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Education, IRS, QuickBooks Software, Tips

Rules for When to Issue a 1099 Form to a Vendor

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As is the case every year, we’re hearing from lots of folks confused about when to send a 1099 form or other “information returns” to someone.  It is true that over time, these forms have continued to change, and the rules have become more specific… but the basics remain the same. The most important point is that only businesses need to issue 1099s — if you paid someone for personal purposes, you are not (yet) required to send them or the IRS a Form 1099.

Here’s a crash course for each type of form, followed by an FAQ.

1099-NEC
This form was new for 2020 and replaces the old Box 7 of Form 1099-MISC. “NEC” stands for “non-employee compensation”. It is due to recipients and the IRS by January 31st (or the first business day after that, if 1/31 falls on a weekend).

If you paid:
1) a NON-corporation (*see below);
2) for services (not products);
3) via check, cash, ACH, or wire transfer — but not merchant services or electronic payments (such as credit & debit cards, PayPal Business, Venmo Business (**see below) — and starting in 2022 Zelle/QuickPay, CashApp, personal Venmo & PayPal);
4) $600 or more in a calendar year;
then you need to send them a 1099-NEC.

(*) A lot of folks get confused and think the rule is if you paid an “individual,” but really the rule is a “non-corporation,” which means that partnerships and LLCs are included. Just because they have a business name doesn’t mean they’re incorporated. You cannot depend on the company’s name to determine corporate status, nor can you rely on the state LLC/Corp database, as it only indicates the entity type at the state level — almost any type of entity may elect corporate status with the IRS.

So, keep in mind that a company can be an LLC but be taxed as a corporation. In this case, you would not need to send them a 1099, because in the eyes of the IRS, they are incorporated. Here’s an example of a W-9 showing an LLC that is taxed as an S-Corp:

This is one of many reasons you should collect Form W-9 from all service vendors before giving them their first check, just to be safe. The person filling out the W-9 will indicate their entity type and whether or not they are taxed as a corporation.

There’s also an exception to the incorporation rule for attorneys and law firms. You must issue a 1099 to a lawyer or law firm regardless of whether they are incorporated. (Law firms and attorneys have so many specialized 1099 issues, they get their own blog post.)

(**) There’s a lot of confusion over Venmo and PayPal, because there are personal-use “Friends & Family” versions as well as business versions of both platforms. Legally, no business should be using the non-business versions of these payment types… but in real life, many do. It’s very hard to distinguish which payments were made using which method — in theory, a 1099-NEC would need to be issued to a vendor who was paid via a personal Venmo or PayPal method, but I’m not sure how this would be tracked. My recommendation (for many reasons) is to only use the business versions, and then the 1099-NEC is a non-issue (because Venmo and PayPal will issue a 1099-K instead). It also sounds like, starting in 2022, even the personal versions of these programs will be required to issue a 1099-K if $600 and over.

I know, that’s all very confusing. Here’s a nice decision-tree provided by our friends over at Bookkeepers.com, courtesy of Bookkeeping Buds.

1099-MISC

Items such as rent payments, royalties, attorney settlements (as mentioned above, not payments for legal services), and medical healthcare payments will still be reported on Form 1099-MISC, though the form has been redesigned and the boxes renumbered.

Report prizes and awards of $600 or more that are not for services performed in Box 3. Include the fair market value of merchandise won. And be careful here, as it is easy to accidentally include these on Form 1099-NEC if the recipient also provided unrelated services.

  • Rent paid ($600 or more) (Box 1)
  • Royalties paid of at least $10 or more (Box 2)
  • Prizes and awards and certain other payments ($600 or more, see instructions for Form 1099-MISC, Box 3 for more information)
  • Backup withholding or federal income tax withheld (any amount) (Box 4)
  • Amounts paid specifically to physicians, physicians’ corporations, or other suppliers of health and medical services ($600 or more) (Box 6)
  • Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (Box 7)
  • Gross proceeds paid to an attorney ($600 or more whether or not incorporated) (Box 10) – “made to an attorney in the course of your trade or business in connection with legal services, but not for the attorney’s services”; for example, a settlement agreement.

The deadline for providing this form to recipients is the same as above, January 31st. However, the deadline for filing 1099-MISC with the IRS is February 28 if filing on paper, and March 31 if filing electronically.

1099-K

It’s unlikely that anyone reading this will be in the position of issuing Form 1099-K to vendors — but you should know about this form, for a few reasons:
1) You are likely to receive one.
2) It’s the reason you don’t have to issue 1099-NEC to anyone you pay via credit card/debit card, Zelle, QuickPay, a business PayPal account, or a business Venmo account.
3) You may need to reconcile this form against the amount of sales income you report on your tax return.

