A librarian for the non-profit organization Always Discovering reached out to me to express appreciation for the blog and other resources on my website, and to suggest a few more.
Some of these grant opportunities expire soon, so if you think you might qualify, take a look and as always — make sure your books are up-to-date and tax returns are timely-filed or extended, so you have the resources needed for applications.
Let us know in the comments if any of these turn out well (or poorly) for you, so we can make sure to promote them in our channels.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
The National Federation of Independent Business is hosting a free webinar with special guest, Matt Evans, CPA, SMA, CFM. Join them as he reviews the benefits of the ERC program, a refundable tax credit that could be worth up to $33,000 per employee for qualified wages an eligible employer pays to employees after March 12, 2020, and before December 31, 2021.
In this FREE webinar, Matt will explain how to:
• Determine ERC eligibility; • Calculate the amount of ERC; • Access and apply for the ERC; and • Utilize both the PPP and ERC programs.
NFIB hosts Beth Milito and Holly Wade will conclude the webinar with LIVE Q&A to answer your PPP, ERC, FFCRA, and EIDL questions. You can submit your questions ahead of the webinar using the registration form so they can make sure to answer them.
Can’t make this webinar? Don’t worry! Register now and they’ll email you an on-demand version.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
The child tax credit has been around for a long time, but as part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit was expanded — the amount has increased for certain taxpayers; it is fully refundable (meaning you get it back even if you don’t owe the IRS); and it may be partially-received in monthly advance payments. The new law also raised the age of qualifying children to 17 (from 16).
The thing is, the amount folks are starting to receive right now is just an advance payment of half of what the IRS thinks your credit will be based on last year’s tax return. The entire credit itself will be calculated and show up on your annual tax return for 2021, and any advance payments will be subtracted from it.
So: let’s say that you qualified for a big credit based on last year’s tax return, but then you made more money this year than last year (which is the case for many small business owners) — then you’d have to pay the difference back on your tax return. As a result, we’re actually recommending to most folks that they just opt-out entirely to be safe. Don’t worry — you will get the entire amount that’s coming to you on the next tax return; you just won’t have to worry about paying back an accidental overpayment.
These tax changes are temporary and only apply to the 2021 tax year. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any unpleasant surprises, I strongly recommend you opt out, or at least contact your tax preparer to run the numbers.
Our colleagues over at Wegner CPAs put together a 5-minute video explaining when you might want to opt out versus receiving the advance payments — it’s worth a watch! She does a great job explaining the situations when you might want to remain enrolled in the program, and other scenarios when you should definitely opt out.
If that wasn’t enough for you, please read on for more details about what it means to qualify and how much you might receive.
Qualifications and how much to expect
The child tax credit and advance payments are based on several factors, including the age of your children and your income.
The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.
To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:
Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool;
A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year;
A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number;
Income less than certain limits.
You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.
Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.
Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.
IRS’s child tax credit update portal
Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to check on the status of payments or elect out of the advance payments. (To reiterate: that’s what we’re recommending to most of our clients. In general, we’d rather our clients be happily surprised at tax-time rather than frustrated that they have to return a portion of what they received.) The IRS also has a non-filer portal to use for certain situations where the taxpayers haven’t filed a tax return, similar to the one that existed for the stimulus payments.
Lastly, if you haven’t filed a tax return for 2020 yet — do not fret! The credit will show up on your 2021 tax return for the full amount; you are not missing out on getting your fair share.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
From the Chicago Department of Business Affairs and Consumer Protection, an update on the myriad changes that Chicago’s City Council made when they recently passed the Chi Biz Strong Initiative — many of which affect small business owners in our city. The list is arranged by the date the legislation is effective.
Note: We have no formal relationship with BACP — just sharing this info as a public service.
July 9, 2021
Dear Chicagoan,
BACP is pleased to announce that Chicago’s City Council passed the Chi Biz Strong Initiative on June 25, 2021. This bold legislative package contains a number of initiatives to help jumpstart our recovery from the COVID-19 pandemic and set our businesses, workers and consumers on the path towards a stronger future. Below you will find an overview of the effective dates and important details for businesses on the various pieces of this broad legislation. BACP will share more information as the effective dates approach, and please do not hesitate to email bacpoutreach@cityofchicago.org with any questions.
