|
A Successful Tax PlanMonday was one of the best days I have enjoyed at work in a long time The morning celebration was about the conclusion of a successful tax plan. It was not smooth sailing. The tax plan limped across the finish line battered and bruised but intact. The afternoon celebration was about a struggling client becoming an overnight success. I will write that newsletter soon. It is quite a story! This newsletter is about perseverance as an essential part of tax planning, and is, of course, shared with our clients’ permission. The morning The tax planning process did not go smoothly Initially, the IRS approved the tax plan effective for the Tax Year 2021. That’s good. Great, even. This is a complex tax plan that will enjoy a long-term multi-year payoff worth millions of dollars. I am happy. But… I really needed this to be effective for the Tax Year 2020. $1.5 million for 2020 is serious money. I know that 2021 and future years represent a lot more tax savings than a single tax year, but I want the tax savings to apply to 2020! The IRS said no. The tax plan In this case, advance IRS approval was not optional. It was required by IRS Revenue Rulings and Revenue Procedures. Many tax plans require advance IRS approval. The tax compliance team The other vital part of our tax planning team is our client. These are careful and knowledgeable women who do their due diligence and know when they have reached the limits of their understanding in tax matters. They ask the right questions, consider the answers over several days before responding, and often ask for clarification. The client is a key part of the tax planning team. A complex client Client communications After discussing our tax plan, the client said, ‘Obviously, you and Clay have our best interest at heart, so, yes, we agree with the plan.’ Good client communications are important. Problems 50-50 That standard colors how CPAs and tax attorneys approach tax problems. Clay and I, after discussion, decided that we had an honest 50-50 chance of success. Ironically the Circular 230 “More Likely than Not” standard does not apply when one seeks advance IRS approval. Even so, the 50-50 discussion is always in the background of any tax planning activity. We met that standard. Thank God, with all the facts disclosed, the IRS agreed. It is more accurate to say that, initially, the IRS agreed with us in part but not in whole. The last possible day These very capable women did not have the time or capacity to discuss why this tax plan went from a near 100% IRS approval to a 50-50 within the very strict time limits allowed by the IRS. Clay said, “Steve, you know this client better than I do; you make the call. Do we file for approval or not?” On behalf of my client, I gave Clay the ok to file for an IRS Ruling. It was only a partial victory!! No, this is bad. This is $1.5 million bad. I am not happy. I want 2020 covered in the tax plan. My client deserves every legal break the Internal Revenue Code will give them. I want my client to have that money. I think the law entitles them to the benefits of this tax plan. Back to Clay It seems that if an appeal comes from a tax lawyer, the IRS will have their own tax lawyers review the appeal. Lawyers are persnickety people. There were a dozen minor issues with this plan that any good lawyer could latch onto. I did not want minor issues to cloud the big tax planning picture. I believed if the IRS focused on the big picture, they would allow the plan to apply to 2020. I made my case. The client drafted a really good appeal. We filed the appeal one year after the initial filing on March 31, 2021. Our argument was pedestrian. Simple arguments are not always bad: if the tax plan was legal for 2021, it should be legal for 2020. The IRS agreed. They had all the facts. The IRS was informed of tax issues related to 2020 that were not factors in 2021. They knew the amount of tax money involved. The IRS approved the plan! In their ruling, the IRS was specific, citing areas wherein the Taxpayer should not abuse the IRS Ruling. But the IRS agreed to allow the plan to apply to 2020. I like my job. |
| Visit Our Website: www.srcocpa.com |
|
Steve Richardson & Company, PC |
January 2021 Update – How COVID-19 Legislation May Affect Your Taxes & 6 Key Tax Q&As for 2021
|
|
How COVID-19 Legislation May Affect Your TaxesThe Consolidated Appropriations Act (CAA), signed into law Dec. 27, 2020, provides extensive relief in response to the COVID-19 pandemic, such as another round of “recovery rebate” payments to individuals and an expansion of the Paycheck Protection Program (PPP) for businesses and other employers. The legislation includes some tax relief as well. A brief overview Here’s a brief overview of some of the tax-related provisions that may affect you or your business: Individuals
Businesses and other employers