Form 1099-K is for payments made in settlement of “reportable payment transactions”, which is any credit card, payment card or third-party network transaction. So if you receive payments in this way (unless you only accept checks, e-checks, ACH, or zelle/QuickPay, you probably do), then you’ll get a 1099-K for this total.

But because these amounts are reported to the IRS for you, you don’t need to issue 1099-NEC or 1099-MISC forms to vendors whom you paid using one of these methods. In that case, the recipient could end up having the same income reported to the IRS twice.

The rule used to be that this form was issued to anyone who had more than 200 transactions or $20,000 worth of transactions — but starting in 2022, that threshold will drop to only $600.

As a bookkeeper, accountant or tax preparer, it’s important to protect your small business clients by making sure all taxable income is being reported on their books/returns. If the 1099-K is for an amount that is lower than what’s on the income section of the Profit & Loss, it’s not likely to be an issue. But if it’s higher, you’ll need to do a reconciliation to show that the difference was due to non-taxable receipts such as sales taxes collected, tips collected, refunded sales, and the like.

1099-INT

This form is issued to anyone who lent your business money, and your business paid them at least $10 of interest in the past calendar year. It includes owners, partners, and shareholders.

Note: do not issue this form for accrued interest; it is only for actual payouts of interest in cash or trade.

The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.

If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.

Another note: I have had clients reach out confused by the language “You are not required to file Form 1099-INT for interest on an obligation issued by an individual”. This means if the loan were TO an individual rather than FROM one, and the individual paid interest to the company. (This is not usually the case.) In that situation, the individual would not have to issue the company a 1099-INT (although the company would still have to declare the interest income).

1099-DIV

This form is issued to a shareholder of a C-Corporation for dividends or other distributions paid in the past calendar year.

Most folks don’t think this applies to them — but if you own a business that is taxed as a C-Corp, and you took money out that wasn’t W-2 or loan repayments, then you may have issued yourself dividends. (And if it was for a loan repayment, did you pay the required amount of interest? If so, see the “1099-INT” section above.)

The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.

If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.

1098

This form is to report mortgage interest and real estate taxes. You may not think it applies to you, but if you do the bookkeeping for or are a member of a housing cooperative, you may find that it does. This needs to be issued to housing co-op members for their allocated portion of mortgage interest and real estate taxes paid by the cooperative, so they can deduct them on their personal tax return, Form 1040, Schedule A. If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.

Frequently Asked Questions

What do I do if the vendor will not give me their Tax ID Number, which I need to file the 1099?

First off, it’s the business’ responsibility to obtain this number. That’s why I recommend getting the W-9 from the vendor before giving them their first payment. But in the case where it’s 1099-time and you still don’t have that TIN for some reason, respectfully let the vendor know that not having their info will not prevent you from filing the 1099. It just means the IRS will receive it with “REFUSED” written in the field where the number should be (or if you use an e-filing program, you will check the box that the number is unavailable). This will almost always trigger an audit for both the business and the recipient, which no one wants. Presented with this information, I find that most non-compliant vendors are suddenly able to fill out that W-9 form after all.

Do I really have to send one to my landlord? They get angry when I bring it up.

If your landlord is not incorporated, yes, you do. If it makes them mad, then consider why… are they trying to avoid declaring it as taxable income? Is that the type of person you want to rent from?

What if you forgot to issue a 1099 to someone?

It’s never too late! Since the statute of limitations never starts if you don’t file a return, penalties and interest can continue to accrue forever. If you noticed that you forgot to file a 1099, even for a prior year, reach out to the recipient in question and make sure they declared and paid taxes on the income you inadvertently forgot to remind them about — and hopefully they have. In this case, no amended return will be required on their end, and the form’s arrival will not come as an unwelcome surprise. If not, then that’s a bigger concern. It is the responsibility of each recipient of income to declare it on their return, regardless of having received the 1099. Not getting the form does not exempt a taxpayer from declaring the income they earned. So, the business owner needs to evaluate the risk involved to their company in knowingly refusing to comply with tax law, versus the recipient’s desire to evade taxes.

What do you do if you receive a 1099 that is incorrect or unnecessary?

If you receive a 1099 that has incorrect information on it, simply reach out to the issuer to ask for a corrected 1099. Do this as soon as possible, as it will help them to fix it before it is submitted to the IRS.

If they will not correct the total, then declare the full amount on your tax return, but “back out” the incorrect amount as a negative, with an explanation to the IRS for why this amount was inaccurate. If you receive an audit notice, provide the IRS with the documentation showing why your calculation is correct, and the support showing you reached out to the issuer when you realized the form was not right.

