https://windes.wistia.com/medias/4h5z8dg701?embedType=async&videoFoam=true&videoWidth=640
This informative webinar covers the “second-draw” PPP loans available for small and “hard-hit” businesses. Topics include expanded qualified expenses for PPP loan forgiveness, review of the deductibility of forgiven PPP-loan-funded proceeds, and additional considerations on the forgiveness application, along with other key provisions outlined in the new tax bill.
This webinar was recorded on January 20, 2021.
Click HERE to view the presentation slides.
Host & Moderator
Guy Nicio, CPA, MST is a Partner and Chairman of the firm’s Tax department. He has more than 20 years of public accounting experience and focuses on tax planning, compliance, and consulting with start-up to middle-market businesses and their owners.
Presenters
Bella Wang, CPA, MST is a Tax Director and has more than 20 years of experience in public accounting and specializes in tax planning, consulting, and compliance.
DISCLAIMER: The information presented in this webinar is intended as general information and does not constitute tax or legal advice. You should always consult your tax, legal, or financial advisor for direction regarding your specific situation.
Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at taxalerts@windes.com.
Guy Nicio:
Welcome everybody, and thank you for joining us at today’s webinar which we entitled; COVID-19 Aid Bill, What Does It Mean For You? Presented by Windes. I guess I have to thank everyone for taking time out to be with us today, since I know you could be watching and maybe you have been watching up to this point.
In case you haven’t been paying attention to the news, today is the inauguration of President Joe Biden Jr. It’s a big day for all of us in this country, so hopefully it’ll all go smoothly. I think so far so good, on the front of being peaceful, so that’s good news. But again, thanks for all for taking time out of your day to join us to find out what’s new in the PPP world.
Before we get onto that, I just want to tell you a little bit about ourselves. Myself, my name is Guy Nicio. I’m a partner here in Windes and tax practice and I’m the chairman of our tax department. I’ve been with the firm for over 20 years. And I serve clients of all industries middle-market, as we are pretty much a middle-market service firm, industry agnostic. And we’re a full-service accounting firm, which has audit tax as well as retirement planning services for ERISA plans.
Bella Wang is going to be the technical guru on today’s webinar, she’ll be presenting the content. And she leads our effort in the PPP loan consulting and forgiveness calculation work we’ve been doing. She’s a tax director with Windes and she’s also got over 20 years of experience in public accounting. She specializes in tax planning, consulting, and compliance for large and midsize domestic and international businesses as well as high-net-worth individuals.
So just a brief introduction about what the agenda’s going to include today. This is the second round of PPP. But just to back up a step, if any of you are new to this topic. Obviously, this stems originally from the CARES Act that originally authorized $349 billion for Paycheck Protection Program, way back when it was initially provided to us as a means to provide some benefits for businesses that were struggling from the current pandemic.
There were a number of follow-up legislative items that happened to enhance that funding. There were a lot of clarifications along the way. We did webinars on all of those. And so, what we have today is really round two, and this is all from the Consolidated Appropriations Act of 2021. This is going to provide for new second draw loans for smaller businesses whose gross receipts have dropped, and supplemental funding for original PPP loans where the loan amount would have changed. But Bella will go over all that technical detail during her presentation.
So we’re going to talk about this second round: who qualifies, changes to the PPP, income tax implications, employee retention credits; we’ve got some favorable changes in employee retention credits and you’ll find out more about that during the webinar as well and then other key provisions to keep in mind. But before I turn it over to Bella, just a couple of housekeeping items.
For anyone who has questions, we’re going to be doing Q&A at the end of the presentation. We’ll do our best to get to as many questions as we can, but we’ll try to take down some notes for the questions that we’re unable to get to and follow up with you or you can feel free to email Bella and I after the presentation at any point. Our contact information will be available on the slides at the end, so please have a pen and paper ready to write that down so you can email any follow-up questions or inquiries about how we might be able to help you and we’ll talk a little bit more about that at that time.
As far as the questions, inside of the Zoom functionality buttons down at the bottom of my screen, there’s a Q&A icon and there’s a chat icon. If you do have a question, please use the Q&A button to put those questions in there. And again, we’ll address those at the end. We also did receive a few questions in advance of today’s webinar, and we’ll be going through some of those questions at the end, during the Q&A session as well. So again, thank you for being with us today. And without further ado, I’ll turn it over to Ms. Bella Wang. Bella.
Bella Wang:
Thank you, Guy. Good afternoon, and thank you for joining us for today’s webinar. I hope you guys all had a nice lunch, but not too nice to put you into sleep. But today we’re going to talk about the PPP and the employee retention credit, those are all very exciting topic.
So before I start talking about the second Round of PPP, I also want you to be aware that if you have not yet applied and received your first PPP, you still have the opportunity to apply for your first draw of PPP. You have until March 31st, 2021, end of March this year, to apply for your first PPP. Just keep in mind the requirement for the first PPP is different than the second draw of PPP.