Effective June 26, 2021: Extension of Third-Party Delivery Fee Caps: During the COVID-19 pandemic, the City instituted a 15% cap on fees that Third-Party Delivery Companies can charge restaurants. This fee cap has been extended until 180 days after all indoor dining restrictions are lifted – December 8, 2021 if current regulations remain in place. See here for an industry notice. Extension of Legalized Cocktails To-Go: Last year, the sale of cocktails-to-go was temporarily legalized to support bars and restaurants during the pandemic. The State of Illinois recently extended this legalization until 2024, and the Chi Biz Strong Initiative ensures that the sale of cocktails to-go from a business with a Tavern or Consumption on Premises-Incidental Activity license remains legal in Chicago during that time. Additionally, this measure allows these businesses to also sell single-serve wine to-go. See here for more information on cocktails to-go. New Package Goods Operating Hours: No establishment that holds a Package Goods License shall sell, permit to be sold or give away any alcoholic liquor between the hours of 12:00 a.m. and 7:00 a.m. on Mondays through Saturdays and between the hours of 12:00 a.m. and 11:00 a.m. on Sundays, except that a supermarket may commence the sale of package goods at 8:00 a.m. on Sundays. Please see here an industry notice on the new hours of operation for Package Goods Licensees. Hospitality Reforms: In order to reduce red tape for the hospitality industry and align with state regulations, the term for a special event liquor permits has been extended from 11 to 15 days. Additionally, the requirements for entrepreneurs to receive a liquor or Public Place of Amusement License have been modernized to reduce barriers to entry for returning residents. Extension of Sidewalk Café Operating Hours: Retail Food Licensees with a Sidewalk Café Permit can now begin operating at 7:00 am, one hour earlier than previous requirements. Flavored Tobacco Regulations: The sale of flavored tobacco is prohibited in Chicago. This regulation has been clarified to make it clear that the cigarette wrapping paper or wrapping leaf cannot be flavored, even if it does not contain nicotine.
Effective July 31, 2021: Wage Theft Protections: Almost $400 million in wages are stolen from Chicagoland workers by bad-faith employers every year. Chicago’s first Wage Theft Ordinance will give Chicago’s Office of Labor Standards the authority to hold business accountable for the non-payment of wages required for work performed, with potential violations ranging up to $1,000 per offense per day. Expedited Restaurant Licensing: The City is making it easier for new restaurants to open in previously licensed restaurant spaces, provided that the previous restaurant had recently passed an inspection. Beginning July 31, new Retail Food Licenses can be issued by BACP to new restaurants prior to the completion of a health inspection, provided that the previous restaurant had passed their most recent health inspection on or after July 1, 2018 and that other conditions are met to ensure that food is prepared safely. Fair Marketplace Reforms: Any “Third-Party Facilitator” that connects customers with clients via a digital application will be required to make sure that their clients are properly licensed.
Effective August 1, 2021: $15 Minimum Wage for Domestic Workers: Effective August 1, 2021, all Chicago domestic workers will be guaranteed a $15.00 per hour minimum wage, no matter the size of their employer. This ensures that domestic workers have access to the full minimum wage earlier than had been previously guaranteed. Paid Sick Leave Enhancements: Chicago workers are guaranteed one hour of paid sick leave for every 40 hours worked. Starting August 1, the possible uses for that paid sick leave will be expanded to include caring for a family member with a closed school or place of care, compliance with public health orders, and mental and behavioral health. Chain Business Workers: This initiative will ensure that chain business workers are paid the minimum wage that they are guaranteed under the Minimum Wage Ordinance by clarifying that all workers at a chain business count towards the size of the business. Public Vehicle Reforms: The public vehicle industry, especially taxicabs, have been hit hard by the COVID-19 pandemic. In order to support the industry, the City will increase vehicle utilization by allowing taxicabs to stay on the road longer – up to fifteen years for fuel efficient or wheelchair accessible vehicles, and up to ten years for all other taxicabs. Additionally, the requirements for individuals to become public chauffeurs will be modernized to reduce barriers to entry. Charter Bus Reforms: The City will maintain public safety and continue to require charter buses with 15 or more passengers which allow drinking onboard (including BYOB) to secure a separate security guard. Also, trips without any scheduled stops (mobile social clubs) will also need separate security guards. All other charter bus trips with 15 or more passengers will require the driver or someone else on board to be trained in safety protocols to ensure the safety of the passengers. All trips transporting 15 or more passengers must maintain a plan of operation ensuring passenger, driver, and public safety. New Low-Speed Electric Public Vehicle License: The City will create a new license to promote operation of environmental friendly and sustainable electric public passenger vehicles, three or four wheeled. These vehicles must be powered by an electric motor with a maximum speed of 30 miles per hour may legally transport passengers for hire, with solicitation of rides prohibited. Full licensing details will be available on the BACP website.
