With the anniversary of the COVID-19 pandemic and its associated economic impacts, combined with a change in federal administrations, now is a good time to take stock of relief available for businesses and other organizations. Below is a brief summary of PPP1 and PPP2 information, along with updated information on the Employee Retention Credit (ERC) and Economic Injury Disaster Loan (EIDL). We are providing this information to answer some of the basic questions clients have been asking. As always, when you are considering moves that may impact your financial or tax planning, your AKM CPA is available to provide advice and guidance that aligns with your circumstances and objectives.
PPP Overview
Applications are now being accepted for a second round of potentially-forgivable PPP loans. The basic requirements are the same as for the first round of loans, and organizations that received a loan in the first round may apply for the second round as well. Additionally, both organizations and self-employed individuals/independent contractors should have a defined process and strategy to apply for loan forgiveness. Below is a high level summary with more recent information first.
PP2: New Requirement
While the PPP1 loans did not require organizations to demonstrate any adverse impact, PPP2 loan applications must show a 25% reduction in gross revenue, year to year, for the comparison quarter.
Expenses Paid with PPP are Deductible
The initial legislation creating the PPP program did not allow expenses covered by PPP loans to be deducted. Subsequent legislation has adjusted this so that expenses covered by PPP loans are deductible as legitimate business expenses to the extent that they normally would be.
PPP1 Loan Forgiveness
Timing Your Application
Just as the initial PPP applications went through several revisions as the process was refined, the PPP forgiveness process is still being streamlined. Those who applied for forgiveness earlier had to submit longer and more complicated forms than those who applied later, and less detailed forms are now being required for loans of less than $150,000. Eligibility for forgiveness is based on the 24 week period during which organizations have to spend the funds along with the desired forgiveness amount.
PP1 Loan Forgiveness for self-employed individuals and independent contractors
Eligible PPP1 loan expenses may be forgiven for self-employed individuals and independent contractors based on information on Schedule C of their 2019 tax returns:
- Owner compensation may be forgiven based on net profits shown on the 2019 Schedule C. The forgiven amount will be the lesser of 8/52 (i.e., 8 effective weeks of compensation) or $100,000.
- Mortgage interest, rent and utilities may be forgiven if paid during the covered period; however, these expense categories must have been claimed on the 2019 Schedule C.
- Retirement and medical benefit payments are included in the compensation cap.
Reminder: Requirements for Loan Forgiveness
Both PPP1 and PPP2 loans can be forgiven, provided certain requirements are met and documented. These include:
- Restrictions on use of funds: Loan funds may only be used for salary and employee benefits
- Maintenance of headcount: Organizations must maintain the same number of employees during the period February 15, 2020 through June 30, 2020 as they had during one of the designated comparison periods:
- February 15, 2019 – June 30, 2019
- January 1, 2020 – February 15, 2020
- Maintenance of compensation: Compensation must be maintained at 75% or more for employees making less than $100,000 per year
The amount of the PPP loan in either round that can be forgiven may be reduced if the above conditions are not properly met and documented. However, in the case of reduced headcount or salary, organizations that can show they rehired workers or restored compensation by June 30, 2020 will not be penalized.
Reminder: Basic Loan Requirements
- Employee ceiling: Available to businesses with fewer than 500 employees
- The ceiling is 1500 employees for select industries
- Certain nonprofits and veterans’ operations are also eligible
- Age of business: The business must have been in operation prior to February, 2020
- Loan amount calculation formula: Loan amount is limited to 2.5x monthly payroll
- The limit is 3.5x for most businesses in the hospitality industry
- Loan terms:
- Interest rate: 4% (maximum)
- Term: up to 10 years
- Deferment period: 6 to 12 months
- Forgivable under certain conditions (see below)
- No personal guarantee or collateral required.
Employee Retention Tax Credit (ERTC) Expanded for 2021
In the initial formulation ERC and PPP presented an “either/or” proposition. Subsequent legislation made it possible for organizations that received PPP loans to also take advantage of the ERC, provided they meet one of these criteria:
- The business was fully or partially suspended due to orders from the federal or state government limiting commerce, travel or group meetings due to COVID-19.
- The business experienced a 50% year-over-year decline in gross receipts during any quarter of 2020 or a 20% decline in the first two quarters of 2021 compared with the same period in 2019.
Employee Retention Credit (ERC) Basics
- Tax credit applies to employer share of SSI
- Credit is based on 70% of qualified wages paid between December 31, 2020 and June 30, 2021
- Qualified wages limited to $10,000 per employee per calendar quarter in 2021
- Maximum credit is $7,000/employee/quarter (i.e., $14,000 total per employee in 2021
- Tax credit is refundable
- Credit may be used to reduce 2021 Q1 and Q2 tax deposits before filing
Alert your payroll company if you plan to take advantage of this program. Having good records will be essential to successfully claiming the credit.
Economic Injury Disaster Loan (EIDL)and PPP
The original EIDL loan program is closed. Initial program rules required any PPP loan forgiveness to offset an EIDL loan. This has been changed so that the two programs are now treated completely separately.
- If an organization’s EIDL was already offset by PPP forgiveness, additional paperwork may be required in order to restore the full amount of the EIDL loan (regulations are still in development).
- The EIDL advance ($1000 per eligible employee) remains forgiven.