Later, I’m going to talk about the headcount requirement and the maximum loan amount you can apply for the second draw. For the first one, the employee headcount limit is 500 and the maximum loan amount is $5 million, and you also need to meet the loan necessity requirement. So any loan amount, first PPP loan amount, over $2 million, you need to fill a 10-page loan necessity questionnaire from SBA. But those are the requirement for the first loan.
And also, as Guy mentioned, let’s say you did receive your first PPP but you later return some of the money back to the bank or return the full amount because you want to claim other benefits such as employee retention credit; but now because the law changed, even if you have a PPP loan you are eligible for the employee retention credit. Now, maybe you are eligible, you qualify for the original loan amount from your first PPP, then there’s opportunity for you to go back to your bank and request a supplemental loan for your first PPP.
Now, let’s talk about the second draw of the PPP. For the second loan, it’s going to have the same term, condition, and requirement as your first one. It’s 100% guaranteed by SBA. No personal guarantee. And no collateral is required. Interest rate is capped at 1% and it’s going to have a five-year term. And the lender, the bank is allowed to rely on your certification that you’re going to use all the money for the qualified expenses.
So, what’s the requirement of getting the second draw of PPP? First, you cannot have more than 300 employees in 2019; this is based on your headcount in 2019 or if you do have more than 300 employees, you need the alternative size standard by SBA. The alternative size standard is that you didn’t have more than $15 million in your net tangible worth. And also your last two years of average net income after federal income tax is less than $5 million.
So, if you apply the second PPP this year in 2021, then you’ll have to look at the average net income for ’19 and ’20 and make sure it is not more than $5 million. If you meet those two criteria, then you can still apply for the second PPP even if you have more than 300 employees.
I also want to mention that for the number of employees, you also need to apply the affiliation rule. So let’s say you as an individual own four separate business entity and each entity has 100 employees, but because the common ownership you have to apply the affiliation rule and you have to aggregate the number of employees for all the entities you own. In this case, after you apply the aggregation rule then you have 400 employees, then you cannot apply for the second PPP. However, there’s an exception for this aggregation rule for restaurants and hotels.
The second requirement is that you must have or expect to spend all the money from your first PPP loan. So again, if you have not applied or received your first PPP, you should apply the first one; you cannot just skip the first one and apply for the second one. Since one of the requirements is that you must have or will expect to spend all your money from the first loan.
The third requirement is a big one, you must have more than 25% reduction in your gross receipt in any calendar quarter in 2020 compared to 2019. Let’s say you’re in second quarter, because the stay-at-home order your gross sales drop a large drop; more than 25% compared to 2019. But then you were able to reopen your business in the third and fourth quarter and your gross receipt go back up, it could be the same as 2019 or a little bit more, that’s fine. As long as you have one quarter, the gross receipt is dropped more than 25%, then you will qualify for the second PPP.
And because of the new bill, they also added something called 501(c)(6) organization to the list so that all these organization are now eligible for the PPP. And again, if they want to apply for the PPP, they will have to go apply for the first one. That includes business leagues, the chamber of commerce, real estate boards, boards of trade not organized for profit with no earnings inuring to any shareholder or individual.
They also provide a list of entities that are still not qualified for the second PPP which is the public traded company, and the rental real estate. You can see the list on the slide here. I want to mention about this shuttered venue grantee, which is in one of my slides I’m going to talk a little bit more about.
There’s more for business in the entertainment industry, because if you qualify you can apply for a grant from the SBA. And you will see the grant amount you qualify for will be larger than the second PPP loan. In most cases, I expect our client in the entertainment industry will apply for the shorter venue grant and not the second PPP. If you have the grant, you cannot apply the second PPP; you cannot have both.
So, what’s the maximum loan you can apply for, for the second draw? The maximum loan amount is your average monthly payroll in three different periods, you can pick whichever period is more beneficial for you; your average monthly payroll times 2.5, either in calendar year 2019 or calendar year 2020 or a 12-month lookback period from the day you receive your PPP loan.
If you are a seasonal employer, then you calculate your maximum loan amount based on any 12-week period between February 15, 2019, and February 15, 2020. The loan amount is capped at $2 million if you meet the definition of single corporate group. Going back to the first example, let’s say you own four entities; they are all related and the four entities can be considered as a one single corporate group. And each entity qualifies for a million, but the loan amount will be capped at $4 million, which is $2 million times two. So if you have more than one entity, the single corporate group apply to you, the maximum loan amount is $4 million.
There’s an exception on the maximum loan amount for restaurants and hotels. Restaurants and hotels have the NAICS Code 72, so when they calculate their loan amount; instead of using 2.5 multiplier they’re going to use 3.5. However, their loan amount still caps at $2 million. Here’s a list of the codes that will qualify for the 3.5 multiplier, for the loan calculation.
There’s an aggregate PPP loan limit. Like I mentioned earlier, if you are considered as a single corporate group then your maximum amount is $4 million; doesn’t matter how many entities you have. And let’s say if you have your first PPP and your first PPP loan is $9 million and you qualify for the second draw, then your second draw loan amount will be capped at a million because aggregate combined you cannot have more than $10 million of PPP loan.
