The IRS has released — or technically, re-released — a new form for Non-Employee Compensation called the 1099-NEC for use starting early 2021 for Tax Year 2020.
It’s actually an old form that hasn’t been in use since 1982 that was redesigned — originally it was for reporting fees, commissions and other compensation, but in 1983 it was retired and we’ve been reporting these types of income on Form 1099-MISC ever since.
Moving forward, instead of using 1099-MISC Box 7 to report Non-Employee Compensation, we’ll all use 1099-NEC Box 1. Box 4 is to report any federal withholding in relation to the compensation. Boxes 5, 6, and 7 are for reporting state tax withheld, state ID numbers, and state income, respectively. IRS instructions can be found on their website.
To clarify: the requirements for reporting nonemployee compensation have not changed — only the form on which it is reported.
Forms 1099-NEC must be filed with the IRS by January 31 of the year following the calendar year to which the return relates. For tax year 2020, the deadline is February 1, 2021, since January 31 falls on a Sunday. The deadline applies whether filing the form electronically or on paper. Unfortunately, unlike Form 1099-MISC, the IRS will not forward data to states for Form 1099-NEC, so processes for filing these will be determined by each state.
Items such as rent payments, royalties, attorney settlements (not payments for services), and medical healthcare payments will still be reported on Form 1099-MISC, though the form has been redesigned and the boxes renumbered. For tax year 2020, the deadline for filing 1099-MISC is February 28, 2021 if filing on paper, and March 31, 2021 if filing electronically.
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The Business Interruption Grant (BIG), a program available through the Illinois Department of Commerce and Economic Opportunity (IDCEO), continues to actively seek applicants, in order to effectively disburse the full amount awarded to the state program. It leverages federal funding provided by the CARES Act to provide economic relief for small businesses hit hardest by COVID-19. The state received $540 million for BIG from the federal Coronavirus Aid, Relief & Economic Security Act, of which $270 million was earmarked for small businesses, according to Lauren Huffman, a spokeswoman for the Illinois Department of Commerce & Economic Opportunity. Applications are live now.
The first round of BIGs provided $49 million to businesses such as restaurants, personal care services, gyms and fitness clubs, and businesses located in “Disproportionately Impacted Areas” (DIAs). A list of awardees is available here.
The second round of BIGs will provide $220 million to “businesses downstate, in disproportionately impacted areas (DIAs), and for heavily impacted industry and regions – representing businesses that have been unable to reopen or operating at a severely diminished capacity since the spring.” A discussion of the program, outlining the various types of prioritized and eligible businesses, as well as eligible costs, is in an earlier blog post, here.
To summarize, Round 2 includes: – $60 million for heavily impacted industries, such as movie theaters, performing arts & concert venues, indoor recreation, amusement parks.* – $70 million for disproportionately impacted areas, defined by zip code for communities that are most economically distressed and vulnerable to COVID-19. – More than $100 million for downstate communities. – $5 million for livestock production disruptions. (Applications available from the Illinois Department of Agriculture.) – Loan Forgiveness for Illinois small business emergency loan recipients.
*In addition to the $60 million for heavily impacted industries, the following types of businesses are being prioritized:
Businesses directly affected by regional mitigations implemented by state or local governments.
Independently owned retail.
Tourism- and hospitality-related industries.
(Businesses outside the categories listed above are also eligible to apply and receive funding under the program but may be reviewed later than priority businesses. Assistance with applications is available at no cost.)
However, as I started to see media coverage touting the benefits to independent retail, and promoting the program, trying to drum up applications, I began to be concerned for my own clients — many of them have received grants, to be sure, for which we are immensely thankful — but they were all in the hospitality industry, or in a DIA. To-date, not a single retail client has received any BIG funds. And since the program says that all businesses will receive a decision on their grant application within four to six weeks of application submission, I was frustrated to see that many of my clients had not heard anything, and yet new articles such as this were frequently coming my way, where my own state rep, Will Guzzardi, was saying the program did not have enough applicants. (Block Club was reporting the same story.) I reached out to colleagues in accounting, bookkeeping, law, and to chambers of commerce and heard the same story — small retailers were not receiving Business Interruption Grants.
So I contacted Rep. Guzzardi to find out what the story was, and he was, as usual, interested in the discrepancy between what he had been told and the actual experiences of small business owners. He took my questions to the state and came back with some solid explanations and more encouragement.
