Dear Clients,

 

PAYCHECK PROTECTION PROGRAM (PPP)

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With Paycheck Protection Program (PPP) loans being funded across our community, most of your attention has undoubtedly shifted to the loan forgiveness provisions of this program. First of all, if you are a business that has employee’s (including yourself) or you have self-employment income, we strongly recommend looking at applying for the PPP loan. The reason is that the SBA has provided a safe harbor for PPP loans under $2 million. “Businesses that together with their affiliates accepted Paycheck Protection Program (PPP) funds of less than $2 million will be assumed to have performed the required certification concerning the necessity of their loan requests in good faith, according to guidance posted by the U.S. Small Business Administration (SBA) on Wednesday, May 13, 2020.” Translation: automatic qualification for the PPP loan. If you need assistance with the application, please contact our office immediately and ask for assistance.

Perhaps the most exciting aspect of the PPP loan program is the opportunity for the loan to be fully forgiven, as long as the funds are spent on eligible expenses. With the passage of the Paycheck Protection Flexibility Act by the Senate and the signing into law of this bill by the President, the percentage of usage for qualified expenses under the PPP law have been decreased from 75% to 60% for payroll and increased from 25% to 40% for qualified mortgage interest, rent, and utilities and others listed below. The Paycheck Protection Flexibility Act extends the eight week covered period to twenty-four weeks or December 31, 2020 (whichever comes first).

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60%

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• Gross payroll:

  • Salary, wage, commission, or similar compensation; for a partnership, recent guidance from the SBA explains that payroll costs include not only guaranteed payments to a partner, but also any partner’s share of income of the partnership subject to self-employment income.

  • Amounts paid are subject to a per-employee or per-partner/owner/member cap of an eight-week equivalent of applicable 2019 compensation or $15,385 for the eight-week period.

  • Payment of cash tip or equivalent;

  • Payment for vacation, parental, family, medical, or sick leave;

  • Allowance for dismissal or separation;

  • Payment required for the provisions of group health care benefits, including insurance premiums;

  • Payment of any retirement benefit; or

  • Payment of State or local tax assessed on the compensation of employees.

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40%

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• Payments of interest on any mortgage obligation that was incurred before February 15, 2020

• Interest payments on loans or leases used to obtain assets such as vehicles, equipment, computers and other office equipment that were incurred prior to February 15, 2020

• Any payment of rent under a leasing agreement in place before February 15, 2020

• Any utility payment for which service began before February 15, 2020.  For example: electric, natural gas, water, telephone, cell phone, and internet.

• Transportation includes fuel for your company vehicles and fuel for the vehicle you use for work.

  • Please note that for sole proprietors you must have claimed or be entitled to claim a deduction for vehicle expenses on your 2019 Form 1040 Schedule C for these costs to be permissible.

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Other payments that we know are specifically excluded from forgiveness:

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• Cash compensation in excess of $100,000 for an individual employee or self-employment income of a partner in a partnership/member in an S-Corp/or sole proprietor.

• Compensation to an employee with a principal residence outside of the United States

• Qualified sick or family leave wages under the Families First Coronavirus Response Act

• Prepayment of expenses or catch-up payments on delinquent accounts

• Employer FICA costs are excluded

• Employer/owners have additional restrictions – please read the following carefully:

  • Buried in the certification is also a special limit on the amount of payroll costs that can count for owner-employees.  At the end of the first certification is found the following language regarding items included in the dollar amount for which forgiveness is requested, certifying that the amount requested:

    • …does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.

    • Presumably eight weeks’ worth of 2019 compensation would be the owner-employee’s W-2 wages multiplied by 8/52.  This would serve to limit the ability of a corporation to attempt to cram in a bonus to get an owner-employee who had less than $100,000 in 2019 cash compensation up to the $15,385 maximum amount per individual for the forgiveness calculation.

 

At the end of your twenty-four week covered period, you will be required to apply for loan forgiveness with your lender. Being able to provide your lender with adequate documentation is vital for getting your loan forgiven. Setting up some systems and processes now will make the application for loan forgiveness easier. Here are some tips for how to keep track of where you are using your PPP funds:

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• Set up a separate bank account for your PPP funds

• Only pay for qualified PPP expenses from this account

• Keep detailed records of your qualified expenses and any receipts or invoices related to those qualified expenses, and be prepared to store these documents for six years.

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A number of issues related to the calculation of loan forgiveness are causing concern for employers. Some of the concern can now be allayed via the following changes provided for in the Paycheck Protection Flexibility Act.