More details This is just a brief look at some of the most significant tax-related provisions in this 5,500+ page legislation. Contact us for more details on how the CAA may affect you. 6 Key Tax Q&As for 2021Right now, you may be more concerned about your 2020 tax bill than you are about how to handle your personal finances in the new year. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2021. Not all tax figures are adjusted for inflation and, even if they are, they may be unchanged or change only slightly each year because of low inflation. In addition, some tax amounts can only change with new tax legislation. Here are six commonly asked (and answered) Q&As about 2021 tax-related figures: 1. How much can I contribute to an IRA for 2021? If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2020.) 2. I have a 401(k) plan through my job. How much can I contribute to it? For 2021, you can contribute up to $19,500 to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. (These amounts are also the same as they were for 2020.) 3. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? In 2021, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees is increasing to $2,300 from $2,200 for 2020. 4. How much do I have to earn in 2021 before I can stop paying Social Security tax on my salary? The Social Security tax wage base is $142,800 for 2021, up from $137,700 for 2020. That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.) 5. What’s the standard deduction for 2021? The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by significantly increasing the standard deduction and reducing or eliminating various itemized deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800 for 2020). For single filers, the amount is $12,550 (up from $12,400) and, for heads of households, it’s $18,800 (up from $18,650). So, if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t benefit from itemizing for 2021. 6. How much can I give to one person without triggering a gift tax return in 2021? The gift tax annual exclusion for 2021 is $15,000, unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically increases only every few years. These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact us. |
| Visit Our Website: www.srcocpa.com |
|
Steve Richardson & Company, PC |
Newsletter from
Steve Richardson & Company
Certified Public Accountants
July 23, 2020
PPP Loan Forgiveness: Part 5
Contact Your US Senator
Dear Clients and Friends:
Jane and I take our children and grandchildren (all sixteen of us) each summer to enjoy a week in the mountains of Highlands, North Carolina. This trip is one of the annual highlights for our family.
We started our annual family trek to Highlands 44 years ago when we were a newlywed couple, in our twenties. Now, our sixteen-member family starts planning next-year’s trip in October. The logistics of transportation, housing, and feeding a family of sixteen is daunting but fun. The planning itself can be ‘entertaining’ with give and take; stubbornness will occasionally bubble up (the children inherited a stubborn streak from their mother). A suitable summer ‘cabin’ must be secured by no later than November.
The Highlands trip, including the planning, in our family, is a year-round event. Ryder, my 7-year-old grandson, has now become an active agent in planning the Highlands trip. Ryder issued a Highlands video on YouTube to make his planning points known to the family; check it out:
Our trip to the mountains by Ryder Richardson
I’m off work for a week. Wow, do things change in a week!!
The PPP Loans, if under $150,000, may become grants! There is a bipartisan bill (S.4117 – Paycheck Protection Small Business Forgiveness Act) making its way through the Senate.
The highlights:
- Specifically, the bill provides for forgiveness of a Paycheck Protection Program loan that is not more than $150,000 if the borrower submits a one-page form to the lender. This would relieve many small business owners of the current, complex PPP loan forgiveness process, allowing them to keep their focus on their businesses.
- Further, it prohibits any enforcement or other action against a lender relating to loan origination, forgiveness, or guarantee based on the lender’s reliance on certifications or documentation submitted by a loan applicant or recipient.
Here’s how you can help! Whether or not you are a business owner, it is important that you let your senators know that this bill is important to you and small businesses in your community and throughout the country. Follow this link to contact your United States senators.
My scholarly interpretation of this important legal development is, “I need to leave town more often!”
Thanks to all of you! I have fun writing these little missives. I hope you enjoy them.
Sincerely,
Steve Richardson, CPA
Revive Alabama: COVID-19 Cash Grants for Alabama Small Businesses
Newsletter from
Steve Richardson & Company
Certified Public Accountants
July 11, 2020
Revive Alabama: COVID-19 Cash Grants for Alabama Small Businesses
Dear Clients and Friends:
This newsletter is of particular interest to our small business clients in Alabama. If your small business is in another state, similar opportunities may be available to you.
The CARES Act continues to offer financial assistance to small businesses impacted by the COVID-19 outbreak. In prior newsletters we have discussed extensively the Paycheck Protection Program (PPP) Loan and Economic Impact Disaster Loan (EIDL). In addition to these programs, the CARES Act funded programs administered at the state level, as well.
More Financial Assistance for Small Businesses
For Alabama small businesses, the Alabama Department of Revenue is administering Governor Kay Ivey’s Revive Alabama Small Business Grant Program. A small business, for the purposes of this grant, has less than 20 full-time equivalent (FTE) employees; in this case, the FTE calculation is based on 30 weekly paid hours. $100 million of the state’s CARES Act funding is designated for providing cash grants of up to $15,000 to reimburse Alabama small businesses for business interruption expenses that have not otherwise been reimbursed through the CARES Act or other sources.