If you should not have received a 1099 at all, follow the same advice as above. A good example of this would be if you received a 1099-K for credit card payments, but also received a 1099-NEC from the company that paid you (this is quite common… it is extremely challenging in most bookkeeping software to distinguish how a bill was paid in most reports). In this case, if the customer will not void the 1099 form for some reason, simply declare the full amount on your business’ tax return and “back out” the amount that was double-issued, with the explanation that it was already declared in income via 1099-K or some similar wording.

However, if the reason you should not have received the 1099 was that you are taxed as a corporation, and you’ve already declared this income on your tax return, then you can ignore the form — it will have no effect on anything and was just a waste of time on the part of the issuer.

How do I run the 1099 report in QuickBooks? Won’t it tell me who needs a form from my company?

Most bookkeeping professionals don’t use the 1099 report that QuickBooks generates — it’s too prone to user error when setting up the vendors, accounts, and dollar-thresholds. Instead we run the detail of the cash accounts and filter by transaction type – Check, Expense, Bill Payment… then sort by Name. The problem may be that there is not a name in there, or it is not a Vendor Name: another great reason to make sure you’re setting up bank rules and being careful about data entry to include vendor information on all transactions.

How does PayPal work?

Oh my goodness, is this ever complicated.

If you pay a business using your personal bank or Paypal account, or pay through “Friends & Family” PayPal you do need to send a 1099 (if over $600), because PayPal thinks this was a personal transaction — because, as I mentioned at the top of this post, personal transactions do not require 1099 forms. If you had used “Business” PayPal, then PayPal would send the 1099-K and there would be no reason to issue a 1099-NEC.

A colleague of mine recently called PayPal support about this and here was their response:
If the transaction detail says “money sent”, those qualify as Friends & Family transactions. However, if the transaction says “invoice paid” or “payment”, then it is a business payment — even if it’s within a personal Paypal account.

What about Venmo?

According to Venmo’s term of service, using it for business is a violation, and they can seize whatever money you have sitting in your Venmo account if they catch you using it for business.

However, we know sometimes this is the best way to collect money from folks, or that customers will send you Venmo funds without thinking about it, or that you’ll do the same with your vendors.

Venmo is considered a “peer-to-peer transfer service”, and not a third-party network. Therefore, treat these like cash payments from a business and send a 1099 form to your vendor.

(Side note: Venmo is starting to accept applications from a number of businesses for a new “Business Venmo”, but it’s brand new and very limited. Be careful with this. The problem with Venmo, PayPal, Bento, and other similar companies like that is that they don’t act like they’re banks — and their staff doesn’t realize that banking is actually the primary function of the company they work for — they don’t get the same kind of intensive training that bankers do. I recommend avoiding Venmo for business payments as much as possible.)

What about the states?

Okay, this gets pretty overwhelming pretty fast, so I am linking to a site that has all the states’ rules in one place — https://www.taxbandits.com/state-filing-requirements/

The short version here is that not all states have the same rules. Some allow the IRS filing of certain information returns to substitute for state filing requirements, and some don’t. Some require e-filing and some allow physical mailings. In past years, the IRS offered state-filings with the 1099-MISC, but didn’t bring that into the modern era when they released 1099-NEC. So please, do your homework when it comes to state filings.

Where can I find more info on due dates, penalties, and real-life scenarios?

Check out my colleague Mark Kohler’s excellent blog post. His charts for deadlines and penalties are very handy.

Another colleague, Questian Telka, and I worked together on a video series on what a W-9 is, and how to prepare a W-9 for each type of entity; and she followed it up with another video on whether or not you need to issue a 1099.

And there you have it! Simple, see?

**many thanks to The Bookkeeping Buds for editing assistance**

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.

COVID-19 Financial Relief, Education, Illinois, Tips

PPP & Other Emergency Funding Opportunities – FREE BACP Webinar 1/19/21

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From the Chicago Department of Business Affairs & Consumer Protection:

The U.S. Small Business Administration (SBA) Paycheck Protection Program will support small businesses throughout the country with up to $284 billion toward job retention and certain other expenses. Businesses apply for PPP loans through a bank, credit union, community lender, online lender or other participating lenders. Please note that some lenders may not be participating in the program – please contact your preferred lender to determine if they are participating. Learn more at sba.gov/ppp and find a lender using the SBA Lender Match Tool.
While BACP does not manage the Paycheck Protection Program, we will be holding webinars and continuing to share information in the coming days and weeks.
The first webinar, “The Paycheck Protection Program and Other Emergency Funding Opportunities,” will be presented by the U.S. Small Business Administration and Accion Chicago on Tuesday, January 19, at 3:00 pm.Register and learn more at chicago.gov/businesseducation. More webinars will be planned in the coming weeks – stay tuned!
To learn more about the PPP, please visit these links:

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.