Effective January 1, 2022: Contract Requirement for Domestic Workers: Care workers have been hard-hit by the pandemic and face high rates of exploitation. Beginning in 2022, all domestic workers must be provided with a written contract that sets forth their wage and work schedule to ensure accountability, transparency and predictability. More details will be shared as the effective date approaches.
Effective March 1, 2022: Legalized Sidewalk Signs: Currently, A-Frame, T-Frame or other temporary self-supporting sidewalk signs are prohibited. Beginning next March, businesses will for the first time be able to receive a low-fee permit allowing them to advertise their business legally with a sidewalk sign. More information will be shared as the effective date approaches.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
I have often imagined what my firm might look like in five years and how what I do then might be different than now. And when I watch videos by Hannah Smolinski of Clara CFO, I think: “that’s it! I want to do what she does.”
No, I don’t necessarily want to specialize as a fractional/outsourced CFO (although we already do a lot of this type of work for our clients). What I mean is that I love teaching small business owners how to better manage their companies, and training other bookkeepers and accountants how to better help their clients.
This video was a great example of that — a topic that small business owners need to understand but that few folks take the time to explain. (Although I have one complaint: she should have made it clear that “CFO” is just a title — it’s not a credentialed designation like EA or CPA. As with “tax preparer,” “bookkeeper,” or “accountant,” anyone can call themselves a CFO. So be careful.)
I agree with Hannah that our profession has done a poor job at explaining exactly what it is that we do. My clients mistakenly referred to me as their CPA for years before I actually sat for (and totally killed, mind you) the exams — and I’d have to correct them to make sure they knew I wasn’t qualified to do public accounting (for which the exams certify you). And they were like, “well, once you’re a CPA, how will what you do for us change?” The answer… um… it won’t, not at all. My firm will still do your bookkeeping, accounting, tax preparation, tax planning, financial analysis; and some things Hannah forgot to mention in her video: accounting technology consulting, internal controls/systems design, HR/payroll/benefits, and local/state tax compliance (sales/use, restaurant, soda, liquor taxes). We pride ourselves in straddling the worlds of bookkeeping, accounting, analysis, and tax — providing holistic small business financial consulting.
I think that’s the reason we don’t do a great job of explaining what we do — there’s no requirement to get a certification or degree to perform any of these duties. I did them before I became a CPA, I did them afterwards, I still do them. And a lot of my non-CPA colleagues in Bookkeeping Buds, for example, absolutely dance circles around certified accountants when it comes to accounting technology, clean-up and problem-solving, local/state law compliance, and designing efficient and accurate systems and processes.
And if you’re wondering why I bothered sitting for one of the hardest exams in the world (four parts, over a period of more than a year), it was because my colleagues took me more seriously as a CPA — not my clients. (At conferences, many CPAs and EAs were entirely dismissive of those of us who hadn’t tested their mettle against the exam process.) It was my Master’s Degree in Accounting & Financial Management — not preparing for the CPA exams — that taught me the additional skills I wanted to use with clients: financial analysis, strategy, managerial accounting, cost accounting, etc.
