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Getting Back to Work

The Back to Work Toolkit

The Back to Work Toolkit is a joint project led by Madrona alongside the Seattle Venture Community, Leading Tech, Retail and Aerospace Companies in the Region and the Seattle Metropolitan and Bellevue Chambers of Commerce. The goal is to provide a toolkit to help companies plan reopening their offices and getting back to work.

Learn more — https://www.backtoworktoolkit.com.

Loans

Many businesses have been able to access financial assistance through two loan programs funded by the U.S. Congress, the EIDL and PPP loan programs. Both programs are summarized below. There may be other loan programs available to your business depending on the location of your business.

Economic Injury Disaster Loan Program (EIDL) ¹

  • https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
  • Quick application - be sure to write down or take a screen shot of your application number – the recipient doesn't receive a confirmation email until they review the application
  • Loans up to $2M, but you can request a quick $10,000 which they intend not to be repaid. The loan is based on the application, and you don't request the amount you need during the application process. You may be able to specify the amount once the application has been reviewed.
  • The grant is being based on number of employees, so you may be limited to just $1,000 for the grant portion
  • For loans less than $200k no personal guarantee is required
  • Payments are deferred for one year
  • After one year, the loan rate is 3.75% for 30 years

¹ Based upon comments by SBA officials on April 30th, the SBA is not taking new EIDL applications.

Paycheck Protection Program ²

  • You would need to get with a local lender (for example, your bank) to get the loans
  • The maximum loan amount is 2.5 times your average monthly payroll
  • This includes W-2 wages, or net earnings from self-employment
  • Full amount of the loan could be forgiven as long as the money is used for payroll costs, interest on a mortgage, rent, and utilities
  • For any grant received through the EIDL program, you would reduce the loan forgiveness by the grant received, which is up to 10k
  • 75% of the loan must be used to cover payroll
  • This has been updated for Sole Proprietors. If you're self-employed it would be calculated based on your average monthly income for 2019
  • The loan interest rate is 1% on any balance that is not forgiven
  • The loan is for two years on any balance not forgiven
  • There is a 6 month payment deferral
  • There are no collateral requirements

² Please note, although the PPP was replenished by Congress, even the additional funding is expected to be rapidly exhausted.

Paycheck Protection Program Updates

PPP Loan Forgiveness and Related Deductions

For the portion of a Paycheck Protection Program, or PPP, loan that is forgiven, the IRS stated that no tax deduction will be allowed for the expenses that are used in the calculation of the loan forgiveness (Notice 2020-32, April 30).

Congressmen Chuck Grassley, Richard Neal, and Ron Wyden wrote a letter to the Treasury Department stating the original intent of the CARES Act was to allow for the deduction of these expenses and the IRS Notice ignores the intent of the PPP loan program which was to exclude loan forgiveness from income and to provide a tax benefit to small businesses that receive a loan; they did not intend to provide a neutral tax treatment for loan forgiveness.

Extension of safe harbor of PPP loan return

The Treasury Department has given businesses which received a PPP loan and subsequently reevaluated their need and/or eligibility extended time to return the loan proceeds from May 7 to May 14, according to the Treasury FAQs released in question number 43. The FAQs, are still not clear as to the circumstances under which a loan is required to be returned, which complicates the decision. The language provided in the CARES Act simply states that a taxpayer must self-certify that the current economic uncertainty makes the loan request necessary to support ongoing operation of the business.

More guidance is expected through the FAQs, but businesses should be aware that there is no objective standard for determining whether or not a loan was necessary. The SBA and Treasury have stated that they intend to scrutinize certain PPP borrowers, including evaluating whether or not their certifications of need were made in good faith.

Workers’ Refusal to Return to Work and Potential Impact on PPP Forgiveness

The FAQs in question 40 include updated guidelines around a worker’s refusal to return to work. The business must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.

This update comes after small businesses asked the SBA and Treasury for relief because some employees declined to return to work. Employees have stated that they are worried about safe working conditions or that they’ll make more money by receiving temporary increased unemployment benefits.

An exception for rehires in the CARES Act provides that businesses that laid off workers between February 15 and April 27 can rehire those employees by June 30 and thereby eliminate any potential reduction of their PPP loan forgiveness. This would include employees who initially refuse to return to work but ultimately decide go back; as long as the employees go back before June 30, a business would meet this exception.

  • Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
  • The information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Credits

Two options are available to businesses who pay employees, the Employee Retention Credit and the Payroll Tax Deferral. Both options are summarized below. Note that the ERC provides an actual credit while the PTD defers a portion of social security taxes.

Employee Retention Credit

  • Two definitions of eligible employer:
  • For employers who have fully or partially suspended business due to government orders/directives; or
  • For employers who experience a significant decline in gross receipts (decline of greater than 50% for the same calendar quarter in the prior year)
  • The employer may continue to claim a credit until the quarter in which they exceed 80% of gross receipts for the same quarter in the prior year
  • How many employees do you have?
  • The credit could be limited if you have more than 100 full time equivalent employees, then the credit is limited to employees that are being compensated (including health care expenses), but not providing services
  • If you have under 100 employees, all employees would qualify
  • Credit is 50% up to $10,000 of wages per employee, so $5,000 per employee
  • To claim the credit, employers should
  • (a) Reduce payroll tax deposits

Payroll Tax Deferral

  • Defer the Employer FICA portion of Social Security taxes until a later date
  • This would only apply for the 6.2% of the Employer FICA tax up to the first $137,700 in wages per employee
  • The Deferral is split 50/50 between amounts due by 12/31/2021 and 12/31/2022
  • Deduction timing rules still apply based on actual payment and earlier payment is permissible

FAQs between EIDL, PPP, and credits

Can I Apply For both EIDL and PPP?

