Employee Retention Tax Credit

Another funding source is now available in time for the tax season. The Employee Retention Tax Credit pays out up to $5,000 per employee for 2020, and up to $7,000 per employee for 2021, and can now be used even if you got a PPP forgivable loan. According to the Colorado Restaurant Association, 98% of restaurants qualify for this credit.

To claim the ERTC for 2020, you’ll need to show a 50% decrease in revenue over any quarter, OR, (2) a government mandate impacting their business (i.e., shortened hours, limited seating, etc.)

To claim the credit for 2021, you must only show a 20% decrease, and can claim the credit for Q1 (January-March) & Q2 (April-June).

More details here.

PPP Update and Second Round Draws

Take advantage of a 14-day Paycheck Protection Program (PPP) application window that the SBA opened just for small businesses and nonprofits with fewer than 20 employees, beginning today, February 24^th.    Contact your lender to apply.  You can also find other lenders here or by contacting us.

Wondering if a second PPP infusion will be beneficial for your business? See these 4 reasons why it might be, especially if you are in the hospitality sector.

Also note that the overall deadline of March 31^st for PPP 2^nd draw loans is approaching.

Program updates

• PPP borrowers can set their PPP loan’s covered forgiveness period to be any length between 8 and 24 weeks to best meet their business needs
• PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;
• The PPP provides greater flexibility for seasonal employees;
• Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and
• Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan. 
• Congress affirmed that expenses covered by a PPP loan are now deductible
• Community Development Financial Institutions 
• Initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13.  The PPP will open to all participating lenders shortly thereafter. 

(Source SBA Guidance 1/8/21)

Second Draw 

The principal amount of a Second Draw PPP loan is limited to the lesser of US$2 million or 2.5 multiplied by the average monthly payroll costs for most borrowers or 3.5 multiplied by the monthly payroll costs for borrowers who use NAICS 72–the accommodation and food service industry.  Borrowers can calculate their loan amounts based on payroll costs for calendar year 2019, calendar year 2020, or (for entities) the actual trailing 12-month (TTM) period before the application. This should benefit borrowers whose payrolls have declined during the pandemic.

Revenue Decline

A Second Draw PPP borrower must demonstrate a revenue decline of 25% in any quarter of 2020 over the corresponding quarter OR submit tax returns showing a 25 percent decline in Fiscal Year (FY) 2020 revenue over FY 2019. For this purpose, “Revenue” is defined to mean “gross receipts”.

Source: National Law Review, 1/11/21

Taxation of Grants & Loans

You might think that a forgivable loan and grant funded through the same Act of Congress would be carry the same tax consequences, but guess again: we all know the IRS always keeps things less than straightforward.  Here are some guidelines (with of course a caveat to consult with your tax professional): 

The IRS has confirmed that a grant to a business constitutes gross income under the Internal Revenue Code and therefore is taxable.  This makes sense from the point of view that the grants are meant to fill the gap in revenue due to Covid, but less sense if the amount was used for PPE or other Covid mitigation measures for the benefit  of the public. You might want to check with a tax advisor on the tax treatment of any grant amount used for those measures. 

Meanwhile, for PPP loans that are forgivable, the outcome is more tax neutral.  The cancelled debt is excluded from gross income.  Accordingly, expenses paid with the proceeds are not deductible, but neither is the forgiven loan amount taxable. Treasury guidance on this matter here. 

How to get PPP Loans Forgiven

Guidance and details on PPP Forgiveness is now available.

Work with trusted advisors to set up and keep accurate records. The best way to remain prepared is to standardize your record keeping for your PPP loan and to have all your documents easily accessible. Focus on records for the allowable uses under your PPP loan, such as payroll reports, utility expenses, mortgage interest and rent expenses.  If you need assistance with this, contact us and we can refer you to a great, local, no-fee resource at info@westcolfaxbid.org.

Three PPP Loan Forgiveness Application Forms are now available: 

• Form 3508S (Instructions) –simplified application for borrowers with loans of $50,000 or less
• Form 3508EZ (Instructions)
• Form 3508 (Instructions)

Plan to submit records that can be quickly and easily reviewed by your lender. Remember your lender will have thousands of these PPP forgiveness applications to review, so keep your application concise and to the point. Maintain more detailed records for up to 7 years for any possible additional followup or review. 

When to apply. Borrowers have time to wait to file for forgiveness. Borrowers may apply for loan forgiveness as soon as they have met the eligible use criteria, or, at any time up until 10 months after the end of your covered period (10 months + 24 weeks).

Work with your bank. Wait for guidance from your lender on when to apply for PPP loan forgiveness. Many banks are also waiting for final rulings and anticipated changes to the Paycheck Protection Program. Lenders are building out their own internal systems to process these efficiently and through their websites.

Other tools to assist you through the Paycheck Protection Program (PPP) forgiveness process are available. Watch for new content from trusted sources like the Colorado Small Business Development Centers, the AICPA and your CPA. 

Source: Colorado Office of Economic Development and International Trade verified by the SBA.

On the topic of forgiveness, with PPP changes enacted June 5th, businesses now have 24 weeks to spend towards forgiveness through December 31st.  That gives you more time to convert the loan to a grant (and more now can be used for overhead versus payroll).  

• • This article from Forbes points out that while the PPP loans can be almost entirely forgivable, the fine print reveals some limitations. However, the legislation enacted 6/5 now allows 40% of the loan to be used for mortgage interest, rent and utilities and still be forgiven, with the remainder of 60% required to be spent on payroll.  This Forbes article uses a hypothetical business to share tips like what documents to prepare, the fact that the loans have no prepayment penalty, and any amount forgiven will not be taxed.  It also describes what documents to get ready while waiting for a bank and the SBA sort through glitches in program roll-out.
  • Do you have questions about rehiring or headcount.  For example, do you have to rehire the same employees? Can I reduce compensation of employees and still get forgiveness? What do I do if my employees won’t return to work? How do I meet the headcount requirements (which are now extended to December 31st)? Check out these PPP FAQs on Rehiring Employees with answers to these questions so you can get your full forgiveness.  

Covid-19 Employer Retention & Leave Credits. If you didn’t get the PPP, these retention credits can provide 50% of the qualified wages paid from 3/13-12/31/20 this year.  There are also credits for all small employers who pay sick or family leave.

Last, you might also check out this compilation from the SBDC provides many more resources, and is updated regularly as more information comes in and programs roll out.