I’ll cover the following topics: 1) Paycheck Protection Program Summary 2) Current Program Overview 3) Eligibility 4) How To Apply 5) Where To Apply 6) Forgiveness Basics 7) Resources & Questions
Slides will be available through Rep. Guzzardi’s office by request, and I will link to a recording here on my blog.
As an exciting bonus, the webinar will be translated into Spanish, by the talented Elsa Prado. She was kind enough to invite me as a guest on her Spanish-language show Alas de Amor this past Saturday — and I managed to pull off about 85% of it without resorting to English, though she was kind enough to expertly translate when I did.
In either language, please join us to learn about the current status of the Paycheck Protection Program and how you can determine eligibility and apply for a non-taxable forgivable loan to help your business stay afloat during these challenging times.
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.
Scroll to the bottom of this post for a link to the full webinar.
As I’ve mentioned in recent posts, one of the main sources of financial relief from the congressional legislation that was finally signed recently is that the Employee Retention Credit (ERC or ERTC) will now be available to businesses who also accepted Paycheck Protection Program (PPP) funds. Not only will eligible businesses be able to claim this moving forward, but they have an opportunity to “scoop up” payroll dollars from 2020 that would have been eligible had it not been for the PPP Loan.
As a reminder, this credit is available to business owners (regardless of size) 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. The credit comprises 50% of up to $10,000 in wages to each employee paid by an eligible employer whose business has been financially impacted by COVID-19. 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. It 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.
Last week, I offered a webinar to members of my favorite professional bookkeeping group, and they have been kind enough to allow me to share the recording here at no charge. The purpose of the session was to explain the credit and the related challenges, and to brainstorm how we might move forward to calculate the totals and claim it for our eligible clients. Our conclusions have been enforced since then:
1. Identify which clients might qualify and make sure their books are up-to-date (even though we are still waiting on a lot of guidance — for example: what receipts are we looking at when we calculate a 50% drop in revenue? Does it include state and local emergency grants?)
Here is the Excel template I used in class to track client eligibility:
2. Reach out to the payroll companies to see what they will need to claim the credit;
3. The likelihood that this will all happen quickly enough to claim the 2020 ERC on the 4Q Form 941 is very slim; plan on filing amendments for Q2, Q3 and Q4 later.
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.
The newest Covid-19 financial relief package was finally signed, and one of the big features is that the Employee Retention Tax Credit (ERC or ERTC) was made available to many businesses that previously were not allowed to claim it, most notably those who accepted PPP loans.
To summarize the ERC: • 50% refundable payroll tax credit on qualified wages paid between 3/13/2020 and 12/31/2020 • Claimed on quarterly payroll tax Form 941 • Qualify for quarters with full or partial shutdown due to government order =OR= 50% decline in gross receipts from prior quarter • Maximum qualified wages of $10,000 per employee during tax year 2020 period • For employers with 100 or fewer employees, all wages paid are “qualified wages” (different rules for larger employers) • PPP loan recipients were previously ineligible
Changes retroactive to 3/13/2020: • PPP loan recipients can use the credit for wages not paid for with forgiven PPP loan proceeds (no overlap) • Group health plan expenses are considered qualified wages even if no other wages were paid to employee
And the reason for this post — the employer can elect to treat newly creditable wages as paid in the quarter that includes the date of enactment of the Act (4Q 2020) if employment tax returns for prior quarters were already filed prior to the enactment of the Act.
The ERC is also being extended and expanded — but that’s beyond the scope of this blog post. A quick summary of what’s to come: The credit availability is extended to wages paid through 6/30/2021 and the following changes will apply: • Credit rate increases from 50% to 70% • Maximum creditable wages increases to $10,000 per employee per quarter • For employers with 500 or fewer employees, all wages paid are qualified wages • Qualifying gross receipts decline from prior year quarter reduced to 20% instead of 50% – Employer can elect to compare to immediately preceding quarter – Employers not in existence for all or part of 2019 can use the credit
But the point here is that the old ERC is now available to any qualifying employers who had either a 50% reduction in gross revenue or were fully or partially shut down by government order — even if they received PPP funds. They just can’t double-dip on the payroll costs that were claimed for PPP forgiveness. And so for these employers, any remaining (non-PPP) payroll costs from 3/13-12/31/20 can now be claimed on the fourth-quarter payroll tax Form 941 and 50% of up to $10,000 per employee will be credited back to them. This is not small change for some employers!
