Category Archives: Education

COVID-19 Financial Relief, Education, Tips

Covid-19 Sick & Family Leave Credits For Employers Extended Through 9/30/21 & Expanded

March 22, 2021 Nancy McClelland Leave a comment

The American Rescue Plan Act (ARPA), just recently signed into law, offers many generous tweaks to federal programs for employers trying to take care of their staff, and for former employees. There are six in particular every employer should research on their own behalf and for the benefit of workers:

Paid Sick & Family Leave
COBRA Subsidies
Dependent Care FSAs
Employee Retention Credit
Short-Time Compensation
Unemployment Insurance

The Department of Labor will be issuing regulations or other guidance regarding these changes to the FFCRA.

Ellen M. Bronchetti & Syed H. Mannan of McDermott Will & Emery have done an excellent job summarizing these updates in this article. I’m including their sections on Paid Sick & Family Leave as well as COBRA Subsidies almost in their entirety — as no amount of summarizing seems to do them justice. I’ve included additional information on the COBRA Subsidies from L. Renee Lieux of McNees Wallace & Nurick.

Homework: Fox Rothschild has a nice Guide For Employers to the American Rescue Plan Act — it’s a good place to start digging into all the provisions.

Paid Sick & Family Leave

Under the previously passed Families First Coronavirus Response Act (FFCRA), companies with fewer than 500 employees were required to provide paid leave to employees who were unable to come to work for a number of Covid-19 related reasons. FFCRA provided employers a refundable tax credit, which would offset for employers the costs of providing the paid leaves.

The requirement to provide paid leave expired for employers with fewer than 500 employees at the end of last year. But employers can still voluntarily choose to provide FFCRA paid sick or paid family leave to employees and receive refundable tax credits for costs related to providing the leave through March 31, 2021.

This is a great value for staff and to employers, and helps keep customers and the community safer as well.

With the passage of the American Rescue Plan Act of 2021, employers should note the following additions and changes:

Refundable Tax Credits Available through September 30, 2021: Employers who choose to voluntarily provide FFCRA paid sick or paid family leave may now receive refundable tax credits through September 30, 2021.

Additional Covered Reasons for Providing Paid Sick Leave:
Previously under the FFCRA, qualifying reasons for providing paid sick time were limited to if the employee is unable to work (or telework) because (s)he:
(1) is subject to a federal, state or local quarantine or isolation related to Covid-19;
(2) has been advised by a healthcare provider to self-quarantine;
(3) is experiencing Covid-19 symptoms and seeking a diagnosis;
(4) is caring for an individual who is subject to quarantine or is self-quarantining;
(5) is caring for a child whose school or place of care is closed (or child care provider is unavailable) because of Covid-19; or,
(6) is experiencing any other substantially similar condition specified by the US Secretary of Health and Human Services.

ARPA expands on the list and now allows employers to provide leave to employees for three additional reasons:
(1) obtaining a Covid-19 immunization;
(2) recovering from an injury, disability, illness or condition related to the immunization; or,
(3) seeking or awaiting the result of a Covid-19 test or diagnosis when the employee has either been exposed to Covid-19 or the employer has requested the test or diagnosis.

Additional Covered Reasons for Providing Paid Family Leave: The scope of reasons for providing emergency family leave is now expanded. Originally, tax credits were available to employers for providing paid family leave only if the employee was unable to work (or telework) to care for a child whose school or place of care was closed or unavailable because of the public health emergency. Now, employers can claim tax credits for providing family leave which arises from any of the six qualifying reasons provided for in the FFCRA and the additional three reasons added under ARPA (noted above).

Duration of Paid Sick and Family Leave for Receiving Tax Credits: ARPA allows employers to receive the tax credit for providing up to 10 days of paid sick leave beginning on April 1, 2021, even if the employer previously took a tax credit for providing paid sick leave to an employee for a covered reason before April 1, 2021. In addition, employers can receive a tax credit for providing up to 12 weeks of paid family leave. In other words, the clock sort of “re-sets” on sick and family leave.

Amount of Tax Credits Available for Paid Sick Leave: Employers providing voluntary paid sick leave receive a tax credit, up to a cap of $511 a day, at the employee’s regular rate of pay if the employee is on leave because of coronavirus quarantine, self-quarantine or has symptoms. ARPA now includes the additional covered reasons (discussed above) for receiving tax credits at the employee’s regular rate of pay. For any other paid sick leave reason, the amount of tax credit available to an employer is calculated at two-thirds the employee’s regular rate of pay and capped at $200 a day.

Amount of Tax Credits Available for Paid Family Leave: Employers providing paid family leave receive a tax credit, up to a cap of $200 a day, at two-thirds the employee’s regular rate of pay for leave which is due to any of the covered reasons for providing paid family leave. ARPA also removes the two-week waiting period (during which the leave was unpaid) for taking paid emergency family leave. The Act also increases the cap on the aggregate paid leave from $10,000 to $12,000, meaning employers can now take an additional $2,000 in tax credits per employee for providing qualifying leave.

Addition of Non-Discrimination Rules: Employers who are voluntarily providing leave and receiving tax credits must also follow the new non-discrimination rule. The anti-discrimination rule makes the tax credit available only to those employers who provide leave to all employees without discriminating against certain categories of workers. Specifically, the tax credit is not available to those employers who discriminate (1) in favor of highly compensated employees, (2) full-time employees or (3) on the basis of the employment tenure of the employee.

