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Important changes were made to the Employee Retention Credit

Important changes were made to the Employee Retention Credit (ERC) that increases its availability and benefit. The most important factors are that the credit is now available for those businesses that availed themselves of the Payroll Protection Program (PPP) and extended the credit through the second quarter of 2021. In order for a business to qualify for the ERC they needed to incur a significant decline in revenue for a quarter compared to the similar quarter in 2019. As this procedure may sound simple it becomes more complex when combined the PPP forgiveness.

To summarize if your business had the following, they should be eligible for the ERC

  1. They had payroll and filed the quarterly form 941’s in 2020
  2. If the 2020 quarterly revenue decreased greater than 50% from the corresponding 2019 quarter you become eligible. For the subsequent quarters you must have at least a 20% reduction when compared to the similar 2019 quarter

Once eligible, important points are:

  1. Their PPP forgiveness, from the 1st round, has to be properly calculated in order to maximize the ERC.

2)    The maximum credit allowed for 2020 is 50% of the 1st $10,000 each employee earns.

  1. In order to claim the credit, the appropriate quarterly Form 941 for 2020 must be amended.
  2. Wages reported on the 2020 business tax return must equal the wages paid less the ERC, even through the credit will be received in 2021. 

For tax year 2021 to claim the credit the 2021 quarterly revenue has to decrease by greater than 20% (instead of 50%) from the corresponding 2019 quarter and the maximum credit allowed is equal to 70% of the first $10,000 each employee earns during the quarter.

The 2nd round of PPP is here

Congress has approved and President Trump has signed a second COVID-19 Relief Bill that includes another set of imminent business funding and certain loan provisions for existing COVID-19 business loans and expansion of the Employee Retention Credit.

  1. PPP Loan Forgiveness for 1st round applicants who have not finalized their loan forgiveness and for future 2nd round PPP applicants, forgiveness will easily be granted to those loans $150,000 or less via a one page application provided by the SBA.
  2. At this point we are not going to prepare any PPP loan forgiveness applications for those businesses that have PPP loans between $50,000 and $150,000 until the SBA puts out its new form and related instructions.
  3. 2nd round PPP applicants will need to show that sales have dropped 25 percent in the quarter they are applying for compared to the same quarter in 2019.
  4. PPP borrowers who are owned 20% or more by “Chinese Entities” are unable to receive a second PPP loan.
  5. PPP borrowers who received forgiveness will now be allowed to deduct the related PPP expenses such as payroll, rent, mortgage interest, accounting fees and utility expense.
  6. Forgiven PPP loan amounts will not be included in income, instead a corporation would embed the forgive loan amounts to your stock basis.
  7. For self-employed schedule C filer, your PPP loan forgiveness amount will not increase your gross receipts.
  8. PPP borrowers are now allowed to take advantage of the Employee Retention Credit on their payroll returns, the ERC credit is extended through 2021 and has increased to $7,000 per year.
  • As a result, many affected businesses can apply for and expect to receive additional funds either through the second round of PPP loans or the Employee Retention Credit or both.
  • However, please have patience as the SBA has yet to issue guidance and receive IRS comments and most lending institutions have yet to gear up for these changes.

As always, if you have any questions or would like us to assist you please feel free to reach out to Diapoules & Feinstein CPAs P.C.

Key points to keep in mind in regards to your EIDL Loan

If you were the recipient of the EIDL (Economic Injury Disaster Loan) from the SBA,   there are some key points to keep in mind:

  • Per SBA guidelines you have to have a Hazard Insurance Liability policy on your business if your EIDL proceeds were $25,000 or more.
  • If your corporation received the EIDL loan, you should have meeting minutes, the loan number and an officer signatory authorizing the company to participate in the EIDL Loan.
  • Financial statements must be issued no later than three months after your fiscal year end to the SBA. The manner in which financial statements are presented is to be determined by the SBA.
  • For certain selected recipients, the SBA may want reviewed financial statements from a CPA.
  • Please keep in mind, even though the SBA states you are not giving a “personal guarantee,” your business assets are still held accountable if any awry situation were to arise.
  • In the event that you must sell/close your business or sell any of your business assets (excluding inventory), you must notify the SBA. Please see below for guidance.
  • You must first email the reconsideration department, the two emails are pdc.reconsideration@sba.gov and pdc.econs@sba.gov.
  • In the email body, you must include the EIN, Business name, officer of the business first and last name, and the loan number.
  • In the email body, please state whether you are selling you’re business, closing it down or selling any business assets other than inventory. 
  • If the owner of the business died please include the certificate of death for proof. 
  • Send the email out to the two emails listed above and the reconsideration department will reach out to you with further question.
  • If you are selling the business or any of the business assets, only send the email out when you are in contract with the purchaser of the business.

