We have written many previous PayDay newsletters about PPP loans and the “payroll tax holiday,” all of which can be found at our website blog. Since a few weeks have passed without much conversation about PPP loans or the ill-fated “payroll tax holiday,” we thought that an “update” about both of these topics was in order—–so here we go!!
PAYROLL TAX HOLIDAY—-DEFERRING EMPLOYEE FICA TAXES—WHAT’S UP?
The only employer we are aware of that is implementing the President’s “payroll tax holiday” is the Federal government. Major employers such as the State of Indiana, JP Morgan Chase, UPS, etc. have all indicated they will not offer the “payroll tax holiday” at this time. The conclusion by employers, both large and small, is that implementation of the deferred FICA taxes for employees is not good for anybody—-employees will be caught off-guard when their paycheck goes down in January due to withholding double FICA tax, and employers are “on the hook” for the FICA taxes of employees who fail to repay their “FICA tax loans” early 2021. If an employee wants to receive the FICA tax deferment, they can only receive it if the employer chooses to offer it—–most employees actually long ago decided they did not want an “interest free loan” anyway, so it looks like the “holiday” is yet another cancelled COVID event.
If you do wish to offer this FICA tax deferral to your employees, let your payroll specialist know—-If you do offer the deferral, make sure you tell your employees in writing that this deferral must be repaid by them to you—and “HR” would suggest that a written repayment agreement be drafted for sign-off by the employee.
PPP LOAN FORGIVENESS—-8 WEEKS OR 24 WEEKS OR SOMETHING IN BETWEEN
When applying for PPP loan forgiveness, an employer should select the “covered/spending period” which enables them to attain 100% forgiveness. This calculation of 100% loan forgiveness can be monitored, and the decision as to the number of weeks selected can be made with “hindsight,” since an employer has 10 months after the end of their selected “covered period” in which to apply to their bank for loan forgiveness. Employers should continually monitor their PPP spending, FTE levels and any “wage adjustments” and select the covered period which provides them with total PPP loan forgiveness. Projections and outcomes can be be entered into an online AICPA “loan forgiveness calculator.” This is an awesome online site which is free for use by any PPP loan recipient——simply enter your SBA loan number into the online “tool” and you can enter payroll, rent, utility, etc. costs into the calculator, for various numbers of weeks, enter any FTE/headcount percentage reductions, and essentially calculate and recalculate the “loan forgiveness results” until you attain total PPP loan forgiveness.
Again, an employer has 10 months from the end of their selected “covered/spending period” in which to apply for PPP loan forgiveness-—-so the employer can use the AICPA free calculator to determine the # of weeks it takes to attain complete forgiveness, and later apply based on that optimum timeframe.
POSSIBLE AUTOMATIC LOAN FORGIVENESS AND REDUCED DOCUMENTATION FOR FORGIVENESS
There has been considerable discussion about possible automatic loan forgiveness for smaller PPP loan amounts, and reduced documentation for somewhat larger loans. However, we currently have a very toxic political climate in D.C, which has not been conducive to implementation of initiatives/suggestions. The primary items being discussed are a one page loan forgiveness “form” for PPP loans below $150,000, in which the employer would certify that they used their PPP loan proceeds in the manner intended by the CARES Act—-no math, simply a “check the box” form. Discussions “on the Hill” also revolved around a reduced amount of documentation/proof for PPP loans between $150K and $2 million, with those employers needing to complete the SBA 3508 form BUT not being required to upload “proof” of expenses—–fill in the “math” but provide no supporting documents. Many SBA lenders have not yet opened their loan forgiveness portals in hopes that the forgiveness process will become easier. If “automatic forgiveness” would apply for PPP loans below $150K, that would represent substantially less work for about 86% of total PPP loans. Nothing is finalized on these “make it easier” proposals at this time, but hope for a reduction in forgiveness complexity is the reason so many advisors and also banks are telling employers to be “patient” on applying for forgiveness.