Cobra Subsidies

Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage allows employees to continue to remain covered under their employer’s health insurance for up to 18 months after coverage is lost because of a reduction in work hours or the employee’s involuntary termination of employment.

Prior to ARPA, workers and dependents assumed full responsibility for payment of premiums. ARPA now provides up to six months of 100% subsidized COBRA coverage to those who are eligible for COBRA because of an involuntary termination from employment or a reduction in work hours. The premium subsidy will last from April 1, 2021, through September 30, 2021, and sponsors of group health plans will be subject to new notice requirements. Employers will receive reimbursements for the subsidy through a payroll tax credit.

Employers must provide three notices to eligible former employees notifying them of the premium subsidy, the extended opportunity to elect coverage, and when the premium subsidy will be terminated.

In addition, employers may, at their option, allow former employees who are currently electing COBRA to elect coverage under a different plan offered by the employer as long as (i) the premium for the new coverage does not exceed the premium for the current coverage, (ii) the new coverage is not an excepted benefit, a QSEHRA, or a FSA, and (iii) the employee did not voluntarily terminate employment.

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.

COVID-19 Financial Relief, Education, Tips

Paycheck Protection Program (PPP) Updates As Of March 21, 2021

March 21, 2021 Nancy McClelland 2 Comments

Ah, the PPP. We thought our daily struggle with you last summer was as challenging as it would get. How naïve we were!

Lots of changes to the program have occurred as of late — all to the theoretical benefit of borrowers, though in practice not as welcome as one might expect.

Here’s a summary:

1) Schedule C filers (self-employed, independent contractors, freelancers, most single-member LLCs, and others) may now — moving forward — use a new calculation that is more advantageous when calculating the loan amount. The total loan is now based on 2.5 (or 3.5 if in hospitality) months of gross income (Line 7) rather than net income (Line 31).

Per the AICPA, “if a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either net profit or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C. If a Schedule C filer has no employees, the borrower may simply choose to calculate its loan amount based on either net profit or gross income.”

This is indeed excellent news, but a) why this didn’t get applied to partnerships as well — which are entities following the same concept as Schedule C filers, only with more than one owner — is totally illogical; and, b) this is a slap in the face to the many millions of PPP borrowers who got practically nothing under the old rules and are now bound to them, as this new rule is not retroactive. AICPA has issued a statement about the inherent unfairness, calling on Congress to correct it.

Furthermore, many lenders have not bothered to re-program their systems with the new rules, as the program is slated to close by March 31 (see below re: pending extension).

2) The safe harbor for the “good faith loan necessity certification” for First Draw loans using the new Schedule C calculation is reduced from $2M to $150,000. If your loan is in this range, carefully consider which calculation you wish to use and weigh the difference against the risks.

3) Businesses that receive a first- or second-draw PPP loan after Dec. 27, 2020, may now also receive a Shuttered Venue Operators Grant (SVOG), with the proceeds from the PPP loan subtracted from the amount of the SVOG. Venue operators do not have to subtract any PPP funding received before Dec. 27, 2020. (More here.)

4) Many more non-profits are eligible for PPP loans than in previous iterations of the program, as well as internet-only news and periodical publishers. (More here.)

5) Costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities, as well as these types:

Covered worker protection and facility modification expenditures, including PPE, to comply with COVID-19 federal health & safety guidelines.
Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance.
Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
Covered operating expenditures, which refer to payments for any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.

6) To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period between eight and 24 weeks’ long (no longer either/or, but any period in-between).

7) Improvements in the PPP have unfortunately led to slowdowns. Though the program is now more focused on and directed toward helping the struggling businesses who need it most — smaller ones, minority- and women-owned, hospitality industry, etc. — it’s been handled in a haphazard way that has confused applicants and lenders alike. And safeguards put in place by the SBA to combat fraud had the unwelcome consequence of holding up millions of valid applications.

8) There is legislation currently pending to extend the current PPP round’s deadline to May 31, but that has not yet been approved. The House voted almost unanimously to extend, but the Senate has not yet acted. Unless they act soon, this week will be the last in which to submit applications.

9) The program our firm uses — AICPA’s CPA Loan Portal — as well as many others, is already closed to new applicants as well as the public, and one must go through a validated partner firm such as ours in order to apply. However, I have heard that Cross River Bank (my favorite lender from the first round) is still accepting applications. Their FAQ, as well as their list of required documents by entity type, are both quality-information and well-organized. Please read those sections before applying. I have recently been informed that Lendio is also still accepting applications. (These are not affiliate links; I do not earn anything for referrals.)

COVID-19 Financial Relief, Education, Illinois, IRS, Site News, Tips

What The ARPA, ERC, PPP And Other Laws Mean For Your 2020 Taxes

March 21, 2021 Nancy McClelland Leave a comment

Recent new legislation from Congress and the White House, as well as guidance from the IRS and DOL, has caused sweeping changes for small business owners and individuals, and we tax preparers are still trying to wrap our heads around it — during what was already the most complex and demanding tax season on record.

Specifically, the American Rescue Plan Act (ARPA) included a few provisions that are retroactive to 2020 — and the IRS, various state Departments of Revenue, Department of Labor, and tax software programs are trying to figure out how best to implement these changes as efficiently as possible. (For a breakdown of key provisions in the Act, see this excellent summary.)