FAILURE TO NOTIFY THE SBA WILL RESULT IN POSSIBLE NONFORGIVENESS ON THE PPP LOAN, A POSSIBLE CALL ON THE EIDL LOAN AND THE IMMEDIATE CALL FOR FULL PAYMENT ON ANY OF THE TWO LOANS LISTED ABOVE.

COVID-19 on the rise

As the number of Covid-19 cases are rapidly rising, and in an abundance of caution, our office will be instituting the following policies:

  • For the Thanksgiving holiday our office will be closed on Thursday, November 26 and Friday, November 27.
  • Our staff will be working remotely for the week following Thanksgiving, November 30 to December 4.
  • For the Christmas holiday, our office will be closed on Thursday, December 24 and Friday, December 25.
  • Our staff will be working remotely for the week following the holiday, Monday December 28 to Thursday, December 31.
  • Our office will be closed for New Year’s Day January 1, 2021.
  • Our staff will be working remotely for the week following New Year’s Day, Monday January 4 to Friday January 8.

As our office has the capacity for our staff to operate and communicate remotely, we do not anticipate any disruption in servicing our clients’ needs. While we will not be physically at our office you can still reach us via our office phone number or by email.

Thank you for your understanding.

PPP Forgiveness Loan Application

Any business that received a Paycheck Protection Program Loan will now have to complete SBA Form 3508 and submit it via their lending institution to the SBA. Unfortunately, completing the form requires complicated calculations and backup documents. You will likely need assistance completed the application.

If you would like us to complete your Form 3508, we will require the following information:

  • The EIDL advance amount received.
  • The EIDL application number
  • Your business’ bank statements starting with the month that the PPP funds were received and include all statements capturing the activity for the next 24 weeks.
  • The payroll journals for 2019 and 2020. These journals need to be converted into an excel spreadsheet in a CSV format. They should the include the following:
  • Employee name,
  • Social security #
  • Pay period start date
  • Pay period end date
  • Date the payroll was paid
  • Hours worked
  • Gross pay.

Other payroll information needed is:

  • Employee contribution for the employee health insurance
  • Employee contributions to retirement plans
  • Federal and State unemployment insurance paid
  • Quarterly Form 941’s for 2019 and 2020
  • State quarterly business and individual employee wage reporting and  unemployment insurance tax filings
  • Eligible non-payroll costs
  • Rent obligations, send us a copy of the lease and copies of the cancelled checks starting 2/15/20
  • Copies of the invoices for electricity, gas, water, telephone, internet service and proof of payment (cancelled checks) starting 2/15/20
  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans starting 2/15/20
  • The amount the employer paid for the employee’s health insurance and retirement account

Please note if you were unable to restore the employee full time equivalent headcount before 12/31/20, there is no reduction in potential loan forgiveness if, “in good faith” you can document the following:

  • Inability to rehire individual who were employees as of 2/15/20
  • Inability to hire similarly qualified employees for unfilled positions on or before 12,31,20: or
  • Inability to return to same level of business activity as such business was operating at before 2/25/20 due to compliance with requirements established or guidance issued by HHS, CDC, OSHA during the period 3/15/2- to 12/31/20 related to maintenance of the standards for sanitation, social distancing or any other worker or customer safety requirement related to Covid-19.

The borrower must retain all documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives  of SBA, including representatives of its Office of Inspector General, to access such files upon request.

Once we receive the above information we will prepare the PPP loan forgiveness application. If the amount received was $50,000 or less and there are no employees our fee will be $350.00. For all others prior to commencing work we will inform you of our fee.

Please call if you have any questions.