A FEW RECENT PPP LOAN FORGIVENESS CHANGES RECENTLY
The SBA/Treasury released another “interim final rule” which addressed eligible PPP loan expenses for related-party rent and also for “owner-employees.” Rent paid by the employer to a “related party” (such as the owner of the business also owning the real estate being rented—-very common) can only be “counted” for PPP loan forgiveness up to the amount of the mortgage interest paid during the covered period on the real estate. This clarification is not a borrower-friendly provision!! So if an employer pays $5,000 per month in rent to a related-party landlord (common ownership), the rent expense can only be “counted” up to the amount of the mortgage interest paid during the covered period on the rented property. If the rented real estate is mortgage free, zero rent expense can be counted by the employer as an expense eligible for PPP loan forgiveness. THIS IS A BIG DEAL FOR SOME ORGANIZATIONS!—-Some employers may need to go beyond their anticipated “covered period of weeks” to offset this reduction in “eligible costs”—-go an extra few weeks and perhaps the payroll costs for those extra few weeks will be sufficient to offset the loss of the rental expense. The SBA also clarified that the “caps” on “owner-employees” as to the amount of payroll which can be counted do not apply to employee-owners of less than 5% of the stock in the S or C corporation—–this is good news for corporations which have highly paid employees who own less than 5% of the company stock. The SBA did clarify that this same benefit does not apply to partners in partnerships—-with no explanation why that is the case!
Please keep in mind when counting PPP eligible costs for “owner-employees” that those owner-employees’ eligible payroll costs are $15,385 for an 8 week period and $20,833 for 10 or more weeks of a covered period (and those amounts may be further limited based on the owner-employees’ 2019 W-2 wage amount.)
INCOME TAX CONSIDERATIONS—–DISCUSS THIS SIGNIFICANT MATTER WITH YOUR CPA/TAX ADVISOR
The CARES Act indicated that the amount of PPP loan forgiveness would be tax-free. A month later in an April IRS Notice 2020-32, the IRS took the position that expenses paid with the tax-exempt PPP loan proceeds would not be tax-deductible, which is tantamount to taxing the PPP loan proceeds. A few months ago a “hot topic” was congressional action to create legislation indicating that expenses paid from the PPP forgiven loan would be tax-deductible—however, it seems that proposals to “not tax” the PPP loan (or actually, “through the back door,” not permit deductions for business expenses resulting in PPP loan forgiveness) have stalled out and it does not appear imminent that legislation will be enacted to permit deductions for PPP loan expenses.
Many discussions among CPA’s/tax advisors are now occurring regarding the timing of “when” the PPP expenses would be disallowed—–since a common fact pattern is that PPP eligible expenses will be paid during 2020, and in many cases the forgiveness of the PPP loan will not occur until next year/2021, what does that mean as to 2020/2021 tax deductions for the expenses. Since the expenses paid this year are in a “pending forgiveness status” until the PPP loan is officially forgiven, are this year’s expense tax-deductible for year 2020, and then expenses paid in 2021 are “disallowed?” This would result in the PPP loan not being taxed this year, decreasing 2020 taxes, but then it would be taxed in 2021 at potentially higher tax rates. We also do not know what tax law changes will be coming down the path for 2021 since this is an election year.
We suggest that you discuss this matter with your tax advisor as to possible options. Some advisors are suggesting that employers file extensions of their 2020 tax returns and then wait to see what happens as to the tax treatment of PPP loans. So, again, the uncertainty of all this suggests that taxpayer organizations simply be patient and weigh the various potential tax outcomes of this matter
CONCLUSIONS
Talk with your CPA/tax advisor about PPP loan forgiveness and the tax options pertaining to PPP loan tax impacts. We highly recommend that PPP loan recipients use the AICPA sponsored “loan forgiveness tool/calculator” to enter expenses/FTE headcounts and use the calculator to help you determine the number of weeks you should select as your “covered period.”
Finally, bi-partisan support exists for yet another round of PPP loans, this time targeted to small employers who have had significant reductions in their 2020 gross sales/receipts as compared to last year. Virtually everybody feels that these additional funds are needed to help out still struggling smaller employers who have exhausted the proceeds of their first PPP loan. At this point, nobody knows when or if Congress can create another round of pandemic stimulus initiatives, of which a second round of PPP loans for the hardest hit smaller employers would likely be included.
AccuPay will continue to follow developments about PPP loans and other stimulus measures. We are happy to answer questions about these topics. Also, our website blog does contain many previous articles about PPP loans and the payroll tax holiday details.