Just a personal note here. As all of you who dealt with PPP know, there's a lot of guidance that will come out based on all of the business facets of this bill. Anything in this could be "subject to change" based on rulings by the IRS and/or SBA and/or Treasury.
PPP Expense Deductibility Is Now a Thing
The exception to my opening statement rule? Right here. PPP deductibility.
Just before this bill passed through the House and Senate one week ago, we had TONS of drama with PPP deductibility on Sunday, December 20. Many reps and senators were fighting about this well into the afternoon, and finally, they came to the conclusion to put it in the bill. That's fantastic news! This means that all of your PPP-related expenses (payroll, utilities, rent, etc.) that are going to be forgiven will also be tax-deductible. This overrules the IRS' stance that these expenses would not be deductible.
It seems clear that there will be no overturning this. Expenses that you applied against your PPP loan which are forgiven will be deductible. Period.
Now that we’re off to a good start, let’s dive into the rest.
PPP Round 2 To Open Soon
There is going to be a second round of PPP for some of you. The qualifications? A little bit different.
In order to qualify for PPP Round 2, you have to demonstrate a 25% reduction in gross receipts in any quarter of 2020 vs. the same quarter in 2019. For those of you who weren't in business in 2019 but were still eligible for Round 1 PPP, further guidance will follow from SBA. In fact, further guidance on all the mechanics of this will follow from SBA.
One question I have is about the definition of “gross receipts.” Is this to mean literal receipts, or rather, gross income as it would be reported on the applicant’s tax return? We’ll have to await more guidance.
They’ve also added to Round 2, a limitation to companies with 300 or fewer employees, as well as a $2M maximum loan cap (remember, this was $10M in Round 1.)
One notable change that will be very important to a few of you: If you're in the restaurant/hospitality industry, you're entitled to take a PPP based on 3.5 months of your average payroll instead of 2.5 months. For a tax-technical definition, if your NAICS code starts with 72, you're eligible for 3.5 months instead of 2.5 months. That's all bars, restaurants, hotels, casinos and the like.
Finally, as another bit of good news, they’re opening up the PPP loan program to a class of nonprofits which were left out initially – 501c(6) organizations, such as civic and business leagues, Chambers of Commerce, etc. There are limitations on organizations that have lobbying activities, and the employee count must still be less than 300.
Timing of PPP Round 2
SBA has 10 days to release rules on how PPP is going to work. Trump signed it Sunday night. That means they only have until early in January to give us rules for this. My guess is applications will begin in the next 2-3 weeks.
I don’t believe this fund will dry up like we saw back in April. There's $284 BILLION in this program. The whole PPP1 program only did $525B. Anyone who took a PPP over $10M the first time will be limited to a $2M PPP the second time. Anyone who had 300-500 employees won't be eligible for Round 2 like they were in Round 1. And of course, we have the revenue test to contend with.
People that are way smarter than me think that this is about the right number for everyone who wants to get PPP who will be eligible. Personally, I think they’ve over-funded this section of the Bill. But that’s just me.
How Much PPP Will I Qualify For?
Assuming you meet the income test, you're going to get 2.5 months of payroll costs based on the greater of your 2019 payroll costs (which is the number you got in Round 1) or your payroll costs for the last 12 months. What does this mean? If you had more payroll in 2020 than in 2019, we can (theoretically) use 2020's numbers. Whether the banks are going to have this baked into their application? TBD. A LOT to be discussed here with SBA guidance.
What's My Covered Period?
As a refresher of what a "covered period" is, that's the period of time you have to use your PPP. Way back when in April, all "covered periods" were 8 weeks long. You had to spend all of your PPP money inside of that 8 weeks. They then extended all PPPs from 8 weeks to 24 weeks, tripling the amount of time you had to spend the money.
PPP2 applications must be done by March 31. From what I can tell at this stage, again subject to change with SBA guidance still to come, the covered period on Round 2 is the 24-week period beginning with receipt of funds. And as a reminder, so long as 60% of your PPP is used on payroll costs, the rest of your PPP can be used on rent, utilities and a bunch of other things that have been added to this bill such as PPE, improvements for making your workplace safer due to COVID-19, cloud software for remote work, and the like.
Stay tuned for more guidance on all this.
What About My Employee Count?
This is a big one that people who have PPP have been worried about. To jog your memory, the CARES Act says you have to have at least the same number of full-time employees by 12/31/2020 that you had either back on 6/30/19 or 2/29/20 to qualify for full forgiveness.
What does this new bill say about employee count?
This bill, in spite of the fact that it runs 5,593 pages, does NOT seem to address this, at least not that I see. Meaning we're going to be at the mercy of SBA to conclude on this.
What I can tell you is that all of you who have loans under $150k you won't have to worry about this with the new forgiveness application, which will be in place for both Round 1 PPPs and Round 2 PPPs.
We'll see what SBA has to say about the rest of this.