These changes include:

1) The first $10,200 per person of 2020 unemployment benefits will no longer be taxable at the federal level, though certain states will continue to tax the full amount (Illinois has asked all taxpayers with unemployment income to hold off on filing returns until the Dept of Revenue has addressed the situation). The IRS will be releasing a worksheet that the tax software companies then need to incorporate into the 1040 returns.

2) A 2020 “Repayment Holiday” for the Marketplace Health Insurance Advance Premium Tax Credit was issued, but implementation questions remain; IRS guidance is expected soon.

3) Another economic impact payment (stimulus check) is on its way. You do not need to file your 2020 tax return right now to claim your check, as the law allows for an additional payment in a few months if your 2020 tax return shows you are entitled to more (vs your 2019 tax return). Conversely, if your income went up in 2020 and you are now ineligible for the full benefit, you’ll want to wait to file your 2020 taxes until after your payment arrives, since you won’t have to pay back the overage on your 2021 tax return.

In addition to the above legislative shifts, the IRS recently released guidance concerning the Employee Retention Credit (ERC) that changed our expectation of how it would be handled on business tax returns for cash-basis business tax filers. Previously we had expected that those who received PPP funds in 2020 and can now (as of the Dec 21 Consolidated Appropriations Act) retroactively claim ERC would adjust for the related deductions on their 2021 tax returns. Not so. These adjustments will have to be made on the 2020 tax returns. As a result, we have had to put approximately 75% of our client business returns on extension.

(Technical note: keep in mind if you are doing tax returns for a client that claimed ERC, not only do you have to reduce deductible wages by the amount of the credit, but also recognize this reduction may impact Section 199A eligible wages for purposes of the 20% qualified business income deduction.)

And yet we are still awaiting essential guidance on whether or not the Employee Retention Credit can be taken on wages paid to >50% owners of a company. Interpretations by tax analysts so far are pretty much split evenly between whether the law as [sloppily] written provides reasonable basis in this area.

I’m guessing you see the challenge here: we don’t yet know the rules for claiming the ERC, and yet we have to report related adjustments (as a direct result of the credit calculation) on the 2020 business tax returns. Most of these returns have a flow-through relationship with the business owners’ personal tax returns — so those may have to be placed on extension as well if we do not get guidance soon.

(Related blog post: please call your representatives and ask for all taxes — estimated quarterly as well as corporate — to be extended; not just the Form 1040.)

We are also expecting guidance about how the IRS wants business owners to treat basis reporting for owners where PPP forgiveness causes issues.

Yet another example of a forced need to wait on certain returns: using tax filing software, we can e-file a return today, but set the payment direct-debit date to a future date — not later than the return due-date. This date has not yet been updated in most tax prep systems to go beyond April 15th to the new due date of May 17th.

It’s particularly frustrating for us as small business advocates, because filing a tax return is the only way to get a refund if you’re owed one, and many of our clients may be more in need this year than usual. And yet, for a large number of taxpayers right now, holding off on filing is the recommended approach.

All the while we are trying to help our small business clients respond to 2021 changes, such as important employment law updates; alterations to COBRA and Marketplace subsidies; major modifications to the current round of the Paycheck Protection Program (PPP); new relief programs such as the Shuttered Venue Operators Grant (SVOG) and the Restaurant Revitalization Fund (RRF); the aforementioned ERC/PPP maximization… and so much more.

The provisions noted above — and others — may affect your return. Tax professionals everywhere need some time and space to learn about these changes, analyze their impact, and develop personalized recommendations to maximize your COVID-19 tax benefits. Please be patient with us during this extremely stressful time.

Education, Illinois, Tips

How To Make IL Dept Of Rev (IDOR) Business Tax And Extension Payments Online

March 14, 2021 Nancy McClelland Leave a comment

UPDATE 12/31/21: Sigh. The step-by-step instructions I painstakingly wrote out below, with screenshots (for making business replacement income tax estimated and extension payments) are now out-of-date because IDOR revamped their MyTaxIllinois website in September (grrrrr). Please see this blog post instead: How To Make IL Dept Of Rev (IDOR) Business Tax Payments Online: Estimates & Extensions – UPDATED | The Dancing Accountant — the basic concepts are the same, but the layout and workflow is totally different now.

Unlike individual tax payments — extensions, estimated tax, etc. — for business payments you will need to log in to MyTax Illinois, using the same credentials you usually use for paying sales tax or monitoring state payroll taxes.

On the main page, you should see a list of all your accounts with IDOR & IDES, something like this:

Click on the “Business” link. You will see a list of periods.

Click on the period for which you want to make the payment. It is very important to pick the correct period. Keep in mind this is usually the prior year’s ending date, if you’re trying to pay income tax (aka “business replacement tax”) for a return or an extension. You would choose the current year’s ending date if you are trying to make a quarterly estimated tax payment for your business.

Then click “Make a Payment” in the upper-right corner of this portion of the screen, under “I Want To”.

Then click “Bank Account Debit”.

That link will take you to a page where you will select a payment type. It is very important that you select the correct payment type.

They changed the forms a couple of years ago so that there’s no separate extension tax payment form — you just make a payment under the type of income tax form that your business usually files.

For example, a partnership or multi-member LLC would usually select IL-1065 payment — whereas an S-Corp would file an IL-1120-ST. Confirm that you are selecting the correct type that corresponds with your annual business tax return.

It will prompt you to enter your payment information.

