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

It is already November and i you are looking to reduce your income tax bill in April as much as possible, what do you do? I am going to discuss some of the best strategies available to reduce taxable income for cash basis taxpayers.

The reason I stress cash basis taxpayers is that accrual basis taxpayers are, by law, required to pick up income when earned (when the service is provided or sale takes place) and deduct expenses as incurred (again when a service is provided or an item is purchased).

Cash basis taxpayers, on the other hand, pick up income as received and expenses when paid. These definitions give the taxpayer some flexibility and I am going to explain how you can take advantage.

Delay Invoicing

I operate my business on the cash basis. I generally send bills in the beginning of the month to my clients. In December I delay sending my bills to at least the middle of the month. Most of my clients take a few weeks to pay their bills and many people are wrapped up in the holidays. This results in receiving more payments in January than in December. Remember if you receive a payment in December (for example December 15th) there is a concept in the law called “constructive receipt” which requires you to include this in income during the year. You are not allowed to hold this and deposit it in January to avoid paying income tax on it.

Prepay Expenses

The tax law allows you to prepay most expenses up to 12 months in advance. This means you can prepay rent, insurance, office supplies, professional memberships, maintenance contracts or software licenses.

Keep in mind if you mail checks on December 31st and they are not received by the company providing the maintenance or by your landlord until January of 2020, then you would receive the deduction and they would not have to pick up the income until next year. If they are cash basis and you pay them and they receive it prior to yearend, then they will have to pick it up as income (see constructive receipt rule previously discussed).

Please also keep in mind that if you prepay expenses this year, you obviously will not be able to take them again next year, although you may very well employ the same strategy next year.

Company Bonuses

Many companies give employees holiday bonuses. If this is something you are considering, make sure you do so before yearend. This will give your company a deduction. There are some companies that give bonuses in January. This is generally done because some key employees would like to delay income tax on the bonus for a year. If you want the deduction before yearend, the bonus must be paid before yearend.

If you are an owner of an S corporation or an LLC being taxed as an S corporation please coordinate with you tax professional to make sure you have taken enough salary to maximize the 20% deduction allowed for self employed business owners. I stress S corporation owners because sole proprietors, partners in partnerships, members in LLCs that are taxed as partnerships and owners of rental real estate are not paid salaries.

Purchase Machinery or Equipment

I never advocate that taxpayers spend money just to spend money, but if you are considering purchasing machinery or equipment in the next few months, why not do it before yearend and take the deduction? If you’re considering a large purchase but need a little extra time to pay, consider using a credit card (more on credit cards very shortly). You must be careful when purchasing something like a passenger vehicle which has depreciation limitations. You are allowed to purchase qualifying business trucks, vans, equipment, office furniture and computers. Please keep in mind that depreciation does not begin until an item is placed in service. In other words, do not pay for a piece of equipment in December that you don’t place in service until January because the deduction is based on not only when the item was purchased but when it was placed in service.

Credit Cards

If you are a cash basis income taxpayer, then anything you charge on your credit card before January 1st will be considered an income tax deduction for this year. Do you recall me mentioning using your credit card to buy you a little extra time to pay? Let me illustrate how you can utilize your credit card to delay making a payment until next year while still receiving an income tax deduction this year. Let’s say you purchase some computer equipment on your credit card on December 28th and place it in service before yearend. Let’s further assume that your billing cycle ends on January 15th and you pay your bill on February 12th. In this example you would be allowed the deduction in the current year although you didn’t actually pay for it until February 12th. Please be aware that depreciation does not begin until an item is placed in service as previously discussed.

Retirement Plans

I know I have discussed retirement plans many times in the past. This should be an indication that I really love retirement plans. They provide for your future and defer income tax. It’s hard not to love them. Retirement plans offer an additional benefit and that is they sometimes allow cash basis taxpayers to take an income tax deduction even though payment is not made until next year. I say sometimes because certain deductions (for instance a 401k salary reduction contribution) must be made by an employee before yearend. There are many other types of retirement plans which may be funded after yearend. Some examples are IRAs, SEPs and profit-sharing plans.

I do want to mention that for years business owners, while they were afforded the luxury of funding retirement plans after yearend, were required to adopt most plans before yearend.  Under the SECURE Act passed on December 31, 2019, this is no longer the case. Employers may now adopt most retirement plans before the due date of their income returns (Including extensions). The one notable exception to this rule are 401(k) plans which must be adopted before yearend. This does create flexibility; however, I still strongly advise you to meet with a retirement specialist before yearend (please don’t wait until the last week of the year) and look at your options. This is very important if you are someone looking for a plan that will allow you to put away more than the $19,000 allowed by 401k of 403b salary reduction contribution plans ($25,000 for those at least 50 years old) and $57,000 allowed by 401k or SEP plans.

Changes in your personal situation

There may be changes in your personal situation that can affect your tax liability.  An example of this might be the child tax credit. There is currently a $2,000 tax credit for children under the age of 17.  If you had a dependent that is age 17 or greater in 2020, then you may be eligible for a $500 credit. 

Medical expenses are not deductible unless they exceed 7.5% of your income in 2020.