COVID-19 Financial Relief, Education, Software, Tips

PPP2 Opens Today 1/11 – But Only To A Few: Be Patient.

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January 11, 2021: The next round of the popular Paycheck Protection Program technically opens today — but only for a very small number of lenders, called Community Financial Institutions. According to CPA Practice Advisor, “To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13.  The PPP will open to all participating lenders shortly thereafter.”

In the finance industry, this is being referred to as the “Soft Launch” of the PPP. The reason for this tiered approach is that these institutions (CFIs), and the disadvantaged businesses they often represent — many of them from underserved communities — were mostly shut-out of the first round of PPP back in April. Brian Thompson published a great article in Forbes yesterday, explaining the details, that I encourage you to read. In short, the SBA is trying to equalize access to business ownership and support for black and brown communities. So if you’re not in one of these groups, today’s opening is not meant for you. Please be patient.

Although only this small group of lenders will be the included in the Soft Launch, unfortunately very few of them will be prepared to take full loan applications this week. These CFIs are generally only accepting applications from their existing customers, and do not have the processing capacity to receive an influx of applications, especially from those outside the communities they serve.

My recommendation is to continue with the strategy that you have already devised — whether that’s working with your existing banking relationship, or with your CPA to apply through a lending portal (I am using the CPA Business Funding Portal, a joint program between the AICPA and biz2credit — more here — you can also use the platform for free to help prepare applications to be sent to clients’ existing lenders).

See my recent blog posts for more information about the details of this round of the Paycheck Protection Program, or how to determine whether or not you qualify.

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.

COVID-19 Financial Relief, Education, Tips

PPP2 Guidance & Forms Are Here – Program to Open Week of January 11

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Three weeks ago today I said it was coming — and it’s here!

Today, SBA and Treasury announced the reopening of the PPP program:

Initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13.  The PPP will open to all participating lenders shortly thereafter.

Updated PPP guidance outlining Program changes to enhance its effectiveness and accessibility was released on January 6 in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act.

Key PPP updates include (underlines are mine):

  • PPP borrowers can set their PPP loan’s covered period to be any length between 8 and 24 weeks to best meet their business needs;
  • PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;
  • The Program’s eligibility is expanded to include 501(c)(6)s, housing cooperatives, destination marketing organizations, among other types of organizations;
  • The PPP provides greater flexibility for seasonal employees;
  • Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and
  • Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan. 

A borrower is generally eligible for a Second Draw PPP Loan if the borrower:

  • Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
  • Has no more than 300 employees; and
  • Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. (Updated since to provide an option for annual comparison for those without quarterly records.)

The guidance included two interim final rules (IFRs).

  • The 82-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” consolidates the rules for PPP forgivable loans for first-time borrowers and outlines changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260.
  • The 42-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” lays out the guidelines for new PPP loans to businesses that previously received a PPP loan.

In addition, the SBA released a three-page “Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns.” That guidance includes a commitment from the SBA to make at least the first two days of the PPP application window open exclusively to applications from community financial institutions that serve minority- and women-owned businesses.

AICPA Firm Services Vice President Lisa Simpson got up at 5 am on the morning the SBA guidance was released, and was ready by 3 pm — slide deck and all — to share it with us on the AICPA Town Hall. The hour-long episode is free and available to the public — it’s all excellent, but her presentation in the first half-hour will give you almost everything you need to know. I’ll attempt to summarize it here, but honestly… you’re doing yourself a favor to sit down and watch it.

Here’s a summary of what I consider to be the highlights:

  • New application Form 2483-SD released Friday night, January 8th!
    (You heard it here first.)
  • SBA program will open January 11, in phases, as outlined above (minority-owned businesses were the last to receive assistance first-time around).
  • March 31st is last day to apply for PPP (first- or second-round).
  • For payroll costs used in calculating the loan amount (x 2.5 months, or x 3.5 for the hospitality industry, including restaurants), one can use:
    a) 2019, b) 2020, or c) 12-months’ prior to application.
  • Borrowers that want a 2nd PPP must show a 25% quarterly revenue loss in any quarter of 2020 compared to the same quarter in 2019 (or annual, see below). The SBA is streamlining this for loans under $150k. It will not require supporting documentation to be submitted with the application but only later, when applying for forgiveness.
  • Businesses trying to show the quarterly 25% revenue drop for 2nd PPP loans can cite an annual reduction of 25% and submit copies of annual tax forms to verify. SBA and Treasury say this will help small borrowers that may not have quarterly revenue information readily available.