For starters, the state is reviewing applications in three categories: DIAs, downstate Illinois applicants, and disproportionately impacted industries — restaurants, bars, venues, etc. If an application doesn’t fall into one of those categories, it’s probably being moved further down the queue. But that doesn’t mean anything about their likelihood of getting a grant. It just means that they’ll be reviewed later in the process.
They evaluate every application first on the basis of whether or not they meet the basic eligibility criteria, and then based on how many of these criteria they meet:
Directly impacted by regional mitigation to prevent the spread of COVID 19, based on applicant industry and county
Has not received any other emergency funding, e.g. in the form of PPP or other state or local grants
Has under $5 million in annual revenue
Located in a disproportionately impacted area (DIA)
Located in a “downstate” county
Operate in a priority industry, including the following: ○ Independently-Owned Retail ○ Restaurant ○ Bar or Tavern ○ Gym or Fitness Center ○ Tourism and Travel ○ Support Service of Arts or Events
Then they conduct separate lotteries based on how many of those criteria you met. So if you meet 6/6, you’re in a lottery group with very good odds. If you only meet one or two, your lottery is less likely. If you don’t win your lottery, your application is held over into the next lottery batch.
BIG Round 1 didn’t go to retailers at all. In Round 2, retail is in a pretty large pool with bars, restaurants, gyms, museums, etc., and so they’re just facing slightly longer odds, especially if they’re not in a DIA or downstate.
The message to retail folks is: if you applied, your application is still in the lottery — just because it hasn’t come up doesn’t mean it won’t. I expect the state is just trying to make sure those who are hardest hit have the best chance at the grants, and then they’ll turn their attention to independently-owned retail and the other eligible business types.
It is not too late to apply!
Join the Illinois Department of Commerce & Economic Opportunity (DCEO) for an informational webinar regarding the Business Interruption Grant (BIG). Attendees will learn about eligibility criteria, required documentation and step-by-step instructions for the online application. DCEO representatives will be available to answer your questions and all attendees will receive a copy of the presentation materials with direct links to the BIG program portal, FAQs and contact information for DCEO representatives who are available for 1-to-1 technical assistance, if needed.
And I know I’ve shared this link countless times by now, but honestly, it is an amazing source of information on applications, evaluation criteria, assistance, eligible costs, and so much more.
For the clients who have received this grant, it has been a lifeline. It’s much more flexible than the PPP, it’s a grant rather than a loan like the EIDL, and it’s built for small business. The application is not a particularly challenging one. If you are a small business struggling due to the pandemic, you owe to to yourself to give this one a try.
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. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
In an effort to push Congress into action, the IRS reiterated its stance on the PPP last week.
Late last week, the IRS and Treasury issued both a revenue ruling and a revenue procedure, doubling down on their stance that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.
This isn’t new news, of course. The IRS is bound to statute on this one and doesn’t have any wiggle room — only Congress can legislate on the topic of what is taxable and deductible, whereas the IRS only has administrative oversight in this arena. They made it clear very early in the game — April 30th, in fact — that they had no intention of accepting deductions for expenses that were paid for with PPP funds.
But in the ensuing months, Congress — despite broad bipartisan support for a measure to render these costs deductible — has been stuck in gridlock and failed to pass legislation making it so. This recent action on the part of the IRS seems designed to signal Congress that only by their action will the original intent of the CARES Act be realized.
However, the IRS took this particular set of guidance one unfortunate step further, at least as far as my clients are concerned.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”
Now, I have been attending the AICPA Town Halls since nearly the beginning of the pandemic, and they are still strongly recommending that no one apply for forgiveness before year-end unless: 1) they need to sell their business; 2) loan covenants are at risk; or, 3) they need to reduce FTEs after meeting a date-driven safe harbor.
Part of the reason for this suggested delay is the aforementioned statutory requirement that prohibits the IRS from permitting any deductions for expenses paid for with non-taxable income. (Also: likeliness of legislation authorizing automatic forgiveness under a certain threshold; and the need for further guidance in many areas that remain unanswered.)
The idea was that if forgiveness was not granted in 2020, then the deductions could be made as usual on tax returns filed in the first-half of 2021. When forgiveness was eventually granted on these PPP loans, one of two things would have happened: 1) Congress would since have acted to protect the deductions and therefore PPP funds could be accepted into non-taxable income; or, 2) Congress would not have acted, in which case the PPP income would effectively be made taxable in 2021.