Act Quickly: Grants Are Awarded First-Come-First-Served
The application program opens July 16, 2020 at noon and is open through midnight on July 25, 2020. I can guarantee you that funds will run out quickly, well before this short one-and-a-half week application window ends!
For Expenses Not Covered by Other CARES Act Program Funds Received
Eligible expenses include expenses incurred due to the interruption of business during the COVID-19 pandemic. This includes but may not be limited to:
- Mortgage Interest.
- Rent.
- Payroll costs (including earnings from self-employment).
- Utilities.
- Personal Protective Equipment (PPE)
No double-dipping! The amount requested from Revive Alabama for COVID-19 business interruption expenses must be reduced by the amount received or expected to be received from the federal Paycheck Protection (PPP) Loan, Economic Injury Disaster Loan, Pandemic Unemployment Assistance (PUA), or insurance payments. This calculation will be made as part of the application process.
Start Now and Be Prepared
We as tax preparers cannot apply for this grant on your behalf. The burden for filing is on you, the small business owner. We are, however, permitted to assist with information needed to establish your online My Alabama Taxes (MAT) account if you do not already have one.
Read the Revive Alabama Resources
Detailed information is available on the Alabama Department of Revenue’s website:
- Revive Alabama: COVID-19 Cash Grants for Alabama Small Businesses
- Frequently Asked Questions about the Revive Alabama Small Business Grant Program
Register for a MAT account
The grant program is only accepting applications through the MAT portal; no applications will be processed by mail or email. Although the grant application portal does not open until July 16th, you should immediately confirm that you have established a secure MAT Account. Each small business applicant must have a MAT account. May businesses will already have one in place, but others will need to apply as soon as possible.
Review your eligible expenses in advance
As funds will be claimed quickly. Before July 16th, identify your eligible, unreimbursed expenses. Taking time to organize and update your accounting records for this purpose is critical. With an opportunity like this, time is of the essence!
Sincerely,
Steve Richardson, CPA
July 2020 Update – Keeping Up With the Net Operating Loss Rules & Charitable Giving in a Time of Crisis
Newsletter fromSteve Richardson & CompanyCertified Public Accountants. |
Keeping Up With the Net Operating Loss RulesWhen a trade or business’s deductible expenses exceed its income, a net operating loss (NOL) generally occurs. When filing your 2019 income tax return, you might find that your business has an NOL — and you may be able to turn it to your tax advantage. But the rules applying to NOLs have changed and changed again. Let’s review. Pre-TCJA Before 2017’s Tax Cuts and Jobs Act (TCJA), when a business incurred an NOL, the loss could be carried back up to two years. Any remaining amount could then be carried forward up to 20 years. A carryback generates an immediate tax refund, boosting cash flow. A carryforward allows the company to apply the NOL to future years when its tax rate may be higher. Post-TCJA The changes made under the TCJA to the tax treatment of NOLs generally weren’t favorable to taxpayers. According to those rules, for NOLs arising in tax years ending after December 31, 2017, most businesses couldn’t carry back a qualifying NOL. This was especially detrimental to trades or businesses that had been operating for only a few years. They tend to generate NOLs in those early years and greatly benefit from the cash-flow boost of a carryback. On the plus side, the TCJA allowed NOLs to be carried forward indefinitely, as opposed to the previous 20-year limit. For NOLs arising in tax years beginning after December 31, 2017, the TCJA also stipulated that an NOL carryforward generally can’t be used to shelter more than 80% of taxable income in the carryforward year. (Under previous law, generally up to 100% could be sheltered.) COVID-19 response The NOL rules were changed yet again under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. For NOLs arising in tax years beginning in 2018 through 2020, taxpayers are now eligible to carry back the NOLs to the previous five tax years. You may be able to file amended returns for carryback years to receive a tax refund now. The CARES Act also modifies the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can now potentially claim an NOL deduction equal to 100% of taxable income (rather than the 80% limitation under the TCJA) for prior-year NOLs carried forward into those years. For tax years beginning after 2020, taxpayers may be eligible for a 100% deduction for carryforwards of NOLs arising in tax years before 2018 plus a deduction equal to the lesser of 1) 100% of NOL carryforwards from post-2017 tax years, or 2) 80% of remaining taxable income (if any) after deducting NOL carryforwards from pre-2018 tax years. Complicated rules The NOL rules have always been complicated and multiple law changes have complicated them further. It’s also possible there could be more tax law changes this year affecting NOLs. Please contact us for further clarification and more information. Charitable Giving in a Time of CrisisThe novel coronavirus (COVID-19) pandemic has created much