Please be mindful of the limit placed on deductible state and local taxes (SALT). These are limited to $10,000 in 2020.

In many instances individuals that have children in college are entitled to education credits either through the American Opportunity Credit or the Lifetime Learning credit.  Each of these credits, however, has income limitations and therefore a credit you are counting on now may not be available to you.  In some instances, it may make sense for a parent to not claim the child as a deduction and allow the child to claim the credit. 

Taxpayers should of course be reviewing their investment activity as well.  If a taxpayer has any capital gains, they may want to start to look at stocks that are not doing as well that could be sold at a loss to offset the gains.

If you have been subject to the Alternative Minimum Tax (AMT) in the past, it is a good idea to take a look at your estimated 2020 income and deductions to see if this tax will apply, although under the since the passage of the Tax Cuts and Jobs Act in December of 2019, this applies to far fewer individuals.

Conclusion

This represents what I feel are the best last-minute income tax saving strategies for cash basis taxpayers. Be careful that you don’t fall into one of the traps I outlined previously. You certainly do not want to spend money with the belief you are going to receive an income tax deduction only to find that you didn’t place an item in service on time or you are subject to passenger vehicle depreciation limitations. Those were not the only traps I mentioned and while I have mentioned the most common problem areas, in no way do I claim these are the only traps. For these reasons I urge you, as always, to consult with a tax professional well versed in this area of the law when deciding your yearend strategies.

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Jeff Skolnick, CPA, M.S. Taxation

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

 According to a survey on the Genworth website, the cost of assisted living facilities are nearing $50,000 per year and nursing homes are edging closer to $100,000 per year. I want to make sure if for some reason you find yourself or a loved one in such a predicament you want to look into the possibility of deducting the costs of the long-term care facility.

Most of us are familiar with the fact that in order to utilize medical expenses as an itemized deduction for Federal tax purposes, medical expenses must exceed 7.5% of our Adjusted Gross Income (AGI) in 2020 (10% of AGI for years after 2020).

One of the items allowed as a medical expense under the tax law is “qualified long-term care services”. Here’s where you have to pay attention to a number of details. This by the way is also why I recommend if you suspect you may be in this situation that you contact a tax professional. This deduction can be worth thousands and thousands of dollars, so you want to make sure you get this right.

The internal revenue code states:

 “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which—

(A)

are required by a chronically ill individual, and

(B)

are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Now that we know the definition of qualified long-term care services, we must now determine the definition of a chronically ill individual.

A chronically ill individual is anyone who has been certified by a licensed health care practitioner as being unable to perform at least 2 activities of daily living without substantial assistance from another individual for at least 90 days due to a loss of functional capacity. An individual may also be classified as chronically ill if one of the aforementioned licensed health care professionals certifies the individual requires substantial supervision to protect the individual from health and safety threats due to severe cognitive impairment.

A licensed health care practitioner is defined as a physician, registered professional nurse or licensed social worker.

The activities of daily living are also defined in the tax code. They are as follows:

Eating

Toileting

Transferring

Bathing

Dressing

Continence

All of the above is a long-winded way of defining how an individual qualifies his/her long-term care facility costs as qualified medical expenses.  Now that you have a rough understanding of the background I will give you the simplified version. If a licensed health care practitioner prescribed the plan, then you will be able to deduct the expenses.

You must of course be very careful. I started out by stating the costs we are looking to deduct can be anywhere from $50,000 to $100,000. As you can imagine the IRS is going to want you to have substantiation if you are audited. This is, however, a deduction well worth taking if you qualify. I have deducted in excess of $100,000 of medical expenses more than once on a taxpayer’s return and it dropped the individual’s income tax significantly. Sometimes the taxpayer’s liability dropped to  $0. Once again, I stress that if you feel you may be able to take advantage of this medical deduction, consult with a tax professional and make sure you do it correctly.

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Jeff Skolnick, CPA, M.S. Taxation

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

On Thursday October 8th, the Treasury and the SBA issued an Interim Final Rule which provides simplified rules of forgiveness for Payroll Protection Program (PPP) loans of $50,000 or less.

Additionally, the SBA has issued a new Form 3508S, for borrowers with PPP loan balances of $50,000 or less to apply for forgiveness.

Simplified Forgiveness Rules

Eligibility

“A borrower of a PPP loan of $50,000 or less, other than any borrower that together with affiliates received loans totaling $2 million or greater, may use SBA Form 3508S (or lender’s equivalent form) to apply for loan forgiveness.”

Exemption from reductions to forgiveness based on reductions to Full time equivalent employees (FTE) or reduction in employee salary or wages

In order to receive full forgiveness, PPP borrowers were subject to the rules I discuss in the next few paragraphs. These are the specific rules that borrowers of $50,000 or less are now exempt from pursuant to this newest interim rule.

To receive full forgiveness small business owners were required to maintain the same number of full-time equivalent (FTE) employees as before PPP proceeds were received. A simplified method was introduced which allows workers to be classified as full-time that work 40 or more hours (1.0 FTE) in the calculation and anyone else to count as 0.5 (FTE). If small business owners prefer, they may calculate FTE by taking the average number of hours each employee worked and dividing by 40. This calculation will obviously be much more difficult (unless the owner uses a payroll service that can easily provide such a report) but may be used if it is more beneficial to the loan recipient.