What About PPP Forgiveness from Round 1?
I know that many of you are worried about getting forgiveness for your first round of PPP. One good thing made it into this bill, and one good thing didn't.
What made it? Companies with PPP loans under $150,000 are now going to be able to self-certify that they used PPP funds for the intended purposes. SBA has 24 days from the date of Trump’s signing to get us a form. You'll have to certify the number of jobs saved by getting your PPP, but that's going to be it -- much, much easier. We'll have to see what this form ultimately looks like when SBA comes up with it.
What didn't make it? An easier loan process for those of you who have loans over $150,000. Simplified processes for loans from $150,000 up to $2M were considered but didn’t make it. Seems like we're still stuck with Form 3508-EZ for you all.
I know that you're going to read a lot over the course of the next several days about needing to apply for forgiveness for Round 1 PPP before getting Round 2. That's not a thing -- at least not with this bill.
This bill specifically states that you only have to have used your PPP or expect to have used your PPP from Round 1 to get PPP Round 2 if you're eligible.
Of course, SBA guidance could change all of this. We’ll have to wait and see.
I know that some of you received the $1,000 per employee EIDL grant. In this bill, if you received less than $10,000 with your EIDL grant, you will be eligible for receiving the remainder up to $10,000.
Caveat: I don't see how the math works on this. SBA did $20B in these grants and averaged paying out $3,400 per grant. And this fund ran out of money. The whole program in this new law only has $20B allocated to it, and that includes potentially new grants that are supposed to be targeted to low-income areas. Even though this is what the law actually says, I suspect that SBA is going to have other ideas once it gets its hands on the money.
If you received an EIDL grant, that grant was supposed to come off of your PPP forgiveness. This bill erases that language, and that money is yours to keep.
Also notable? EIDL grants are also considered non-taxable. It's also entirely possible that all of those CARES grants that so many of you got may also be non-taxable. We're going to need more IRS guidance, but this bill seems to infer that perhaps ALL OF THE MONEY from the CARES Act will be treated as non-taxable income. We shall see...
Speaking of EIDLs...
The EIDL program is going to be reopened again if you are in need of disaster loans. Same terms: 30 years, 3.75%.
Details are very sketchy on this right now. As a Firm, JHM generally didn’t encourage our clients to get EIDLs (since many of you got PPPs, and at the time, it didn't make sense to have both), and we remain committed to the idea that the EIDL program is generally not your best solution. If you really need it, go get it. But otherwise, we still don't recommend tying yourself to the SBA for the next 30 years.
Employee Retention Credit (2020)
This could be a BIG DEAL for some of our clients. There's a lot we don’t know yet, and there's still a lot that we're going to need some guidance on from the IRS. But the Employee Retention Credit has gotten itself a huge overhaul, and it seems like you can now use this in conjunction with PPP, which may be a really nice late Christmas present.
This is technical, so apologies in advance.
The basis of the Employee Retention Credit (ERC going forward) is that those who took out PPP loans are now potentially eligible to claim an ERC for wages going way back to March 12, 2020 and potentially forward as far as June 30, 2021.
Many of you on this email received PPP loans. If you received a PPP, you have/had a period of up to 24 weeks to spend that money. At least 60% of that money has to be used on payroll costs, and the rest can be used on rent (subject to related party restrictions), utilities, and a litany of other things that this new bill just added. Once you finish using up your PPP payroll costs though, those payroll costs can then be used for an ERC.
Example: Say you had a $100,000 PPP loan. You have $40,000 in rent, utilities, etc. inside your 24-week covered period, and you have $200,000 in payroll costs. Since we only have to use $60,000 in payroll costs to achieve full PPP forgiveness, the other $140,000 is potentially eligible for an Employee Retention Credit.
Not everyone will qualify for an Employee Retention Credit. In order to qualify, you need to meet one of two tests.
- Your business was shutdown by government mandate.
- Your business experienced a 50% reduction in revenue in a quarter as compared to a quarter in the prior year. You continue as eligible for the credit until the end of the quarter in which you return to at least 80% of your gross receipts as compared to the same quarter in the prior year. (Effectively, once you have a qualifying quarter, you have two qualifying quarters.)
If you meet one of those two requirements, the IRS gives you a credit of 50% of your wages paid to individuals up to $10,000 in wages ($5,000 in credit) per individual for the year. So if you have a staff of 10, and they all fully qualify, you'd get a $50,000 ERC. Not bad!
So how do you get both PPP and ERC? We're not 100% sure how this is going to work yet, and we're going to need guidance from both the SBA and the IRS, but we know that this is going to be available. Effectively, if you faced a mandatory shutdown from the government for any period of time OR had a 50% reduction in revenue in any quarter in 2020, you're going to be in some luck when push comes to shove so long as you didn't boot too many people off of your payroll. We also don't know the timing of all of this quite yet.