We talked about one of the requirements, you must have more than 25% reduction in your gross receipt. One question I get a lot is that, did you use cash method? You use accrual method? They are accrual method for the financial statement, but the cash method for their tax reporting. The answer is, you can use either one, you can use either cash or accrual.
Bella Wang:
The actual language from the SBA guidance says: gross receipts are all revenue in whatever form received or accrual, according to your accounting method. So if you used cash method for 2020, then you just need to be consistent and use the same method for 2019 to calculate if you have more than 25% reduction. You cannot use cash method for one year and accrual method for the other year. But you can use either cash or accrual.
In the SBA guidance, they also specifically said the gross receipt, your gross receipt, do not include the following: the sales tax you collect they are from your customer; and your proceeds from transaction with your affiliate, so if you have any gross receipts from the intercompany transaction that you don’t include those in your gross receipt; and also any amount you collect if you’re a travel agent, real estate agent, advertising agent; if you collect any amount, a lot of people in those are not included in the gross receipt.
Also in the guide, they’re saying that there are several items that must include in your gross receipt, do not exclude them, such as; subcontractor costs, reimbursement, the employee-based costs such as, payroll taxes, those must be included in your gross receipt.
Let’s say you have your small business, you don’t have a strong internal accounting department, you cannot produce the quarterly financial statement when you apply the second draw, then the SBA gives you an option; you can use your annual income tax return. So if you use your annual income tax return and if you have more than 25% reduction in your annual gross receipt in 2020 compared to 2019, then you will qualify for the second PPP.
This is from the guide, SBA guide, and just issued yesterday. It’s very new information. They say that if you are going to use your annual tax return, then this is the way you should get your number from. For Schedule C, then you need to sum up those two number. If you’re a partnership, depending on what entity you are, then that’s how you figure out your annual gross receipts.
Again, you look at the number on your 2020 return compare with your 2019 return and if you have more than 25% reduction, you will qualify for the second draw. Of course, we just started a busy season, so you probably don’t have your 2020 tax return file yet. But you just need to fill out the form, a preliminary or draft 2020 tax form, and submit to the lender to prove that you have more than 25% reduction in gross receipts.
In your second draw PPP, if the loan amount is greater than 150,000, you are required to provide the documentation to the bank when you apply for the second draw. The bank will ask for either your annual tax returns that you’re going to file for 2020 or your quarterly financial statement. And again, this is from the guidance that was issued yesterday.
So quarterly, if you’re going to provide your internal quarterly financial statement to the bank and the financial statement are not audited, you must sign and date on the first page of your financial statement and also initial on all the other pages attesting that this quarterly financial statement is accurate. Alternatively, if you have a quarterly financial statement and you’re not using your annual income tax return, you can also submit your quarterly or monthly bank statement showing the deposit to your bank account, your business bank account.
I think this is more for if you’re using your cash method then you can use the bank statement to prove the amount of the cash revenue you collect from your customer or client, and to demonstrate that you have more than 25% reduction in your gross receipts. If the loan is 150,000 or less, then you are not required to submit any documentation to the bank when you apply for the second draw. However, you will be required to submit the documentation to the bank where you asked for the forgiveness for your second draw of PPP.
This is the application for your second PPP. As you can see, it’s very similar to your first one. Again, you will see that they just add more entity who will qualify for the PPP, it’s the same average monthly payroll. Going back to the loan amount, you calculate your loan amount based on your average monthly payroll either in 2019 or 2020 or the 12-months lookback period from the day you receive your PPP loan.
Most of the borrower, by using a 2019 average payroll costs, will give you a higher number; so you will end up with the exactly same number as what you had when you applied for your first loan. In that case, the bank will not require you to submit any additional supporting documentation for the cost. Basically, they already have all the information they need for your second loan from the first one. So it’s more efficient and beneficial for you to go back to the same lender for the second draw, but you are not required to use the same bank for the second draw.
And sometimes you may find that maybe the bank you use for the first draw is not participating in the second draw, then you will need to find a different lender. But if you can use the same lender, that’ll be more efficient for you because they already have all the information, they need from your first PPP loan. As you can see, there’s also more expenses add on the application which I will go over a little bit later during my presentation, and then there’s information you have to provide to prove that you have more than 25% in your gross receipt.
The other thing I do want to mention, when you’re calculating your average monthly payroll for your first PPP loan, the payroll costs include the salary plus the healthcare benefit; the employee benefit that you provide to your employee, mostly it’s medical insurance. But because of the new bill passed on December 27, 2020, they expand the health care bucket; it’s not limited just to health insurance. You can also include your group insurance, your disability, vision and dental.
Something to keep in mind, when you apply for the first PPP you didn’t include the group insurance or the disability insurance, but now because the rule changed you can include those. That may change your numbers slightly. The other change from the new bill is that, when you apply for the forgiveness you don’t have to subtract your forgiveness amount by the EIDL you receive in advance.
So now, according to the most recent guidance issued by SBA on Sunday; after you’re calculating your average monthly payroll cost, then you also you have the outstanding amount of any EIDL that you received between January 31st, 2020, and April 3rd, 2020, then you can add that outstanding EIDL amount to your loan amount.