The problem, of course, is that we have to act fast — the fourth-quarter 941 forms will be filed in a matter of a week or so, depending on your payroll company. They are all scrambling to find a way for us to report which wages are eligible… but in the meantime we need to get our clients ready.
The first step is to determine which clients are already taking the credit.
There are many fine payroll companies out there (actually, there aren’t), and Gusto is hands-down my favorite, and that of many of my colleagues. (And if you use my referral link you’ll get a $100 gift card when you run your first payroll by January 31. If you’re a bookkeeper or accountant wanting to switch your clients to Gusto, this referral link will get you a $500 gift card.)
So I’ve written up instructions with screen shots on how to look up which clients of yours using this system are already claiming the ERC. Once you know this, you can then 1) reach out to them to let them know they can now apply for the PPP, and 2) reach out to the ones who haven’t to let them know they might qualify.
Step One: log into your Gusto Accountant dashboard. Step Two: click on “Clients” in the upper-left to see a list of your clients. Step Three: you’ll need to click into each client and perform the following steps.
Click “Covid-19” in the upper-left.
Scroll past the new notice about the Consolidated Appropriations Act (see screenshot at top of blog post).
There are a bunch of blocks of info on the different programs for which the client might be eligible. Click the “Claim credit” button for the Employee Retention Tax Credit.
4. You will see one of two screens — either it will say “You’re currently receiving the employee retention tax credit” or it won’t.
This is what it looks like if your client is already receiving it:
And this is what it looks like if they’re not:
If they’re not, and you’ve determined that they qualify (50% reduction of gross revenues over the same quarter in the prior year =OR= full/partial shutdown by the government), then click the button at the bottom of the screen to claim the credit and you’ll come to this screen next.
You’ll need to know the quarter in which they became eligible and had wages that qualified for the credit.
Once gross revenues climb back up to 80% of what the same-quarter prior-year revenues were, the client ceases to qualify and must stop taking the credit.
Again, remember that this is to claim wages paid from 3/13-12/31/20 (that were not paid for with PPP funds) on your fourth-quarter payroll tax Form 941. We do not yet know how Gusto (or any of the other payroll companies) will process this information, but given how soon they will need to be filed, it’s essential that we get our clients ready as quickly as possible, and this is Step Two — finding out if they’re already claiming it or not.
(In case it’s not obvious: Step One is determining if they qualify. We’re going through all our clients’ QuickBooks files to review for a 50% drop in gross revenue and then reaching out to clients accordingly, after determining whether they have taken the ERC already or not.)
Good luck!
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.
From the IRS e-News for Small Business Issue 2020-13 today, a note encouraging businesses to use a new fax line to file Form 7200. The IRS still is ramping up staff and catching up departments post-quarantine, so in order to get your advance payment as quickly as possible, please follow their instructions and use the dedicated fax line.
(If you are working with a payroll company who is filing Form 7200 for you, confirm they are taking care of it — do not simply assume. I’ve already come across two companies so far who won’t do it. Time to switch payroll companies, in my opinion.)
IRS Form 7200 fax line: Employers use Form 7200 to request an advance payment of the tax credits for qualified sick and qualified family leave wages and the employee retention credit. The employer tax credits for qualified sick leave wages and qualified family leave wages apply to those wages paid from April 1, 2020, to December 31, 2020.
Businesses should fax the completed form to 855-248-0552.
Due to scheduled maintenance, the 7200 fax line will be unavailable from August 7 at 10 p.m. to August 8 at 7 a.m. ET.
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.