For details on both first-draw and second-draw maximum loan amounts and eligible costs, this Journal of Accountancy article is the best summary I have read so far.

The AICPA has been very generous in encouraging us to share its slides from the Town Halls in order to get the word out. Here are a few “best of” from Thursday’s session. Again, I encourage you to watch for yourself to get some clarity.

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.

COVID-19 Financial Relief, Education, Tips

Summary of “Save Our Stages” Grant for Shuttered Live Venues

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UPDATE 3/9/21: See this informative blog post written by a colleague of mine for recent updates to the program, application process, required documentation, etc. An important reminder that applicants are required to register for a DUNS number on the SAM.gov website prior to applying — and it takes up to two weeks to process.

UPDATE 1/12/21: SBA is offering a free webinar overview of this program on Thursday, January 24, 2021 at 2 pm Central.

It’s big news that Consolidated Appropriations Act of 2021 (CAA) — the newest financial relief legislation — included a provision of grants for shuttered venue operators, originally known as the Save Our Stages Act. They set aside $15 billion to help these organizations, regardless of entity type.

I’ve recently received some questions that make it clear that folks don’t really understand how this program is distinct from others, and I wanted to clear up some confusion:
1) The reason live venues cannot receive PPP2 funds is that the Shuttered Live Venue Grant program is its substitute, built specifically for these types of organizations and industry.
2) It will be phased in over the course of a month — two weeks for the hardest hit, then two more weeks for the next-hardest hit, then it opens up to any other qualifying businesses. (This is generally not the case for other grants or credits, like PPP or ERC. Each has its own rules.)

To clarify, the grant program is not yet live and we do not yet know at what point the funds will be available.

But as is the case with all the other financial relief I’ve been covering, what’s important is to get as ready as you can be NOW, so that the moment guidance is released, forms come out, and the program goes live, you’re on it.

I’m going to start by encouraging you to read two articles — one is from Withum, a trusted accounting firm with a team that specializes in this industry. It’s to-the-point, instructional, and a solid reference.

The other is no surprise: my favorite tax writer, Tony Nitti, breaks it down and explains the details like few others can, with analysis and humor. If you actually intend on applying for one of these, skip the rest of my post and just switch to his most recent Forbes article. My post is simply a summary of his article, for those who aren’t sure if they might be interested and just want to learn about the basics.

And with that… there are three types of requirements: qualifying category; business requirements; and venue requirements. His article lists them in detail, but as a summary:

I. Qualifying Category Requirements

Category 1: Live venue operators or promoters, theatrical producers, or live performing arts organization operators
a) Organize/Promote/Produce/Manage/Host Life Performances
b) Ticket Brokers

Category 2: Relevant Museum

Category 3: Motion Picture Theater Operator

Category 4: Talent Representative

II. Business Requirements

1. It must have been fully operational on February 29, 2020;
2. Had a 75% of gross revenue during any quarter of 2020 over the same quarter in 2019;
3. Intends or has resumed operations (requirements differ based on which category);
4. Cannot be publicly traded or have received more than 10% of its revenue during 2019 from federal funding;
5. Cannot have MORE THAN TWO of the following characteristics:
– Locations in more than one country,
– Locations in more than 10 states, or
– More than 500 employees as of February 29, 2020.
6. No strip clubs;
7. Cannot receive a Paycheck Protection Program loan — either round 1 or the new second round — after December 27, 2020.

III. Venue Requirements
Depending on the category, there are specific requirements that the venues have certain characteristics, such as a defined performance and audience space, as well as paid ticket or cover charges. Again, see the article for a detailed list by category.

Once a business meets ALL the relevant requirements above, it is eligible to receive a grant.

Grant Amount Calculation

The initial grant will generally be equal to the lesser of three amounts:
1. 45% of the gross earned revenue of the business during 2019;
2. If the business started after January 1, 2019, the amount equal to the product of 6 multiplied by the average monthly gross earned revenue for each full month the business was in operation in 2019; or,
3. $10 million.

The grants will be prioritized: for the first 14 days they are available, grants will be awarded to those with a 90% drop in revenue compared to the same period in 2019. The next 14 days will prioritize those businesses who lost at least 70% of revenue when comparing the two periods.

Each qualifying business — even if affiliated with other businesses –- is eligible for its own grant. However, no more than 5 business entities of any “affiliated group” can receive a grant. For museums, the maximum grant for any one museum operator is $10 million, regardless of the number of museums operated.

A supplemental grant is also available if the revenues for the first quarter of 2021 are at least 70% less than the revenues for the same quarter in 2019. It will be 50% of the initial grant, but between initial and supplemental grants, the total amount received cannot exceed $10 million.