Your PPP forgiveness application

In order to complete your PPP forgiveness application;

If you received $50,000 or less, you will need the following information handy:

  • The EIDL advance amount, if any, that you received
  • The EIDL application number
  • The business’ bank statements for your covered period that begins as of the date the PPP funds were received. Your covered period was either the 8 or 24 weeks that you elected.
  • The payroll journals for the same period listed in # 3 for either the 8 or 24 week period. These journals should include:
  • Employee contribution for the employee health insurance
  • Employee contributions to retirement plans
  • State unemployment insurance
  • Each employee’s gross pay, payroll deductions, net pay and hours worked
  • Quarterly Forms 941
  • State quarterly business and individual employee wage reporting and unemployment insurance tax filings
  • Eligible non-payroll costs:
  • In order to include rent paid, you will need a copy of the lease and copies of the cancelled checks starting 2/15/20.
  • Copies of the invoices for electricity, gas, water, telephone, internet service and proof of payment (cancelled checks) starting 2/15/20
  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans starting 2/15/20

If your company received more than $50,000, you will need the above information plus:

  • The last payroll journal you had in 2019. For each employee it should include:
  • Wages
  • Employee retirement contribution
  • Employee health insurance contribution
  • Hours worked
  • The amount the employer paid for their health insurance and into their retirement plan
  • The same information listed in # 1 and # 2 but for the period 1/1/20 to 3/31/20

Please note if you were unable to restore the employee full time equivalent headcount before 12/31/20, there is no reduction in potential loan forgiveness if, “in good faith” you can document the following:

  • Inability to rehire individual who were employees as of 2/15/20
  • Inability to hire similarly qualified employees for unfilled positions on or before 12/31/20 -or-
  • Inability to return to same level of business activity as such business was operating at before 2/25/20 due to compliance with requirements established or guidance issued by HHS, CDC, OSHA during the period 3/15/20 to 12/31/20 related to maintenance of the standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19

The rules have changed regarding the safe harbor full forgiveness.  Under the initial CARES ACT, the businesses that rehired their employees by June 30, 2020 were entitled to full forgiveness but that date no longer applies. Under the second phase of the CARES ACT you need to have rehired your entire staff by the earlier of; the day you file for forgiveness or December 31, 2020. This has the unfortunate effect of negating full forgiveness if the business met the initial safe harbor date of June 30, 2020.

The borrower must retain all documentation in its files for six years after the date the loan is forgiven or repaid in full and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.

Diapoules & Feinstein will gladly help you prepare the PPP loan forgiveness application. As you can understand, our work will be made easier if you forward us a complete set of the required documents.

If you have any questions or seek guidance we have posted on our website the SBA FAQ on the PPP Loan Forgiveness process or you can call our office at  631-547-1040.

Good Luck!

COVID-19 Related Tax Credits for Employers and Self Employed

For those business owners and self-employed individuals currently experiencing an adverse business environment due to COVID-19. The IRS in conjunction with Congress have a couple payroll tax credits to help with your quarterly or annual tax liabilities.

  • Employee Retention Credit:

Eligible employers can claim the employee retention credit, a refundable tax credit equal to 50 percent of up to $10,000 in qualified wages (including health plan expenses), paid after March 12, 2020 and before January 1, 2021.  Eligible employers are those businesses with operations that have been partially or fully suspended due to governmental orders due to COVID-19, or businesses that have a significant decline in gross receipts compared to 2019. Self-employed or businesses that have accepted any PPP loan proceeds from the SBA don’t qualify.

  • Credit for Sick and Family Leave:

For business owners who are dealing with an employee, who was diagnosed with COVID-19. The employee had to stay home due to a sick child or ordered to stay home due to medical advice by a professional. As a business owner you are obligated to pay that employee for the time missed (up to 10 days or 80 hours). You are reimbursed for those days/hours paid to your employee through the Qualified Sick and Family Leave payroll credit.

  • Credit for Self-Employed Individuals:

An eligible self-employed would be entitled to receive qualified sick leave and qualified family leave wages. You qualify if you were subject to a federal, state or local quarantine due to COVID-19. You have been advised by a health care professional to self-quarantine due to COVID-19. You experience symptoms of COVID-19.  If you qualify under any of the three situations listed above you then qualify for the qualified sick leave and family leave wage credit that goes right against your Self Employment Taxes.