And then click Submit. Make sure to save or print the confirmation page that pops up as a pdf — for your files, but also please send it along to your amazing and dedicated tax preparer.

(If you miss that last bit, then please go into your payment history for this account and do a print-screen that includes the status section; it will show the amount, confirmation number, and date/time.)

COVID-19 Financial Relief, Education, Illinois, IRS, Tips

Illinois IDES 1099-G Form For 2020 Unemployment: What You Need To Know

March 5, 2021 Nancy McClelland 1 Comment

Understandably, there is some confusion this year about unemployment compensation, how it is reported to recipients, and what tax forms taxpayers might need to report it on their returns.

The Illinois Department of Economic Security (IDES) created the helpful infographic above, as well as an Info Sheet, which I’m sharing in its entirety here so it’s easy for folks to find.

From the Illinois Department of Employment Security (IDES) – January 2021

Background

All individuals who received unemployment insurance (UI) benefits in 2020 will receive the 1099-G tax form.

Claimants who collected UI benefits last year need the 1099-G tax form from IDES to complete their federal and state tax returns. The 1099-G tax form will be available by the end of January 2021 and mailed or emailed to IDES claimants based on previously selected claimant preference.

The 1099-G form is necessary for individuals who received state and/or federal benefits. This pertains to claimants who received both regular UI benefits and benefits paid under new federal pandemic relief programs including Federal Pandemic Unemployment Compensation (FPUC), state Extended Benefits (EB), Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Lost Wages Assistance (LWA).

How to Access the 1099-G Form

Upon establishing an IDES account, claimants are provided an option to receive their 1099-G form electronically. Those who opted for electronic delivery will receive an email notification towards the end of January 2021. This email will contain instructions to access the document from the IDES website.

For those who opted NOT to receive their 1099-G form electronically, IDES will mail a paper form during the last week of January. These claimants may also access and print their 1099-G form online by going to ides.illinois.gov/1099G, or calling Tele-Serve at (312) 338-4337.

Fraud Warning

If an individual did not receive UI benefits in 2020, yet still received a 1099-G form from IDES, this may indicate that a fraudulent claim was filed in their name. The IRS has provided guidance to states regarding these nationwide identity theft and unemployment fraud schemes. Individuals who may have erroneously received a 1099-G form should immediately contact IDES at (800) 244-5631.

IDES representatives will return calls on a first-in, first-out basis to ensure the fraudulent claim is shut down, and to address the 1099-G form. Once a fraudulent claim is reported, investigated, and confirmed by IDES, the victim will not be held responsible for repaying any benefits fraudsters may have received in their name, nor will they be held responsible for tax implications resulting from a fraudulent claim. IDES understands the urgency associated with tax season and is committed to ensuring agency resources are available to assist individuals who received a form in error.

See the recent alert on 1099-G forms from the U.S. Department of Justice National Unemployment Insurance Fraud Task Force.

Additional Information and Questions

Additional information on 1099-G forms is available at ides.illinois.gov/1099G. For tax filing information, individuals
are encouraged to call the IRS at (800) 829-1040 or visit their website at irs.gov.

Individuals can also contact the Department at 800-244-5631 and select the appropriate queue to speak with an expert:

• Select your language

• When prompted, press 2 to indicate you are an individual

• Next, press 1 if you received a 1099-G form in error, or press 2 for all other 1099-G related inquiries

If you are already awaiting a callback for a different inquiry, we will be able to handle your 1099-G related questions on that same call. There is no need to queue for an additional callback.

Additional FAQs are available here. With questions about tax filing, please visit the IRS.

Tax fraud can result in criminal penalties. Some of the criminal activities in violations of federal tax law include deliberately underreporting or omitting income or hiding or transferring assets or income. See https://www.irs.gov/compliance/criminal-investigation/types-of-fraudulent-activities-general-fraud. Federal criminal penalties can include fines and imprisonment. See 26 U.S.C. §7201, §7206, and §7207. Under Illinois law, intent to defraud for tax purposes may be inferred from conduct such as concealment of assets or covering up sources of income, or any other conduct, the likely effect of which would be to mislead or conceal. See 86 Illinois Admin Code 700.330(c). State law provides penalties for tax fraud. 35 ILCS 735/3-6.

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.

Cooperatives, COVID-19 Financial Relief, Education, Site News, Tips

The Dancing Accountant In The Journal Of Accountancy

March 3, 2021 Nancy McClelland Leave a comment

I am excited to highlight yet another feature in the AICPA’s Journal of Accountancy. Their “CPA Insider” has been one of my habitual reads and go-to publications for years, and so to be included in their article, “The Year Ahead: CPAs share their ambitions and goals” is a special honor. Many thanks to author Kelly Hinchcliffe for reaching out again after our last piece together, about protecting small business clients from predatory loans.

As with all interviews, one shares more information than can be printed, so I always enjoy posting the full interview here on my blog.

What are your goals for 2021 in the following areas for yourself and/or your business?

Career goals: What would you like to accomplish professionally in 2021, and why?

It has been a long-standing goal to start putting my company’s internal systems on the same level of importance as client work… to prioritize them in the spirit of “Profit First” (which I’m also terrible at doing, despite being an accountant). Everyone else’s needs always seem more pressing than our own company’s: cybersecurity, engagement letters, contracts, operating agreements, workflows/ procedures/ standardization, and billing. I would love to “catch up” and focus on my own company’s health with as much passion and investment as I show my clients’ companies. To that end, I am hoping to slow down client acquisition growth (we always have a waiting list, so this is challenging), develop staff internally, and hire an administrator to help keep me on-track and focused on these projects.