Again, if you need help, we are here to help you. If you want more information and want to make sure that your second PPP loan application is filled correctly, please reach out to us. We are here to help you for the entire process. Here’s all the signed certification that you have to provide on your application. So that’s all I had for the second draw PPP application.
Next, I’m going to go over the changes to the program, to forgiveness. Keep in mind that there are four additional categories added to eligible expenses for forgiveness, but all this will go to we call a non-payroll costs bucket. The 60% and 40% allocation between the payroll and non-payroll costs, didn’t change. The payroll costs include: the salary paid to your employee, the healthcare benefit, again, that includes the medical, dental, disability, vision and life insurance.
So, salary healthcare benefits, retirement plan contributions and employer’s state and local payroll taxes all fall into the payroll costs bucket. It has to be at least 60% of the loan amount or the amount you asked for forgiveness. The remaining 40% can be considered non-payroll costs and it can be for the amount of the rent, interest, utility and the additional four category expenses that were added in this new bill that you pay during the cover period or the forgiveness period.
The first category is called, cover operation expenditure; is payment for any business software or cloud computing services that facilitate your operation product or service delivery, the processing payment or tracking of your payroll expenses. Perfect example, if you have a NetSuite, you have Xero or SAP or any business software; Adobe or cloud computing that you pay that all those qualify for the forgiveness, if those are paid during pay or incurred during the cover period.
The cover operation expenses also include the payment for any human resources, the sales and billing function or accounting or tracking of supply inventory records and expenses. Example: you pay for the annual subscription for your QuickBooks Online, you pay paychecks, you pay ADP for your payroll processing; all those expenses qualify for the forgiveness under this category. Again, but it has to be paid or incurred during the cover period.
The second category they add is called, cover property damage costs; it is a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020. The damage is not covered by your insurance or any other compensation. However, it does not cover damage due to natural disaster. So last summer we had the wildfire in California, if you had some property damaged due to the wildfire, that’s not covered, that’s not eligible for the forgiveness.
But when we have the vandalism happening, the looting happening in June last year and you have a property damage, than those damages, if it’s not covered by your insurance, can be included in your forgiveness. Again, all those additional categories they add, apply to your first PPP. So if you have not yet submitted your forgiveness application to the bank for your first PPP loan and you’re a little bit short on your expenses, you can add these expenses to your first forgiveness calculation.
Later, I’m going to talk about the changes to the employee retention credit and that does change our strategy on the forgiveness calculation a little bit. Since some of the wages you pay during the cover period may be eligible for the employee retention credit, so you will want to maximize your 40% non-payroll costs, then maximize your healthcare benefit, maximize your retirement plan contribution and try to preserve as much wages as possible for the credit.
The third category they add is, the cover supplier costs; is any expenditure you pay to your vendor pursuant to a contract or purchase order that’s already in place before you receive your PPP fund for the supply of goods that’s essential to your operation. For example, let’s say you have a 12-month contract with a vendor for your office supply, your kitchen supply, your manufacturing supply; all those supplies are essential to your business operation and you pay the vendor during your cover period. All those payments qualify for the forgiveness.
The fourth and last category they add is, the worker protection expenditure, the PPE. If you have any paid or incur expenses for your workers personal protection equipment or make modification to your facility to protect your worker, all those qualify for the forgiveness. Again, we will send you the copy of the presentation after webinar. I have all the list of the qualified expenses here; it’ll be a good reference material for you to go back and reference what kind of expenses can be included in this category.
The worker protection expenditure does not include residential real property or intangible property. As I mentioned, you can include those expenses in the forgiveness application for your first PPP loan. It’s not just for the second one, you also apply to the first one.
The other changes, this is also a big one. You may remember under the old rule for your forgiveness or cover period, you can only choose either eight or 24. But they changed the rule, so you can pick any time period in between eight and 24. So you can pick; 9, 10, 12, 20, 22 weeks, as your cover period. However, your cover period cannot extend later than September 30, 2021 this year. Again, the deadline for you to apply for the second loan PPP is March 31, 2021, which is the same deadline for applying the first one if you haven’t received your first one or haven’t applied for the first one.
If you think about 24 weeks from March 31st, it will be September 30; that’s why they have a September 30th date there. But it’s very important for you to pick the right cover periods if you have a salary reduction or reduction in your FTE headcount, again, those rules didn’t change. You want to make sure that you pick the right cover period, so you can maximize your forgiveness. The other big change is that, as I mentioned earlier, the EIDL advance no longer needs to be deducted from your forgiveness amount. And then also, now any group life, disability, vision and dental insurance, can be included in your health benefit and that’s part of your payroll costs.
The other changes are that SBA is supposed to issue a new one-page loan forgiveness application form. We should see that pretty soon because they have about 24 days from the enactment of the new law to issue this new application form. Let’s say your PPP loan is 150,000 or less, then you just need to submit this one page form to provide number of employees that you retained because of the loan, the amount you spent on the payroll costs and certify that you are in compliance of all the requirement. You don’t have to submit any supporting documentation to the bank. And you still need to keep all your employment record for at least four years and other records for at least three years just in case they can still audit you, so you want to make sure that you still keep those records.
