Resources and information that matter to you. Doing Business Better are virtual, high impact sessions featuring insightful and informative presentations tackling small business owners’ greatest challenges and providing resources for their continued growth and success.
In the first session of our new virtual series, Doing Business Better, Melonie Hammond-Trace, Partner at Tideline CPA Group, discussed the qualifications for receiving assistance along with pertinent tax law changes of the act. In addition to adding funds to Phase I of the Payroll Protection Program and establishing Phase II, it also changed the qualifications for the Employee Retention Credit, potentially yielding up to $5,000 per employee for 2020 and $7,000 per employee in 2021.
Let’s start with the added funds to Phase I of the Payroll Protection Program (PPP) and establishing Phase II of this program. Then you will learn more about the Employee Retention Credits.
On December 27, 2020, the Economic Aid Act was signed into law.
An overview of the Economic Aid Act includes:
- Changes to forgiveness of PPP Phase I
- An Additional PPP eligible expenses
- An Added $284 billion to the Paycheck Protection Program (PPP)
- A clarification of tax treatment for covered loan forgiveness
- Changes to Employee Retention Credit
- 50% limit on business meal deduction is suspended for meals provided by restuarants in 2021 and 2022
- Additional direction to taxpayer advances on “refundable recovery rebate credit for 2020.”
What you need to know if you are a first-time borrower
To be eligible to be a first-time borrower, you did not take advantage of the first round of PPP funding. You will also be eligible if you are a:
- 501(c)(6) non-profits with limited lobbying
- Local newspaper, TV and/or radio stations
- Housing coops
You will be ineligible if:
- Your entity has permanently closed
- Your business wasn’t in operation on February 15, 2020
- Your entity received “shuttered venue operator” grants
- You’re a publicly traded business
- You have hedge funds or private equity funds
- You have household employers
- Your entities in bankruptcy
First Draw Increases Information:
- Begins January 25th
- Not intended as a “top off” due to miscalculations or new categories included
- Not allowed if loan has been forgiven
- May apply for it if:
- Partner compensation was not originally included
- New approach for seasonal employees or for ranchers/farmers yields a higher loan amount
- 1st draw was cancelled, or money was returned
What you need to know if you will be a second-time borrower
You will be eligible to be a second-time borrower if:
- Your company has been in operation on February 15, 2020
- You received the first draw previously
- You have 300 employees or less – this is based on headcount and includes all full- or part-time employees
- Businesses with NAICS code 72 (such as hotels and restaurants), businesses must have 300 or less employees per physical location
- You have a 25% reduction in gross revenue between comparable quarters in 2019 and 2020
- You have used or will use all first draw PPP funds (including the amount of any increase of a first draw) on eligible expenses on or before expected date of the second draw loan disbursement
- Same affiliation rules apply as with the first draw
- Entities ineligible to receive a first draw are also ineligible to receive second draw
Requirements to use 1st draw for eligibility for second draw
- The SBA will require lenders to delay funding the second draw until the borrower has fully used all of the first draw funds
- For the second draw application, the borrower will be required to attest that they have used or will use the full amount of the first draw funds on eligible expenses. This includes the requirement that the borrower has spent at least 60% of the first draw funds on eligible payroll (owner comp limits apply)
- A second draw may be approved but for it to actually be received, the borrower will need to certify that the first draw has been used
- It is not a requirement to apply for forgiveness of the first loan or that forgiveness be granted
Amount of Loan
Second draw loans for borrowers with employees are calculated as 2.5 times average monthly payroll costs, up to $2 million. Borrowers with a NAICS code that begins with 72 (such as hotels and restaurants) are eligible for loans up to 3.5 times average monthly payroll cost (max $2M).
Borrower can choose to calculate average monthly payroll based on 2019, 2020 or the 12-month period prior to when the loan is made. Calculation is the same as 1st PPP draw.
The following loan amount factors are specific to second draw loans and differ from a first draw loan:
- Borrowers cannot include a refinancing of an EIDL loan in a second draw
- There is a limit of $4,000,000 in the aggregate for second draw PPP loans for businesses that are part of a single corporate group. (Applies to entities that are majority owned, directly or indirectly, by a common parent)
- Self-employed borrowers who file a form 1040, schedule C, same multiples as above and net profit for calculating owner comp is capped at $100k
Calculating Decline in Gross Receipts
For borrowers in operation all four quarters of 2019, compare gross receipts during the first, second, third or fourth quarter in 2020 to the same quarter in 2019 to determine if there was a 25% or greater revenue reduction.
For example, an applicant that had gross receipts of $50,000 in the second quarter of 2019 nad had gross receipts of $30,000 in the second quarter of 2020. This reduction of $20,000 in gross revenue is a 40 percent reduction.
What is and isn’t included in Gross Receipts
Included in Gross Receipts
- Sales of products or services
- Interest, dividends, royalties
- Fees or commissions
- Reduced by returns and allowances
For non-profits, contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activites, sale of assets, and investment income (interest, dividends, rents and royalties
Not included in Gross Receipts
- net capital gains or losses
- taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees); proceeds from transactions between a concern and its domestic or foreign affiliates
- amounts collected in an agency relationship…collections on behalf of someone else
- first draw PPP loans and EIDL loans/advances are excluded from gross receipts
Gross receipts are not reduced for any associated costs or expenses
Documentation Requirements for Second Draw
- For loans greater than $150, 000, documentation of revenue reduction is necessary at the time of the loan. Documentation may include relevant tax forms, including annual tax forms, quarterly financial statements or bank statements
- For loans of $150,000 or less, documentation is not required with the loan application, but will be required with loan forgiveness applications
- Other documentation requirements as to payroll costs will vary depending on whether the borrower is using the same payroll information as the first draw application and the same lender
Employee Retention Credit
Good news – even though you received a PPP loan, you can now be eligible for this.
Here are the basics:
- Intended to provide liquidity to employers during the pandemic
- Employers of any size, including tax-exempt orgs. Engaged in a trade or business can take the credit
- To claim the credit, report on Form 941 quarterly payroll filing or submit Form 7200
- The credit is refundable
- Affiliated entities are aggregated to determine eligibility
- Wages paid to owners or individuals related to owners are not eligible
- Gross receipts defined the same as noted earlier for PPP phase II eligibility
How PPP and Employee Retention Credit Play Together
Employers that received a PPP loan would not have evaluated whether they qualified for the credit and may want to do so now.
Most employers will have wages in excess of their PPP loan and will have qualified wages for the ERC. Many employers reported only wages on PPP loan forgiveness applications even if they had rent, utilities, etc. It is unclear how this will impact the “double dip” of not using same wages for both. Most believe it will be worked out fairly.
Ways to Learn More
- Watch the full webinar:
If you have specific questions regarding this topic, please contact Melonie Hammond-Trace, CPA at email@example.com