financial stress, but the crisis has also generated an intense need for charitable action. If you’re able to continue donating during this difficult period, the Coronavirus Aid, Relief, and Economic Security (CARES) Act may make it a little easier for you to do so, whether you’re a small or large donor. Tax benefits From an income tax perspective, the CARES Act has expanded charitable contribution deductions. Individual taxpayers who don’t itemize can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020. “Above-the-line” means the deduction reduces adjusted gross income (AGI). You can take this in addition to your standard deduction. For larger donors, the CARES Act has eased the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI. There’s no requirement that your contributions be related to COVID-19. Careful steps To be able to claim a donation deduction, whatever the size, you need to ensure you’re giving to a qualified charity. You can check a charity’s eligibility to receive tax-deductible contributions by visiting the IRS’s Tax-Exempt Organization Search. If you’re making a large gift, it’s a good idea to do additional research on the charities you’re considering so you can make sure they use their funds efficiently and effectively. The IRS tool provides access to detailed financial information about charitable organizations, such as Form 990 information returns and IRS determination letters. Even if a charity is financially sound when you make a gift, there’s no guarantee it won’t suffer financial distress, file for bankruptcy protection or even cease operations down the road. The last thing you likely want is for a charity to use your gifts to pay off its creditors or for a purpose unrelated to the mission that inspired you to give in the first place. One way to manage these risks is to restrict the use of your gift. For example, you might limit the use to assisting a specific constituency or funding medical research. These restrictions can be documented in a written gift or endowment fund agreement. Generous impact Indeed, charitable giving is more important than ever. Contact our firm for help allocating funds for a donation and understanding the tax impact of your generosity. |
PPP Loan Forgiveness, Part 4
Newsletter from
Steve Richardson & Company
Certified Public Accountants
May 11, 2020
Dear Clients and Friends:
In my last newsletter, Gina got onto me about over-simplifying the FTE discussion. This newsletter will try to rectify that deficiency.
I can guarantee you that my understanding of the CARES ACT and the related Rules and Regulations is limited and flawed. New information is released every day! Whatever is said here is subject to rapid change.
A Full Time Equivalent (FTE) Employee
As defined by the SBA, a full time equivalent employee is:
- A full-time employee is one who works 30 hours per week or more. This is equal to one FTE for each fulltime employee.
- The aggregate of employees who work less than 30 hours per week whose hours, when added together, total at least 30 hours per week. You can add part-time employees’ hours together to get blocks of 30 hours; each block of 30 hours is equal to an FTE.
- Temporary employees, independent contractors (Form 1099) and leased employees are not considered in the FTE calculations.
The SBA, in an effort to get guidance to the public as quickly as possible, borrowed its definition of FTEs from the Internal Revenue Code, Section 4980H.
This defines an FTE. It’s not hard or tricky. It is, however, precise!
FTEs are Important!
If you have a reduction in FTEs, you will need to reduce your eligible costs as follows:
- Divide your average number of FTEs during the 8-week covered period by the lesser of:
- The average FTEs from 02-15-2019 to 06-30-2019, or
- The average FTEs from 01-01-2020 to 02-29-2020
- Subtract 1 from the above calculation. If you have had a reduction in FTEs, this will be a negative number.
- Multiply your eligible costs by the result above and reduce your eligible costs by this number.
There are two ways to calculate the ‘baseline’ FTEs (also correctly called “denominators”). These calculations are in the above bullet points.
- Calculation number 1: The average FTEs from 02-15-2019 to 06-30-2019, or
- Calculation number 2: The average FTEs from 01-01-2020 to 02-29-2020
For example, in a bi-weekly payroll, calculation number 1:
For example, in a bi-weekly payroll, calculation number 2:
Like the above table says, choose the lower denominator or baseline FTE number.
Finally, calculate your 8-week disbursement period FTEs:
The FTE Reduction Calculation
If your 8-week FTEs fall below your baseline FTEs, you will need to do an FTE reduction calculation.
The following shows an example of how this is to be calculated.
Change the facts only slightly, the outcome could be substantially different.
Budget!
I strongly recommend that you set an FTE budget and run these calculations in advance!
Even if you do have a portion of your PPP Loan unforgiven due to an FTE calculation, there may be an out. However, the “out” only works if you have an FTE budget, run the calculations, and know in advance that you have a problem. You can exempt yourself from the FTE reduction if:
- On April 26, 2020, you had a reduction in FTEs as comparted to the number of FTEs on February 15, 2020; and,
- You restore your FTE number back to February 15, 2020 levels not later than June 30, 2020.