UPDATE: THIS POST IS ALMOST A YEAR OLD AND NO LONGER IS USEFUL INFORMATION.
(Way too many folks are landing on this page and I want to dissuade them from using this as a reference — there have been so many changes to the PPP since this was published. Make sure you restrict any internet searches to posts made in the past month!)
I’m getting this question a lot:
I have someone telling me that they can use all 100% of their PPP for payroll instead of the 75/25 rule of payroll/rent+utilities. Is that correct?
Yes, it is — and yes, you absolutely want to include all of your payroll costs in the forgiveness application calculations!
Some folks are in the situation whereby they have more payroll costs than 75% of the loan will cover. In fact, in some cases, the entire PPP loan — 100% — will be used on payroll costs. And that’s a good thing when it comes to requesting forgiveness, for reasons I’ll explain.
In my firm, for example, I’m paying staff tax-season rates right now, and I have a new employee as of January 2020… but my loan total was calculated based on the average of all of 2019 — so it’s much lower than my actual current payroll costs. I’ll be using 100% of my PPP funds for payroll (and then some). By including all my payroll costs in the forgiveness application and projection calculations, I don’t have to worry about going to the effort of submitting rent/mortgage interest and utilities costs (which are very low for me anyway, as my staff is entirely work-from-home).
But it’s not just a matter of having low overhead and not wanting to spend administrative effort to gather mortgage interest and utilities cost substantiation… it’s more importantly because for forgiveness, we’re all aiming to hit three important tests: the FTE reduction, wage/salary reduction, and 75% of forgiveness hurdles. These are all based on payroll measurements, so it’s best when plugging in your forecasting calculations to first include all the payroll you can… and then just make up the difference with non-payroll costs. The total forgiveness cannot exceed the loan total, so there is no harm in taking this approach.
It is, after all, a Paycheck Protection Program.
Reminder: owners themselves (be they sole proprietors, partners, or shareholder-employees) cannot have more than 8/52 of their 2019 compensation forgiven for PPP purposes, which does mean that for a business owner with no employees, they will not be able to use 100% of the funds for payroll. But for everyone else, yes!
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.
Note: this post is about partners in a partnership — those filing Schedule SE on their personal tax returns due to flow-through income from a Form 1065 K-1. For information on sole proprietors (who are also considered self-employed for the purposes of the PPP), please see this post instead.
There has been so much back-and-forth and conjecture and guidance on how to calculate W-2 payroll for purposes of the PPP loan, but very little on the subject on how to include partner income in these calculations. The reason is that partners in a partnership (or, more commonly, multi-member LLC taxed as a partnership) are by law prohibited from paying themselves as an employee, through a payroll system. They therefore do not receive W-2 forms and are not included in quarterly “941” payroll reports.
The key here is that this is a “Paycheck Protection Program” — the goal is to keep people working instead of going onto the unemployment rolls. Why? Because it’s better for 1) business owners, 2) workers, and 3) the economy. Business owners are able to keep their companies afloat in a challenging environment (to put it mildly), continuing to produce products or services and maintain revenues at some level; workers generally earn more in their jobs than on unemployment (and if not, this means they are low-paid workers and probably deserve a raise for hazard pay); and the economy of course benefits because companies spend money on their vendors and landlords, and individuals spend their money on other products and services, and all of this helps to keep other businesses going, too.
So what constitutes a “paycheck” if you aren’t allowed to be on payroll?
The key here is “payroll taxes” — which are the portion of taxes that go to Social Security and Medicare programs, often known as FICA. Employees have 7.65% of each paycheck withheld for these purposes (and their employers match this amount for a total of 15.3%). Partners, on the other hand, pay estimates quarterly toward this and other taxes, and reconcile them on their annual personal tax return, using Schedule SE (Self-Employment) to calculate “self-employment tax”. This tax is the same as “payroll tax” for employees — with the painful added cost of having to pay both sides of the tax… the employee 7.65% and the matching 7.65% as they are their own “employer”. (Yes, ouch. Being self-employed is expensive.)
