance, which is paid within 3 days after the application is submitted. These funds can be used for paid sick leave for employees unable to work due to the direct effect of the coronavirus, payroll costs during business disruptions or substantial slowdowns, increased material costs incurred because materials are unavailable from the applicant’s original source due to interrupted supply chains, rent or mortgage payments and repaying obligations that cannot be met due to revenue losses. These loans were only available through December 31, 2020. The new law extends this date to December 31, 2021.

EXTENSION OF CREDITS FOR PAID SICK AND FAMILY LEAVE

The Act allows a 100% credit of the qualified sick leave wages. Below is a summary of qualified sick and family leave wages from the U.S. Department of Labor’s website. The new law extends the Families First Coronavirus Response Act from December 31, 2020 to March 31, 2021.

“The Families First Coronavirus Response Act (FFCRA or Act) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The Department of Labor’s (Department) Wage and Hour Division (WHD) administers and enforces the new law’s paid leave requirements. These provisions will apply from the effective date through March 31, 2021.

Generally, the Act provides that employees of covered employers are eligible for:

Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay where the employee is unable to work because the employee is quarantined (pursuant to Federal, State, or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; or

Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine (pursuant to Federal, State, or local government order or advice of a health care provider), or to care for a child (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19, and/or the employee is experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of the Treasury and Labor; and

Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the employee’s regular rate of pay where an employee, who has been employed for at least 30 calendar days, is unable to work due to a bona fide need for leave to care for a child whose school or childcare provider is closed or unavailable for reasons related to COVID-19.”

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Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

There are various entity types available for business. Your business may be structured as a sole proprietorship, partnership, S corporation or C corporation.  As I’ve mentioned before there are also LLCs and also LLPs (limited liability partnerships) but these are generally taxed as one of the first four entities I mentioned and are usually formed for legal liability, not tax issues.

Believe it or not when discussing the tax treatment of health insurance deductions for the owners, each of the four entities has a different tax treatment I’ve always found it a bit strange, but nonetheless the law is the law. I am now going to explain the treatment under each structure type.

C corporation. The treatment of health insurance paid for the owner(s) of a C corporation is very straightforward and simple. It is deducted as an expense of the corporation no different than health insurance premium payments paid for any employee. The owner gets no deduction on their personal income tax return and they do not have to report payments made on their behalf as income. They are treated exactly the same as any other employee of the corporation.

S corporation. The treatment of health insurance paid on behalf of S corporation shareholders if they own 2% or less of the company is exactly the same as it is for owners of a C corporation. If, however, the shareholder owns more than 2% of the corporation, then there is a different treatment. For these individuals premiums paid on their behalf are treated as wages to the shareholder for income tax purposes, but are not however, subject to Social Security, Medicare or FUTA taxes. The amount reported as compensation is the total amount paid for the shareholder, spouse and dependents.

There are limitations on this deduction. The first limitation is the deduction is not available for calendar months the shareholder or spouse are eligible to participate in another employer-subsidized health insurance plan. The second limitation is that in order to deduct the expense on his/her personal return “above the line” he/she must have taxable social security wages from the S corporation equal to or greater than the medical deduction. Above the line means the taxpayer is able to deduct the medical insurance before Adjusted Gross Income (AGI). The advantage to this is that the taxpayer receives the deduction whether or not they itemize their deductions.

I mentioned that wages added because of medical insurance premiums paid are not subject to payroll taxes but there must be payroll wages subject to these taxes in order to get the deduction. This means the shareholder must have wages outside of those added for medical insurance, paid to him/her by the S corporation in order to receive the deduction. For example, let’s say we have a 100% owner of an S corporation. Additionally, let’s say medical expenses paid on behalf of this shareholder, spouse and dependents is $18,000. The $18,000 added to the shareholder’s wages would not be subject to payroll taxes and therefore, the shareholder would have to have additional wages equal to or greater than $18,000 from the business in order to receive the deduction.

The health insurance plan must be owned and paid by the S corporation or the S corporation must reimburse the shareholder or pay the insurance company for a policy in the shareholder’s name in order for the taxpayer to receive the above the line deduction.

Payments made to a more than 2% shareholder’s HSA plan are also treated as wages and added to the shareholders wages.

Partnership. Payments made by a partnership on behalf of a partner that provides services to the partnership are treated as guaranteed payments. Guaranteed payments are deducted by the partnership and reported as income by the partner on his/her tax return. Guaranteed payments are subject to self-employment tax thereby satisfying the rule that the individual taking and “above the line” deduction on their personal income tax return has paid social security tax on an amount of income equal to or greater than the medical insurance premiums being deducted. The health insurance policy must be established under the name of the partnership or must be a direct reimbursement to the partner for a premium being paid. If this condition is not met, the partner will not receive an “above the line” deduction. Similar rules apply in the case of HSA payments. The payments for partners that provide services are included as a guaranteed payments. If the partner is not providing services, then it is considered a distribution (not deductible by the partnership, not included as income by the recipient, however keep in mind, since the partnership did not deduct the expense the partnership income will be higher and lastly, the partner can deduct the HSA contribution on their individual tax return).

Sole proprietorship. Sole proprietors can deduct premiums paid on behalf of themselves, their spouse, dependents and nondependent children under age 27. The individual must not be eligible to participate in a subsidized plan (one which an employer pays a portion of) from an employer of the individual or their spouse. The sole proprietor must have earned income from their business equal to or greater than the medical insurance being deducted. Once again, the government wants to make sure that in order to allow an “above the line” deduction, social security tax must have been paid on income equal to or greater than the medical insurance premiums being deducted.