A failure to budget FTEs, in this case, is a plan to fail.
Keep Compensation Steady
If individual employee’s compensation is reduced by more than 25% you will need to reduce your eligible cost calculation.
- Determine each employee’s average pay for the first quarter of 2020 and the 8-week covered period.
- For each employee with a reduction greater than 25% of the first quarter 2020 pay, determine the reduction in excess of 25%
- Reduce your eligible costs by the sum of each employee’s excess reduction in wages over the 25%.
- Only count employees who earn less than $100,000 during 2019.
This is not complex math. This calculation does lend itself well to an eligible costs budget spreadsheet. If you are reducing employee compensation, you may want to call me.
Even here there is an exception (a get-out-of-jail-free card): You are exempt from the reduced individual employee compensation reduction if:
- On April 26, 2020, an employee had a reduction in pay compared to their pay on February 15, 2020, and
- You restore their pay back to February 15, 2020 levels not later than June 30, 2020.
What Do You Need to Be Doing?
Calculate you FTEs for your two baseline periods.
Document all eligible costs:
- Payroll records
- Cancelled checks
- Payment receipts
- Account transcripts, and
- Other documentation to verify payments
Make budgets to steer you clear all the way to a 100% loan forgiveness.
Budgets are essential to your success.
Sincerely,
Steve Richardson, CPA
PPP Loan Forgiveness, Part 3
Newsletter from
Steve Richardson & Company
Certified Public Accountants
May 8, 2020
PPP Loan Forgiveness, Part 3
Dear Clients and Friends:
Where does one go on vacation in a time of pandemic? Todd decided that he needed some time off; that I can understand. We have all been working crazy hours, Todd more than most, helping our clients and friends navigate the business and employee benefits related to the CARES ACT.
With Todd out of the office, I think that, maybe, I can escape the brutal proofreading and fact checking; no such luck. Apparently arrangements were made for Gina to do the proofreading in Todd’s absence. Gina has no mercy!
Following is my second draft.
Okay, now I’m on to my third draft. Gina say’s I’m over simplifying the FTEs. I think Gina is correct. The FTEs are too important to skim over. I will follow-up this newsletter with one devoted to FTEs and the entire loan forgiveness process.
PPP Loan Forgiveness Issues
I’ve run across a few PPP Loan forgiveness issues that must be carefully considered if you are to achieve any level of loan forgiveness. Planning and budgeting will be crucial.
Also, I want to address a few income tax issues related to loan forgiveness. If you do not understand what I am trying to say, ask me!
- PPP Loan forgiveness requires a formal letter to your lender requesting forgiveness. It is not automatic.
- CARES ACT Wages, for purposes of loan forgiveness, must consider Full Time Equivalent (FTE) employees.
- If your PPP Loan application had employees whose wages were capped at $100,000, there is a wage limit calculation on forgiveness.
- It may be impossible for self-employed individuals to qualify for Loan forgiveness without creative cost and expense planning.
- There are tax issues of the PPP Loan forgiveness.
These important issues must be considered to make sure that you enjoy the maximum PPP Loan forgiveness. If you need help or advice, ask me! (Or, ask Todd; he actually knows more than I do!)
Formally Request PPP Loan Forgiveness in Writing Before June 30, 2020
A formal letter to your lender requesting forgiveness is required!
A client, being diligent, took the initiative to talk with an SBA official about loan forgiveness. I have since verified this information. It is accurate!
Before any loan forgiveness is possible, the borrower (that would be you) is required to request loan forgiveness in writing. On or before June 30, 2020, you must issue to your lender a formal letter requesting forgiveness. The June 30th date is, for some reason, important to the loan forgiveness letter.
Absent a written request for loan forgiveness, the SBA, according to two different SBA officials, will not forgive the PPP Loan. This is hidden in SBA Regulations and, frankly, most bankers are not aware of this requirement. The SBA has told me that this will be enforced!
Steps to Take
Soon after the 8-week period within which you will need to disburse the PPP Loan proceeds, (which could be well after June 30th for some), reissue the letter as a cover letter with the required documentation to demonstrate compliance with the forgiveness provisions of the loan. The required documentation for your loan forgiveness request should include documents showing: 75% (or more) of the loan proceeds were expended on wages, the number of full-time equivalent employees and pay rates to equal or exceed the base period FTEs (see below), expenditures on eligible mortgage interest, lease, and utility payments.