Long story longer: check out the video above. It does a nice job of explaining the breakdown among job titles — and I think the most important takeaway is to make a list of the duties you’d like fulfilled, and then ask around your network of other small business owners until you find a professional who knows which of these they can perform, and has a solid network to find others who can fill in the missing pieces. A good bookkeeper, accountant or CPA doesn’t work in a vacuum — we refer the work that isn’t in our wheelhouse to other talented professionals. For example, it’s prohibited by law for us to perform legal or investment services, but we’ve worked with many lawyers and investment advisors and know where you point you. Hiring any of these roles should be an addition to your team that is greater than the sum of its parts.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
For over a year I’ve been answering the question, “when should we apply for PPP Loan Forgiveness?” And for over a year I’ve been responding, “not yet; there’s still so much that’s up in the air” — as AICPA (thankfully) recommended we wait for legislation from Congress as well as guidance from both the SBA and IRS.
Well, on June 24th, they gave us the green light in the AICPA Town Hall Series. Lisa Simpson said that if you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply.
This means that if you are a sole proprietor or partnership and have no employees, you are ready to apply (since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company). See my recent blog post for easy instructions.
It also means that if you do have employees (or are an employee yourself), but you know that your company does not qualify for ERC, you are ready to apply. You’re in the right place — see below for instructions.
For borrowers of $150k or less who had no wage or FTE reductions, or who qualify for a safe harbor/exemption:
Because your loan was for $150k or lower, you qualify to file the easiest PPP Forgiveness form: 3508S. Please make sure your lender allows you to use this approach.
For reference, here is the forgiveness application form – but most lenders will have you actually apply through their own loan portal, which will walk you through the process. Just be clear that you are a self-employed individual with no employees, that your loan was $150k or less, and so you qualify for Form 3508S.
Please read through this Form 3508S Step-by-Step guide before beginning the process at your lender’s portal, as the questions you will be asked mirror the actual application.
Some important tips when going through the process:
Have your original PPP loan application and loan documents handy so you can make sure the info on your forgiveness application matches it exactly (legal name, DBA, address, NAICS code, EIN/SSN, loan number, number of employees at time of loan application).
Reminder: number of employees at time of loan application and forgiveness application are both simple head-counts, not FTEs or full- vs. part-time or anything else.
Covered Period is the date you received the funds through 24 weeks later, unless you determined a shorter period would be advantageous.
Amount of Loan Spent on Payroll Costs should not be any higher than the minimum needed for forgiveness.
Requested Loan Forgiveness Amount should be the exact full total of your PPP Loan.
There is nowhere on the application to note the amount spent on non-payroll costs; this understandably confuses many people. Just make sure the “Amount of Loan Spent on Payroll Costs” is at least 60% of the loan, and the “Requested Loan Forgiveness Amount” is the full amount, and they will assume that the difference was spent on non-payroll costs. Keep backup documentation in case of audit.
There is no SBA requirement for backup documentation of payroll or non-payroll costs for loans $150k or less. Most lender portals will have a screen with the ability to upload documents, but this is supposed to be optional. Some lenders may insist on it, however.
In order to qualify to fill out this simpler form (rather than the full Form 3508), you must not have reduced any employee’s wages by more than 75% or significantly cut their hours. (Unless, as I mentioned above, your loan is for $50k or less.) If there is any concern that you might not have fulfilled these “wage reduction” or “FTE (full-time equivalent)” tests, or that you do not meet a safe harbor or exemption for them, we strongly suggest working with a trusted advisor to prepare your PPP Forgiveness application, as it gets extremely complicated. Our approach, to be safe, has been to download the free Form 3508 PPP Forgiveness Calculator from the AICPA, regardless of which form you qualify to submit, so as to run all the numbers for the wage reduction test, and fill out the information to see if you are exempt from the FTE test or not. (If you are not exempt, the AICPA also offers a free FTE calculator.) We then suggest you retain these files as backup in case of audit, even if you end up passing all the tests and qualifying to submit a simpler form than the full 3508.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
For over a year I’ve been answering the question, “when should we apply for PPP Loan Forgiveness?” And for over a year I’ve been responding, “not yet; there’s still so much that’s up in the air” — as AICPA (thankfully) recommended we wait for legislation from Congress as well as guidance from both the SBA and IRS.
Well, on June 24th, they gave us the green light in the AICPA Town Hall Series. Lisa Simpson said that if you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply.
This means that if you are a sole proprietor or partnership and have no employees, you are ready to apply — since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company. See my recent blog post for easy instructions.
