Tax Considerations/Strategies for PPP loans and Grants

by Karen A. Hahn, CPA, Inc

PPP #1:

• For those of you who received a PPP during the first round April – June of 2020, THE MONEY YOU SPENT FROM YOUR PPP LOAN WILL BE TAX DEDUCTIBLE!!!
• Be aware that California has not conformed to this non-taxable provision. The forgiveness of the loan will be taxable on California tax returns.
• There is a new simplified loan application for loans below $150,000. (This will apply to PPP 1 &2.) Form 3508EZ One page no documentation required.
• Long form is 3508, requires documentation to be attached.

PPP #2:

Same as original PPP Loan:

• The loan amount will be 2.5 times your monthly payroll (for most)
• Terms: 1%, 5-year maturity (loans before 6/5/2020 have a 2-year maturity)

New terms on PPP2 loan: Your business is qualified to take a “second draw” on the PPP loan if you meet the following requirements:

• For businesses with no more than 300 employees per physical location
• $2 million maximum loan amount
• You must prove you have had a decrease in gross sales of at least 25% for at least one quarter in 2020 (as compared to the same quarter in 2019).
• Restaurants & Hospitality businesses can borrow 3.5 times their payroll amount
• If you did not get a PPP loan the first time, you can apply for BOTH draws!
• If your first PPP loan was lower than 2.5 of your payroll, you may be able to get the additional amount with your 2nd loan!
• In addition to payroll and rent expenses being qualified expenses, you now will be able to include COVID related expenses! This means personal protection gear, supplies necessary to meet CDC safety compliance, disinfectant supplies and even certain qualified software will be included for forgiveness.
• There is a 90-day window between your original PPP loan funding and the new application. There is also some verbiage that suggests you must have used up your original loan before you can apply for the new loan. While we don’t have any guidance on this, it simply means you have to justify that you spent the money on payroll & rent (and COVID expenses?) before you can apply for the 2nd loan. (This may not be the same as proving the bank account you had the PPP loan deposited into is zero. Don’t presume that account must be zeroed to qualify. Let’s wait for more guidance.)

IF YOU ARE INTERESTED IN APPLYING FOR PPP2, YOUR MAIN PRIORITY RIGHT NOW SHOULD
BE GETTING YOUR 2020 BOOKS UP TO DATE.

This will help you get the information needed to apply.

• EIDL Loans no longer have to be deducted for the PPP loan to ascertain forgiveness.

GRANTS

• Some business have received grants from different entities such as professional organizations and cities. In order to determine if these grants are taxable, one has to look to the original grant paperwork. How was the grant money calculated? If it was meant to be a replacement of income, then it is most likely taxable.

OTHER ITEMS on the Economic Relief Bill:

Economic Impact Payments

If you receive a stimulus with the last round ($1200 per person), you will most likely receive the new stimulus of $600 per person (plus $600 for dependents under age 17). Here are the qualifications:

• Single income below $75,000; Head of Household income below $112,500 and Married joint income below $150,000. If your income is above these thresholds, the amount you receive will be phased out.
• Payment will be based on your income on your 2019 tax return.
• Social Security & Veterans will receive the $600 automatically.
• You may not receive the payment in the same fashion as the last one. If you did not get direct deposit or paper check, you may get a check or debit card in the mail.
• If you do not receive the payment & you are eligible, you will get the money as a tax refund when you file your 2020 return. (Recovery Rebate Credit)
• You can go to Get My Payment to get information about your first and second stimulus payments.
• You will not be able to change checking information on-line. If your bank account has changed, you may receive a paper check or can claim the recovery rebate credit when you file your 2020 return.

Unemployment

• Unemployment benefits have been extended for 11 weeks. These benefits also include an additional $300 per week through 3/14/2021.
• Pandemic Unemployment Insurance for self-employed or subcontractors will also be able to collect unemployment for another 11 weeks. The $300 additional pay also applies.
• You do not need to do anything if you already have an open claim. If you have recently become unemployed, you should open a claim.
• Maximum weeks of unemployment is extended to 50 weeks.
• I to recommend business owners do NOT collect unemployment if you are eligible for PPP2. It’s expected the loan process will be much quicker and you should use the PPP loan to pay yourself.

Payroll Tax Deferral

• If you took the payroll tax deferral, you have until 12/31/21 to pay the taxes back. (It had been 4/30/21.)
• Self-employed individuals can get a social security credit if they contracted COVID19.

Paid Sick Leave Credits

• If the employer pays an employee for paid sick and family leave, you can use payroll tax credits through 3/31/21.

Employee Retention Credit

A payroll tax credit can be taken if you experience a 20% decline in gross receipts (was 50% decline) from January 1 to June 31, 2021. The tax credit applies to:

• A credit equal to 70% of gross wages, up to a maximum of $10,000 in wages per quarter (was per year). This means up to a $7000 payroll tax credit per employee.
• This is only for employers who did NOT get a PPP loan.

Rent Assistance & Eviction Moratorium

• The eviction moratorium was extended until 1/31/2021.
• Eligible renters can receive up to 12 months assistance to pay for rent, utilities and unpaid rent or unpaid utilities. This assistance is tax free.
• States will be responsible for distribution of these funds. Contact your local housing authority for assistance.