Make your presentation clear. Organize the data and do the math for the banker. Make the bank’s job easy!
The requirement for a written request is important. Do not miss this critical step!
I understand why the SBA is making this required. The ‘why’ of it does not matter. The requirement is all that does matter. Do not miss this critical step! If you are curious as to why this odd-duck requirement is being enforced, ask me.
CARES ACT Wages
By now I trust all of you understand the correct definition of CARES ACT Wages. If not, refer to prior newsletters or call me. The other critical component of wages is FTEs.
How are Full Time Equivalent employees (FTE) computed?
Neither the CARES ACT nor the SBA offered guidance on how one calculates FTEs. What the CARES ACT did was refer to the Internal Revenue Code (my area of expertise) in Section 4980H.
By that definition, a full-time employee is an individual who works an average of at least 30 hours per week. A full-time equivalent employee is determined by adding the hours of part-time employees on a monthly basis and dividing by 120 [IRC Section 4980H]. Until guidance is received otherwise, we suggest using this computation to determine the FTEs for those employees who work fewer than 30 hours per week. Employees working at least 30 hours per week are counted as full-time employees.
There are two steps for this calculation:
Step 1: What was your FTE count prior to COVID-19? Your FTEs can be calculated on the basis of:
- 2019 reported full time hours, or
- 2020 pre-COVID-19 basis: employee hours paid from January 1, 2020 to February 15, 2020
Step 2: What was your FTE count during the 8-week period in which you must use your PPP Loan proceeds?
I recommend that you do a side-by-side calculation to demonstrate that you have the same FTEs during the 8-week loan period as you did compared to the base period (tax year 2019 or the pre COVID-19, 2020 period).
The Keys to Success!
- Recordkeeping: Keeping excellent hourly records is the key to successfully jumping through this forgiveness hoop. Good, reliable hourly employment records will make planning and budgeting easier.
- Budgeting: Make a budget for wages and FTEs to ensure full compliance with the terms of forgiveness. A budget is simply a tool to ensure success. Do not be surprised by a failure to gain loan forgiveness!
If you do not know how to make such a budget ask me! I will expand on this topic with a more detailed newsletter on FTEs and the loan forgiveness process in general.
Wages Capped at $100,000
For employees in your PPP Loan application with wages capped at $100,000, forgiveness period wages are limited to $1,923 per week for the 8-week loan distribution period. The math is simple: $100,000, divided by 52 weeks is $1,923 a week.
Wages paid in excess of that amount are allowed but must come from other funds and are not a part of the loan forgiveness calculations.
Potential Loan Forgiveness Issues for Some Self-Employed Individuals
An unanticipated math quirk may make it impossible for certain self-employed individuals to qualify for any loan forgiveness!
Self-employed individuals, who report on IRS from Schedule “C”, can be people such as:
- Physicians
- Real estate agents
- Computer geeks and programmers
- This, of course, could be a very long list.
It is not unusual for self-employed individuals to have no wages other than what is paid to themselves. This creates a math problem making the 75% wages requirement difficult. Following SBA guidelines can trap a self-employed individual at 69% of wage calculation. I’ve run across this problem often!
Allow me to illustrate the problem for a self-employed married couple and one of many potential solutions.
Will hiring your spouse work? I hope so. I know that if one follows the SBA guidelines to the letter, no self-employed person will get any loan relief. In my opinion, such a plan, as outlined above, is a good idea. The SBA may think I’m wrong.
This is not the only solution to the issue of being trapped to a maximum 69% of a required 75% CARES ACT wage for a self-employed individual. Somehow wages must be boosted past the 75% required minimum. The only way to do that is to hire someone. Hiring someone means that W-2s must be issued. Frankly, W-2s and payroll taxes are complicated.
If you are self-employed and have a PPP Loan, you really need to call me. This gets complicated fast.
There Are Tax Issues of the PPP Loan Forgiveness
A PPP Loan, which is forgiven, does not create taxable income. In most cases, any forgiven loan will create taxable income. The CARES ACT made sure that a forgiven PPP Loan will not create taxable income. That is good news.
There is a not-so-good part of that news for businesses and self-employed individuals. It is long-standing IRS policy that expenses paid with tax free or tax exempt income are not tax deductible. If your PPP Loan is forgiven, then:
- The wages paid with the PPP Loan are not tax deductible
- The business mortgage interest, rents, or utilities paid with these loans are not tax deductible.
