We have summarized some key information of the newly passed tax acts and measures the Government has recently taken to stimulate and provide relief to the economy, i.e YOU! Most of the information below differentiates between individuals vs business owners. NOTE: The FBI has issued a warning regarding an increase in potential fraud scams during this time. Be on high alert and do not give anyone information over the phone and be very leery of any emails.
There are many nuances to this legislation. For more specifics, please contact Archford. We hope you and your family are doing well and staying healthy!
The forgiveness application is finally here – key items are summarized below:
- 8 weeks- starts from day you received fund OR you can choose the alternative which allows you to start the 8 weeks from date of first payroll following the disbursement!
- Payroll costs are incurred OR paid (incurred must be paid on next payroll after covered period ends)
- No prepayments of mortgage interest are allowed
- Does not address prepayments on rent or utilities, assume follow rent agreement which would not allow for prepayment
- Rent, interest and utilities can be paid OR incurred (if incurred must be paid on next billing date)
- EIDL Advance amounts are deducted from the forgiveness amount
- Asks for # of Employees at time of loan application and at time of forgiveness application
- As expected, each individual is capped at $15,385 for the covered period
- For owner-employees and self-employed, your compensation allowed for forgiveness is the LOWER of 2019’s 8 week equivalent compensation or 2020’s 8 week pay capped at $15,385. So if an owner was going to pay themselves a bonus to achieve the 75% payroll criteria, this will only help if they paid themselves the same amount in 2019. This is NOT what we anticipated. What they have not clarified is who is an owner-employee. More to come.
- Computation of average weekly FTE during covered period compared to- elect 1) 2/15/19-6/30/19, 2)1/1/20-2/29/20 or 3)seasonal 12 weeks between 5/1/19-9/15/19- exempt from this if Safe Harbor applies
- Safe harbor- if reduced FTEs between 2/15/20 and 4/26/20 and restored by 6/30/20 to same FTEs at 2/15/20
- FTE = 40 hours, use average number of hours per week divided by 40 or simplified method = 1 for anyone 40 hours, .5 for anyone under
- Exceptions: FTE includes any position made written offer to rehire and was rejected by the employee and includes any employee fired for cause, voluntarily resigned or reduced their hours
- If reduced wages by more then 25% and did not restore by 6/30/20, need to determine forgiveness reduction
- Documentation for rent- Copy of current lease agreement or lessor account statements verifying eligible payments
Anyone paying time off through the CARES ACT, those payroll costs are not allowed to be included as payroll costs for the forgiveness of the PPP loan.
If you find yourself needing more payroll costs to meet the 75%,
- Pay a Bonus or give hazardous pay (do not pay anyone over $15,385 for the 8 weeks)
- Make your retirement plan matching and profit sharing contributions now
For a copy of the application, click here.
How to Record Your PPL Loan and EIDL Grant
Step 1- If you created a separate bank account for your PPP funds, add a new bank account, called PPP Account. Record the initial deposit to the new loan account you will set up in step two.
Step 2- Your PPP loan will need to be set up as a loan until the amount of forgiveness is granted. Create a new loan account (liability account) called PPP Funds.
Step 3- Every transfer between your PPP Account and your operating account will just be recorded as a transfer.
Step 4- Any expenses paid for using the PPP funds, record to the proper expense category- payroll, taxes, utilities, rent, etc.
Step 5- Once all or a part of the loan is forgiven, you will need to record a journal entry to move the forgiven amount from the loan account to a new “other income” account, called PPP Forgiveness.
Step 1- Your EIDL proceeds that were received as a grant should be recorded as other income. Create an other income account called EIDL Funds.
Step 2- Your EIDL proceeds that were received as a loan should be recorded as a new loan account, a long-term Liability, called EIDL Funds.
Step 3- Any expenses paid for using the EIDL funds, record to the proper expense category.
Did you get funded? Below are guidelines to follow if you are going to request forgiveness of your PPP Loan. The full loan amount + accrued interest can be forgiven IF you follow these SBA guidelines:
- Timing – the funds need to be used within 8 weeks starting on the date your bank makes the first PPP funds available for use
- Payroll costs– 75% of the loan needs to be spent on payroll costs, which include salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).
- Full-time Employees and Wages – Forgiveness could be reduced if you reduce the number of full-time employees or reduce their wages by more than 25%. You have until June 30, 2020 to restore your full-time employees and salary levels for any changes made between February 15, 2020 and April 26, 2020. If the business is able to re-hire employees and restore salaries by June 30, 2020, the business is not required to reduce the loan forgiveness.