Technology skills: What technology skills will be most important for your job in 2021? Is there anything new you’d like to learn?

I have prided myself on being at the forefront of accounting technology for a long time, compared to many CPAs — most colleagues that I know either focus on the tax side or the bookkeeping side, whereas we make it our goal to straddle both worlds and provide value-added accounting services in doing so. I think we pull that off quite well where our clients are concerned — we have a rich tech stack and solid implementation resources for automating accounting, bookkeeping, point of sale, payroll, retirement and similar systems. However, internally, our own systems are very disjointed. Because of the challenges of staff growth and migrating away from legacy software, we do not follow the same advice we give clients — to make sure all the apps in our tech stack “talk to each other”. Therefore, technology-wise, my goals align with the career goals I mentioned earlier: focus on internal needs and improving workflows to make us more efficient. This includes migrating time-tracking & billing software, using Zapier to automate client onboarding and database population, and switching file upload software to automatically connect with our cloud file servers.

Professional development: What professional development goals do you have for 2021, and what learning opportunities are most helpful to you?

Continuing education is never-ending in our firm! It seems my staff and I are always attending one webinar or another — on such diverse topics as PPP (my favorites being the AICPA Town Halls and Alan Gassman‘s periodic free sessions); ERC and tax law changes (Tom Gorczynski and Tony Nitti are favorites); Intuit’s QuickBooks Online In The Know updates; and app demos (I recommend Hector Garcia, Heather Satterley, and Cathy Iconis‘s regular offerings)… as well as the usual suspects, such as tax updates (I never miss the NATP Annual Conference, and usually attend Tax Speaker‘s year-end class), and co-operative topics (a niche market for my firm, I like the NSAC webinars as well as the annual CPG Conference). CPA Academy also offers highly-specific free or low-cost webinars that I find quite valuable. I provide a good budget for both time and course costs to my staff because I want them all to be as excited about learning new things as I am. We each have different interests and areas of expertise.

Business opportunities: What are your business goals for 2021, and why?

The pandemic made me realize how much of a dedicated following my award-winning blog has… it truly hadn’t hit home until I realized I was one of the only reliable sources nationally for the constantly-changing Paycheck Protection Program. I started offering free zoom Q&A sessions to my clients and colleagues every week, and some of these I shared on the blog. The feedback has been incredible. It reminded me how much I love teaching, and gave me renewed interest in offering low-cost educational materials and sessions specific to small business owners (and the bookkeepers and accountants who assist them). I’ll be exploring this direction more in the coming year.

Anything else: Is there anything else you’d like to add?

My staff and I have operated a remote company for years, but I still met with clients in-person most of the time. This limited the personal goal I had of becoming a “digital nomad” and traveling while working (my husband’s software development work is 100% remote). The pandemic changed all that — we were in Yucatán, Mexico on a tax-season work retreat when Covid-19 hit, and we simply never went back home to Chicago. (We intend to do so once a vaccine is widely-available.) My clients had the opportunity to discover that I am every-bit as involved in my hyper-local community from afar as I was at home, and the silver lining is that I am now considering what my new office will look like… will it be half-a-year in Chicago and the other half elsewhere? Will we sell our home and live on a boat? What about every tax season being somewhere sunny? The options are endless and give me some extra energy and anticipation while I trudge through the challenging task of keeping my small business clients afloat to see a brighter future.

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Tips To Maximize 2020 Employee Retention Credit (ERC) & PPP Interaction

March 2, 2021 Nancy McClelland 20 Comments

I recently wrote about reasons to hold off on Paycheck Protection Program (PPP) forgiveness applications for the time being. Among them is the complex interaction between PPP and the Employee Retention Credit (ERC), which previously was not permitted as an option for financial relief for those that had received PPP funding.

Because ERC is now available for small businesses who have accepted PPP funds — but not for the same payroll dollars (no double-dipping) — there are some pretty complicated calculations that, if done right, could generate a great deal of financial relief to a lot of independent business-owners in need.

The IRS came out with guidance on March 1. The Journal of Accountancy summarizes:

The notice explains (1) who are eligible employers; (2) what constitutes full or partial suspension of trade or business operations; (3) what is a significant decline in gross receipts; (4) what is the maximum amount of an eligible employer’s employee retention credit; (5) qualified wages; (6) how an eligible employer claims the employee retention credit; and (7) how an eligible employer substantiates the claim for the credit.

Summary of the 2020 Employee Retention Credit

As a reminder, the 2020 ERC is a payroll tax credit available to business owners whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. (Note: in the new IRS guidance it also states that if “the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order”, your business may be eligible for ERC — even though there was no governmental order in your area.)

The credit comprises 50% of up to $10,000 in wages to each employee. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC.

The ERC is claimed as a reduction of payroll taxes on quarterly Form 941 (or a prepaid refund on Form 7200). The IRS updated the form on July 1, and a handy breakdown of the new lines can be found here. There are different rules for eligible businesses to be able to claim the 2021 ERC moving forward — a topic for another day — but this post concerns the opportunity to “scoop up” payroll dollars from 2020 that would have been eligible for ERC had it not been for the PPP Loan. These can be claimed by filing an amended Form 941 for each relevant quarter.