The bill provides that during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness will NOT be reduced when a borrower experiences a loss of FTEs if the borrower, in good faith, is able to document any of the below:

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1. There was an inability to rehire individuals who were employees of the eligible recipient on February 15th,

2. There was an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or,

3. There was an inability to return to the same level of business activity as such business was operating at before February 15th due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 21, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID– 19. This is the BIG ONE. It basically provides that if the world is such that on December 31st, restaurants and bars, for example, are unable to fully open due to government orders, any loss in FTEs resulting from such restrictions should NOT be taken into account in computing a required reduction in the forgivable amount.

4. Employees who during the Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs if the position was not filled by a new employee.

5. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.

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Rules under the Paycheck Protection Flexibility Act have changed to provide an additional incentive that allows employers to defer the employer’s 6.2% share of 2020 Social Security tax until the end of 2021 (50%) and 2022 (50%). Prior to the enactment of the Paycheck Protection Flexibility Act, this deferral was not available to a borrower of a PPP loan until the moment the loan was forgiven.  With the new Act, an employer is allowed to double dip; a borrower of a PPP loan may now also defer all of its 2020 Social Security tax burden into 2021 and 2022, even if the PPP loan is forgiven prior to December 31, 2020.

  

CODE SECTION 139:  DISASTER RELIEF PAYMENTS

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While uncertainty still exists in the details of the PPP loan forgiveness, there is a bright spot that you may not have heard about.  Internal Revenue Code Section 139:  Disaster Relief Payments was enacted as part of the Victims of Terrorism Tax Relief Act of 2001. With President Trump’s declaration of national emergency status due to Covid-19, this Code Section is once again available for utilization in providing non-taxable qualified disaster relief payments to employees.

 

Employers are able to either pay for or reimburse employees for:

• Unreimbursed medical expenses including co-pays, deductibles, vitamins and supplements

• Increased expenses associated with being quarantined or telecommuting.  For example:

  • Increased utilities

  • Enhanced internet connection

  • Computer monitors

  • Laptops

  • Printers

  • Office Supplies

  • Housing for additional family members (e.g. transportation and living expenses for college students returning home including duplicative meal expenses)

  • Non-perishable food purchases/reserves

  • Increased childcare expenses

  • Expenses to enhance mental health and physical well-being from social distancing such as meditation apps and home health fitness

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These funds cannot be used as:

• Payments for expenses that are not reasonable or necessary

• Payments that constitute income replacement (lost wages, business income, or unemployment)  

• Payments that are reimbursed or reimbursable by insurance

 

And then the truly unusual part:  1) employees are not required to account for the expenses; 2) there is no dollar limit an employer can provide as long as the expenses are reasonable and necessary with respect to the corona virus; 3) relief payments are excluded from gross pay and will not be shown on the W-2; and 4) employers may reasonably take the position that the payments remain fully deductible.  However, #4 may be limited if the employer has received a PPP loan.  Stay tuned for further guidance on PPP deductions. However, in light of the new legislation, it appears this will not be necessary as an expense to qualify for loan forgiveness due to the extension of the 8 week period to 24 weeks for spending the PPP money.

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VARIOUS TAX FILINGS POSTPONED TO JULY 15, 2020

 

You are all probably aware that the due date for 2019 federal income tax returns has been postponed until July 15, 2020.  Other postponements that may be important to you as well:

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• Both the April 15th and June 15th estimated tax payments have been postponed until July 15th.

•  You may file an automatic extension that will delay the filing of your tax return until October 15, 2020.

• Any taxes you owe on your 2019 income tax return are due on July 15th and no interest or penalties will be due for the time between April 15th and July 15th.

• Please note that interest and penalties will begin to accrue on any outstanding balance due, and will continue to accrue until paid in full.

• All federal income tax return filing and payments due on April 1, 2020 and before July 15, 2020 are now due on July 15, 2020.

• Contributions may be made to your IRA, HSAs, and others for 2019 through July 15, 2020

• There are many more lesser-used forms, tax court filings, and claims for refund.  If you have a question about a filing deadline not listed here, you may call our office for assistance or go online for a more comprehensive list at  https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers#hsas

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FINAL NOTE

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These rules and changes can be very confusing. Be assured that if you need assistance in navigating through this maze of complexity that we are here to assist you. Please contact our office right away and one of our knowledgeable experts will be glad to help whether it’s navigating through the loan forgiveness process, qualifying for new special tax credits, structuring tax free income to pay to your employees (and yourself), or any other tax or financial matter that you may have.

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Take care and stay healthy,

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Soelberg, Durrett & Associates, PS