- No expenses paid with the PPP Loan will be tax deductible.
This is a minor problem. The loss of a tax deduction will cost far less than an unforgiven loan.
This is not great news, but it’s not terrible news either. It’s just tax law at work.
Conclusion
The loan forgiveness is not automatic; be careful.
Stay healthy and safe.
Call me if you need help; we are here for you!
Feel free to share my newsletters with whomever you will. Any and all are welcome to subscribe to our newsletter.
Sincerely,
Steve Richardson, CPA
PPP Loan & The Minister’s Housing Allowance (Part 2)
Newsletter from
Steve Richardson & Company
Certified Public Accountants
April 27, 2020
PPP Loan &
the Minister’s Housing Allowance (part 2)
Dear Clients and Friends:
The SBA has made it official: the minister’s housing allowance is a part of wages for purposes of the PPP Loan application.
See the following link to the US Treasury Department’s website, Paycheck Protection Program Loans Frequently Asked Questions (as of April 26, 2020), and look at Question 32:
32. Question: Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?
Answer: Yes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.
One Issue Still Remains
There is no flat statement that the minister’s housing allowance is also a part of wages for purposes of PPP Loan forgiveness, although I strongly suspect that we will have clarity on this issue soon. Based on the above response to Question 32, the SBA/US Treasury may believe that this issue is fully resolved.
Even without clarity on forgiveness, with a bit of planning, the forgiveness related to the minister’s housing allowance can be made a non-issue. During the eight weeks of the PPP Loan spending cycle, do not pay housing. Convert all housing to normal wages. Subsequent third- and fourth-quarter tax planning can make the related tax issues more manageable.
Sincerely,
Steve Richardson, CPA
PPP Loan Forgiveness
Newsletter from
Steve Richardson & Company
Certified Public Accountants
April 22, 2020
PPP Loan Forgiveness
Dear Clients and Friends:
My Mistake!
I made a mistake in my last newsletter. Employer-paid Social Security, Medicare, and federal unemployment taxes are not CARES ACT wages for PPP Loan forgiveness purposes. I just assumed that since these employer taxes are CARES ACT wages for the purpose of getting the PPP Loan that they would be part of the loan forgiveness calculation. Wrong!
My first mistake was in assuming! When the government writes the rules, it is against the rules to assume anything.
Every day my understanding of the PPP Loan forgiveness rules evolves.
Housing Allowance
My understanding of housing allowance as a part of the CARES ACT is also evolving.
I’ve made compelling arguments that minister’s Section 107 housing allowances are ‘wages’ for purposes of the CARES ACT.
Did I really win?
I actually won that argument with a loan underwriter – once! But he told me, in no uncertain terms, that it may be wages for the PPP Loan but, it is, not wages for the PPP Loan forgiveness. Apparently there is a more definitive list of CARES ACT wages for the loan forgiveness than there is for the loan application.
The bottom-line: housing allowance is not CARES ACT “wages” for PPP Loan forgiveness. That is unlikely to change before June 30, 2020.
Amy
Amy Foster proofread this short memo; Amy is my trusted colleague and cohort. In her sage voice, she said, “Wait until tomorrow to mail this out; you know it will all be different by then.”
She has a point.
Sincerely,
Steve Richardson, CPA
New PPP Loan Funding And The Loan Forgiveness
Newsletter from
Steve Richardson & Company
Certified Public Accountants
April 20, 2020
New PPP Loan Funding and the Loan Forgiveness
Dear Clients and Friends:
Many of us have received the Paycheck Protection Program (PPP) Loan. Those of us who have not, do not despair: there is another round of funding expected from Congress.
A Potential Problem With the New Funding
There is a potential problem with this second round of funding!
The first round of PPP Loans issued are widely reported to have been “misused.” Misused is a polite code word for ‘fraud and theft.’ When you toss $349,000,000,000 into a loan fund that is, by design, intended to get to small businesses quickly, fraud and theft are inevitable.
As lenders well know, if it is not too widespread, fraud and theft can be a simple cost of doing business. The real problem seems to be that some of our major national and regional banks may have willingly facilitated the “misuse” of these relief funds. I will not name any names here; that’s not my job. If you want to know, read a few of our national newspapers.
The culpable banks have been mentioned in the media. The news reports that these banks are, ‘playing favorites’, ‘limiting access to the PPP Loan program’, and ‘disregarding SBA rules’ to maximize bank profits over service delivery to small businesses. I suspect that the problems with these large banks run deeper.