Keep in mind that we still have the other three forms available, it’s a form 3508; the regular form is a 11-page form, and 3508EZ which is three-page form. And the rule didn’t change, you can submit the 3508EZ if you have no salary reduction and no reduction in your FTE headcount or to say everybody’s salary is the same; you have no salary reduction but you do have FTE headcount reduction but you can apply one over the safe harbor, then you still qualify to use the EZ form. And if your loan amount is 50,000 or less, then you can also use this form 3508S.
Now, I’m going to talk about the income tax implication on the PPP loan forgiveness. Again, this is a big, big relief for all our clients. We are so happy, very excited when we see this in the new bill. Now, keep in mind this only for the federal income tax purposes. Unfortunately, California already said that they’re not going to conform to the federal treatment. As of today, I know two other state conform to the federal treatment, New York and Alabama.
If you operate in more than one state, in multiple states, you will need to check every single state’s conformity. But for federal income tax purposes now, you can deduct the expenses you pay with your PPP fund on your 2020 tax return. However, you got to keep in mind, if you own a pass-through entity; either an S corporation or a partnership, and the pass-through entity is the one who has the PPP loan and has all expenses and because now all the PPP expenses are tax deductible, the entity may have a loss in 2020. Whether or not you are an owner of the pass-through entity, you can get the immediate tax benefit of deducting the loss incurred in 2020. There’s a couple of hurdles you have to pass through; you have to see if you have enough tax bases in the pass-through entity and also, if there’s a business interest expense deduction limitation, any passive loss limitation. Again, it can get very complicated.
Also, we still have the 100% federal bonus depreciation available in 2020, so maybe you want to consider out of the depreciation so you can preserve loss deduction later. Again, with the new administration, with our new president, we have expectation that the tax rate may go up anytime soon, so it’s a good time to think about the next couple years doing planning. And again, you should contact us for any ideas, we should get together and talk about it. But I want to put it out there so you can really put this in the back of your mind.
The other thing is that even though you can deduct the PPP expenses when you receive the official approval for your forgiveness, the forgiveness will be recorded as income on your book, but that income is not taxable. And going back to the example, let’s say if you are owner of a pass-through entity, S corp or a partnership, you will get a basis for the forgiveness income which will, let’s say if you cannot deduct the path of loss in 2020 because there’s a basis limitation, then that loss may get freed up in 2021.
However, there is also other issue. What about if there’s a change in ownership? All the PPP expenses are deducted in 2020 when they will pay or incur, but then forgiveness was received in 2021. And when you have a change of ownership, then the old owner received the benefit of detecting those expenses, but the new owner has the income or the forgiveness income is not taxable. It can be more complicated. So, again, there’s just a lot of things to think about. Now I’m going to move on to the next very exciting topic, employee retention credit is also called ERC.
Guy Nicio:
Hey Bella, maybe we can take a quick break to answer just a few of the questions while these questions are still fresh in some of the minds of the audience here. Do you mind if we answer a couple of those live?
Bella Wang:
No, not all. Go ahead.
Guy Nicio:
Okay. The first question from Denise is, does the first PPP need to be forgiven before a second PPP can be applied for? I think the answer is no. As long as you expect that you will use all the funds, that you can apply for the second PPP loan.
Bella Wang:
Correct, but it will depend on the bank. Some bank may request you to give them a draft forgiveness application or calculation, to prove that you had or expect to spend all your money from the first loan.
Guy Nicio:
Okay, great. Can a business apply for the second PPP if they did not apply for the first PPP?
Bella Wang:
If they did not apply for the first PPP, they must apply to the first one first.
Guy Nicio:
Basically, the answer is that; you can still apply for it now so you’re not out, you just don’t go directly and skip that first loan.
Bella Wang:
Exactly.
Guy Nicio:
Since all second draw loans will be less than or equal to two million dollars, with a good faith necessity certification and 5809 still apply or will they all be deemed to meet the good faith certification as the rules dictated in R1?
Bella Wang:
You are deemed to meet the necessity requirement, since your loan amount is two million.
Guy Nicio:
And what if the first loan is not forgiven but the second loan is deemed to satisfy eligibility due to two million dollar max and revenue reduction requirement?
Bella Wang:
The first loan, the first forgiveness is not approved.
Guy Nicio:
It’s not forgiven.
Bella Wang:
Not forgiven. I think we’ll probably need some clarity on the question. If it’s not forgiven because it hasn’t been submitted yet or if it’s being rejected because you didn’t spend the money in the qualified expenses?
Guy Nicio:
Yes, that’s come from an anonymous. If you could, anonymous attendee who submitted that question, please resubmit with that clarification. Can I use quarter sales tax return as proof of revenue reduction? From Jamie.
Bella Wang:
That’s a good question, it’s not included the most recent SBA guidance that was issued yesterday. Basically, on the guidance, they only give the three-bullet point; one is your quarterly financial statement, your quarterly or monthly bank statements or annual IRS income tax filing. Because I think the concern would be, if you use your quarterly sales tax return. I’m not a sales tax expert, I’m not sure if all your sales are required to be reported on your sales tax return.