There is also a reduction that can occur if pay rates decline. This could happen if a small business owner replaces employees with less expensive employees.

This is a very brief overview of loan reduction based on a reduction of FTEs or compensation rate. This one area is tedious. I did want everyone to realize that if you have a reduction in your workforce or compensation rate, then you will have a reduction in the amount of loan forgiveness.

There are rules in place which allow employers who have a reduction in FTEs to restore these FTEs by December 31, 2020 (even if this is outside their covered payroll period).

Additionally, provisions have been put in place to eliminate individuals that were offered their jobs back and turned them down from reducing the loan forgiveness amount. A borrower may exclude any reduction in full-time equivalent employee headcount if:

i. the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;

ii. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;

iii. the offer was rejected by such employee;

iv. the borrower has maintained records documenting the offer and its rejection; and

v. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer

Keep in mind borrowers of PPP loans of $50,000 or less are subject to ALL other documentation rules of forgiveness.

PPP Forgiveness Update

Based on the latest interim rule here is an update on my stance for Loan forgiveness.

At this point almost all lenders have been emailing customers indicating their PPP loan forgiveness applications are ready. I am advising my clients not to run toward forgiveness at this time. The introduction of Form 3508S will require lenders changing their forgiveness applications. Below I have updated my reasons for not rushing toward forgiveness.

There are a number of reasons why I believe small business owners should wait on PPP forgiveness.

• As with the rollout of the PPP, nobody has ever been involved in this program before. If you remember the CARES Act was passed on March 27, 2020 and the PPP started the following week, April 3rd. Many lenders were not ready on day 1 and the process was complicated and confusing during the first 6 or 7 weeks while rules were constantly changing, and lenders and the SBA were still figuring it all out. If you applied for a PPP loan before approximately May 15th and after May 15th you had far different experiences. This interim rule moves the process along, however, lenders still have no experience with the process and I would like them to have some before I advise clients to apply for forgiveness.
• I doubt that this will be the only clarification issued. There was a forgiveness form released. Before the form was even used it was replaced by 2 more forms (an EZ short form and a more simplified long form). Now we have a third, and hopefully, final form. Once again, even if no changes are made few of these forms have been processed to date.
• I believe that almost all borrowers should utilize the 24-week, compared to the 8-week covered period for forgiveness. This allows for greater forgiveness of owners’ compensation and also it allows businesses that may not have been able to restore their full payroll to use payroll for up to 24 weeks. It also allows nonpayroll costs (rent, utilities, or mortgage interest) to be used for 24 weeks, instead of 8 weeks. Most borrowers have either just reached or have not reached the end of a 24-week covered period. Forgiveness applications are not considered late until 10 months after the covered period ends.
• There is no benefit to being forgiven in October vs. being forgiven in November, December or even January. The only thing that happens if borrowers wait and have a portion of the loan not forgiven is that interest has accrued at the rate of 1% over that time period. It is my feeling that the Payroll Protection Program Flexibility Act passed on June 5th allows almost all businesses to achieve total forgiveness which makes the interest a moot point. Even if there is a portion not forgiven, it should be exceedingly small and 1% interest for a few months will be negligible.

I will conclude by stating that we are moving closer to the time when I will start advising borrowers to apply for forgiveness.  Once again, I want lenders to gain some experience over the next month or two.

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Jeff Skolnick, CPA, M.S. Taxation

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

On August 28th, the Treasury issued Notice 2020-65 to provide guidance on the employee portion of Social Security taxes deferred between September 1, 2020 and December 31, 2020.

Recap of the Executive Order

The order 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 order defers the withholding and discusses the Treasury exploring avenues to eliminate this deferred obligation altogether. Meaning the payment would never be paid.

Treasury Guidance

The notice issued on August 28th states that the withholding deferred between September 1st and December 31st must be paid between January 1st and April 30th of 2021. This presumably results in a 12.4% withholding rate in 2021 (double the normal rate) and is therefore merely a delay in paying the tax.

Remaining Questions

There are a number of questions that still remain:

The Executive order requests the Treasury Secretary to explore avenues to eliminate the obligation to pay the taxes deferred. In other words, he would like to see the deferred taxes eliminated, instead of being required to be paid back. Is this possible?

The answer is it is possible, but I am not sure how likely it is. First of all, President Trump would have to win reelection and second a law would need to be passed in order to allow forgiveness. If the Democrats retain the House and/or take control of the Senate, it is unlikely to happen.

What happens if an employee who has had their payroll taxes deferred in 2020, leaves your Company before April 30, 2021?

I have seen no guidance on this, but my fear is that this would become a Company obligation. If the tax deferred must be repaid and the employee is not there to earn wages from which to take the withholding, that possibly leaves the Company on the hook.

What happens if the Company goes out of business before April 30, 2021?

Normally, even if a Company goes out of business, its owners remain responsible for payroll taxes withheld as these are considered trust funds of the government which were never supposed to be used by the business for other purposes. Will the owners remain liable?

At this time, I have no answer for this question, but I am expecting guidance down the road.