To me, whether the expenses paid with PPP proceeds were deductible hinged on whether forgiveness was obtained; as a result, I strongly maintained that those expenses did NOT become nondeductible until that “condition subsequent” occurred. As a result, if a business were filing its 2020 tax return before word on its forgiveness application had come down from the SBA, the expenses would be fully deductible. After all, we have a little something called the “tax benefit” rule, which allows a taxpayer a full deduction if at the time of filing the return, no event has occurred to render the amount nondeductible. Then, if a future event occurs that is fundamentally inconsistent with the premise on which the previous deduction was based (for example, an unforeseen refund of deducted expenses, or in this case, the forgiveness of a loan), the taxpayer must take the deducted amount into income. Applying the principles of Section 111 to PPP loans, the taxpayer would be entitled to a full deduction in 2020, with a potential income pick-up in 2021 when the loan was forgiven.
But with this recent IRS guidance, as Tony points out — he was wrong (again).
According to the Ruling, it matters not whether the application for forgiveness has been filed by the time the tax return is ready to go; rather, what matters is that the taxpayer apparently knows, in their heart of hearts, that the loan will ultimately be forgiven. After all, as the Ruling explains, “Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients… with clear and readily accessible guidance to apply for and receive covered loan forgiveness,” a sentence which I would have found laughable had the lies contained within it not ruined the past six months of my life.
I won’t get into the details of what it means to “reasonably expect” forgiveness, or determine partial forgiveness, or whether or not the new safe harbor applies if you “reasonably expect” wrong. (I’ll let Alan Gassman, another fan of Tony’s, dive into those weeds.) But as a short summary: 1) You can deduct expenses on your 2020 return if you find out before the return is filed that the PPP loan didn’t get forgiven or if you decide not to apply for forgiveness; 2) If you guessed wrong about the amount of forgiveness (and therefore deductions), you can either a) amend the 2020 return to adjust the disallowance, or b) deduct the improperly disallowed expenses for 2020 in the year forgiveness is determined.
Somehow, with not only a revenue procedure but also a revenue ruling, the IRS managed not to address two big issues that their rulings raise: 1) How should a Schedule C filer handle the deduction question? For a self-employed person, it’s not the expenses that determine forgiveness, but rather a calculation based on their 2019 income. 2) Which deductions will be limited, and in what order (payroll, rent, mortgage interest, utilities)? This has serious ramifications for the §199A Qualified Business Income deduction, Research & Development credits, and the §163(j) Interest Deduction limitation.
But I am not even going to touch on those two issues. Why? Because I truly believe the IRS made this announcement to rile up Congress members into finally taking action. It might have worked.
The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.
In the meantime… as an accountant, what do you tell your clients? As a small business owner, what do you do?
Well, if I’m right, and Congress is duly riled, then hopefully we’ll finally see some movement here, preferably before the end of the year, but (dear lord please) at least before tax season. At which point — poof — it becomes a non-issue (with the exception of the countless hours I and others have spent worrying and writing about it).
Tax Filing Approaches for Consideration 1) Wait and see • Use extensions until additional guidance or legislation is available • Pass-through entities don’t need to be concerned until March/April 2021 deadlines 2) File return and pay taxes • Assumes expenses paid with PPP funds will not be tax deductible • If this changes, the borrower can file an amended return 3) File return and deduct expenses** • Contrary to current guidance (but in the spirit of the PPP legislation)
For what it’s worth, Bill describes himself as a “wait and see” kind of guy. (I strongly suggest watching Bill’s participation in the most recent AICPA Town Hall — from 32:00 through 52:40. His logical process, description of history and legislative intent, and arguments are thought-provoking.)
I’ve already spoken with my tax partner, and our plan is to put all partnership and corporate clients on extension to avoid the unnecessary cost of approach #2 and the unnecessary risk of approach #3. Haven’t yet decided how to handle Schedule C self-employed filers… but also hoping we won’t have to cross that bridge.
In the meantime, it’s business as usual, trying to close out books and prepare for 1099s… as if it were any other pandemic year-end.
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With Black Friday, Small Business Saturday, and Cyber Monday in November kicking off the holiday shopping season, now is a good time for small businesses to boost sales. This year, 60% of consumers plan to do half or more of their winter holiday shopping at local retailers. Capitalize on this growth opportunity by using the following marketing strategies this holiday season.