Guy Nicio:
You do have to report them whether they’re taxable or nontaxable. I think the answer is, even though it’s not officially a document that you can use, since sales tax returns themselves need to be based on your books and records, naturally they would tie to them and reconcile. So, in short, the answer really should be, yes, as long as your sales tax return is right, you just need to have the support behind it, which would be the financial statements.
Bella Wang:
Correct.
Guy Nicio:
Can Schedule C filers with employees use the net income on line 31 up to 100K, to add to average monthly payroll?
Bella Wang:
Well, the average monthly payroll is to your Schedule C employee. So if you are a Schedule C filer, you have your employee, then you include your self-employment earnings on line 31 of your Schedule C limit to 100,000 and then add the-
Guy Nicio:
The answer is yes. You would divide the 100,000 by 12 and multiply it by 2.5.
Bella Wang:
Or whatever amount reported on your 2019 Schedule C, line 31.
Guy Nicio:
Right. This is assuming that you hit the max of 100K.
Bella Wang:
Exactly.
Guy Nicio:
Let’s see, I believe I included payroll tax as part of payroll costs on the first PPP, is that still true?
Bella Wang:
Correct.
Guy Nicio:
As long as they’re employer payroll taxes and not employee payroll taxes, I think is the clarifying difference there. In other words, typically, it’s the employer who’s doing the borrowing and so it’s the taxes that you would have paid. But you don’t get to count employee withheld payroll taxes, since you’re already counting that as part of your gross payroll.
Bella Wang:
And only stay in local, so the amount would be very minimal, your employment insurance and your employee training tax.
Guy Nicio:
Okay. I included federal taxes on the first PPP as payroll costs will I be penalized?
Bella Wang:
The SBA did issue additional guidance yesterday and saying that, if you calculate your first PPP loan amount incorrectly, either your mistake or the bank mistake or your payroll processing company makes a mistake, you have to return those money to the bank. You cannot include the additional money you received from your first loan, due to the mistake in the forgiveness.
For example, if you include your federal payroll taxes in your first application. Let’s say you receive additional 10 grand that you’re not supposed to receive, then you need to notify the lender, the lender needs to notify the SBA and you need to return that money. There’s SBA procedural notice that was effective January 15, 2021, that discuss how you should return the money you’re not supposed to receive from your first loan back to the lender.
Guy Nicio:
Great. Thank you, Bella. We do have more questions, but we won’t get through all of them now, we’ll save some for the end. Just thought that would be a good way to break up the technical content. But Bella, I’ll turn it back over to you to continue on with your employee retention credit portion of the presentation.
Bella Wang:
Thank you, Guy. So, employee retention credit; I have to say that the rule is very, very confusing, don’t worry if you don’t get it. Especially since we have a different rule applied to 2020 versus 2021. The main takeaway is that, you just contact us; either call or email us just to schedule a meeting, and then we will go over your eligibility and the amount of credit you can claim based on your circumstances. But here’s the rule.
After the CAA, now when you have a PPP, you are eligible for the employee retention credit, the ERC. And the credit can be claimed on any wages you pay after March 12, 2020. However, you cannot use the same wages for the PPP forgiveness, there’s no double dipping. So if you were able to submit and get your first PPP or forgiveness approved, there’s some wages included in the forgiveness calculation; you cannot use that same wages for the credit.
And there’s a couple criteria. Let’s say I know everybody’s busy trying to file their Q4 form 941, the payroll tax return by February 1; that’s the deadline of your 941. But again, keep in mind that because even if you have a PPP loan but you can still be eligible for employee retention credit in 2020, you can coin all that credit on your Q4 form 941. It can be a good cash refund opportunity because if your credit is bigger than your liability, then it’s a refundable credit.
What’s the rule to qualify for the credit? First, you just need to meet one of the two. The first criteria is that you have either partial or fully complete suspension of your business operation in 2020 or 2021 due to the government order because of the COVID. So back in March 2020, if you are not in the essential business because the government issued the stay at home order, you have to shut down your business. The perfect example would be restaurant, retail store, theater.
If you have to shut down your business because of the government order, then you qualify, then no doubt you can claim this; you’re eligible for the employee pension credit. But let’s say you’re the essential business, your manufacturer, your distributor, so you never closed your business; but because your customer is all stay at home. Let’s say you’re a car dealer, everybody’s staying home, nobody coming to buy a car. So, if you have more than 50% reduction, keep in mind that this is different percentage, than your second PPP. If you have more than 50% reduction in any current quarter in 2020 compared to 2019, then you qualify for the employee retention credit.
For this employee retention credit, not only PPP borrower eligible for the employee retention credit now, they also extend the credit to June 30, 2021 this year. Originally, it was supposed to expire at the end of 2020. And because now you can claim a credit for the first two quarter in 2021, the other big change for 2021 is that they would substitute a 50% reduction by 80%.
In 2021, let’s say either you have a partial or complete suspension of your business operation to cover, again, like a restaurant, or if you have more than 20% reduction in your gross receipt in Q1 of 2021 compared to 2019, then you qualify for the employee retention credit. Keep in mind the different percentage, 50% for 2020, but 20% for 2021.