The grant dollars must be used for costs incurred from March 1, 2020 through December 31, 2021 (or as late as June 30, 2022 for supplemental grants). If not expended by the relevant deadline, the funds must be returned within 1 year after the date of disbursement of the grant.

The grants must be used on eligible expenses, including: payroll costs, mortgage interest, rent, utilities, worker protection expenses, independent contractors (up to $100,000 in annual compensation each), maintenance, administrative costs, state and local taxes, operating leases, insurance premiums, advertising, production transportation, and certain capital expenditures.

Receipt of the grant is not taxable — the grant represents tax-exempt income; and 2) any expenses paid with the grant money is fully deductible.

Again, thank you Tony — and best of luck to any of you out there who qualify; we can’t wait until the pandemic is over and we’re back in your halls again.

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.

COVID-19 Financial Relief, Education, QuickBooks Software, Tips

PPP2: Do You Qualify? And How to Calculate The Max Amount – Clara CFO

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In preparing webinars and zoom sessions for my clients and colleagues, I often run across other CPAs doing similar work. Some are better than others, and some leave a lot to be desired. I’ve been very impressed with the free series presented by Hannah Smolinski of Clara CFO.

Recently I presented a webinar for Bookkeeping Buds members that they graciously allowed me to share at no charge on my blog. It goes through everything Hannah mentions in the above video, however it a) focuses on the Employee Retention Credit and its interaction with PPP, and b) is directed toward accounting and bookkeeping professionals, rather than small business owners.

Hannah sums up the PPP2-eligibility portion of that webinar in this free 18-minute video quite well, so I wanted to share it with my readers (rather than record a new one of my own or make you sit through an hour and 15 minutes of accounting-speak).

But before you watch it, here’s a summary of PPP2 commonly-asked questions and answers:

Am I eligible for more money?
If your business’s gross receipts declined at least 25% in at least one quarter (any one) of 2020 compared to that same quarter in 2019.

Can I get more PPP money if I got it the first time?
Yes, you can get a second loan if you got a first, as long as you meet the above eligibility requirement.

Do I need to apply with the same bank that gave me my first PPP loan?
No, it doesn’t have to be with the same bank. I am using the AICPA’s partnership with biz2credit because their application and forgiveness process are both streamlined; it is directly with a bank, rather than a third-party; the professional consultation of AICPA gives me confidence that the calculations are accurate.

Do I need to have applied for forgiveness already on my first loan?
No, you don’t have to have already applied for forgiveness on your first loan in order to apply for a second round. You just have to certify that you have used all the PPP1 funds.

What if I didn’t apply first-time around?
You are eligible to apply for a loan under the original rules, meaning you don’t have to prove the decline in revenue like second-time borrowers.

Hannah also provides a free spreadsheet with a tab to run the “25% decline in gross receipts” test, if you don’t already use QuickBooks Online (or if you use QBO Simple Start, which does not have the same reporting features).

She goes through both the spreadsheet tab and the QBO reporting option in the video. (Note: this sheet is an additional tab she’s added to her already-existing free PPP Forgiveness Calculator Excel workbook; and while I think she’s done a very good job with it, I prefer the AICPA version, also free to the public. They also offer a free FTE calculator, which you will need if you are not able to claim any of the safe harbors.)

Once you’ve determined that you qualify, you’ll want to know how to calculate the maximum amount of PPP2 to which you’re entitled. The AICPA offers a free calculator for that as well, but I noticed that Hannah has a low-cost ($37) one-hour webinar recording from January 6th available; she generally does a nice job explaining things to business owners who might be doing their own bookkeeping, so while I have not myself seen the video, it feels worth sharing with you here in case it is helpful.

I do not have any professional affiliation with Clara CFO and do not receive any payment from her or AICPA for promoting their offerings — I just think they’re really good and want to share!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

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FREE Bookkeeping Buds Webinar Recording – Troubleshooting The New ERC Rules

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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.

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 thorough the details of calculating the ERC according to the 2020 rules.

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:

Client PPP-EIDL-ERC templateDownload

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.

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How To Look Up The Employee Retention Tax Credit (ERC) In Gusto Payroll

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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.

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 thorough the details of calculating the ERC according to the 2020 rules.

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.

  1. Click “Covid-19” in the upper-left.
  2. Scroll past the new notice about the Consolidated Appropriations Act (see screenshot at top of blog post).
  3. 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.

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New Relief Package Passes Congress

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I will be spending the afternoon in webinars learning the details of the recent financial relief package that will become law soon, including “PPP2”, and will share what I learn in a post here later today. In the meantime, the National Association of Tax Professionals has prepared a summary for its members — it’s the clearest, most succinct explanation of “what you need to know” that I’ve read in the past two days. Many thanks to them for allowing us to pass along this info to clients.