For self-employment tax purposes, both guaranteed payments to partners for services and their ownership-percentage allocation of net income are included.
Initially, many of us assumed that only guaranteed payments qualified as “payroll” for the PPP calculation, as these are in theory the amounts paid for services rendered. However, many partnerships do not use guaranteed payments, and instead split all of the profits (for various reasons, including increasing the Sec 199A deduction). Since all income to an active member of a partnership is taxed for self-employment/payroll tax purposes, it should not matter whether it is due to guaranteed payments or an allocated portion of net income — that is a distinction left to the partnership agreement and says nothing about whether it is “payroll” for these purposes or not.
So, based on the above perspective, I have been suggesting that partners take the amount on Line 4 from Schedule SE on their personal tax returns to substantiate the amount of income from the partnership on which they paid “payroll taxes”. And to clarify: this is still the easiest approach for most people!
But here are the potential problems with that approach for some. If you fall into one of these groups, then keep reading for an alternative method:
Tax deadlines have been moved to July 15th — for many small businesses, preparing their books for taxes is the last thing on their minds, and CPAs such as myself are scrambling to help their clients apply for relief, so we’re behind on the returns from folks who have found time to submit their info. As such, many partners simply don’t have their personal returns yet.
Some partners have self-employment income from other businesses as well, such as another partnership or a Schedule C sole proprietorship. Well, Schedule SE adds all businesses together. Guidance has not been forthcoming here, but it is likely that those in this situation will need to apply for PPP separately for each business — or at least the businesses that also have employees.
So for partners in either of these situations, here’s what you can do instead:
Pull up your client copy of the 2019 partnership tax return — Form 1065.
Scroll down to the K-1 forms — there’s one set for each partner.
Line 14A of each of the K-1 forms shows self-employment earnings for each partner. This includes guaranteed payments as well as the flow-through portion of net income.
Take that amount and multiply it by 92.35% to back out the deductible portion — which is the Employer part of self-employment tax. Treasury regulations for the PPP do not allow the employer portion of payroll taxes to be included in the calculation.
In a partnership where all partners are actively working for the company — rather than one or more being silent investors — you’ll see that the total of Line 14A for all partners, equals Form 1065, Line 10 (Guaranteed payments to partners) + Line 22 (Ordinary Business Income).
However, if you have investor-partners, these folks usually are allocated their ownership-percentage of net income on which they do not pay self-employment taxes. And because they do not work for the business, they also will not receive guaranteed payments (which are also taxable for self-employment purposes). Therefore they are not eligible to apply for the PPP, and these amounts should not be included in the calculation. This is why I suggest sticking to Line 14A of the K-1 schedules, rather than using the amounts from the front of the 1065.
And if you are one of the unlucky partners whose 2019 1065 partnership return is still on extension, and therefore does not yet have a Schedule K-1, Treasury regulations allow you to use a reconciled Profit & Loss from your bookkeeping software to calculate these totals. (Make sure your banker knows this, as I have had some requiring 1099-MISC forms as substantiation, which is nothing short of ludicrous for many reasons — I won’t go into that here, as this post is plenty long already.) You would in this case simply add together the row for Guaranteed Payments and the final row, Net Income, and multiply by 92.35% to back out the employer portion of self-employment tax, as mentioned above. Again, if you have any silent investors, you would need to back out their percentage portion of net income.
If you already submitted an application and did not use the correct period or amounts, it’s by no means too late. Based on recent clarifications by the SBA and Treasury, you will be given an opportunity to revise your application — just explain the situation to your banker. It’s only “too late” once your application has already been approved — and in that case, Treasury says anything submitted based on older guidance is still considered accurate as long as it was consistent with the rules in place at the time of the application.