And what to consider qualified wages for the credit. I’m going to go over the rule for 2020 first. Again, this is based on your full-time employee headcount in 2019. Now, I want to make this more complicated, but that’s your role.
Definition for the full-time employee for the employee retention credit question purposes is different than a PPP. If you may remember, for PPP you have to calculate your full-time employee headcount, you have to do the average work hour based on 40 hours a week; either probably 0.5 or do the ratio, decimal. But for this purpose, the full-time employees, anybody who worked more than 30 hours, not 40, more than 30 hours a week or 130 hours per month, then that’s considered a full-time employee.
If you go back to your 2019 and you have 100 or less employees and again, assuming you meet one of the two criteria; has suspension of your business operation or has more than 50% reduction in your gross receipts, and then all the wages you pay from March 12, 2020, to end of the year, will qualify for the ERC. And I think I have a slide on this. But then there’s also a wage limit per employee, is $10,000 per employee.
In 2020, the maximum quota you can claim on each employee is 5,000; the credit rate is 50%, the wage limit is 10,000, so maximum credit you can claim on the eligible wages per employee is $5,000. Let’s say if in 2019 you have more than 100 employees, then you can only count the wages you pay to employees during the shutdown period or when you have the significant reduction gross, to see when the employees are not providing service to you.
Also, I want to add that, for qualified wages it’s not just salary, you also include the health plan expenses. Let’s say, as an example, I have a client who has a restaurant; the restaurants closed from April 1st to May 31st because of the government order. They have a government order, they all have a significant reduction in gross receipts, so they are you eligible for the credit.
And while the restaurant is closed, they have all the employee on furlough. But during that period, they still continue to pay their employee either half of the pay or there’s no pay but they continue to pay their health benefit, then all this is considered qualified wages and then now you can claim the employee retention credit on those expenses.
There are changes in the qualified wages in 2021, as I mentioned earlier, the credit being extended to June 30. Also, the employee’s threshold increased to 500. So in 2021 or go back to the headcount in 2019, if you have 300 employees, now you don’t have to only count the wages you pay to the employees while they are not working; you can include all the wages you pay during the first two quarter while you have a shutdown or if you have a reduction in your gross receipts.
As I mentioned earlier, the changes in 2021 are that; they increased the credit rate from 50% to 70%, they also increase the wage limit from 10,000 per employee per year to 10,000 per employee per quarter. As I mentioned earlier, in 2020 the maximum credit you can claim on each employee is 5000, but in 2021 the maximum credit you can get is 14,000 per employee.
Bella Wang:
Let’s say if you meet a criterion for the entire two quarter and you have 100 employees, the credit amount can be as much as 1.4 million; which is pretty significant. And you also need to consider, you cannot use the same wages for PPP forgiveness and also for the credit. So again, we are here to help. It’ll be a perfect time to contact us and then we will do both the PPP forgiveness calculation and also the ERC analysis for you and make sure that you can maximize your benefit on both the ERC and the forgiveness.
Also, there’s a safe harbor rule that you can use the prior quarter gross receipts. Let’s say in first quarter 2021 you don’t have a reduction but in fourth quarter of 2020 compared to the fourth quarter of 2019 you have a reduction in your gross receipts, then you can use the Safe Harbor.
I’m just going to go over some other key provisions in this new bill. They also extend the paid sick and family leave credit, which is the First Family Response Act. So originally, the credit expired at the end of 2020, it was extended to March 31, 2021. If you are a self-employed individual you file a Schedule C, you’re a schedule C filer, and you’re exposed to COVID or you cannot work because of the childcare issue, you are also eligible to claim this credit on your individual return.
Bella Wang:
The other provision I mentioned earlier during my presentation is that there’s grants for shuttered venue operator. 15 billion is authorized for the qualified business in the entertainment industry. It could be pretty significant amount of grant that you can be eligible for. Again, if you want more information, please contact us and then we can go over the requirement to see if you’re eligible for the grant.
The other change they extended is, charitable contribution deduction; this only applies to cash donation. So let’s say in 2020 you make a cash donation to a qualified charity, you don’t claim the itemized deduction you just do the standard deduction, then you are eligible to coin the $300 above-the-line; we call that above the adjusted gross income deduction on your personal return. It’s limited to $300, even your married filing joint, but then for 2021 it’s $600 limit for married filing joint. Also, they extend the 100% adjusted gross income limitation for cash donation to 2021.
This is a big-ticket item. As you may recall, back when we had the TCGA or the business meal either at 50%, entertainment is non-deductible, they changed the rule. Now, for all the business meals, not entertainment but all the business meals as long as provided by the restaurant, is 100% deductible. This will apply to business meals in 2021 and 2022.
The other key provision is that there is a five-year extender for the Work Opportunity Tax Credit and any employer-provided educational assistance such as, repayment of the student loan for your employee. Keeping in mind, again, there’s no double-dipping. If you have wages paid that qualify for the employee retention credit, you cannot use that same wages for the Work Opportunity Tax Credit. And let’s say you are an educator and you pay some personal protection equipment; you can also deduct that on your personal return.