Keep in mind that the ERC is complex, and this blog post will not walk you through the specifics — I’ve included a list of some of my favorite resources below. The goal here is to share the steps in our firm’s approach toward these calculations for our clients.

So let’s start with a couple of things to be aware of before we go through the steps that my firm plans to walk through come May/June.

First, the ERC is not generally as valuable as the PPP. It is a payroll tax credit, rather than actual cash funding (though you can file for an advance on it).
And the ERC did not get the benefit of having Congress declare its related expenses deductible, like the special treatment that PPP costs received. So you will lose all the deductions for the payroll tax dollars on which you receive the credit. Deductions aren’t worth as much as credits, so you still come out ahead. But if you’re choosing PPP or ERC for a given payroll dollar, you want to pick the PPP first — up to the minimum 60% requirement for that loan to be forgiven.
However, once you’ve reached that 60% requirement, if you can use non-payroll costs for the remaining 40%, then you “free up” the rest of the payroll dollars to be used for ERC. So you’ll want to work on PPP1 forgiveness applications at the same time as 2020 ERC calculations — they are related to each other, and changing one will potentially affect the other.
But what does this mean for companies filing income tax returns for 2020? Businesses that later decide to retroactively claim the ERC will need to file amended income tax returns — or preferably, put their income tax returns on extension until they have claimed the ERC for 2020. We had previously thought that cash-basis filers could potentially claim the income for the credit and the associated reduction in payroll costs on the 2021 income tax return, but that was ruled out with the most recent IRS guidance.

Steps to Evaluate Payroll for PPP vs ERC

The hope is that in most cases you’ll be able to do Steps One and Two and skip the rest. But just in case, Steps Three and Four will take you the rest of the way there.

Step One
When figuring out how to combine ERC and PPP, literally make a calendar for each client and work from that.

a) Determine dates for which you qualify for ERC, based on either:
– the full or partial shut-down period, or
– a gross receipts decline of 50% over the same quarter in 2019
(the latter qualifies you from the beginning of that quarter to the end of the quarter where receipts go back up to 80%)

Keep in mind that both scenarios may apply, but for different periods — for example, the business was shut down on 3/18/20, and then later fully reopened… and then the 50% revenue drop started in the following quarter.

Note: you may want to find out the exact dates that your client’s city/county/state decreed full-capacity indoor dining was illegal — for those dates, restaurants qualify for ERC based on “full/partial shut-down” rules. If your client is a gym, bar, or other type of non-essential business that had hours limited, find out the exact full-or-partial shut-down dates decreed for that industry in that specific area.

b) Determine PPP covered period. For most folks, this will be the 24 weeks starting on the date of loan fund disbursement.

c) Determine the “bookend” periods — the time both before and after the PPP covered period; for the timeframe when the client qualified for ERC but was not in the PPP realm.

Step Two
You may be able to skip the rest of the steps by eyeballing whether you’re able to claim the entire 2020 ERC of $5k per employee (on the first 10k paid to each) all in one quarter — for most businesses this would usually be the final quarter of the year. Then, not only will you not have to worry about overlapping PPP and ERC payroll dollars, but you also will be able to claim this through most payroll companies and not have to manually amend the 4Q 2020 Form 941. Double-bonus!

If not, then see if you can get the full $5k per employee ERC (again, on the first 10k paid to each) using only the periods before and after the PPP1 covered period. You at least eliminate the need to juggle the PPP payroll dollars along with the ERC payroll dollars during the covered period.

Step Three
If that’s not an option — if you can’t get to the full 10k within the bookend periods — then:

Before you work on PPP1 forgiveness, subtract whatever the 2020 unallocated ERC balance is after Step 2 (not to exceed 10k of wages per employee) from the payroll amounts during the PPP covered period — before putting numbers in the forgiveness application, just to make sure you can still get full forgiveness at this rate. This is just a “gut check” to see if you can eliminate the need to run the actual ERC calculations for the PPP covered period.

If so, then go ahead and take ERC on the difference, even if you haven’t figured out the specifics of your PPP1 forgiveness yet.

Step 4
If you can’t get full forgiveness on PPP1 at this rate, then go ahead and fill out the PPP1 application in full, using only 60% of the PPP funds to allocate payroll.

Then see how many payroll dollars are “left over” to be used for ERC.

And remember that you can use payroll from employees who made over $100k annually for ERC during the PPP period — because those dollars are not eligible for PPP (due to rules and limitations specific to that program), but they are eligible for ERC.

You can also count — for ERC purposes — dollars that were above 60% of the PPP loan, and therefore are not needed for forgiveness (presuming the business has sufficient eligible costs to make up the 40% “non-payroll” portion of PPP forgiveness).

Think of it this way: you are effectively reducing the ERC subtraction amount per-employee from PPP forgiveness until you get to full PPP forgiveness… and taking 2020 ERC on the balance (since as I mentioned before, the PPP payroll dollars are more tax-advantaged than the ERC dollars).

Does this four-step process sound easy? No! It’s not. It may not in fact be worth it for most small business clients to pay a professional to scoop up the remaining piddly amounts in the PPP covered period — in which case, consider just using Steps One and Two: the amounts in the bookend periods, or even better, just the amount from the final quarter (because that way they don’t have to pay you to manually prepare a 4Q Form 941, either).

