Each week, I will cover the top three things small business owners need to know as they head into the weekend.
The Path To Forgiveness
The path to forgiveness just got a lot easier for the vast majority of PPP borrowers with the signing of the Consolidated Appropriations Act of 2021. Borrowers with loans of not more than $150,000 can now submit a one-page form to their lender requesting forgiveness. This change covers 87% of all PPP loans. The borrower will simply document the number of employees retained because of the PPP loan, the estimated amount spent on payroll costs, loan value, and attest they complied with all applicable requirements. That’s it!
Borrowers must retain PPP related supporting documentation for several years. Don’t wait to pull your documentation together. It will only get harder to pull together as time goes on.
Taxpayers Can Breathe A Sigh Of Relief
The Consolidated Appropriations Act of 2021 included a variety of tax wins for small business owners:
Forgiveness of PPP loans IS NOT taxable
Expenses paid for with PPP funds ARE deductible
Emergency Injury Disaster Loan (EIDL) Grants/Advances ARE NOT taxable
Loan Payment Subsidies (related to certain SBA loans) ARE NOT taxable
Each of the above items is a positive for small business owners. There are still some potential negative tax consequences of various assistance programs out there that small business owners need to be aware of.
The four points above related to federal taxes. States may choose to not follow federal guidelines. For example, some States may choose to consider expenses paid for with PPP funds non-deductible for State tax purposes.
State and local grants are likely to be considered taxable income
It’s advised you speak with your tax professional to determine how these things will affect your tax situation in 2020 and potentially 2021.
The Best Of Both Worlds?
The Consolidated Appropriations Act of 2021 made significant changes to the Employee Retention Credit (“ERC”). There are essentially two ERC programs now, which can be separated by eligibility period. I’ll refer to the first program as the “2020 ERC” and the second program as the “2021 ERC” for simplicity sake.
The 2020 ERC program was established in the CARES Act and runs through December 31, 2020. Eligibility requirements and credit calculations have not changed. Eligibility begins in a 2020 quarter in which the business experienced a 50% reduction in gross receipts compared to the same quarter in 2019. The credit equates to 50% of eligible wages, with eligible wages capped at $10,000. This means that in the best case scenario you could claim a credit of $5,000 per employee.
There was a major change to the 2020 ERC program however. PPP borrowers are now eligible for the ERC credit. This was not the case prior to this Act being signed into law.
The 2021 ERC program runs from January 1, 2021 through June 30, 2021. Eligibility begins in the 2021 quarter in which the business experienced a 20% reduction in gross receipts compared to the same quarter in 2019. The credit equates to 70% of qualified wages, with eligible wages capped at $10,000 per quarter. This program has a best case scenario of $14,000 per employee. PPP borrowers can take advantage of this program as well.
There are nuances to both of these programs. Please make sure you fully understand the rules and requirements of both programs prior to taking advantage of them. We expect guidance to come from the SBA and Treasury Department related to these programs in the coming weeks as there are many unanswered questions.
The main point of consideration for PPP borrowers related to these programs is the fact you cannot claim the same wages for the ERC credit and for PPP forgiveness. You will have to evaluate your situation and be strategic about which program (or both) may be most beneficial to your business.