Can a company decide to withhold payroll taxes from some, but not all employees? In other words, can they give the employees a choice?

There is no guidance at this time.

Can a Company decide not to defer payment initially, and then change its mind in a few weeks when the law is further clarified?

Unfortunately, at this time there is no answer to this question.

Should your Company choose the deferral?

This is the question everyone has. Currently, the decision is a difficult one. As you can see there are many questions that remain on the subject. I expect that we will see additional guidance issued in the coming weeks and I will pass it along as soon as it becomes available.

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Jeff Skolnick, CPA, M.S. Taxation

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

On August 24th, the SBA issued their latest Interim Final Rule on PPP loan forgiveness. The rule covered 3 areas. The first has to do with owners of a business that have less than 5% ownership. The second and third areas pertain to rent expense. The clarifications under rent expense address situations when a business subleases its space and also when the business leases from a related party.

Owners

Eligible payroll costs for employees include wages, health insurance and retirement funds paid during the covered period. The covered period is 24 weeks from the date loan proceeds were received if they were received after June 4, 2020. If PPP loan proceeds were received before June 5, 2020, then the business has the option of selecting 8 weeks or 24 weeks.

PPP forgiveness limits compensation for any individual to no more than $100,000 prorated over the number of weeks in the covered period. For example, if a business were to select an 8-week covered period, then no employee would be allowed compensation of more than $15,385. This is calculated by taking $100,000 dividing it by 52 weeks ($1,923.08 per week) and multiplying by 8. There is also a second rule that states that owners, even if the 24-week covered period is selected, are eligible for no more than two and a half months of compensation. This is calculated as $100,000 divided by twelve ($8,333) multiplied by two and a half ($20,833).

The Interim rule states owner-employees with less than a 5 percent ownership in a C or S Corporation are not subject to this rule. The rule does not cover partners in partnerships or members in LLCs that own less than 5%. It only covers C and S Corporation shareholders. It also does not address S corporation shareholders that own 2% or more but less than 5%. S corporation shareholders that own at least 2% of an S Corporation have their health insurance added to wages and therefore their compensation, including health insurance, is capped at $100,000 prorated. These owners are allowed an additional amount for retirement contributions. C corporation shareholders are allowed a prorated salary of $100,000 plus health insurance and retirement contributions. A question remains as to whether individuals owning more than 2% but less than 5% of an S Corporation are allowed to prorate compensation and add health insurance along with retirement benefits. The health insurance would still be included their salary, which was the justification given for not allowing it as an additional forgivable amount, however this rule states these individuals are not treated as owners.

RENT

Businesses that have rent expense but sublease a portion of their space are limited on the portion of rent eligible for PPP forgiveness. An example given in the rule discusses a business that pays $10,000 per month in rent and sub-leases a portion of their space for $2,500 per month. In this instance only $7,500 is eligible for PPP forgiveness.

The same logic applies to mortgage interest. If a business sub-leases 25% of its space, then only 75% of the mortgage interest is allowable for forgiveness.

Borrowers that share space with another business “must prorate expenses in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.”

Borrowers taking the home office deduction are limited to the “share of covered expenses deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.”

RELATED PARTY RENT

If a business leases from a related party the rent expense is eligible for forgiveness as long as the rent expense “is no more than the amount of mortgage interest owed on the property during the covered period”.  The rationale behind this rule is that if the related party were applying for forgiveness they would be limited to mortgage interest on the property and therefore the SBA does not want the related lessee to be in a better position than the owner.

In addition, the lease must have been entered into before February 15, 2020.

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Jeff Skolnick, CPA, M.S. Taxation

As most people know the $600 per week Pandemic Unemployment Assistance (PUA) officially ran out on July 31st. While Congress is fighting over the next stimulus bill to pass, the President, yesterday August 8th, passed 4 executive orders. I am sure each will be challenged and there is uncertainty as to when and if some of these orders will be carried out however, I will highlight each of the four.

Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019.  This order directs the Federal Emergency Management Agency (FEMA) to assist states with unemployment benefits. The order mentions that The Department of Homeland Security currently has in excess of $70 billion in emergency assistance funding available in the Disaster Relief Fund. The order directs up to $44 billion be used to pay 75% of PUA benefits. The order also requests states to kick in 25% of this PUA amount from amounts received through the Coronavirus Relief Fund. The order estimates more than $80 billion are available for this purpose. The amount of PUA is reduced from the $600 per week individuals were receiving through the CARES Act through July 31st to $400 per week. Again, the federal government would be paying $300 and each state would be $100. This is scheduled to stop when the $44 billion is exhausted or for the week ending December 6, 2020, whichever is later.

Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. This order 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. Currently the order defers the withholding and discusses the Treasury exploring avenues to eliminate this deferred obligation altogether. Meaning the payment would never be paid.

Fighting the Spread of COVID-19 by Providing Assistance to renters and Homeowners. The CARES ACT had issued a 120-day temporary eviction moratorium that expired in July. This order instructs the Federal Housing Finance Agency (FHFA), in consultation with the Secretary of the Treasury to “review all existing authorities and resources that may be used to prevent evictions and foreclosures for renters and homeowners resulting from hardships caused by COVID-19”.