There are some changes to both Flexible Spending Accounts and medical expense deductions. The $500 carryover rule got extended to year 2021change to adjusted gross income limitation for your medical expense’s deduction. If you have medical expenses and you take itemized deduction.”
It was supposed to repeal the 7% adjusted gross income limit, now it’s permanent; so, the 7% AGI limit for your medical expense’s deduction. The other permanent change is the 179D. If you are owner of the energy efficient building or you’re a architecture engineer who design the energy efficient building and you qualify for the 179D, now that is permanently eligible for you.
There’s also changes on retirement plan. 10% early distribution penalty that was waived if you take out the distribution from your retirement plan for the qualified disaster distribution. Also, you can borrow money from your retirement plan, the qualified retirement plan, up to 100,000 is because of the qualified disaster. And then you can also recontribute any money you took off on your retirement plan, because you are in the qualified disaster area.
That concludes my presentation today.
Guy Nicio:
Thank you, Bella. We do have five minutes left, so not a whole lot of time. And I want to highlight a couple things; one, going back to the employee retention credit, big change there between ’20 and ’21. And I just want to highlight the importance of making sure that you’re familiar with all of the rules and how they interact with one another.
For example, in 2020 the employee retention credit and the Paycheck Protection Program loan, were not both able to use the same payroll costs concurrently. In other words, if you used the payroll cost for the PPP loan forgiveness, you can’t use those same payroll costs for the employee retention credit; and that’s for 2020, again. So it’s just one example.
And that guidance came out very, very late. And so for anybody who submitted their PPP loan forgiveness application early, you may have missed out on the opportunity to strategize and to allocate some of the costs to non-payroll costs so that you can maximize your employee retention credit without being penalized on your PPP loan. In 2021, we don’t have that issue. As Bella said in her presentation, you get the benefit of both.
But in this case, it’s just I wanted to highlight it because sometimes patience is a virtue, if that’s the expression. It’s just important to make sure that we have the clear guidance as stuff all evolves rapidly, and it’s important to make sure that you have clarity on all the rules. And there’s not necessarily any motivation to submit the loan forgiveness applications quicker than they need to be, to the extent that we don’t have all the guidance that we hope to have. Any case just wanted to clarify that.
We do have a few more questions, I’ve answered some through the chat box, but we’ll just quickly run through the rest. And again, we will be happy to answer any questions if you email Bella and or I. Bella you want to go… Before we do that, because this can all be so very confusing and there’s so much information to remember, for those of you who do want to help as Bella mentioned during your presentation; if you don’t want to rely on your recollection, and studying the slides, and watching other webinars, Windes is absolutely happy to help you out on any of the two options.
We can help you on a partial basis where we’re consulting and reviewing your calculations answering questions along the way, that’s a more limited service or we have the full VIP service where we basically do the entire thing, including the loan forgiveness applications and any necessary documents that go with that.
But without further ado, Bella do you want to move it to the slide with our contact information so they can see that. Feel free to take down this contact information here and follow up with any questions that we’re not able to answer before the end of our hour, since we only have a few minutes left here. But Bella, you want to take a couple questions from this list here? Do you want me to read them or do you have them? I’ll read them to you.
For application purposes, what are the inclusions of the average payroll calculation? Basically, what he’s asking I guess is, what you’re allowed to include. It’s two and a half times your payroll capped at $100,000. There were some additions I believe in round two, Bella, for what qualifies for payroll and I think that may be what they want clarification on.
Bella Wang:
So it’s the additional: the group life insurance, the disability insurance, dental and vision, those are not included in your monthly average bill costs calculation in your first PPP application. If you may remember when you’re applying for your first PPP, you have to calculate your average monthly payroll costs. The salary is capped at 100,000 per employee, but then you also get to add the health insurance, but it just health. But now, you can include the, health, life, disability, vision and dental.
Guy Nicio:
Okay. And I think we have time for one last question. For ERC, if my Q3 has more than 50% reduction, but my Q4 has only 30% reduction, can I still apply for the ERC for Q4?
Bella Wang:
Yes, you can. As long as the subsequent quarter gross receipt is not more than 80% of the same quarter in 2019. You have 50% reduction in Q2, you have 30% reduction, but still you don’t have more than 80% in Q3 compared to 2019, then you qualify for the ERC.
Guy Nicio:
Great. So this slide here shows a little bit about Windes as a firm. I think most of you know us. We’ve been around for almost 100 years. We’ve got several offices across Long Beach, Orange County and Los Angeles. Here’s some of our industry recognitions. But again, I think most of you already know us; Bella, myself.
Bella is the director. I’m the chairman of tax. You have our contact information, feel free to follow up with any questions that we didn’t get to answer for you. And we again, thank you for joining us for today’s webinar and presentation. Thank you, Bella, for all your expertise sharing with our audience today. And wish everyone the best of day and a good 2021 ahead of you. Thank you and take care.
Bella Wang:
Thank you. Thank you for having us. Take care.