Proverbs
I have a few proverbs reasonably well known to my clients and friends. One of these proverbs is this:
‘In a crisis, the bank is not your friend’.
Forgiveness!
The PPP Loan is a loan. (Notice there is a period at the end of that sentence!) This is a LOAN! It’s a loan until it is forgiven. Pay attention! You do not know this stuff as well as you may think. I know I didn’t and don’t. There is a big hiccup!
The loan forgiveness requires very specific behavior! The forgiveness requirements are not obvious! Pay attention! There is stuff here we need to learn.
8 Weeks
The loan must be used within an 8-week time frame beginning on the day that the loan hits your bank account. Do not press your timeline. I suggest that you complete your spending plans in 7-weeks, 7-and-a-half at most.
75% Must Be Spent On Wages
Again, I suggest that you spend more than 75% on wages and try not to cut too fine a line on the definition of wages. Wages, in the CARES ACT, has a precise definition. There are a few simple rules:
- If it goes on a W-2 (in Box 1 “Wages”), the CARES ACT will treat this as ‘wages’.
- If it goes on a Form 1099 for a contractor it is not wages!!! If you have a question about this, we are happy to help.
The W-2 wages versus a 1099 contractor distinction is clear!
Do not make that mistake!
The CARES ACT will allow other items to be wages:
- Employer-paid Social Security and Medicare taxes are ‘wages’.
- Employer-paid health insurance: this does not include the portion that is paid by the employees.
- Employer-paid portion of certain retirement plans: 401k plans, SIMPLE IRA, SEP IRA.
Correction from original newsletter! Employer-paid Social Security, Medicare, and federal unemployment taxes are not CARES ACT wages for PPP Loan forgiveness purposes. I just assumed that since these employer taxes are CARES ACT wages for the purpose of getting the PPP Loan that they would be part of the loan forgiveness calculation.
Again, I urge caution. Be well above 75%. Complete the spending within the required 8-week period of time. Be super cautious: I recommend that 100% of the PPP Loan be spent on wages within the required time frame. This means that there will be fewer questions to ask upon forgiveness time.
75% Must Be Spent On Wages – THE HICCUP!!
There is a big hiccup in the 75% spent on wages rule!
The employee head-count must be the same or higher than the number of employees showing on your PPP Loan Application!!
The employee head-count
The employee head-count is a very big deal! If you spend 75% of your PPP Loan on employees, within the 8-weeks as required, and fail your employee head-count, your loan will not be forgiven!!
If you fail your employee head-count, your loan will not be forgiven!
The solution is simple: Do not fail your employee head-count!
What are the head-count rules?
Here begins the problem: the SBA hasn’t told us the rules. We really don’t know.
Here’s what I think the rules are:
The number of employees shown on the PPP Loan Application, at least with the underwriters we have worked with, is reconciled to the number of W-2s issued in 2019.
The Problem!
The rules to count employees necessary to get the PPP Loan and the rules to have the loan forgiven are not the same!
The CARES ACTS created the PPP Loan for the single purpose of keeping people off unemployment. Who gets unemployment and who gets a W-2, are subject to different rules. Getting the loan approved and having the loan forgiven are, likewise, going to be subject to different definitions of ‘who is an employee’.
We will be required to do some sort of ‘full-time’ equivalence (FTE) calculation to find out who is an ‘employee’ for purposes of loan forgiveness. This is a different definition of an ‘employee’ from that which was used to obtain the loan and will cause a lot of PPP Loans to be unforgiven.
My Advice
Make sure that, at the end of your 8-week spending period and again, at the end of June, that you have the same number of employees (or more) and that they are paid the same wages (or more) than they were paid prior to the COVID-19 crisis.
I am the first to admit that my advice is over-cautious. CPAs are cautious creatures.
You Can Spend Up to 25% of the PPP Loan On Select Overhead:
- For the mortgage on business property, but only for the interest portion
- And the mortgage had to be in place on February 15, 2020.
- For business property rent or lease
- Must have a current lease document in effect prior to February 15, 2020
- No advanced or pre-payments are allowed
- And, for business utilities.
Conclusion
These are the rules as I understand them today. I promise that next week, my understanding will be different. You can 100% guarantee significant changes are coming as these rules evolve.
I recommend caution and more caution! I recommend using more than 75% on wages. I recommend that you pay close attention to the employee head-count. I recommend that 100% of the loan be expended well within the 8-week time prior allowed.
If you need advice, please email me at: SteveR@srcocpa.com
Sincerely,
Steve Richardson, CPA