Keep in mind that this is only my personal interpretation of the Treasury regulations concerning what constitutes “payroll” for the purposes of the PPP, and ultimately your banker or lender will be the person with final authority on the matter. However, the Treasury is clear that they will allow lenders to rely on borrowers’ representations. Furthermore, the American Bankers Association is still in the process of seeking SBA and Treasury clarification for many issues, and as they receive it, they have to communicate it to member institutions, who then have to pass it along to the bankers themselves — who are overworked and have scarce little time for daily continuing education. You can do a favor for your banker by organizing your calculations and documents in such a way as to make their job easier, especially if you include a brief note explaining why you used the data you did, and as in middle-school math class: always show your work.
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.
IMPORTANT: This blog post is now out-of-date due to new guidance released on April 6th — see new post here.
The new CARES Act has introduced the “Paycheck Protection Program” (PPP) — $350 billion in loans to be administered by the SBA. The loans may be used to cover a borrower’s payroll and payroll taxes, mortgage interest, rent and utilities for eight weeks from the date of the loan.
But this is the key: if an eligible borrower uses the loan for qualifying expenses “while maintaining its workforce”… the loan may be forgiven. This makes the PPP way more valuable than most other federal, state and city aid (with the exception of flat-out grants, and possibly some credits).
The loans aren’t available yet — hopefully we’ll begin seeing these within the next two weeks. This legislation is hot off the press, and lenders do not yet have guidelines or checklists in place to know how to process applicants. I know this sounds awful to ask of you at a time like this, but: please be patient. Use the time to get your books and documentation in order, select and reach out to your favorite lender, and get everything ready to apply the moment they open the gates.
Qualification and Terms
To qualify for the loan program, a borrower:
(1) must have been in operation on February 15, 2020;
(2) have no more than 500 employees; and,
(3) must certify that the uncertainty of current economic conditions makes necessary the loan request to support its ongoing operations.
The amount of a loan cannot exceed 250% of the borrower’s average total monthly “payroll costs” during the one-year period leading up to loan origination. “Payroll costs” include salaries, wages, commissions, tips, paid time off, health insurance, retirement benefits, and state and local taxes not to exceed $100,000 per employee.
Loans are subject to a maximum of $10 million.
Amounts not forgiven (explained below) will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
Interest on the loans shall not exceed 4% until June 30, 2020, but may be subject to change afterwards. All loan payments (principal, interest and fees) are deferred for at least six months, and up to one year.
Loans are “non-recourse” (which means company owners are not responsible for payments if the company defaults), except to the extent the loan proceeds are used for a purpose other than borrower’s payroll, mortgage interest, rent and/or utilities expenses.
Borrowers/owners will not need to provide any collateral or personal guarantee during the “covered period” (February 15-June 30, 2020). (It’s unclear whether lenders will require collateral and/or a personal guarantee to spring into effect upon the loan continuing to remain outstanding — or not completely forgiven — after June 30, 2020.)
Loan Forgiveness
The total of all payroll costs, mortgage interest payments, rent and utility payments incurred and made by a small business PPP borrower during the eight weeks following the loan — capped at the total loan principal amount — is potentially eligible for forgiveness. Unlike other forms of forgiveness of indebtedness, the amount of forgiveness received by a borrower will not be taxed as income. So this is kind of a big deal.
However, the maximum forgiveness amount will be reduced if the company reduces its number of Full-Time Equivalent Employees (FTEs) and/or reduces wage or salary compensation in excess of 25%. The reduction of forgiveness is reduced in proportion to the decrease in the number of FTEs during the eight-week period following the loan origination date, and the borrower’s monthly average FTEs from either (1) February 15, 2019 – June 30, 2019 or (2) January 1, 2020 – February 15, 2020.
In addition, the maximum forgiveness amount will be reduced dollar-for-dollar for any wage or salary reduction of an employee (who is paid less than $100,000 year) in excess of 25% (measured against the wage and salary for that employee during the most recent full quarter prior to the loan origination date).
If the small business previously reduced its workforce or the salary/wages it pays its employees, they can still qualify for loan forgiveness if FTEs are re-hired and/or wages are restored by June 30, 2020.