Both houses of Congress voted to pass the latest COVID relief legislation and all indications are that the president will sign it into law. We know that more guidance will be provided as this rolls out, but here are the highlights as we know them:

PPP and small business support: New COVID-19 relief package provides much needed support for small businesses. Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with Congressional intent in the CARES Act. In addition, the loan forgiveness process is simplified for borrowers with PPP loans of $150,000 or less. Unspent funds totaling $138 billion will be reinvested in the PPP program.

Economic impact payments (EIP): The bill includes a second round of EIPs for qualifying Americans.

The IRS will use the data it already has in its system to begin making payments at the end of December through the first two weeks of January. If the IRS has your direct deposit information, you will receive a payment that way. If it does not, you will receive your payment as a check or debit card in the mail. If you are eligible but don’t receive your check for any reason, you can claim the payment when you file your 2020 taxes in the spring of 2021.

In regards to eligibility, any person who has a valid work-eligible Social Security number (SSN), is not considered as a dependent of someone else and whose adjusted gross income (AGI) does not exceed certain thresholds (see below) is eligible to receive the credit. This means workers, those receiving veterans’ benefits, Social Security beneficiaries and others are all eligible.

  • Spouses of military members are eligible without an SSN
  • An adopted child can use an Adoption Tax Identification Number to be eligible

Under the CARES Act, joint returns of couples where only one member of the couple had an SSN were ineligible for a rebate. This latest round of relief changes that provision. These families will now be eligible to receive payments for the members of the family who have SSNs. This change is retroactive, meaning those who fall under this category who missed out on the first round of EIPs can claim that money when filing 2020 tax returns in the spring of 2021.

The full credit amount is $600 per individual, $1,200 per couple and $600 for children. It is available for individuals with AGI at or below $75,000 ($112,500 for heads of household), and couples with AGI at or below $150,000. If you have children, you will receive an additional $600 per child.

For those above this income level, your tax rebate amount will be reduced by $5 for each $100 your AGI exceeds the above thresholds.

This means:

  • An individual without children will not receive any rebate if their AGI exceeds $87,000.
  • A couple without children will not receive any rebate if their AGI exceeds $174,000.
  • A family of four will not receive any rebate if their AGI exceeds $198,000.

The IRS will use the same methodology for calculating payments as it did for the first round of economic impact payments.

Unless obtained by fraud, rebate checks do not need to be repaid. If an individual experienced an income loss in 2020, or if they have an increase in family size, they may be able to claim an additional credit of the difference when the individual files their 2020 tax federal income tax return in spring of 2021.

If you are eligible and the IRS does not have your direct deposit information, you will receive your payment as a paper check or a debit card as long as the IRS has your address. If the IRS does not have updated contact information for you, you can claim the payment when you file a tax return in spring 2021.

Someone who is claimed as a dependent on another taxpayer’s tax return is not eligible to receive the $600 refund check themselves. Children 17 and older are not eligible for the $600 per child tax credit.

For those with taxable income, you will need to file a tax return for the 2020 tax year, which you can do during the coming filing season that is expected to begin in late January and end on April 15, 2021. Those with little or no taxable income are encouraged to use the IRS’ free file program.

Other than Social Security beneficiaries (retirement and disability), railroad retirees and those receiving veterans’ benefits, individuals with no taxable income will be able to file a simple form provided by the IRS specifically for the purpose of receiving the rebate check.

Social Security retirement and disability beneficiaries, railroad retirees and those receiving veterans’ benefits do not need to file to receive their rebate. The IRS has worked directly with the Social Security Administration, Railroad Retirement Board and the Veterans Administration to obtain information needed to send out the rebate checks the same way benefits are paid.

The credit is not taxable, consistent with other refundable tax credits.

The rebate is considered a tax refund and is not counted towards eligibility for federal programs for both income and asset test purposes. The rebate checks are not subject to the majority of offsets, including student debt and state debts. The only administrative offset that will be enforced applies to those who are subject to a child support garnishment court order.

A family with a child born in 2020 is eligible for the $600 per child rebate amount (assuming all other requirements are satisfied). The IRS will calculate the payment based on the most recent tax data in its system. If a child was born since the family’s last filing, the family will not automatically receive the $600 rebate amount for the child born in 2020. To receive the credit the family can claim the $600 credit on their 2020 tax return filing made in spring 2021.

If you believe you are eligible for an economic impact payment but did not receive a round one or round two payment, you will have the opportunity to claim the payment on your 2020 tax return. This year’s tax forms will provide a place for individuals to claim the payments. If you don’t normally file taxes and are eligible for a payment, make sure to file a return this spring to claim the payments.