Leverage email to grow sales. In a 2020 survey, 79% of small business owners said email is “important” or “very important” to their businesses. Take time over the coming weeks to establish an effective email marketing strategy for the holiday season. Start by adopting email marketing best practices, such as using email marketing software, dividing your email list into specific demographic groups, locations or other characteristics, and writing engaging subject lines. Next, consider what types of emails will be valuable to your customers during the holiday season, such as highlight sales, new products and services, pre-ordering and curbside pickup options, and shipping timelines that may interest your customers. After a customer first signs up for your email list or makes a purchase, follow-up with a “thank you” note and a discount code to stay connected to your customers. Avoid sending too many emails each week, or you risk losing subscribers (no matter how compelling your emails are)!
Engage with customers on social media. Social media is another great way to directly communicate with customers and market your business. Through social media, you can show why current and prospective customers should buy your products or services. If you’re a retail business owner, broadcast a Facebook Live event to showcase some of your latest merchandise and why they make the perfect gift. If you provide a service, consider marketing gift cards as holiday presents. Alternatively, you can explain how your services can ease the stress of the holiday season. Use hashtags and partner with other businesses to help your social media posts reach as many potential customers as possible.
Add a personal touch. In some cases, you might not be seeing your customers in-person this year due to local regulations related to the pandemic. If you have a direct mailing list, send handwritten notes to customers to maintain personal connections. Post a compilation video of your staff on social media thanking customers for patronizing your business in 2020. As always, provide top-quality customer service by responding promptly to messages by phone, email, and social media. Small things can make a big difference when distinguishing yourself from the competition.
For an expert second opinion on your holiday marketing plans, reach out to local SBA resource partners, who can provide one-on-one advice and are available remotely. Take advantage of SBA marketing resources, including SBA Learning Center courses such as Marketing 101 and Social Media Marketing. Focusing on marketing this holiday season will not only boost your sales at the end of the year, but will also help you generate leads and build brand loyalty for 2021 and beyond.
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In today’s AICPA Town Hall, they reviewed the reasons a business might decide to apply for PPP forgiveness now — even though we have been consistently recommending to loan recipients that they wait until there’s movement from Congress on an automatic or streamlined forgiveness program (and continue to do so).
Basically, unless you are: 1) selling your company; or, 2) potentially violating loan covenants because of the PPP being represented as a liability; or, 3) needing to lay off staff after meeting FTE reduction requirements; …you should still hold off on applying for forgiveness.
However, if you are in one of the groups above, then consider the AICPA‘s list of “Factors impacting timing of forgiveness application”: • Has the borrower spent the full amount of PPP funds? • Is borrower trying to sell the business? See Oct. 2 SBA Procedural Notice • Is the loan under/over the $150k dollar amount of potential threshold for simplified forgiveness in Congress? (New form for <$50K) • Has tax planning around timing of deductibility of expenses paid with PPP funds been considered? See Aug. 20 discussion with Ed Karl (AICPA VP of Tax) • Does the borrower need to make business operating decisions that may include FTE reductions? (See AICPA FAQ #10, below) • Does borrower want to get PPP debt off the books? Are there loan covenants to consider? • Is the lender even accepting applications?
It’s important to weigh all of these criteria before making the decision to apply for forgiveness.
And for reference, here’s AICPA FAQ #10: If a borrower applies for forgiveness before the end of the covered period, how does the FTE reduction safe harbor work in operation?
The instructions for the Form 3508 forgiveness application indicate that the borrower includes the number of FTEs at the end of the covered period OR the date the application is submitted. The SBA has provided information to lenders as follows: “When a borrower submits the completed application and a lender has processed the borrower’s forgiveness application, the borrower is no longer bound to the FTE restrictions. The covered period ends when the borrower successfully applies for forgiveness.”
To summarize: we still recommend, as does the AICPA, that unless you fall into one of the groups above, you hold off on forgiveness applications for now. Work with your CPA to run the numbers to make sure you meet the requirements as they currently stand — knowing they might get easier, but protecting yourself if they don’t — but hold off on the actual application until Congress takes some action, which will be coming eventually… it’s a question of “if”, not “when”.