But reviewing this approach before going in and working on all the client ERC and PPP calculations should help a great deal in identifying where the bulk of the payroll dollars are that will qualify for the ERC program, and will allow you to make intelligent decisions about which periods to mine for this type of financial relief for your small business clients.

Resources

For a wonderful in-depth explanation of the Employee Retention Tax Credit, please see Tony Nitti’s two-part Forbes article:
– Breaking Down Changes To The Employee Retention Tax Credit In The New Covid Relief Bill, Part 1
– Breaking Down The Changes To The Employee Retention Credit In The New COVID Relief Bill, Part 2
– Part 2 also links to an earlier article of his that goes through the details of calculating the ERC according to the 2020 rules.

KBKG is offering a free one-hour webinar on March 17:
– Employee Retention Tax Credits: Qualifications, Benefits & Refunds (kbkg.com)
–This is the same firm that offers the free 2021 ERC estimator calculator.

The three paid courses I’ve taken so far that were the most valuable were:
– Tom Gorczynski‘s Employee Retention Credit Update, which included an Excel Calculation Template.
– AICPA – The NEW Employee Retention Credit: More for Eligible Employers
– NATP (natptax.com) – Calculating the Earned Income Credit

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Why You Should Still Hold Off on PPP1 Forgiveness Applications

March 2, 2021 Nancy McClelland Leave a comment

Many clients and colleagues have reached out to me over the past two months to ask whether they should apply for PPP1 forgiveness yet, and my answer (and that of the AICPA) is still “not quite yet”. But rather than just pushing off the question of “but when” into the future, I wanted to publicly share our company’s strategy and timeline for handling these applications.

The deadline to apply for Paycheck Protection Program (PPP) forgiveness is 10 months after the end of the covered period — which for most folks for the first round was 24-weeks — so that wouldn’t be until sometime in July 2021 for the earliest borrowers. (It’s not really a deadline, but it’s the date on which the lender will start requiring loan payments, so I think of it as one.)

We’re planning to dedicate May & June 2021 to working through all our existing clients’ PPP forgiveness applications. There are many clarifications we’re still waiting for (they keep dribbling out of Congress, IRS, and the SBA bit by bit, with occasional leaps), and the interaction between the PPP and other types of financial relief is complex.

In particular, the rules surrounding the 2020 Employee Retention Credit — which until recently was not an option for PPP borrowers — are vague and complex, even with the recent IRS Notice and FAQ. Furthermore, most payroll companies have not figured out how to collect the information and prepare the 4th-quarter Form 941 forms for partial quarters, and we may end up having to file some ERC requests manually. (Don’t get me started on this one.)

An example of how the changing rules affect applications: the EIDL advance grant was previously supposed to be subtracted from PPP forgiveness; but by asking our clients to wait on their forgiveness applications, they were able to take advantage of a December 2020 change that removes this requirement, saving them many thousands of dollars. (Though thankfully, it sounds like SBA will eventually refund those amounts to businesses who applied before this new rule went into effect.)

As if these reasons weren’t enough, in a recent on-demand AICPA Town Hall, they mentioned that:
– Most lenders are not actively taking forgiveness applications because their teams are focused on administering PPP2.
– SBA is working very slowly on forgiveness process because they are also focused on PPP2.
– The new simplified form for $150k and under will not be worked into the SBA system until sometime in March.

Between the constantly-changing rules for PPP and the guidance and calculations needed for ERC, we’re still following the recommendation of the AICPA and asking folks to hold off on PPP1 forgiveness applications, until tax season is behind us all and the IRS can focus on the remaining questions, allowing us to be methodical and consistent in our approach.

There’s no reason to be nervous about holding off on forgiveness — of the one-third of PPP loans that have been submitted for forgiveness, fully 99% of the loan dollars have been forgiven. The very small amount that have not are small loans at only 1% interest. Furthermore, by waiting you are giving your business the best chance at maximizing other types of financial relief, especially as the new Biden-Harris administration is in the process of changing rules to make them more attainable for a larger number of the smallest businesses out there, as well as Congress creating new funding opportunities.

(For tips on planning for the potential Employee Retention Credit, see my next blog post.)

Cooperatives, COVID-19 Financial Relief, Education, IRS, Tips

Changes to Paycheck Protection Program (PPP) Starting Feb 24

February 23, 2021 Nancy McClelland Leave a comment

A slide from this morning’s CPA Loan Portal-AICPA update.

Big changes yet again in the world of the Paycheck Protection Program (PPP), where it sometimes seems the only constant is change.

The White House released a Fact Sheet early yesterday indicating immediate changes to the program intended to shift focus to small businesses with few or no employees, and increase program access to those who may otherwise have been shut out.

The five main changes, as summarized in the CPA Loan Portal-AICPA slide above (from this morning’s webinar), are in two different areas — “Focusing On Small Businesses” and “Increasing Program Access”, and are as follows:

Starting Wednesday, a temporary pause in applications for 20+ employee businesses.
New eligibility calculation rules for Schedule C self-employed (see below).
Borrowers with non-fraud convictions will no longer be prevented from applying.
Student loan delinquency will no longer prevent borrowers from applying.
Clarify that ITIN applications for non-citizens will be accepted.