Continued Student Loan Payment Relief During the COVID-19 Pandemic. On March 13, 2020 student loan interest had been temporarily lowered to 0 percent, additionally payments of student loans were also temporarily suspended. Both provisions have been extended through December 31, 2020.

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Jeff Skolnick, CPA, M.S. Taxation

On Tuesday, August 4th, 2020, the SBA and Department of Treasury issued a list of Frequently Asked Questions (FAQs) regarding forgiveness of Payroll Protection Program (PPP) loans. I have attached a complete copy of the FAQs to this email, and I will now highlight the contents.

The first section covers General loan Forgiveness FAQs. The questions covered in this area state that sole proprietors, independent contractors, and self-employed individuals with no employees file form 3508EZ to obtain forgiveness. They also state that E-signatures may be used and a borrower that applies for forgiveness in a timely manner (within 10 months of the completion of the covered period, either 8 or 24 weeks), is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. In other words when the business is informed of any unforgiven loan proceeds. Interest accrues on any unforgiven portion of the loan from the day the proceeds were originally received.

Keep in mind; I am advising my clients not to run to forgiveness at this time.

The second section covers Loan Forgiveness Payroll Costs FAQs. The first few questions cover timing of expenses. My belief is with the 24-week covered period option; most small businesses will be able to obtain total forgiveness. You can refer to questions 1 through 3 in this section of the FAQs for more detail.

Questions 4 through 7 highlight that gross, and not net, payroll should be used when calculating compensation for forgiveness. That salaries and wages can include tips, commissions, bonuses, and hazard pay. The only limit is each employee is limited to $100,000 on an annualized basis. Also covered are both health care and retirement benefits. The questions state that only costs incurred during the covered period (8 or 24 weeks) may be counted. For group health benefits, this figure is easily obtained from paid bills. Retirement limits may have to be limited to either 8/52 or 24/52 of the 2019 contribution, as most companies will not know their 2020 contribution until the end of the year. I expect to see more guidance on retirement benefits going forward.

Question 8 discusses owner compensation. The law was originally written to allow a maximum of 8/52 of 2019 compensation for owner employees. This amount is generally found on line 31 of Schedule C for sole proprietors and independent contractors. For general partners it is their self-employment taxable income form line 14a of their partnership K-1 reduced by any section 179 expense shown on line 12 of the K-1.The maximum allowable payroll is $100,000 and therefore the maximum allowed was 8/52, or $15,385. The PPP Flexibility Act changed the maximum to 2.5 times the monthly payroll cost. If we use $100,000, then the maximum amount becomes $20,833. This assumes that the small business owner has selected the expanded 24-week covered period. If the owner selects the 8-week period, then only $15,385 is allowed. Businesses can choose either an 8-week or 24-week covered period. I suggest to any Schedule C filer that they take the expanded 24-week covered period and use 100% for payroll. The IRS has ruled that since PPP funds forgiven are not considered taxable, then expenses paid with those funds are not deductible. This may change, however, if the law is not changed, then I would rather see the Schedule C filer use all the PPP for his/her own compensation because that is not deductible on a Schedule C anyway. Let’s take an example of a sole proprietor that capped themself at $100,000 and therefore borrowed $20,833. If the sole proprietor were to use $15,385 as compensation and the remaining $5,448 for rent and the IRS ruling is not changed, then the $5,448 is not deductible. If the sole proprietor elects the 24-week covered period and takes all $20,833 as compensation, then he/she still gets to deduct rent expense.

Question 8 also states that a C corporation shareholder receives not only the compensation as outlined above but also employer contributions on their health insurance and employer contributions to their retirement plans capped at 2.5/12 of the 2019 employer retirement plan contribution.

S corporation shareholders with at least 2% ownership in the corporation are not allowed health benefits. For S corporation shareholders that own at least 2% of the stock, health benefits are included in their W-2 wages and wages are limited to the same amounts as a sole proprietor discussed above. Employer contributions to their retirement plans are capped at 2.5/12 of the 2019 employer retirement plan contribution.

.

Lastly, LLCs are considered disregarded entities. They are legal entities only. For taxation purposes they are treated as either sole proprietorships, partnerships, or S corporations.

The third section covers Loan Forgiveness Nonpayroll Costs FAQs. The first few questions in this section again have to do with timing of nonpayroll expenses and the fact that the covered begins for nonpayroll costs on the day PPP funds were received. Payroll is allowed an Alternative payroll covered period to coincide with a business’s regularly scheduled payroll if the business pays bi-weekly or more frequently. Nonpayroll costs are not eligible for this alternative calculation. This section also appears to clarify that gasoline for automobiles is not considered a utility. It had appeared from an earlier Interim Rule that this would be allowable.

The fourth and final section discusses Loan Forgiveness Reductions FAQs. This section outlines that businesses have until December 31, 2020 to restore Full Time Equivalent (FTE) employees to their February 15, 2020 levels. Below is the answer to what happens if a business attempts to rehire individuals but are turned down. It is the answer to Question 1 of this section of FAQs.

“In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.”