Yes, you can apply for both - however, you can’t “double dip” and get funds from both loan programs for the same purpose. If you get an EIDL for purposes other than payroll costs between January 31, 2020 and the date the PPP Loans are first made available, you may still be eligible for a PPP Loan as long as it is not used for the same purposes.

Can I Apply For PPP and take the employee retention credit?

Your business cannot receive both the Employee Retention Payroll Tax Credit and a PPP Loan.

Which Is Better for My Business: EIDL or PPP?

This decision will depend on a number of factors, including how much you qualify for, how you plan to use the funds, and whether you expect to benefit substantially from forgiveness under PPP. We recommend:

  • Reading the FAQs released by the US government on the EIDL and the PPP. Many sites also include commentary on these FAQs including these: (EIDL) and (PPP). All are typically updated frequently.
  • Consulting with your tax, financial, or legal advisor to make the right choice for you and your business.
  • For more information, please contact someone from KPMG Spark - https://www.kpmgspark.com

Can I Apply For PPP and continue to utilize the Payroll Tax Deferral credit?

Yes, employers can continue to defer the payroll taxes as described above up until the date they receive a forgiveness letter from their PPP loan lender.

Helpful Tax Provisions

The following section provides a variety of tax provisions that may be helpful to businesses and individuals – everything from delaying the due dates for filing and paying taxes to deducting losses and charitable contributions.

For the federal government

The IRS issued a notice (Notice 2020-23) supplementing prior notices and guidance that automatically postpones the deadline for any person with a Federal payment obligation or a Federal tax return filing obligation on or after April 1 2020, and before July 15, 2020 as identified in the notice (https://www.irs.gov/pub/irs-drop/n-20-23.pdf). In summary:

  1. Individual income tax payments and return filings related to Form 1040
  2. Calendar year or fiscal year corporate tax return payments and return filings related to Form 1120 and Form 1120-S
  3. Calendar year or fiscal year partnership filings on Form 1065
  4. Estate and Trust income tax payments and return filings related to Form 1041
  5. Exempt organization business income tax and other payments and return filings on Form 990-T and the
  6. Form 990 series
  7. Excise tax payments on investment income and return filings on Form 990-PF and Form 4720
  8. Quarterly Estimated income tax payments calculated on or submitted with Form 1040-ES, 1041, 1120

This is not a comprehensive list, refer to the above notice for additional tax forms that have been extended.

For States including income, property, and other taxes:

Other helpful Tax Provisions

Qualified Business Income (QBI) Deduction

  • What is a QBI deduction – this is a tax deduction that is taken on your personal tax return and not reflected in your books.
  • The deduction is essentially 20% of your income from the activity.
  • There are limitations. Generally,
  • If the taxpayer’s 2019 taxable income (before the QBI deduction) is less than $160,700 (or $321,400 for married taxpayers filing joint), the taxpayer may take the deduction
  • For taxpayers with taxable income above these levels, there are other limitations related to the type of trade or business, wages, and/or property used in the business.

Disaster Relief Payments (IRS Code Section 139)

  • Essentially, this is a way for employers to pay an employee’s additional expenses due to the COVID-19 national emergency and they would not be includable in the employee’s wages.
  • For example, to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a “qualified disaster”
  • If paid to an employee, this is a business expense for you and it may reduce the amount of your income subject to self-employment tax.
  • The law doesn’t specifically exclude self-employed individuals who have no other employees besides her- or himself: Consult with your advisor as this provision is unclear at this time.
  • We recommend you include rigorous records to demonstrate how the payment relates directly to the declared disaster. Employees aren’t required to account for this but there would be potential for more scrutiny for a sole proprietor. So document that, for example, you had to work at home and needed proper equipment, you incurred actual medical expenses related to Covid-19, etc.

Disaster Losses

  • You are able to deduct currently on your 2019 tax return, the losses attributable to 2020 that can be related to COVID-19
  • Taxpayer must have tax basis in a tangible or intangible asset, or capitalized expense resulting from a disaster loss. For example:
  • Store or business facility permanently closed
  • Abandonment of leasehold improvements
  • Disposal of inventory, supplies, or other property that is unsellable or unusable
  • Worthless securities
  • Impaired securities under mark-to-mark approach
  • The following are not deductible
  • Deductible expenses such as employee compensation or severance
  • Bad debt expense
  • Taxpayer documentation will be critical. Like Disaster Relief payments (above). you must demonstrate that COVID-19 is a strong contributing factor
  • If you are claiming a loss on either original or amended 2019 return, you must attach a statement

Net Operating Losses (NOLs)

  • For NOLs arising in the 2018, 2019, and 2020 tax years, a taxpayer is able to carry the NOL back 5 years and claim a refund against taxes paid in those prior years.
  • Previously a taxpayer could only offset 80% of the taxable income in the 2018, 2019, and 2020 tax years. Under the CARES act a taxpayer can now offset 100% of taxable income in those tax years
  • Taxpayers that want to apply for a tentative refund based on a carryback of NOLs that arose in tax years beginning in 2018 and ending on or before June 30, 2019, have been granted an extended due date of June 30, 2020.

Charitable Contributions

  • Individual taxpayers can deduct up to $300 “above the line³” for certain cash charitable contributions made in 2020
  • The $300 deduction is permitted for taxpayers who do not itemize their deductions
  • All eligible contributions made by the taxpayer in 2020 could be claimed when the taxpayer files her or his tax return in 2021.

³ As a deduction from adjusted gross income