The biggest take-away for our client base is #2 above — this particular section of the White House statement:

Help sole proprietors, independent contractors, and self-employed individuals receive more financial support.
These types of businesses, which include home repair contractors, beauticians, and small independent retailers, make up a significant majority of all businesses. Of these businesses, those without employees are 70 percent owned by women and people of color. Yet many are structurally excluded from the PPP or were approved for as little as $1 because of how PPP loans are calculated. To address this problem, the Biden-Harris administration will revise the loan calculation formula for these applicants so that it offers more relief, and establish a $1 billion set aside for businesses in this category without employees located in low- and moderate-income (LMI) areas.

The SBA followed up with their own release shortly afterwards, stating, “The 14-day exclusivity period will start on Wednesday, February 24, 2021 at 9 am, while the other four changes will be implemented by the first week of March. The SBA is working on the program changes and will communicate details throughout this week.”

Therefore, self-employed taxpayers should wait until the new rules are released next week to apply for PPP funds.

What does this mean for applicants and their advisors?

PPP loans are based on wages to employees, which are subject to “payroll tax” (or “Social Security & Medicare taxes”). Whereas for certain types of one-person companies that don’t have payroll, the amount is calculated based on the net profit from IRS 1040 Schedule C — the amount on which “self-employment tax” is paid (also known as “Social Security & Medicare taxes”).

As CNBC reports, because of this method of defining “payroll” for the self-employed, some applicants saw very low loan amounts in previous rounds of the program, because they make very little in profit.

To “fix” the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will calculate loan amounts from gross income instead of net profit.

This means that millions of small business owners who posted a loss in 2019 or 2020 will still be able to apply for PPP funds, based on their revenues before deductions are taken.

This sounds wonderful — and to some extent is — but it’s inherently unfair to partnership owners, who also have their PPP loans based on self-employment income. It’s also unfair to the millions of Schedule C filers who already applied for both rounds of the PPP without the benefit of this changed rule.

In a Forbes article from yesterday afternoon, Brian Thompson pointed out, “even more important is the question of whether this formula will be retroactive for those sole proprietors who have already applied. We don’t know yet whether these businesses will be allowed to gross up based on the new formula.”

As for small business advisors, it puts us back in a sprint again, during an already-grueling tax season. This morning, we developed our plan internally for next steps, which is to identify:

1) Clients who file Schedule C;
2) Who have not filed for PPP;
3) Because they have a loss or very low income on Line 31 of their 2019 Schedule C.

Then we’ll reach out to each one of them to explain that they may in fact be eligible for PPP after all, and to offer to prepare their application through our CPA Loan Portal, as we’ve been doing since early January for all our clients who qualify.

Although I am extremely grateful for this opportunity for small business owners, the inequity of the situation is extremely upsetting; we will see if additional changes are made that allow partnerships and prior applicants to use the same rules. But even if those concessions are made, there is an inherent issue with using gross revenues rather than net — which is that other types of single-member companies (S-corps, C-corps, Non-profits and Co-operatives) did not have the same option, and I know quite a few that suffered from lack of PPP funding as a result; even harder-hit were newer companies that did not show a 25% decrease from 2019 to 2020. (It’s hard not to go up from zero.)

I could go on, but I won’t, because it’s tax season and I have to take care of client deliverables in the midst of it all. Who knew that client financial relief would be such a moving target?

COVID-19 Financial Relief, Education, Site News, Tips

Cómo Aplicar Un Préstamo Del Programa de Protección de Cheques de Pago (PPP) – GRATIS – En Español

February 22, 2021 Nancy McClelland Leave a comment

Explico el proceso para solicitar un préstamo del Programa de Protección de Cheques de Pago.

The webinar I gave last week on how to apply for a PPP loan was translated into Spanish by the talented Elsa Prado — just click the image above to hear the whole thing in Spanish.

She was also kind enough to invite me as a guest on her Spanish-language show Alas de Amor on Radio Dimension Latina FM last Saturday — and I managed to pull off most of it without resorting to English, though she was kind enough to expertly translate when I did. (Our session is from about 3:30-35:30 -ish.)

Alas de Amor on Radio Dimension Latina FM — https://fb.watch/3IztQD22aS/

Algunos aspectos destacados:

Estoy muy ansioso por difundir este importante programa de ayuda financiera para empresas pequeñas, se llama PPP. El Programa de Protección de Cheques de Pago (PPP) de la SBA se abrió para una otra ronda de solicitudes, hasta las 31 de marzo. Este programa proporciona a las pequeñas empresas fondos para costos de nómina, alquiler, servicios públicos y otras categorías nuevas de gastos adicionales.

Necesitas solicitar un préstamo PPP a través de un banco u otra institución financiera, no directamente a través de la SBA. Además, no tienes que solicitar el préstamo de tu banco principal. Hay muchos diferentes bancos, prestamistas y otras instituciones financieras que pueden ayudarle a presentar la solicitud.

En la primera ronda de préstamos PPP en abril de 2020, había muchos problemas con las aplicaciones. No había suficiente información sobre cómo presentar la solicitud y a veces había información contradictoria. Esto resultó en bastantes problemas para los negocios que trataron de solicitar préstamos PPP1.

Después de los desafíos de abril, la SBA publicó más información sobre cómo presentar una solicitud y el congreso presentó nueva legislación retroactiva que resolvió muchos de los problemas originales.

Las reglas ahora son más claras y beneficiosas para las pequeñas empresas.

La nueva ronda de préstamos PPP está abierta y la fecha límite para las solicitudes es el 31 de marzo. ¡Todavía hay tiempo para presentar su solicitud – incluso para la primera ronda de préstamos PPP!

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