The IRS has not announced the exact date the coming filing season will begin, but it typically begins near the end of January. If you need to update your information by filing your tax return, keep an eye out for an IRS announcement about the start of the filing season.

Individuals can claim the payment by filing a simple tax return when the tax filing season opens in late January 2021.

Unemployment assistance: For those who are unemployed, the pandemic unemployment insurance program will be extended by 16 weeks. Supplemental federal unemployment benefits of $300 per week will continue into April 2021 instead of ending in December.

Rental assistance: The current CDC eviction moratorium will be extended until Jan. 31, 2021.

Student loans: Extension of student loan forbearance provisions created in CARES and extended by executive order, from the current expiration date of Jan. 31, 2021 through April 1, 2021.

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.

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PPP2 Is Almost Here — Be Ready Or Risk Missing Out

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For the past few weeks, we’ve been hearing in the news that Congress is coming closer to an agreement on another round of stimulus. It will be a more narrowly-targeted package than prior relief, but it will contain (at least the draft does) funding for the most important items: vaccine distribution; unemployment extension & federal supplement; stimulus checks; emergency food, rent & loan assistance; PPP loan forgiveness simplification; and our main topic here: another chance at PPP funding.

At this week’s AICPA Town Hall (free recording here), Lisa Simpson and Mark Peterson walked us through what is included in the current round of proposed legislation, and what it would mean for the next PPP program (popularly dubbed “PPP2”). They have encouraged us to share their slides and other resources.

Some of the notable elements are that 501(c)(6) organizations — including Chambers of Commerce — will be eligible for PPP this time, providing their lobbying efforts don’t exceed a certain threshold (10% as of now but that could change); and hospitality-industry chains will yet again be allowed to each apply for PPP as if they were independent hotels and restaurants (surprising after the negative press from the first round, but they have a loud voice in politics). Thankfully, the IRS and Congressional representatives are working together to include a provision for expenses paid for with PPP funds to be deductible — the current biggest obstacle for small businesses who receive(d) aid.

In addition, Lisa went through what we know so far about how the new PPP program will be structured and what eligibility requirements might look like. Keep in mind that this is all in draft at this point.

The idea is that if the gross revenues for any quarter in 2020 are down 30% or more over the same quarter in 2019, the business would be eligible for a second application for PPP funds, as long as they have 300 or fewer employees (per location, if in the hospitality industry). EIDL and PPP funds would not be included in this calculation, but no word yet on whether other aid, such as state, local or industry grants, would.

You do not have to apply for forgiveness for PPP1 before applying for PPP2 — in fact, we are still recommending that you hold off on your forgiveness application until Congress passes forgiveness simplification and tax deductibility of related expenses.

Nothing has been finalized yet and we don’t know all the details. But the AICPA has been meeting with politicians on both sides of the aisle and says that something is certainly going to be passed — it’s just a question of when, not if — and what the exact details will be.

It’s likely we’ll have news soon, and as such, it’s important that small business owners begin anticipating their next decision here, since time will likely be a factor — there is less capital in PPP2 than there was in the first round (which was exhausted in 6 days), so being prepared is key.

With that in mind — tips to consider if you might want to pursue additional PPP funding:

1) Have your books up-to-date and reconciled so you and your accountant can begin preparing your application the second the legislation drops.
2) There will be an eligibility hurdle for second-time PPP applicants. You will need to prove a 30% (as of now) drop in revenue — not profit, but gross revenue — in any quarter of 2020 compared to the same quarter in 2019. (If you didn’t get PPP funds in the first round and you want to this time, this rule does not apply.) The first round of PPP/EIDL does not count toward income for this purpose. No word yet on whether other grants may. Otherwise the calculations will be the same as in the first round.
3) I’m asking my interested clients to reach out to me to get their file set up in my CPA Business Funding Portal now, before legislation is passed, so we can just hit “submit” when the program opens, to try to get them in the first tranche of applicants.

(Note to other CPAs and accounting colleagues: this time around I am using AICPA-developed PPP application and forgiveness software, CPALoanPortal.com, so as to make the process for getting client funding less haphazard, more reliable, and more efficient. It’s free at the basic level, which allows you to apply for funding and forgiveness all in one portal, with a client dashboard. I’ve decided to pay to upgrade so I can use the payroll company reporting and AICPA FTE-calculator integrations. Their partner, Biz2Credit, was directly approved by SBA to lend money to small businesses; it’s not a third-party (like so many of the services we used first-time around who brokered loans as a middle-man). Looking forward to same-day PPP2 loan approvals, and disbursements within days. No I am not paid a cent to say any of this.)

Sincerely hoping the process goes more smoothly this time than it did in April!

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.