It also means that if you have employees (or are an employee yourself), but you know that your company does not qualify for ERC, you are ready to apply. See below for less-than-easy but still DIY-worthy instructions.
For borrowers of more than $150k who had no wage or FTE reductions, or who qualify for a safe harbor/exemption:
As your loan was higher than $150k, you do not qualify to file the simplest PPP Forgiveness form (3508S). However, presuming you followed all the rules and had no reductions, you do qualify for the “EZ” form (3508EZ). Please make sure your lender allows you to use this approach. For reference, here is the forgiveness application form (pages 1-4) and instructions – but for the actual forgiveness process, instead of filling the form out, you will apply through your lender’s loan portal and it will walk you through the steps. Please carefully read through the checklist and instructions on pages 5-9.
Please also read through this Form 3508EZ Step-by-Step guide before beginning the process at your lender’s portal, as the questions you will be asked mirror the actual application.
Some important tips when going through the process:
Have your original PPP loan application and loan documents handy so you can make sure the info on your forgiveness application matches it exactly (legal name, DBA, address, NAICS code, EIN/SSN, loan number, number of employees at time of loan application).
Number of employees at time of loan application and forgiveness application are both simple head-counts, not FTEs or full- vs. part-time or anything else.
Covered Period is the date you received the funds through 24 weeks later, unless you determined a shorter period would be advantageous.
We recommend the “Amount of Loan Spent on Payroll Costs” total is not any higher than the minimum needed for forgiveness.
“Requested Loan Forgiveness Amount” should be the exact full total of your PPP Loan.
If you were unable to operate at full capacity, you may check the second box on the checklist, which means there is no requirement to fulfill the FTE (full-time equivalent) test.
Regarding backup documentation that you must submit with your application, keep in mind that what is considered acceptable support is up to each individual lender. – Payroll: your lender may ask you for bank account statements, payroll tax form 941s, and canceled checks for benefit invoices as proof of payment. – Nonpayroll: For rent/mortgage/utilities payments, your lender may ask for documentation that the obligation/services existed prior to 2/15/2020. They are likely to ask for proof of payment for all amounts claimed in this section.
If there is any concern that you might not have fulfilled the wage reduction or FTE tests, or that you do not meet a safe harbor or exemption for them, we strongly suggest working with a trusted advisor to prepare your PPP Forgiveness application, as it gets extremely complicated. Our approach, to be safe, has been to download the free Form 3508 PPP Forgiveness Calculator from the AICPA, regardless of which form you qualify to submit, so as to run all the numbers for the wage reduction test, and fill out the information to see if you are exempt from the FTE test or not. If you are not exempt, the AICPA also offers a free FTE calculator. We then suggest you retain these files as backup in case of audit, even if you end up passing all the tests and qualifying to submit a simpler form than the full 3508.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
For over a year I’ve been answering the question, “when should we apply for PPP Loan Forgiveness?” And for over a year I’ve been responding, “not yet; there’s still so much that’s up in the air” — as AICPA (thankfully) recommended we wait for legislation from Congress as well as guidance from both the SBA and IRS.
Well, on June 24th, they gave us the green light in the AICPA Town Hall Series. Lisa Simpson said that if you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply.
This means that if you are a sole proprietor or partnership and have no employees, you are ready to apply — since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company.
For borrowers of $150k or less who are self-employed with no employees:
For self-employed with no employees, it’s an “owner compensation replacement” approach, which means you will have 2.5 months’ worth of your 2019 net profit automatically forgiven. That is why the form is so simple. Your forgiveness amount should exactly equal your loan amount, presuming the original loan was calculated properly.
For reference, here is the forgiveness application form – but most lenders will have you actually apply through their own loan portal, which will walk you through the process. Just be clear that you are a self-employed individual with no employees, that your loan was $150k or less, and so you qualify for Form 3508S.
It should not matter how long you select for your covered period — anywhere between 8 and 24 weeks — but the first- and second-draws cannot overlap (your first loan covered period must be short enough that it ends before your second loan covered period starts).
You can indicate that you spent the entire loan on payroll.