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My colleague Eric Krienert will be teaching a one-hour webinar on October 22 on the topic of the Paycheck Protection Program. This session will provide an overview from a cooperative perspective of loans and forgiveness under the PPP. Beginning with the economic necessity certification, to qualifying expenses, to the spending timeframe and FTE limitation — an explanation will be provided on restoring FTEs and wage limitation before looking at the loan forgiveness application process. The session will conclude with a review of tax and other considerations.
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. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Another late-night guidance drop from the SBA — this time, good news for PPP borrowers of $50,000 or less… and somehow managed without the Congressional action we’ve been waiting for that seems to have all but stalled out.
The SBA has released a new, streamlined forgiveness application for these borrowers (and has eased the burden on lenders as well) — but notably, the requirements are exactly the same as prior to this newest Interim Final Rule. It’s just the simplified application and reduced documentation that make it easier. This means that small business owners still have to meet all the forgiveness rules that were in place before this most recent development — and they must certify as such on the application.
So on the one had, it’s great news — on the other, I’m not sure how much this will help anyone… it’s essential to run the numbers and collect the documentation regardless, to confirm compliance, as well as for support should the forgiveness be audited or challenged.
This also is a far cry short of the “under $150,000” floor that has been introduced by numerous members of Congress. Maybe this is just a start, and it will be increased with a legislative act?
Regardless… because the calculations and documentation must be dealt with despite the shorter application (and kept for your permanent records), I still recommend using the free AICPA tool — PPPForgivenessTool.com — as it does an amazing job of taking care of much of the number-crunching behind the scenes, and turns out an application and supporting documentation pdf packet that should be just the thing for your files. It’s the best PPP calculation resource I’ve tested yet (and believe me, I’ve tested quite a few).
Given the slow pace of SBA forgiveness and the likelihood that there will be more relief coming from Congress after the election, the AICPA continues to recommend that borrowers hold off on applying for forgiveness for now — unless they need to because they’re selling a business or have restrictive debt covenants.
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As Republicans in Congress refuse to pass further relief packages for those hit hardest by COVID-19, Chicago announced a new fund to help struggling local performing arts spaces — as it’s currently estimated that 90 percent of live music venues won’t survive without additional support, reported Block Club.
Venues can apply for up to $10,000 from the Performing Arts Venue Relief Program, funded in part by the Walder Foundation and the Arts for Illinois Relief Fund, and in partnership with Accion. The city said 120 eligible applicants will be randomly selected by lottery for the relief grants.
Eligibility criteria and applications are available at chicago.gov/artsvenuerelief — the application deadline is October 23 at 5pm Central. Grant recipients will chosen via lottery and notified of their acceptance on November 16th.
The program will prioritize funding organizations located on the South and West sides, in LMI (Low and Moderate Income) community areas, organizations that were not eligible for the City of Chicago’s Together Now program, and organizations that have not received grants through the Arts for Illinois Relief Fund, the City of Chicago’s Together Now program, or the 2020 CityArts Large program for organizations with budgets over $2M.
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Recorded webinars for Phase 4 reopening guidance are available online now.
Chicago has moved forward, along with the rest of Illinois, into Phase 4 of reopening.
According to ABC News: Illinois has made progress through its plan for having tiered mitigation for the 11 regions in the state with the potential for increasing mitigation measures based on local resurgences. Regions are currently at the Tier 4 level, with some having additional measures.
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I’m particularly excited about this upcoming webinar offered by the National Society of Accountants for Cooperatives (NSAC) — Tuesday, September 29, 2020 at 2 pm ET / 1 pm CT / 12 pm MT / 11 am PT — entitled “Distinguishing between patronage, nonpatronage and nonmember income“.
Why? Well, not only is it an important and complex topic about which there is little written — and even less often presented at conferences and in continuing education settings — but it’s being taught by some of my very favorite colleagues in the co-op world. In particular, Teree Castanias and George Benson are regular educators in the space of cooperative tax issues, and among the very finest in their fields. (And one of the moderators is none other than a friend of mine, the extremely knowledgeable and dedicated Rebecca Smith.)
“This session will discuss the consequences of patronage distributions and/or patronage retentions in the current environment. Panelists will discuss prior case law and the proposed regulations as well as the consequences of both in the current environment.”
If you work in co-op accounting, you owe it to yourself and your clients to take an hour out of your day to get up-to-speed on this complicated and essential topic. It’s a fast, convenient, easy, and affordable way to learn from some of the leaders in the field. Nope, they don’t pay me to say this… I’m just excited about it. Register here. See you there!
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. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
