This is a sequel to the popular articles: “COVID-19 Crash Course for Small Biz Payroll Protection Plan Applicants,” “A Quick, Easy Update on the CARES Act,” and “CARES Act Potholes”
EDITED BY GEORGE W. HIGHTOWER
If you’re interested in the Paycheck Protection Program (PPP) of the CARES Act, you may have realized that embedded in the program is an anti- double-dip agenda. If your business has already taken an EIDL loan and received a $10,000 non-refundable advance, that reduces the amount of forgiveness available under the PPP loan.
Other provisions in the PPP loan calculation indicate that an “eligible recipient” should add paid time off to the payroll calculation, but should not include sick leave if that time off is covered under a different component of the COVID relief portfolio. Bear in mind that the CARES Act is the third piece of relief legislation in the COVID series. Buckle up, because we’ve dug in yet again to give you the scoop on how PPP continues to affect small and medium business owners.
A quick recap and SBA Update
The PPP loan is fairly straightforward. However, during the rush to get the legislation in place and the ensuing hectic setup period, things changed. Provisions of the draft law were modified by the time the final version came out and federal guidance was twisted and twerked a bit more (remember rule #1 – only trust information from a dot-gov website). The SBA continues to clear up the confusion with daily updates. So far, our interpretations have been pretty much on target.
In summary form—see our prior three articles here for details—you should start by determining your payroll (total wages paid) for the trailing 12-month period before COVID impacted your business (that might be calendar year 2019, or it might be the trailing 12-month period ending February 15, 2020—you decide). That includes tax withholdings from employee checks (i.e. gross pay, not net). Include all wages, commissions, incentives, tips, paid holidays, sick time, training time, etc. paid out to US-based employees. If it is incorporated in their paycheck, put it as a line item in your calculations. If as the owner you are not paid wages but instead take a draw or distribution, include it. If you use a Professional Employer Organization (PEO), add on the assigned staff and costs.
Next comes the employer portion of health insurance. Some writers are suggesting you include the full health insurance premium. My read of the law is that you should add in the employer’s cost, but not the employee’s share. If you are going to be slick and ask for the full statement amount, then start paying the entirety of your team’s health insurance. Otherwise, it looks a lot like double dipping.
Do add in state employer payroll taxes but not federal employer payroll taxes. The Feds are granting you an interest-free extension for repaying those taxes through December 31, 2021 (more on that below). Basically, you need to consider in-state unemployment taxes for most jurisdictions. Interestingly, there is one double dip in the law. If you’re a tax expert and have found something counterintuitive, please reach out to me.
Now for the adjustments: Subtract wages paid to anyone that exceed $100,000 over the one-year period. If you were only in business for eight months, pro-rate the $100,000 cap down to $66,666.67. Remove employees who claim residency abroad. If you paid sick or family leave to receive a credit under the Families First Coronavirus Response Act, deduct that credit (this is another no-double-dipping rule). If you paid some “staff” as 1099 workers, do not include them. While there has been a lot of confusion on this point, the SBA has been very clear: 1099ers are required to apply on their own behalf.
What about federal employer payroll taxes?
This seems to be a burning question overlooked by many. Employer-paid federal payroll taxes are NOT included in the wage calculation for a PPP loan. The reason is evident by the title: Section 2302 DELAY OF PAYMENT OF EMPLOYER PAYROLL TAXES. A business’ aggregate federal payroll taxes for the period of March 27, 2020, through December 31, 2020 are due in two installments: 50% of the 2020 taxes are due by December 31, 2020; the remaining 50% of 2020 taxes and all 2021 taxes are deferred until December 31, 2021.
The big double dip
Let’s assume your payroll with benefits and state payroll taxes is $40,000 a month. You can apply for a (2.5x) loan of $100,000. You are limited to using $80,000 of that loan for payroll expenses, which includes benefits. The amount you pay over the first eight weeks following receipt of loan proceeds is fully forgiven. We will leave to another day the disconnect between two months of payroll [61 days] vs. eight weeks of forgiveness [56 days]. Let’s assume your rent, utilities, and interest on pre-existing loans consumes the other $20,000.
You submit the evidence of the costs and proof of payment in order for the bank to forgive the loan. Forgiveness of debt is normally a taxable event. That means you can treat forgiven debt like revenue. In the CARES Act, the wording unequivocally states that loan forgiveness is not taxable.
How does the double dip work?
As an illustration, let’s assume that at the end of the year with $100,000 of proceeds you have broken even. Since the $100,000 of forgiven debt is not to be included in revenue, your business now shows a loss of $100K. Supposing you continued to earn your wage or draw (it was included in the loan proceeds), as a business owner you will likely have personal taxable income. Your K-1 will now show a $100,000 loss, which can either offset your other earnings, or you may be able to carry the loss backwards for a prior year refund. Depending on your other earnings, or overall business earnings, that loss could put an additional $20,000 to $35,000 back into your coffers. If your business is a direct tax-paying entity [a so-called C-corporation], your $100,000 loss will either allow a carry back for a refund, or a tax loss carry forward. Don’t take our word for it, check with your tax advisor.
In any event, the government appears to be giving you the money to pay the expenses but not requiring you to claim those monies as revenue—even if forgiven—but is still allowing your business to take the deduction for the expenses paid by those forgiven funds. This is a horrible economic period for most, but some of you may be enjoying a sweet double dip like a July dose of Dairy Queen chocolate covered ice cream.