The FAQs also covers wage reductions in excess of 25% also result in a reduction to forgiveness.

I want to start this article off by discussing why I believe it makes sense for almost all small businesses that received PPP funds to hold off just a bit on applying for forgiveness. Let’s start at the beginning. A Payroll Protection Program Loan is an SBA loan. To further clarify it is also considered an Economic Injury Disaster Loan (EIDL). All EIDL loans are SBA loans, however, not all SBA loans are EIDL loans. Also, all PPP loans are EIDL loans, but not all EIDL loans are PPP loans. In other words, PPP loans are a subset of EIDL loans which are a subset of SBA loans. When individuals borrow money from the SBA, it is generally treated as any other loan. The loan is expected to be repaid. The PPP loans contain a specific provision which allows these loans to be forgiven if certain conditions are met.

There are a number of reasons why I believe small business owners should wait on PPP forgiveness.

As with the rollout of the PPP, nobody has ever been involved in this program before. If you remember the CARES Act was passed on March 27, 2020 and the PPP started the following week, April 3rd. Many lenders were not ready on day 1 and the process was complicated and confusing during the first 6 or 7 weeks while rules were constantly changing, and lenders and the SBA were still figuring it all out. If you applied for a PPP loan before approximately May 15th and after May 15th you had far different experiences. Once the system had more defined rules and the lending institutions and SBA had some experience, the process was much smoother.

It is my belief that the same thing will occur on the forgiveness end. There was a forgiveness form released. Before the form was even used it was replaced by 2 more forms (an EZ short form and a more simplified long form). My feeling here is that there can still be changes made to these forms as well. Even if no changes are made none of these forms have been processed to date.

I believe that almost all borrowers should utilize the 24-week, compared to the 8-week covered period for forgiveness. It allows more owner’s compensation and also it allows businesses that may not have been able to restore their full payroll to use payroll and costs for up to 24 weeks. It also allows nonpayroll costs (rent, utilities, or mortgage interest) to be used for 24 weeks, instead of 8 weeks.

There is no benefit to being forgiven in August vs. being forgiven in November or December. The only thing that happens if borrowers wait and have a portion of the loan not forgiven is that interest has accrued at the rate of 1% over that time period. It is my feeling that the Payroll Protection Program Flexibility Act passed on June 5th allows almost all businesses to achieve total forgiveness which makes the interest a moot point. Even if there is a portion not forgiven, it should be exceedingly small and 1% interest for a few months will be negligible.

Lastly, there is currently talk of forgiving all loans under $150k. It may be as simple as borrowers certifying on a 1-page form that the PPP funds were used for their intended purpose. The push for this legislation is because loans under $150k account for 86% of the total loans, but only 26% of the total proceeds. This would allow the SBA and lenders to focus their resources on the remaining 14% of borrowers that are responsible for 74% of the borrowed funds. If this legislation were to pass this would simplify the process for most borrowers.

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

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

On Tuesday June 30th  the Senate passed an 8 week extension of the Payroll Protection Plan until August 8th. The bill will still have to pass the House and be signed by the President. I will update you as soon as possible.

I have also wanted to repost some highlights of the Payroll Protection Program flexibility Act and the loan forgiveness applications. I have previously written on both, however with everything going on there still appears to be some confusion, therefore I have included details below. The section in blue addresses changes made to the Loan forgiveness forms. I added a Section on S Corporation Shareholders. The section in red addresses the provisions of the Payroll Protection Program Flexibility Act.

On Wednesday June 17th, the SBA released a revised loan forgiveness application and EZ application for forgiveness of PPP loans. Additionally, the SBA issued revised guidance on owner’s compensation and its good news!

Owner’s Compensation Eligible for Forgiveness

Most of the changes reflected on the revised application for PPP forgiveness were made to accommodate the changes relating to the Payroll Protection Flexibility Act. The changes made by the new law are shown in red below for your convenience. The big surprise (at least to me) was the change in owner’s compensation. The law was originally written to allow a maximum of 8/52 of 2019 compensation for owner employees. The maximum allowable payroll is $100,000 and therefore the maximum allowed was 8/52, or $15,385. The revised ruling allows 2.5 times the monthly payroll cost. If we use $100,000, then the maximum amount becomes $20,833. This assumes that the small business owner has selected the expanded 24-week covered period. If the owner selects the 8-week period, then only $15,385 is allowed. Businesses can choose either an 8-week or 24-week covered period. I suggest to any Schedule C filer that they take the expanded 24-week covered period and use 100% for payroll. The reason for this suggestion has to do with the “Key Item Excluded” listed below. The IRS has ruled that since PPP funds forgiven are not considered taxable, then expenses paid with those funds are not deductible. I still believe this will be changed, more on that in the “Key Item Excluded” section below. If, however, the law is not changed, then I would rather see the Schedule C filer use all the PPP for his/her own compensation because that isn’t deductible on a Schedule C anyway. Let’s take an example of a sole proprietor that capped themself at $100,000 and therefore borrowed $20,833. If the sole proprietor were to use $15,385 as compensation and the remaining $5,448 for rent and the IRS ruling is not changed, then the $5,448 is not deductible. If the sole proprietor elects the 24-week covered period and takes all $20,833 as compensation, then he/she still gets to deduct rent expense.

