Just the Tax: The New Covid 19 Relief Package
Our first look at the new COVID-19 stimulus package
A week ago Sunday, President Trump signed the 5594 page Coronavirus Relief and Spending Package. We are wading through the bill’s contents to determine all of the provisions which apply to our clients. In the interim, we wanted to provide you with a high level summary of the most relevant portions of the package.
This update applies to me if …
You received a Paycheck Protection Program (PPP) loan earlier in the year;
Your business has endured a reduction in revenue in any quarter in 2020 compared to the same quarter in 2019;
You did not apply for a PPP loan previously because you were an S-Corporation;
You already applied for and received an employee retention credit;
Your business was subject to a mandatory government shutdown in 2020;
You find this stuff as interesting as we do.
What’s new?
PPP Loan Round 2 Timing
Now that the bill has been signed, the SBA has 10 days from last Sunday to give us all of the guidance for what we are calling PPP Round 2. If we had to guess, our clients are going to be able to start applying for PPP at some point in the next 2-3 weeks.
In order to qualify for PPP Round 2, you have to demonstrate a 25% reduction in revenue in any quarter in 2020 vs. the same quarter in 2019. For those of you who weren't in business 2019 but were still eligible for Round 1 PPP, further guidance will follow from SBA as to whether you will or will not be eligible for Round 2 PPP.
PPP Round 1 - Potential Opportunity for S-Corps
Some of our clients were Subchapter S-corp owners who didn't take a Round 1 PPP because they didn’t take a payroll deduction in 2019. One of the things we’re going to be watching closely for is SBA guidance on whether they will grant some latitude to these S-Corporations. One of the little-known PPP facts is that you can calculate payroll costs off of EITHER your 2019 payroll OR your payroll over the course of the 12 months prior to applying for the loan. Does this mean that those of you who are taking payroll for the first time in 2020 would be eligible for Round 1 PPP? Very possibly. We don't know yet.
PPP Round 1 and Round 2 Together?
An interesting strategy here... if you didn't receive PPP Round 1 and are eligible for it, you can apply for PPP Round 1 as soon as applications open, spend the money as quickly as possible, then apply for PPP Round 2 if you qualify with the 25% reduction in revenue (assuming that funding for PPP Round 2 remains funded). It's wholly possible that some of you on this email will actually be able to get two rounds of PPP.
What About My PPP Round 1 Forgiveness?
As most of you know by now, the IRS clarified that the expenses you incurred which were financed by your PPP funds are deductible. That is a huge relief to our clients (and to us as your tax advisor).
As for forgiveness, the SBA now has 24 days from Sunday to provide a 1-page application that will be used for those who have PPPs under $150,000. For everyone else, you’re still stuck with Form 3508EZ (which is frankly anything but "easy"). Our best guess is that it'll be at least February before the banks are ready to accept Round 1 PPP forgiveness based off of this newer, easier application. For those of you anxious to apply for forgiveness, our advice continues to be to wait for additional guidance. And, of course, we will be here to assist when you’re ready to file.
Recapturing Round 1 PPP for Those Who Took Employee Retention Credit
If you didn't take a Round 1 PPP due to the fact that you took an Employee Retention Credit, we have an interesting option for you.
Option 1: Keep the Employee Retention Credit and forgo PPP
Option 2: Pay back the Employee Retention Credit and get a PPP
While we are waiting for some further guidance from SBA on eligibility, there's a good chance that you can go back and get PPP and capture your Employee Retention Credit.
Employee Retention Credit (2020 Style)
This is a BIG DEAL for some people. There is a lot we didn't know yet, and there's still a lot that we're going to need some guidance on from the IRS. However, the basis of the Employee Retention Credit (“ERC”) is that those who took Round 1 PPP are now potentially eligible to recapture an ERC for wages going all the way back to March 12, 2020 and potentially forward as far as June 30, 2021.
If you received a Round 1 PPP, you had a period of up to 24 weeks to spend that money. At least 60% of that money had to be used on payroll costs, and the rest can be used on rent, 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 shut down 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.
Employee Retention Credit (2021 Style)
This is a SIGNIFICANTLY 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 faced a mandatory shutdown at any point along the way until June 30, 2021.
For more information
If you’re having trouble falling asleep, the actual bill can be found here.
What do I need to do now?
There really isn't anything to do at this point except some planning. Our team is diving into the entire bill to ensure that we understand all of the nuances and how they might apply to your own unique tax and financial situation. We’re also looking forward to reading the guidance from the SBA when it is made available.
We will continue to update you as we work our way through the bill. During our individualized planning meetings, we will, of course, discuss the relief bill in greater detail to ensure that there you haven’t missed any opportunities to which you can avail yourself.
If you have any questions about a particular provision in the legislation or in our update, please don’t hesitate to contact us at cpa@sherwoodtax.com.
The fine print
We draft these Tax Tips to assist you. That said, they do not consist of tax advice nor are they intended to be a comprehensive summary of the tax law. If you have specific questions please let us know and we are always happy to assist you.