Employee Retention Credit (2021)
This is a BIGGER DEAL for a lot of you than the 2020 ERC.
Starting with 2021, the rules for the ERC are changed dramatically.
- Instead of needing a 50% reduction in revenue, you only need a 20% reduction in revenue for a quarter as compared to the same quarter the previous year.
- The credit is SIGNIFICANTLY more favorable. Instead of receiving 50% of up to the first $10,000 in wages paid to each individual, the credit is 70% of the wages up to the first $10,000 in wages PER QUARTER for each individual. A credit that was $5,000 for the year in 2020 could be $14,000 for the year in 2021. Big deal.
Most importantly, there is a built-in automatic qualifier for the 1st quarter of 2021. If your gross receipts in the 4th quarter of 2020 were reduced by at least 20% of what they were in the 4th quarter of 2019, you automatically qualify for the ERC in the 1st quarter of 2021.
The same rules continue to apply if you face a mandatory shutdown at any point along the way until June 30, 2021.
So What Do I Need To Do Now?
There really isn't anything we can do at this point except some planning. A few key things to check.
- Did your business have a 50% reduction in revenue in any quarter compared to the same quarter in 2019? (ERC 2020)
- Did your business have a 25% reduction in receipts (definition still TBD) in any 2020 quarter compared to the same quarter in 2019? (PPP Round 2)
- Did your business have a 20% reduction in revenue in the 4th quarter of 2020 compared to the 4th quarter of 2019? (ERC 2021)
- Was your business subject to mandatory government shutdown at any point in 2020 due to COVID? (ERC 2020)
Extension of the FFCRA
This involves the paid family and sick leave that was required for many small businesses starting 4/1/2020. The FFCRA is back and is being extended through 3/31/21. As a reminder, you (the employer) will have the opportunity to take a dollar-for-dollar tax break for paying employees who have COVID, have COVID symptoms, or are in some other way quarantining from COVID and are unable to telework. In addition, employers will get 2/3 credit for any wages paid to employees who are taking care of kids who have COVID, have COVID symptoms, etc. or are out of school/daycare because those educational facilities are closed due to COVID.
For some of you, this is mandatory due to your number of employees. For others who are significantly smaller, this is optional but highly encouraged since there is no cost to you whatsoever to use it since every dollar paid out to employees is returned to you. Remember to include yourself in with your employees. You're eligible for this credit as well for paying yourself if you get COVID, have symptoms of COVID, etc. and are unable to work or if you're taking care of kids who are out of school/daycare.
One note to a question I’m sure some of you have: No, the FFCRA "clock" doesn't reset on 1/1. At least based on what we know about this right now (again, pending guidance that changes this) each individual is only covered for a total of 2 weeks of sick paid and 12 weeks of family leave pay for the duration of this bill.
Don't be shocked if this changes significantly once Biden gets into office. But this is what we have for now.
Business Meals are 100% Deductible for 2021 and 2022
Business meals are now 100% deductible instead of 50% deductible. Meals had been 50% deductible for the last 3+ decades, but effective 1/1/21, business meals are now fully deductible for the next two years (at which point, business meals will go back to 50% deductible). Notably, there's no change in entertainment, which is still 0% deductible.
States Will Have More Time To Issue CARES Grants
Previously, all of the CARES Act money was set to expire on December 31. This new bill allows states until 12/31/2021 to actually spend all of the money that they were given with the CARES Act. That isn't necessarily notable at this moment because most of the states used all of their money. It's possible that we'll see more local grants in the future. Most importantly, if there is future legislation that does give more money to the states for COVID relief, so long as it is earmarked as COVID relief money, the states will have until 12/31/2021 to use it. We'll see if there's ultimately another COVID relief bill or not.
Extension of the Work Opportunity Tax Credit
I don't know how many of you are interested in the Work Opportunity Tax Credit, but for those who hire individuals who would qualify for the WOTC, that's been patched into the law for the next five years. The WOTC was set to expire on 12/31. There was a thought that perhaps the WOTC would be expanded to include virtually any new hire that a business made in 2021, but that didn't make the final cut of the bill (and was never in serious consideration).
SBA 7a Loan Benefits
If you have a regular SBA 7a loan from before COVID, the amounts paid on your behalf for your loans will be non-taxable to you, overturning a previous IRS ruling. You will also still get a deduction for the interest that is paid on your behalf. This should impact very few of you on this email, but I wanted to list it here.
What's Not in This Bill
(Not nearly as much not in this bill as we originally anticipated would have been left out.)
-Money for states (this will be addressed at a later date by the new Congress)
-No liability protection for businesses (again, will be addressed at a later date by the new Congress)
-Extension of payroll tax deferrals
As always, we remain committed at JHM to doing our best to keep you apprised of relief available to you. We are always here as a sounding board to discuss these and other questions you may have.
Happy New Year All, and thank you for the Confidence you’ve placed in us!