Special Rule for S Corporation Shareholders

We learned upon the publishing of the updated loan forgiveness forms that S corporation shareholders can take 8/52 of wages and retirement fund contributions from 2019 (if the 8-week covered period is elected). S corporation shareholders are not allowed to take 8/52 of medical expenses because these are supposed to be included in wages. If S corporation shareholders elect the 24-week covered period then they would be entitled to forgiveness on 2.5 X their monthly payroll cost, which would be there 2019 W-2 and retirement plan contributions.

Revised Loan Applications

The new form is far more streamlined then the original and there is even an EZ form if certain criteria are met. If the borrower can satisfy any of the following 3 requirements, they can file the EZ form:

Are self-employed individual, independent contractor, or sole proprietor with no employees.

Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Covered Period and did not reduce the number of employees; or

Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Covered Period and was unable to operate during the Covered Period at the same level of business activity due to compliance guidance issued in response to the Pandemic

Borrowers not meeting any of these criteria are required to file the long form which has been streamlined down to 5 pages.

Key Item Excluded

Deductibility of expenses paid with PPP forgiven funds. I have discussed in previous writings that the IRS has ruled that since PPP funds forgiven are considered nontaxable income, then expenses paid with these funds (both payroll and nonpayroll expenses) are not considered deductible. 19 senators, in a bipartisan effort, sent a letter to Treasury Secretary Mnuchin declaring this was not the intent of the law and they would like a ruling that allows expenses paid with PPP funds to be deductible even though the proceeds are not taxable. My belief is the easiest way to fix this would be for congress to pass a provision that allows these expenses to be deducted, but as of now this has not happened.

Changes to PPP Loan Proceed Forgiveness

Covered Period

This bill changes the covered period from 8 weeks beginning on the day proceeds are received by the borrower to the earlier of 24 weeks or December 31, 2020.

Restoration date for FTE count

The law, as originally written, allowed employers whose Full time equivalent (FTE) employee count had fallen to restore the workforce by June 30th and avoid a reduction in PPP loan forgiveness. Part of forgiveness is calculated by looking at the total FTEs a business had in place and if that number had dropped, forgiveness of loan proceeds was reduced. Let’s take an example where an employer had 3 full time employees (40 hours per week employees) and 2 part time employees (20 hours per week each). The calculation would assign each full-time employee a value of 1.0 and each of the two-part timers would count as 0.5 FTE. Based on this calculation the employer would have a total of 4.0 FTEs ((3 X 1.0) + (2 X 0.5)). If the employer had received PPP money but based on reduced business hired back 2 full time employees and the two-part timers then the FTE calculation was reduced to 3.0. This would cause a reduction in loan forgiveness, however, if the employer rehired one full-time employee (or 2 part time employees) by June 30th, then there would be no reduction. This law changes the June 30th date to December 31, 2020. Additionally, while the simplified calculation assigns a value of 1.0 to each individual that works 40 hours or more and 0.5 to any employee that works less than 40 hours, businesses can use an actual percentages if it benefits them. Using the actual percentages would assign someone who works 35 hours as 0.875 (35 hours / 40 hours). Again, while this method is more tedious to calculate, businesses may use this method if it is more beneficial than the simplified method.

Additional Section added Based on Employee Availability

The law adds a new paragraph to the existing law which states the following:

(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—

“(A) is able to document—

“(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and

“(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

“(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued 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 during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

The above standard gives employers additional protection against having their forgiveness reduced if circumstances out of their control prevent them from restoring their workforce to pre pandemic levels.

Change to the 75% Payroll cost rule

Previously, to receive forgiveness, borrowers must have spent 75% of the forgiven amount on payroll costs. The law changes the parameters from a minimum of 75% payroll costs to 60%. This means that up to 40% can be spent on nonpayroll costs. Nonpayroll costs include rent, utilities, and mortgage interest.

Change in Loan Deferral Period

The law previously allowed a deferral of loan repayments on any portion of PPP proceeds not forgiven for 6 months after receiving the proceeds. This law changes this to the date on which the amount of forgiveness determined is remitted to the lender or a maximum of 10 months after the last day of the covered period if the borrower does not apply for forgiveness within 10 months after the last day of the covered period.

Change in Repayment Period

The law previously allowed loan proceeds to be repaid over two years at one percent interest. This law changes the repayment period from two years to five years.

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:
https://calendly.com/jeffskolnickcpa/30min

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

On Wednesday June 17th, 2020 the SBA released a revised loan forgiveness application and EZ application for forgiveness of PPP loans. Additionally, the SBA issued revised guidance on owner’s compensation and its good news!