The policy may be in the name of the business or the individual.

As you can see, the type of entity that you operate your business under can have a significant impact on how and when medical insurance premiums are deducted. I caution you here, as I do with many complicated areas of taxation. If you are an owner of a business and you would like to take an above the line deduction, please seek the help of a tax professional familiar with these rules.

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Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

On Wednesday November 18th,  2020 the IRS issued guidance on the disallowance of otherwise deductible expenses that are paid with forgiven PPP funds.

Revenue Ruling 2020-27 and Rev Proc 2020-51 are the latest releases explaining Notice 2020-32 which the IRS issued on May 2, 2020.

Notice 2020-32 stated that loan proceeds received under PPP which were forgiven were similar to tax exempt income. The Internal Revenue Code states that expenses related to tax exempt income are not deductible. Let’s take an example of a taxpayer borrowing $100,000 from a home equity loan. Home equity interest incurred after 2017 is not tax deductible unless it is for improvements on a home, however, it may be deductible as investment interest. Investment interest is deductible only to the extent of investment income. If the taxpayer incurred $4,000 of investment interest expense but only earned $2,000 of investment income (interest income and certain dividend and capital gains income that are taxed at ordinary (not long-term capital gain tax rates) are considered to be investment income), then only $2,000 would be deductible and the remaining $2,000 would carryforward to future years when additional investment income can be used to allow the deduction. If the taxpayer had $4,000 or more of investment income, then the entire $4,000 of interest expense becomes deductible. If, however, the proceeds were invested in tax exempt bonds, there would be no taxable interest income and therefore none of the interest expense would be deductible. The IRS used this logic to state that the expenses paid with PPP proceeds (payroll costs, rent, utilities and mortgage interest) would not be deductible if the proceeds of the PPP loan are forgiven.

Revenue Ruling 2020-27 gives two examples of taxpayers that received PPP funds in 2020. Both taxpayers used the PPP funds for their intended purpose (payroll, rent, utilities and mortgage interest). The first taxpayer applied for forgiveness of their PPP loan in 2020 but did not have an answer by December 31, 2020 as to whether the loan was forgiven. The second taxpayer did not apply for forgiveness until 2021 but just as the first taxpayer had done, used the proceeds to pay only eligible expenses within the covered period.

Ruling 2020-27 states that since both taxpayers reasonably expected forgiveness then expenses paid with the forgiven PPP funds were not deductible. Keep in mind, even though neither taxpayer had received an answer on forgiveness just the reasonable expectation of forgiveness is enough to disallow the deductions.

You could file for an extension of the return in question, either by March 15th for S corporations or by April 15th for sole proprietorships, partnerships, or C corporations. An extension of time allows taxpayers an additional 6 months to file a return and taxpayers should have answers by the extended due date.

Revenue Procedure 2020-51 explains that a taxpayer that has part of their forgiveness denied may deduct expenses paid with PPP proceeds that are not forgiven. This may be done on either a timely filed 2020 tax return, an amended 2020 return if the original return was filed and did not include such expenses, or on the taxpayer’s 2021 tax return.

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Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

The SBA has developed two forms relating to the Payroll Protection Program (PPP). The forms are loan necessity questionnaires created to ascertain whether borrowers that received $2 million or more of PPP funds actually had a need for the funds.

The Forms are Form 3509, which pertains to For-Profit Borrowers that borrowed $2 million or greater and Form 3510 which pertains to Not-for-Profits that borrowed $2 million or greater.

To be specific, each form begins with the following statement. “The purpose of this form is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application that economic uncertainty made the loan request necessary”.

The Form is due to your lender within ten business days of receiving the Form from your lender.

The For-Profit Form (3509) compares revenues from the second quarter of 2020 to the second quarter of 2019, or if the business did not exist in 2019, to the revenues of the first quarter of 2020. Additional questions inquire about whether your business was ordered to shut down, whether the borrower had to significantly alter its operations, whether a business voluntarily ceased, whether there were any capital improvements, cash on hand at the onset of the pandemic, whether any debt was paid down, were there payments for dividends or capital distributions, were there payments of compensation of more than $250,000 to an individual (annualized over the covered period of the loan) and were funds received from any other CARES Act program beside PPP. There are also questions pertaining to publicly held entities.

The Not-for-profit form (3510) is similar to the for-profit Form. This Form beside comparing revenue to periods inquires also compares expenses from the second quarter of 2020 to the second quarter of 2019, or if the business did not exist in 2019, to the revenues of the first quarter of 2020. The remaining items pertain to  whether your business was ordered to shut down, whether the borrower had to significantly alter its operations, whether a business voluntarily ceased, whether there were any capital improvements, cash on hand at the onset of the pandemic, whether any debt was paid down, were there payments of compensation of more than $250,000 to an individual (annualized over the covered period of the loan), and were funds received from any other CARES Act program beside PPP.

This is a summary of the forms and while I cover the major items, if your company borrowed $2,000,000 or more through PPP, then you should consult with a tax professional to make sure your properly file these forms.

Keep in mind. These forms only pertain to entities (for-profit or not-for-profit) that borrowed $2 million or more form PPP.

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Jeff Skolnick, CPA, M.S. Taxation