We’re in the middle of tax season which is normally a high-stress time of year. To make matters worse, Texas had an unprecedented snowstorm that shut down the state for a week in the middle of February. The IRS took pity on us and extended the due dates until June 15. Some details are available here. It’s important to be aware that state filing deadlines are not extended at this time.
PPP2 rolled out over the past few months and businesses are getting their cash accounts replenished by the SBA. The requirements are stricter this time around and you will have to show a 25% reduction in revenue for one quarter in 2020 vs. that same quarter in 2019. Applicants can use 2019, 2020 or a rolling 12-month period before submission as the calculation period. Compared to the first round of loans, PPP2 has a few notable differences. Maximum business size was reduced from 500 to 300 employees. Maximum loan size was reduced from $10M to $2M. Restaurants and hospitality industries with a NAICS code beginning with 72 are eligible for 3.5 times the average monthly payroll. This is an increase from the standard 2.5 multiple used for the other PPP loans.
In a shocking move, the rules for Schedule C filers changed just this week. Taxpayers are now allowed to use line 7 (gross profit) instead of line 31 (net profit). This can turn a $0 loan into a $20,833 loan. The maximum loan for a Schedule C filer without employees is still based on $100K annually. It’s unclear how this will affect loan recipients who applied under the old rules. Guidance should be coming in the weeks to follow. We expect a retroactive application where additional funds will be available based on the new rules. This is pure speculation at this point, so keep those fingers crossed.
The employee retention tax credit (ERC) has flied under the radar and money is being left on the table by uninformed employers. PPP loan recipients were ineligible for the ERC for most of 2020, but that changed retroactively with the December bill. Employers can claim the ERC even if they received a PPP loan. The interplay between the two programs does prohibit the same dollar from being used for PPP forgiveness and for ERC calcs. As a result, taxpayers are taking their time to submit forgiveness applications efficiently to maximize the ERC. Maxing out your non-payroll costs (rent, utilities, etc.) is a prudent move on your forgiveness application.
The ERC has a maximum benefit of $5K/employee for 2020. This maximum benefit increases to $7K/employee for both Q1 and Q2 2021. To qualify, you must meet one of the two tests. The bright-line test is showing a revenue reduction of 50% for a quarter in 2020 vs. that same quarter in 2019. For 2021, you’re able to use 20% instead of 50%. Additionally, you can elect to use the preceding quarter, so comparing Q4 2020 to Q4 2019 may qualify you for Q1 2021. You need to consult with your tax adviser to maximize this credit and claim the credits correctly. The second way to qualify is based on the shutdown rules. A government order must have prevented your business from operating (fully or partially). This involves applying the facts and circumstances to your specific case. Please consult your accountants and attorneys to make this determination.
Self-employed individuals have a reprieve by way of the form 7202 credits. If you are a Schedule C filer or a partner in a partnership, be aware of these new tax credits for 2020. The credit is based on days you could not perform services as a self-employed individual. This includes up to 10 days for receiving medical care personally or caring for others with the virus. You can also include time spent under a federal, state, or local quarantine or isolation order in this 10-day max. Part II of form 7200 also allows for a credit for parents who couldn’t work because they had to stay home with their children. Schools and daycares were closed, and parents were forced to miss work as a result. This credit is intended to help compensate for the lost time.
Contact our office with any questions on these important updates!