Owner’s Compensation Eligible for Forgiveness

Most of the changes reflected on the revised application for PPP forgiveness were made to accommodate the changes relating to the Payroll Protection Flexibility Act. The changes made by the new law are shown in red below for your convenience. The big surprise (at least to me) was the change in owner’s compensation. The law was originally written to allow a maximum of 8/52 of 2019 compensation for owner employees. The maximum allowable payroll is $100,000 and therefore the maximum allowed was 8/52, or $15,385. The revised ruling allows 2.5 times the monthly payroll cost. If we use $100,000, then the maximum amount becomes $20,833. This assumes that the small business owner has selected the expanded 24-week covered period. If the owner selects the 8-week period, then only $15,385 is allowed. Businesses can choose either an 8-week or 24-week covered period. I suggest to any Schedule C filer that they take the expanded 24-week covered period and use 100% for payroll. The reason for this suggestion has to do with the “Key Item Excluded” listed below. The IRS has ruled that since PPP funds forgiven are not considered taxable, then expenses paid with those funds are not deductible. I still believe this will be changed, more on that in the “Key Item Excluded” section below. If, however, the law is not changed, then I would rather see the Schedule C filer use all the PPP for his/her own compensation because that isn’t deductible on a Schedule C anyway. Let’s take an example of a sole proprietor that capped themself at $100,000 and therefore borrowed $20,833. If the sole proprietor were to use $15,385 as compensation and the remaining $5,448 for rent and the IRS ruling is not changed, then the $5,448 is not deductible. If the sole proprietor elects the 24-week covered period and takes all $20,833 as compensation, then he/she still gets to deduct rent expense.

Revised Loan Applications

The new form is far more streamlined then the original and there is even an EZ form if certain criteria are met. If the borrower can satisfy any of the following 3 requirements, they can file the EZ form:

Are self-employed individual, independent contractor, or sole proprietor with no employees.

Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Covered Period and did not reduce the number of employees; or

Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Covered Period and was unable to operate during the Covered Period at the same level of business activity due to compliance guidance issued in response to the Pandemic

Borrowers not meeting any of these criteria are required to file the long form which has been streamlined down to 5 pages.

Key Item Excluded

Deductibility of expenses paid with PPP forgiven funds. I have discussed in previous writings that the IRS has ruled that since PPP funds forgiven are considered nontaxable income, then expenses paid with these funds (both payroll and nonpayroll expenses) are not considered deductible. 19 senators, in a bipartisan effort, sent a letter to Treasury Secretary Mnuchin declaring this was not the intent of the law and they would like a ruling that allows expenses paid with PPP funds to be deductible even though the proceeds are not taxable. My belief is the easiest way to fix this would be for congress to pass a provision that allows these expenses to be deducted, but as of now this has not happened.

Changes to PPP Loan Proceed Forgiveness

Covered Period

This bill changes the covered period from 8 weeks beginning on the day proceeds are received by the borrower to the earlier of 24 weeks or December 31, 2020.

Restoration date for FTE count

The law, as originally written, allowed employers whose Full time equivalent (FTE) employee count had fallen to restore the workforce by June 30th and avoid a reduction in PPP loan forgiveness. Part of forgiveness is calculated by looking at the total FTEs a business had in place and if that number had dropped, forgiveness of loan proceeds was reduced. Let’s take an example where an employer had 3 full time employees (40 hours per week employees) and 2 part time employees (20 hours per week each). The calculation would assign each full-time employee a value of 1.0 and each of the two-part timers would count as 0.5 FTE. Based on this calculation the employer would have a total of 4.0 FTEs ((3 X 1.0) + (2 X 0.5)). If the employer had received PPP money but based on reduced business hired back 2 full time employees and the two-part timers then the FTE calculation was reduced to 3.0. This would cause a reduction in loan forgiveness, however, if the employer rehired one full-time employee (or 2 part time employees) by June 30th, then there would be no reduction. This law changes the June 30th date to December 31, 2020. Additionally, while the simplified calculation assigns a value of 1.0 to each individual that works 40 hours or more and 0.5 to any employee that works less than 40 hours, businesses can use an actual percentages if it benefits them. Using the actual percentages would assign someone who works 35 hours as 0.875 (35 hours / 40 hours). Again, while this method is more tedious to calculate, businesses may use this method if it is more beneficial than the simplified method.

Additional Section added Based on Employee Availability

The law adds a new paragraph to the existing law which states the following:

(7) EXEMPTION BASED ON EMPLOYEE AVAILABILITY.—During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith—

“(A) is able to document—

“(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and

“(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

“(B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued 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 during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

The above standard gives employers additional protection against having their forgiveness reduced if circumstances out of their control prevent them from restoring their workforce to pre pandemic levels.

Change to the 75% Payroll cost rule

Previously, to receive forgiveness, borrowers must have spent 75% of the forgiven amount on payroll costs. The law changes the parameters from a minimum of 75% payroll costs to 60%. This means that up to 40% can be spent on nonpayroll costs. Nonpayroll costs include rent, utilities, and mortgage interest.

Change in Loan Deferral Period

The law previously allowed a deferral of loan repayments on any portion of PPP proceeds not forgiven for 6 months after receiving the proceeds. This law changes this to the date on which the amount of forgiveness determined is remitted to the lender or a maximum of 10 months after the last day of the covered period if the borrower does not apply for forgiveness within 10 months after the last day of the covered period.

Change in Repayment Period

The law previously allowed loan proceeds to be repaid over two years at one percent interest. This law changes the repayment period from two years to five years.

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 here: https://calendly.com/jeffskolnickcpa/30min

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation