COVID-19 tax relief for businesses comes in many forms

By Christopher Davis, CPA

As the last several months have shown, a lot can happen in a very short period of time. Congress has kept pace with these changes by passing several incentives designed to assist individuals and small businesses as we all continue to navigate through the COVID-19 pandemic. 

These new incentives range from tax credits on wages paid to employees, to new loans available to small businesses, payroll tax deposit deferrals and several changes made to tax laws. As you’ve likely read much about many of these new incentives, including the Paycheck Protection Program (PPP) loan, we will focus this article on next steps within certain incentives and other COVID-19 relief items.

Your business received a PPP loan. Now what?

The first step is to use the loan proceeds for qualified payroll costs, rent, utilities and interest expenses on existing mortgage, or other debt obligations during the earlier of 24 weeks after receipt of the funds or December 31, 2020. Recent changes from the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) require that 60 percent of the loan proceeds received be used for payroll costs, with the other 40 percent available for specified non-payroll costs as well as making the change of the covered period from eight weeks to 24 weeks as previously mentioned. 

Please note that for loans received before the PPPFA was passed, you may elect to keep the eight-week covered period. Close attention should be paid to the timing and use of these funds so you have adequate documentation when it comes time to apply for the forgiveness of the PPP loan. 

On May 15, the Small Business Administration released the PPP loan forgiveness application (Form 3508) to be used when applying with your lender. Careful review of Form 3508 is merited before you begin the application process. 

Form 3508 was released with instructions that clarified several questions and, of course, created many others. Among the clarifications provided, the SBA is allowing businesses to use an alternative covered period for payroll costs which would begin the first day on a new payroll period following receipt of the PPP loan. This option allows for an employer to align the covered period with the businesses payroll costs to simplify the tracking of qualified payroll costs. 

Form 3508 also added detail regarding the possible reduction of the forgivable amount of your PPP loan by adding further clarification regarding the calculation of an employer’s full-time equivalent (FTE) count, including FTE reduction exemptions that may apply to your particular situation. The SBA also formalized an FTE safe harbor for employers that restores FTE levels by June 30, 2020 (however new provisions in the PPPFA indicate that this deadline has been pushed back to December 31, 2020 as well as adding two other FTE exemptions). Additionally, rules were formalized with regard to how to calculate the PPP loan forgiveness amount as it applies to a reduction of an employee’s wage by more than 25 percent.

Your business will be required to prepare Form 3508 and will submit the application, along with information to support the expenses, FTE counts and pay rates, directly to your lender. Your lender will then have 60 days to make a decision on the loan forgiveness calculation. 

To the extent that all or part of your PPP loan is not forgiven, the term of the loan is five years at 1 percent. The PPP loan rules, including the use of the funds and those governing the forgiveness of the loan, are constantly changing and should be monitored as you begin to prepare the loan forgiveness application.

Relief beyond the PPP

Many businesses applied for both the PPP loan and the Economic Injury Disaster Loan (EIDL) made available through the SBA. If both loans were offered and accepted, it is important to make sure to use these loans for different types of expenses. The PPP loan should only be used for the costs discussed above, particularly during the earlier of 24 weeks after funds are received or December 31, 2020. EIDL proceeds should be used for other expenses. 

If you have not applied for or are unable to secure a PPP loan, you may qualify for the new employee retention tax credit. This credit is applicable to qualified employers that saw a decrease of gross receipts of at least 50 percent as compared to the same quarter in 2019 or had to fully or partially suspend operations due to a government order related to COVID-19. This determination of an eligible employer is done on a calendar-year, quarterly basis. 

This 50-percent credit of up to $5,000 per employee is available to cover eligible wages paid between March 13, 2020 and December 31, 2020. This credit is claimed by either reducing the current payroll tax deposit or filing for an advance payment of the credit, as well. Employers that receive a PPP loan cannot claim this credit.  

New guidance has also been issued regarding the deferral of the employer’s share of the Social Security tax on payrolls. Even if an employer has applied for and received the PPP loan, the employer may defer payment of its share of the Social Security tax due for deposit periods beginning March 27 and ending on December 31. There are no interest and penalties assessed on this deferred amount. Fifty percent of the Social Security tax that was deferred through the date before notification of the PPP loan forgiveness must be paid by December 31, 2021, with the remainder due by December 31, 2022. To be clear, this is a cash deferral and does not eliminate the employer’s responsibility of this tax. 

A little known law created back in 2002 in response to the 9/11 attacks enables employers to make certain relief payments to employees in a federally declared disaster, which is the case for all businesses during the COVID-19 pandemic. This law allows the employer to make tax-deductible payments to the employee that will not be subsequently included in the employee’s taxable income. Examples of qualified expenses include medical expenses not reimbursed by insurance and costs to work at home during the pandemic, including cell phones, home office set-up costs, higher levels of bandwidth and the costs of computers, printers and paper. 

The program implemented for these costs should have a clear start and end date and should include a description of the types of expenses that will qualify as well as a maximum amount per employee and for the entire plan. This is not to be used for payments of lost income to the employees.

I strongly recommend speaking with your CPA to explore these programs and others not discussed in this article. I have also made no mention of several pro-business changes made to the tax law that could potentially generate reduced tax bills for the 2019 tax year or previous tax years as well. I wish you good health and safety through these trying times.

Christopher Davis is a Shareholder with Sol Schwartz & Associates, which is celebrating the firm’s 40th anniversary in 2020. He has been practicing public accounting since 2008 in various areas including tax compliance and consulting for individual, corporate, S corporation and partnership taxation. He is co-chair of the firm’s healthcare niche, which specializes in identifying and implementing solutions to achieve the goals of the firm’s physician clientele.