Have your original PPP loan application and loan documents handy so you can make sure the info on your forgiveness application matches it exactly (legal name, DBA, address, NAICS code, EIN/SSN, loan number, number of employees at time of loan application).
And according to AICPA Funding Partner, Biz2Credit, on today’s July 1 webinar (from their PPP Forgiveness Required Documents Customer Guidebook):
(This had been the case for all the lenders I’ve seen so far, but the jury seemed to still be out for some of them, including Biz2Credit — so this was a relief.)
For self-employed folks with no employees, the PPP Forgiveness process should be very straightforward, from everything I’ve seen so far. Please let me know in the comments if you come across challenges, so others can learn from your experiences. Best of luck to you all!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Note to readers: the issue outlined below only applies to 50%-or-greater shareholders — which means the business is a corporation — and their spouses who work at the company. It does not apply to sole proprietors or partners — those two groups do not get paid via payroll and therefore are not eligible. Shareholders who own less than 50% are eligible if the business meets the other requirements to claim the credit.
If you are a 50%-or-greater shareholder and your company qualifies for the Employee Retention Credit for either 2020 or 2021, please read on.
I truly cannot believe that it’s June 2021 and I’m writing a blog post to help people choose the least-worst 2020 Employee Retention Credit interpretation — because even though the pandemic is starting to show in our rearview mirrors, we are still living in a universe totally devoid of IRS guidance on the topic of ERC shareholder eligibility. Accountants jokingly refer to this mystery as the Tax Advisers’ “Area 51” on #TaxTwitter.
What am I talking about? And why am I so annoyed? Let me set the scene:
3) Now that the first round of PPP loans are nearing the end of the payment deferment period — and to be fair, we’re also only a few months away from the tax return extension deadline — we would like to finalize those calculations and returns. (Reminder: there is no “deadline” for applying for PPP Forgiveness — per the SBA, “borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.”)
What’s that? You’re saying the IRS has still not issued essential guidance on a credit that was created in the first month of the pandemic? Yes. Yes, I am.
Recently, both the AICPA and Tony Nitti, two of my most trusted sources, have weighed in on this with a big “why is the IRS dragging their heels on this” reaction. Nitti went as far as to say, “Are wages paid to greater than 50% owners eligible for the credit? If I had a nickel for every time someone emailed me this question, I could afford to stop shamelessly and relentlessly shilling this newsletter. It is absolutely amazing that a full year after the ERC was created, we still don’t have a definitive answer.”
Okay, enough backstory. As a small business owner, what are your options? I call them Choice 1 (yes) and Choice 2 (no) for short:
#1 Calculate ERC as if owners are eligible and file 2020 income tax returns accordingly. This would result in a higher tax for clients (because more wages are disallowed as deductions). Submit PPP Forgiveness applications, but hold off on submitting ERC claims (941-Xs) until guidance is released. If guidance indicates that owners are eligible, file the ERC claims accordingly. If guidance says owners are not eligible, then amend the income tax returns and file the ERC claims accordingly.
This approach may make the most sense when there are two 50%-owners on payroll, and not many other other staff — as the increased credit would be worth the wait, compared to the total credit without owners.
#2 Calculate ERC as if owners are not eligible and file 2020 income tax returns accordingly. This would result in a lower tax for clients (because fewer wages are disallowed as deductions). Submit PPP Forgiveness applications, and submit ERC claims (941-Xs) — rather than holding off on these as in the above option. If guidance is eventually released that indicates owners are not eligible, then no action is needed. If guidance indicates that owners are eligible, then decide whether it is worth amending the income tax returns and ERC claims to get the additional funds.
This approach may make the most sense with only one 50%+ owner and many employees, as the cost to amend all returns and claims will probably not be worth the additional credit.
The goal with both approaches is to get PPP Forgiveness applications and tax returns filed as soon as possible, with the best balance between wage deductions and potential wage credits.
While I was tempted to pick one of these two approaches and inform all clients of our choice, I decided — especially with advice from an AICPA Town Hall — that this is a decision that each client needs to make for themselves. We’re happy to explain the potential costs and benefits of each approach and make a personal recommendation for each client’s individual situation, but the decision should be theirs. We recommend other CPA firms take a similar approach.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
