Whether business owners are in the process of applying for the forgiveness of their first PPP loan, applying for a Round 2 PPP loan, or deciding whether to keep their EIDL loan that matures in 30 years, recent legislation has created opportunities for businesses to achieve maximum PPP forgiveness and receive refunds (cash flow) on payroll taxes paid in 2020 and 2021. The American Rescue Plan Act of 2021 ($1.9 Trillion), signed March 11, 2021, made changes to some of the provisions included in the CARES Act ($2.2 Trillion) signed on March 27, 2020, and the Consolidated Appropriations Act of 2021 ($2.3 Trillion) signed on December 21, 2020.
- Question: When do I have to submit the application for the forgiveness of my PPP1 Loan? Answer: You have ten months from the end of your covered period to submit your application. The covered period starts the day you received your PPP1 Loan and ends either 8 or 24 weeks from that date. Most practices have chosen the 24-week covered period, so for example, if you received your PPP1 Loan in May 2020 and chose the 24-week covered period, your covered period would end in October 2020. You would then have ten months from October 2020 or until August 2021 to file your forgiveness application.
- Question: Why should I wait to apply for PPP1 forgiveness? Answer: Under recently passed legislation (The Consolidated Appropriations Act), businesses are now allowed to qualify for Employee Retention Tax Credit (ERC) AND PPP1 forgiveness. Since the same wages cannot be used for calculating both PPP forgiveness and the Employee Retention Tax Credit, holding off on the forgiveness application provides additional time for you or your advisor to make sure you are maximizing your tax credits AND achieve 100% forgiveness on the PPP loan.
- Question: Is every business qualified to take the ERC? Answer: In general, to qualify for the ERC, there must be a drop in gross receipts OR a full or partial suspension of business (because of an order from a government authority). For 2020 (3/13/20 through 12/31/20), there must be a greater than 50% drop in gross receipts when comparing a quarter in 2020 to the same quarter in 2019. For 2021 (1/1/21 through 06/30/21), there must be a drop of 20% or more in gross receipts from the same quarter in 2019.
- Question: How much is the credit? Answer: For 2020, the credit is 50% of $10,000 of compensation (or $5,000/year/ per employee. For 2021, the credit is 70% of $10,000 of compensation (up to $14,000/year/employee for the first two quarters of 2021) per employee. The credit for 2020 is claimed by amending the quarterly payroll tax returns for the quarter in which the credits were earned (Form 941). For 2021, Form 7200 can be used to claim a refund. Many payroll companies will prepare the amended quarterly payroll reports if you provide them with the correct wage information.
- Question: If I want to apply for a second PPP loan what is the deadline? Answer: On March 30, 2021, the President extended the deadline to apply for PPP Round 2 from March 31, 2021, to May 31, 2021. The extension gives the SBA until June 30, 2021, to authorize loans.
- Question: I received an EIDL loan, but I do not need it to cover ongoing operating expenses. I am trying to decide whether to send it back or use it to pay off my higher-interest equipment loans with it.
Answer: While you can use EIDL funds to pay normal operating expenses, the Loan can not be used to refinance long-term debt (i.e., debt with a term of more than 12 months). However, you can use the Loan to pay off high-interest rate credit cards because credit card debt is considered short-term debt. You should consult with your advisor before paying off any debt with EIDL loan proceeds.
- Question: Do I have to pay tax on the amount of my PPP loan that is forgiven? Answer: While the forgiveness of PPP loans will not be taxable for Federal Tax purposes, each state has its own rules in deciding whether a deduction for the costs covered by the PPP loan. As of March 25, 2021, the following states require PPP forgiveness to be included in taxable income or are not allowing a deduction of the expenses: AZ, CA, FL, MA, MN, NC, NH, NV, OH, TX, UT, VA, VT, and WA. Many states and local governments are in the process of providing guidance on the tax treatment of their loans and grants.
Lance Jacob, EA
Equity Member, DentalCPAs
Lance joined Naden/Lean, LLC in 1991. Lance provides accounting, tax, and consulting services for individuals and businesses which include dentists, other healthcare providers, retail, and equine. Learn more about Mr. Jacob, by reading his full bio.