- Rent– payments under a lease agreement in force before 2/15/2020
- Utility payments– electricity, gas, water, transportation, telephone, and internet service for which service begin prior to 2/15/2020
- Interest – Interest payments can be for any debt obligation that is a liability of the borrower incurred before 2/15/2020. It does not include payments or prepayments of principal. The Act does stipulate however that the underlying debt must be a “mortgage on real or personal property.” This would include debt on real property that is secured by a traditional mortgage lien as well as working capital lines of credit and other indebtedness where a UCC-1 is filed on the borrower’s personal property. This definition does not appear to include unsecured debt.
Sole proprietors/ Schedule C – the following expenses during the 8 week measurement period will be considered:
- Payroll costs up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits (health/retirement) for employees (but not owners)
- Owners compensation replacement, calculated on 2019 net profit; with forgiveness limited to eight weeks’ worth (8/52) of 2019 net profit.
- Interest on mortgage obligation on real or personal property (on loans made on or prior to 2/15/20), to the extent they are deductible on Schedule C
- Rent payments on lease agreements in force before 2/15/20, to the extent they are deductible on Schedule C
- Utility payments under service agreement dated before 2/15/20 to the extent they are deductible on Schedule C
You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Schedule C for them to be a permissible use during the 8 week measurement period. 2020 expenses may not be considered for the calculation of this loan (for those in business in 2019 and who filed or will file a 2019 Schedule C), due to the lack of verifiable documentation on expenses during that period. MORE GUIDANCE will need to be used for those self-employed in 2020 and not for 2019.
We expect further guidance and we will continue to keep you informed as we learn more.
You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan.
The forgiveness portion under the PPP program will not be treated as taxable income to the borrower. However, the IRS has indicated the expenses attributed to the forgiveness portion will not be allowable deductions. Any amount not forgiven will be subject to a 1% fixed rate, 2-year period with no prepayment penalties. All payments are deferred for 6 months after disbursement date, but interest will accrue over this period.
How will they compute this reduction???
Reduction based on reduction of # of employees
Payroll cost X Average number of FTEs per month for the 8 weeks 1) Average # FTEs per month from 2/15/19-6/30/19
2) Avg # of FTEs per month from 1/1/20-2/29/20
*FTE = 1 employee that worked at least 30 hours in a week (SBA has not released guidance on what FTE is, we are presuming 30 hours)
Tip: If employee does not want to come back to work, you can hire a new employee, the rule does not indicate you have to rehire the same person, just an FTE. If increasing an employee’s hours to cover a lost employee, pay attention if it does not put them over the 30 hours or they were already over the 30 hours.
Reduction based on salaries
Payroll costs — for any employee not earning more than $100k a year whose wages were reduced more than 25% of Quarter 1 wages, your total payroll costs spent during 8 weeks is reduced by the amount of their pay reduction greater than 25%.
*The preliminary guidance compares an eight-week period to a three-month period, so we expect further guidance to clarify the calculation.
Tip: Wages include salary, commissions, or similar compensation. We believe bonuses are similar compensation and will be allowed for this computation. They will review at individual employee level, not just in total. Any employee over $100,000 will not be included in this reduction calculation.
Forgiveness will be submitted to the bank servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The bank must make a decision on the forgiveness within 60 days.
Be sure to have good documentation of the use of funds. Creating a separate bank account for these proceeds and withdrawing the funds only for each of the qualifying expenditures will help with recordkeeping. Documentation to support payroll costs will include payroll tax filings and state income and unemployment insurance filings. Documentation to support mortgage and utility costs will include canceled checks, payment receipts, transcripts of accounts, or other documentation providing verification of payment.
PPP and EIDL
You can apply for both loan programs. If approved for both, keep in mind the proceeds must be used on separate expenses. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
Families First Coronavirus Response Act (FFCRA)– Paid Leave
- Starting April 1st, employees can receive up to 80 hours of paid sick leave. (Each situation may differ as to the amount of pay to be received.)
- Employees can receive up to an additional 10 (ten) weeks of expanded paid family and medical leave, if caring for child whose school/daycare is closed due to COVID-19.
- Employers with 500 or fewer employees will receive 100% reimbursement for wages and health insurance costs for paid leave through payroll tax credits and/or through refunds from IRS.
- Employers 50 employees or less may qualify for exemption from this requirement.
- Recovery Rebate – Americans will receive a one-time direct deposit of up to $1,200, and married couples will get $2,400, plus an additional $500 per child under 17, if income is less than $75,000 for individuals and $150,000 for married couples. Money is expected to go out by April 6th.
- Retirement Fund Withdrawals
- The bill waives the 10% early withdrawal penalty for 401(k) distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1 for individuals under 59 ½. Anyone can take the maximum $100,000 withdrawal without penalty and no taxes will be withheld from the distribution (assuming have $100K vested balance). Pre-tax contributions that are distributed would be subject to income tax. The CARES Act permits any income tax owed to be spread out over three years unless the individual elects to the contrary. The amount of the coronavirus-related hardship distribution may be repaid within three years of the date the distribution was originally received. Such repayment may be made in one or more payments (with no required minimum repayment) over the three-year time period.