For clarification or advice on any of the payroll tax credits discussed above you can certainly give us a call at 631-547-1040 or shoot us an email. Thank you

Are you prepared for an audit?

 

We have been noticing an alarming trend regarding our clients record keeping practices. They are more often than not insufficient thus making our job of defending you much more difficult.

What constitutes the business records needed in case of an audit?

The most obvious ones are bank statements, payroll journals and tax filings. But you will also need:

– Employee personal file (which should include W-4, copy of Social Security Card & secondary form of identification.)
– Employee time & Attendance record
– Customer Sales Invoices
– Vendor Invoices
– Credit card statements (Credit card statements are not by themselves records and you must keep the related reciepts)
– Appointment Calendar
– Correspondence
*IMPORTANT*
– Your records must be saved in an organized fashion and easily accessible.
– Electronic copies of these records are considered valid
– Make certain that your computer system is backed up daily.

If you, like the many other small businesses, are using an online accounting and or payroll program be aware that your data may not be accessible once you leave the service.

In addition to assisting us in an audit, good record keeping practices will help you if and when you have a billing dispute, labor or legal issue, or looking to value or sell your business.

Major changes made to Paycheck Protection Program

As you are probably aware, there have been major changes in the Paycheck Protection Program. The SBA now allows recipient companies an extended period in which they may be able to use their PPP funds from 8 weeks to 24 weeks. Also, only 60% of the proceeds need to be paid out as wages and the filing deadline for submitting your application for forgiveness has been extended to December 31, 2020.

Unfortunately, the Full Time Employee Equivalent safe harbor requirement date of June 30, 2020 has been pushed back to either the date their FTEE forgiveness application is filed or December 31, 2020. Recipients that may have met the terms of the safe harbor on June 30 may not be able to do so at these later dates.

You will be submitting your PPP Loan Forgiveness Application to your lender. This application can be made either on SBA forms or any application designed by your lender. It appears that many lenders are creating online applications to accept your PPP Forgiveness request.

The amount of loan forgiveness is dependent on how the funds were used, how many full time employee equivalents you had post COVID-19 versus pre COVID-19 and whether you choose to follow the original PPP rules or the revised rules.

As there are mutterings of a new set of changes coming, there appears to be no rush to apply for forgiveness. Many lending institutions are requesting that any company who received PPP funds of less than a certain amount need only to certify that they met the requirements of full forgiveness and many recipients that met the June 30 Safe Harbor are complaining that the rules were changed in mid-stream.

We will certainly be available to assist you in your application process. Our fee for this service will based on firm’s normal billing rates with a 25% discount for current business conditions.

Preparing for loan forgiveness

While you focus on running your Business the U.S. Small Business Administration(SBA) and financial institutions are working on finalizing the loan forgiveness application process for Paycheck Protection Program(PPP) loan proceeds.

When can I apply for loan forgiveness? Many of you have or soon will deplete your PPP loan proceeds and will be ready to apply for loan forgiveness we are currently finalizing the loan forgiveness online application portal which will be similar in format to how you will applied for your PPP loan. We are awaiting final instructions as to how we will submit your forgiveness application to the SBA.

As you know the PPP has been updated several times. It is possible that Congress brings forth additional legislative changes that could impact the loan forgiveness process which is why D&F are proceeding with caution and waiting for clarification before filing out forgiveness applications.

Some of the conversations have included options for simplified forgiveness processes and documentation for loan less than a certain dollar amount. There is also consideration of allowing companies hardest hit by the pandemic to apply for a second PPP loan.

We feel it is important to communicate this so you can better understand the variables affecting the timeframe for opening our loan forgiveness application portal. Know that your team is doing everything we can to provide you the simplest process possible. We will move forward as soon as we are certain that we can provide the best PPP loan forgiveness experience.

Keep documenting.

Even if Congress makes concessions for loan forgiveness documentation will still be required please continue to keep diligent records on how you are spending ppp dollars if you are unsure of what documentation you will need remember you have the option for 24 we covered. So there is no need to rush.

The value of the paycheck protection program:

The PPP has been a lifeline for millions of businesses across the country that were adversely impacted by closures. It has been humbling to be part of a program that delivered much needed aid to so many of our clients and their greatest time of need. Thank you for being our client. We are proud to be your accountants.