The Restaurant Revitalization Fund (RRF) is a grant calculated by subtracting 2020 revenue from 2019 revenue to calculate the total drop between the two years — presumably caused by the Covid-19 pandemic. To substantiate the amount of the revenue decrease between 2019 and 2020, the SBA will be requesting tax returns for both years. There are other documents that will be acceptable, but the way to get the application through the system as quickly as possible – processed by computers rather than slowed down by human review – is to use tax returns.
The issue is that many restaurants are also eligible retroactively for the 2020 Employee Retention Credit (ERC), and the IRS has recently ordered that the corresponding reduction in wages for that credit needs to be on the 2020 tax return. However, the Paycheck Protection Program (PPP) Forgiveness applications need to be prepared before calculating the amount of the ERC, in order to maximize the amount of financial relief the client receives between the two programs. Therefore, at our firm, these returns are all on extension while we run these calculations.
Now that the RRF is about to open – possibly as soon as the third week of April – we would like to finalize those calculations and returns, but the catch is that the IRS has still not released guidance on whether or not 50%+ owners of a business are eligible for the credit. Accountants are split down the middle on what the existing legislation, which is extremely unclear, tells us on the topic. As such, we either need to take a position or wait for IRS guidance.
(In the past two days, both the AICPA and Tony Nitti, two of my most trusted sources, have weighed in on this with a big “why is the IRS dragging their heels on this” reaction. Nitti went as far as to say, “Are wages paid to greater than 50% owners eligible for the credit? If I had a nickel for every time someone emailed me this question, I could afford to stop shamelessly and relentlessly shilling this newsletter. It is absolutely amazing that a full year after the ERC was created, we still don’t have a definitive answer.”)
So the options are:
- #1 Calculate ERC as if owners are eligible and file 2020 income tax returns accordingly. This would result in a higher tax for clients (because more wages are disallowed as deductions). Submit PPP Forgiveness applications, but hold off on submitting ERC claims (941-Xs) until guidance is released. If guidance indicates that owners are eligible, file the ERC claims accordingly. If guidance says owners are not eligible, then amend the income tax returns and file the ERC claims accordingly.
This approach may make the most sense when there are two 50%-owners on payroll, and not many other other staff — as the increased credit would be worth the wait, compared to the total credit without owners.
- #2 Calculate ERC as if owners are not eligible and file 2020 income tax returns accordingly. This would result in a lower tax for clients (because fewer wages are disallowed as deductions). Submit PPP Forgiveness applications, and submit ERC claims (941-Xs) — rather than holding off on these as in the above option. If guidance is eventually released that indicates owners are not eligible, then no action is needed. If guidance indicates that owners are eligible, then decide whether it is worth amending the income tax returns and ERC claims to get the additional funds.
This approach may make the most sense with only one 50%+ owner and many employees, as the cost to amend all returns and claims will probably not be worth the additional credit.
To clarify, neither approach will hold up the RRF or cause a smaller amount to be awarded, because ERC is not considered income (that’s why the wages they pay for cannot be deducted). The goal with both approaches is to get tax returns ready for the RRF application as soon as possible, with the best balance between wage deductions and potential wage credits.
While I was tempted to pick one of these two approaches and inform all clients of our choice, I decided — especially with advice from the AICPA Town Hall yesterday — that this is a decision that each client needs to make for themselves. We’re happy to explain the potential costs and benefits of each approach and make a personal recommendation for each client’s individual situation, but the decision should be theirs. We recommend other CPA firms take a similar approach.
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