After an application is submitted for loan forgiveness, the lender will have 60 days to make a determination as to whether the loan will be forgiven. Lenders will then work with the SBA to be reimbursed for the forgiven amount; this won’t be something the small business owner has to do.
Information on Lenders
The Paycheck Protection Program will be administered by the existing network of approved SBA lenders, but the SBA and Treasury Department have said they are adding qualified lenders to disburse and service loans made with the guarantee of the SBA. Supposedly it’s not that hard to qualify as a lender, so if you have a good business relationship with a bank or other lending organization, encourage them to apply to become a qualified lender ASAP.
Lenders can make borrower eligibility determinations without SBA approval, using only the program eligibility rules. A borrower does not need to show it is unable to obtain credit elsewhere (a customary SBA loan requirement). This is also kind of a big deal.
Loans under the program are fully guaranteed by the federal government, which is an increase to the existing guarantee percentages under the current SBA loan program. (Ditto on the big deal.)
The SBA and the Department of Treasury are in the process of developing the guidelines lenders will use to administer the Payroll Protection Program loans. They must issue regulations within 15 days of enactment of the CARES Act, which means it’s possible that lenders could begin taking loan applications in two weeks. Just to be clear here: this is light-speed for a newly-enacted government program.
Recommendations for Potential Borrowers
I’m hearing from clients and colleagues that none of the lenders have received guidance yet for these PPP loans. However, if you have your books in order and gather all the appropriate documentation that you expect they’ll ask for, then you’ll be ready when the time comes.
In addition to getting the books in order for 2018, 2019 and up-to-date through 3/31/20 (if they’re not already), I’m recommending to clients who may be interested in the program, as potential borrowers, start working on documentation to verify the following: 1) the number of full-time equivalent employees on payroll and pay rates for the applicable periods: including payroll tax filings, state income, payroll, and unemployment insurance filings (basically, payroll from a comparable period one year ago); and, 2) payments on mortgage obligations, lease obligations and utilities: including payment receipts, transcripts of accounts, or other documents (to prove you had a lease or mortgage and utilities in service before February 15th of this year). 3) You’ll need some type of certification by an “authorized individual” (presumably an owner, partner or officer) as to the business having been negatively impacted by COVID-19; 4) And of course you’ll need some relationship with an SBA-approved Sec 7a lender, which means start calling around now.
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.
UPDATE 6/11/20 — an excellent, straightforward article by Accounting Web was released entitled, “How to Help Clients Conduct Layoffs and Furloughs While Mitigating Their Risk“. It explores the differences between various strategies: furloughs, paycuts, and layoffs — and how to navigate which to choose and what pitfalls each entails.
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.
If for some reason your employee does not consent to online delivery, or if they do not have an email address, you can print the W-2 and give or mail it to them.
Gusto files the required federal, state and local copies of W-2 forms to the appropriate tax agencies, so you don’t need to order special paper stock in order to print and mail copies of W-2s — you can just print them on regular paper for those employees who may need it.
To recap, there are three methods to issuing your employees their W-2 forms —
Method 1: Enable your employees online access to their Gusto accounts so that they can obtain their W-2 forms electronically.
Method 2: Download individual W-2s, and distribute them to specific employees.
Method 3: Print the entire W-2 PDF bundle, and distribute them to all employees.
As you probably know if you are a regular reader of my blog, I am a big fan of Gusto. They have made many improvements over the past few years, and at this point they really blow away the competition, especially with their QuickBooks Online integration. (I am not being paid to say any of this — I am simply a big fan, having spent way too many years dealing with payroll company frustrations.)
And if you are a client of mine, but aren’t using Gusto payroll yet and would like to — just let me know, or sign up here! You will receive a 15% discount, since I do not accept revenue shares.
For those of you who are not clients of mine, but are interested in using Gusto for payroll, sign up here!
And for colleagues who are interested in offering Gusto as an option to your own bookkeeping and accounting clients, let me know and I’ll introduce you to my rep, Annie Arthur — who is seriously the best.
