Michael Garcia is a partner in the enterprise solutions group for Kahn, Litwin, Renza & Co. Ltd. He has more than 20 years of public accounting experience and has dedicated himself in the last year to all things Coronavirus Aid, Relief, and Economic Security Act, becoming a “subject matter expert” in tax changes and programs such as the Paycheck Protection Program.
PBN: What are the most significant changes to the PPP program under the latest stimulus bill that businesses should be aware of?
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GARCIA: We believe there are two items regarding the PPP program that all businesses should be focused on. The first is that expenses paid with PPP loan proceeds will be tax deductible for 2020. This has obviously been one of the most talked about topics related to PPP and by far the No. 1 question asked by our clients this past year given the significant impact it will have on their 2020 tax returns.
The second item is PPP round two, or PPP2, which was established with the recent stimulus bill. PPP2 loans are available for both first-time borrowers or “second-draw” borrowers. Generally speaking, to be eligible for a PPP2 loan, a borrower must have less than 300 employees, used (or have plans to use) all of its PPP1 loan and must demonstrate at least a 25% reduction in gross receipts in any quarter of 2020 compared to the same quarter in 2019. The PPP2 loans are limited to 2.5 times average monthly payroll costs (accommodation and food-services businesses may receive loans up to 3.5 times average monthly payroll) and are now subject to a $2 million limitation.
PBN: How should businesses account for these changes when looking back at their year-end finances and planning for the year end?
GARCIA: The biggest change to year-end planning for many businesses will be that expenses paid for with PPP loan funds are now officially deductible for tax purposes. This will help many cash-strapped businesses, as they will have lower income taxes associated with their 2020 taxable profits.
One issue that business owners should be aware of is that although the PPP expenses are now tax deductible, certain shareholders/partners of entities that obtained PPP loans who did not receive forgiveness in 2020 may have to wait until 2021 to realize a tax benefit from those deductions due to tax basis issues. This is a complex tax issue that all PPP borrowers should be discussing with their tax adviser.
PBN: What remaining uncertainties about the program still need to be clarified, if any? How would you advise business to plan for these scenarios?
GARCIA: How much time do I have? I could talk all day about the many areas of the PPP that could use further clarification. A glaring issue we see that needs to be clarified relates to the “FTE Reduction Safe Harbor 1” on the loan forgiveness application. This safe harbor essentially states that if a borrower was required to be partially or fully shutdown due to various government orders, then any FTE [full-time equivalent] reduction would not have an impact on loan forgiveness. The issue is that there is no guidance on what support a business needs to provide in case they use this safe harbor provision and the loan is ever selected for review by the SBA [U.S. Small Business Administration] in the future.
Our advice to PPP borrowers in this situation is the same advice we have been providing since the CARES Act was introduced: have a due diligence file related to your PPP loan. This due diligence file should contain all the paperwork and supporting documentation used to apply for the PPP loan, apply for forgiveness of the PPP loan and a memo. The memo to the file is the most important document and should memorialize why the loan was economically necessary for the business when applying, how the business determined it was eligible for the PPP loan, and support any positions taken by the business during the PPP loan process, including situations such as “FTE Reduction Safe Harbor 1,” where there may be some uncertainty with respect to the published guidance.
PBN: Are there other tax provisions included in the year-end stimulus that are particularly pertinent or impactful for businesses?
GARCIA: Absolutely. The biggest one is the modification and extension of the Employee Retention Credit. Originally introduced as part of the CARES Act, the ERC originally offered a credit of up to $5,000 (50% of the first $10,000 in wages) per employee for wages paid by employers whose operations were fully or partially suspended by a shutdown order or whose gross revenues declined more than 50% when compared to the same quarter in the prior year. This credit has not had much press in 2020 because if a business applied for a PPP loan, they were ineligible for this credit. For many businesses, the PPP loan was more beneficial than the credit.
However, with the recent stimulus bill, PPP borrowers are now eligible for the credit retroactively for 2020. This could generate significant tax savings for eligible businesses who were affected by a shutdown order during 2020. In addition, for 2021, the credit has been increased to 70% of wages paid up to a maximum credit of $10,000 per quarter, per employee through June 30, 2021, among other changes. It is important to note that wages paid for with PPP dollars are not eligible for calculating this credit.
While we are still waiting for guidance from the IRS on how to apply these changes, all businesses should start talking to their tax advisers about this credit to see if they qualify.
PBN: What impact, if any, will the various tax extenders included in the bill have on the local business community?
GARCIA: Unfortunately, we are still experiencing significant cases of COVID-19 in our communities, and with that, many businesses are still subject to partial shutdown orders and experiencing COVID-19 infections occurring with their employees and family members. The extension of the ERC combined with the extension of the paid sick and family leave payroll tax credit established as part of the Families First Coronavirus Response Act are there to help our local business community during these uncertain times. These provisions will allow companies to keep their workforces employed.
Additionally, by allowing for the deductibility of expenses paid with PPP funds, businesses will have additional cash available that would have had to be used to pay income taxes. They can now reinvest in their businesses and the economic impact will be felt throughout their local communities. We are all in the same storm and KLR is committed to helping others navigate through it.
Nancy Lavin is a PBN staff writer. You may reach her at Lavin@PBN.com.