- The Act also increased loan amounts that can be taken against retirement accounts to $100,000. $50,000 is the normal maximum loan amount but if the plan is amended to allow the CARES Act a participant can take a loan up to $100,000. If the borrowing participants elect not to repay the loan, such distribution will be included in his or her income ratably over a three-taxable-year period beginning with the taxable year in which the withdrawal was taken.It also waives the required minimum distribution rules for IRAs, 401(k)s and certain other retirement plans for 2020.https://news.bloomberglaw.com/employee-benefits/insight-who-cares-retirement-plan-withdrawals-ok-if-youre-impacted-by-coronavirus
- Expanded Unemployment Insurance – extended from 3 to 4 months, and provides temporary unemployment compensation of $600 per week, in addition to the same regular state program payments. It also extends UI benefits through Dec. 31 for eligible workers.
- Charitable Deductions – Cash contributions of up to $300 to qualifying charities will be deducted “above the line” in computing adjusted gross income if you do not itemize your deductions. If you do itemize, the Act increased your ability to deduct your donations up to 100% of your adjusted gross income for 2020.
- College Loan Deferrals – loan and interest payments can be deferred through Sept 30th without penalty for all federally owned student loans.
- Net Operating Loss (NOL) Carryback – NOLs will temporarily be permitted to be carried back for up to 5 years. Losses on 2018, 2019 and 2020 will be permitted to be carried back. Any carryforwards can offset 100% of the taxable income, as opposed to the 80% previously allowed. And the cap of $250,000 if single or $500,000 if married is also temporarily halted.
- Paycheck Protection Program- Small businesses forgivable loans:
- Companies with 500 employees or fewer that maintain their payroll during coronavirus can receive up to 8 weeks of cash-flow assistance.
- If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
- If eligible, a business can receive a loan for 2 ½ times the average monthly payroll for preceding 12 months, excluding some highly compensated employees (amounts greater than $100,000). Payroll includes wages, tips, PTO, health insurance premiums, retirement benefits and state and local taxes.
- These loans will be unsecured and do not require personal guarantees.
- SBA Disaster Relief loans can be converted to a forgivable Paycheck Protection Loan.
- The PPP loans will be applied for through a local SBA lender.
- The forgiveness application will need to be submitted after June 30th and will include computations of FTEs and require supporting documentation of how utilized the proceeds.
- Download the Final PPP FAQs
- Download the Small Business Guide
- Additional Bonus Depreciation – Qualified Improvement Property for interior improvements made to nonresidential buildings after the building was placed in service is reduced to 15 years, and therefore eligible for 100% bonus depreciation. This change is retroactive to January 1, 2018. Therefore, taxpayers should file amended returns and reap the benefits of the accelerated depreciation.
- Paycheck Protection Program- Small businesses forgivable loans:
- Payroll Tax Credit & Payment Deferral:
- If a business suspends or closes but continues to pay its employees, a 50 percent refundable payroll tax credit on wages paid up to $10,000 will be available. You cannot receive both this credit and the Payroll Protection Program loan.
- Employers can also defer 100% of the payment on their 6.2% share of Social Security tax through December 31, 2020 until December 21, 2021 (50%) and December 31, 2022 (50%).
- If you take out the Payroll Protection Program loan, you are not eligible for this deferral.
- Interest Expense Deduction Limitation – the net interest deduction limitation (which currently limits a business taxpayer’s ability to deduct interest paid) is increasing from 30 up to 50 percent of EBITDA for 2019 and 2020. This will increase liquidity for those businesses with interest-bearing debt during the pandemic.
Eligible businesses may qualify for a loan of up to $2 million with 3.75%. These loans are collateralized and personally guaranteed. SBA applies a “credit elsewhere test” meaning if the guarantor has greater cash and marketable securities on their personal financial statements than the loan request, they may be ineligible.
- Emergency Grants – Businesses that apply for disaster loans can get an immediate advance of up to $10,000. It can be used to cover immediate operating costs. It is not required to be repaid, even if the loan is denied.
Tax Filing Deadline Extended
- Federal Income Tax Returns that were due April 15th have been extended to July 15th.
- Quarter 1 2020 Estimated tax payments that were due April 15th were also extended until July 15th. And they have recently extended Q2 payment due June 15th to July 15th.
- 2019 IRA and H.S.A. contributions that were due April 15th are also extended to July 15th.
- Illinois extended the tax return filings and payments that were due April 15th to July 15th, however 1st and 2nd quarter estimated payments for 2020 are still due April 15th and June 15th.
- Missouri has also extended tax return filing and payment to July 15th. They also extended April 15th estimated tax payments for individuals and corporations to July 15th.
We also have linked helpful resources here: