PPP loans have reopened: Let’s review the tax consequences

The Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) reopened the week of January 11. If you’re fortunate to get a PPP loan to help during the COVID-19 crisis (or you received one last year), you may wonder about the tax consequences.

Background on the loans 

In March of 2020, the CARES Act became law. It authorized the SBA to make loans to qualified businesses under certain circumstances. The law established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients. Taxpayers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover certain other expenses.

At the end of 2020, the Consolidated Appropriations Act (CAA) was enacted to provide additional relief related to COVID-19. This law includes funding for more PPP loans, including a “second draw” for businesses that received a loan last year. It also allows businesses to claim a tax deduction for the ordinary and necessary expenses paid from the proceeds of PPP loans.

Second draw loans

The CAA permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP second draw loan of up to $2 million.

To qualify for a second draw loan, a taxpayer must have taken out an original PPP Loan. In addition, prior PPP borrowers must now meet the following conditions to be eligible:

• Employ no more than 300 employees per location,
• Have used or will use the full amount of their first PPP loan, and
• Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.

To be eligible for full PPP loan forgiveness, a business must generally spend at least 60% of the loan proceeds on qualifying payroll costs (including certain health care plan costs) and the remaining 40% on other qualifying expenses. These include mortgage interest, rent, utilities, eligible operations expenditures, supplier costs, worker personal protective equipment and other eligible expenses to help comply with COVID-19 health and safety guidelines or equivalent state and local guidelines.

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors and small agricultural co-operatives.

Deductibility of expenses paid by PPP loans

The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted on tax returns. Last year, the IRS took the position that these expenses weren’t deductible. However, the CAA provides that expenses paid from the proceeds of PPP loans are deductible.

Cancellation of debt income

Generally, when a lender reduces or cancels debt, it results in cancellation of debt (COD) income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Assistance provided

This only covers the basics of applying for PPP loans, as well as the tax implications. Contact us if you have questions or if you need assistance in the PPP loan application or forgiveness process.

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by Dukhon Tax

One reason to file your 2020 tax return early

The IRS announced it is opening the 2020 individual income tax return filing season on February 12. (This is later than in past years because of a new law that was enacted late in December.) Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.

How is a person’s tax identity stolen?

In a tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Note: You can get your individual tax return prepared by us before February 12 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

When will you receive your W-2s and 1099s?

To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2020 Form W-2 to employees and, generally, for businesses to issue Form 1099s to recipients of any 2020 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

How else can you benefit by filing early? 

In addition to protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

If you haven’t received an Economic Impact Payment (EIP), or you didn’t receive the full amount due, filing early will help you to receive the amount sooner. EIPs have been paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Amounts due that weren’t sent to eligible taxpayers can be claimed on your 2020 return.

Do you need help?

If you have questions or would like an appointment to prepare your return, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

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by Dukhon Tax

Getting more for your marketing dollars in 2021

A new year has arrived and, with it, a fresh 12 months of opportunities to communicate with customers and prospects. Like every year, 2021 brings distinctive marketing trends to the table. The COVID-19 pandemic and resulting economic challenges continue to drive the conversation in most industries. To get more for your marketing dollars, you’ll need to tailor your message to this environment.

Continue to invest in digital

There’s good reason to remind yourself of digital marketing’s continuing value in our brave new world of daily videoconferencing and booming online shopping. It’s affordable and allows you to communicate with customers directly. In addition, it provides faster results and better tracking capabilities.

Consider or re-evaluate strategies such as regularly updating your search engine optimization so your website ranks highly in online searches and more people can find you. Adjust your use of email, text messages and social media to communicate with customers and prospects.

For instance, craft more dynamic messages to introduce new products or special events. Offer “flash sales” and Internet-only deals to test and tweak offers before making them via more expansive (and expensive) media.

Seek out better deals

During boom times, you may feel at the mercy of high advertising rates. In the current uncertain and gradually recovering economy, look for better deals. The good news is that there are many more marketing/advertising channels than there used to be and, therefore, much more competition among them. Paying less is often a matter of knowing where to look.

Track your marketing efforts carefully and dedicate time to exploring new options. For example, podcasts remain enormously popular. Could a marketing initiative that exploits their reach pay dividends? Another possibility is shifting to smaller, less expensive ads posted in a wider variety of outlets rather than engaging in one massive campaign.

Excel at public relations

When the pandemic hit last year, every business had to address current events in their marketing messaging. This stood in stark contrast to decades previous, when companies generally tended to steer clear of the news. Nowadays, public relations is a key component of marketing success. Your customers and prospects need to know that your business is aware of the current environment and adjusting to it.

Ask your marketing department to craft clear, concise but exciting press releases regarding your newest products or services. Then distribute these press releases via both traditional and online channels to complement your marketing efforts. In this manner, you can disseminate trustworthy information and maintain a strong reputation — all at a relatively low cost.

Strengthen ROI

Your company’s marketing dollars need to provide a return on investment just as robust as its budget for production, employment and other key areas. Our firm can help you evaluate your marketing efforts from a financial perspective and identify ways to make those dollars go further.

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by Dukhon Tax

The new Form 1099-NEC and the revised 1099-MISC are due to recipients soon

There’s a new IRS form for business taxpayers that pay or receive certain types of nonemployee compensation and it must be furnished to most recipients by February 1, 2021. After sending the forms to recipients, taxpayers must file the forms with the IRS by March 1 (March 31 if filing electronically).

The requirement begins with forms for tax year 2020. Payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report any payment of $600 or more to a recipient. February 1 is also the deadline for furnishing Form 1099-MISC, “Miscellaneous Income,” to report certain other payments to recipients.

If your business is using Form 1099-MISC to report amounts in box 8, “substitute payments in lieu of dividends or interest,” or box 10, “gross proceeds paid to an attorney,” there’s an exception to the regular due date. Those forms are due to recipients by February 16, 2021.

1099-MISC changes 

Before the 2020 tax year, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee (in other words, an independent contractor). These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was introduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that reported NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers.

Payers of nonemployee compensation now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. But for 2020 tax returns, the due date is February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

When to file 1099-NEC

If the following four conditions are met, you must generally report payments as nonemployee compensation:

• You made a payment to someone who isn’t your employee,
• You made a payment for services in the course of your trade or business,
• You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
• You made payments to a recipient of at least $600 during the year.

We can help

If you have questions about filing Form 1099-NEC, Form 1099-MISC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

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by Dukhon Tax

Don’t forget to take required minimum distributions this year

If you have a traditional IRA or tax-deferred retirement plan account, you probably know that you must take required minimum distributions (RMDs) when you reach a certain age — or you’ll be penalized. The CARES Act, which passed last March, allowed people to skip taking these withdrawals in 2020 but now that we’re in 2021, RMDs must be taken again.

The basics

Once you attain age 72 (or age 70½ before 2020), you must begin taking RMDs from your traditional IRAs and certain retirement accounts, including 401(k) plans. In general, RMDs are calculated using life expectancy tables published by the IRS. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what you should have taken out — but didn’t. (Roth IRAs don’t require withdrawals until after the death of the owner.)

You can always take out more than the required amount. In planning for distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.

In order to provide tax relief due to COVID-19, the CARES Act suspended RMDs for calendar year 2020 — but only for that one year. That meant that taxpayers could put off RMDs, not have to pay tax on them and allow their retirement accounts to keep growing tax deferred.

Begin taking RMDs again

Many people hoped that the RMD suspension would be extended into 2021. However, the Consolidated Appropriations Act, which was enacted on December 27, 2020, to provide more COVID-19 relief, didn’t extend the RMD relief. That means if you’re required to take RMDs, you need to take them this year or face a penalty.

Note: The IRS may waive part or all of the penalty if you can prove that you didn’t take RMDs due to reasonable error and you’re taking steps to remedy the shortfall. In these cases, the IRS reviews the information a taxpayer provides and decides whether to grant a request for a waiver.

Keep more of your money

Feel free to contact us if have questions about calculating RMDs or avoiding the penalty for not taking them. We can help make sure you keep more of your money.

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by Dukhon Tax

PPP Second Draw – Program Analysis, Eligibility, and Instructions

Summary: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021) into law. The CAA includes Division N - Additional Coronavirus Response and Relief (ACRR), which has a provision that provides for Paycheck Protection Program (PPP) Second Draw loans.

CAA, 2021 - Paycheck Protection Program Second Draw Loans. ACRR permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts may take a second draw from the PPP of up to $2 million.

Eligible entities. Prior PPP borrowers must meet the following conditions to be eligible for the second draw loans:

• Employ no more than 300 employees per physical location;
• Have used or will use the full amount of their first PPP loan; and
• Demonstrate at least a 25% reduction in gross receipts in the first, second,or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Loan terms. Borrowers may receive a second loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs.

Gross receipts and simplified certification of revenue test. Second draw loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement.

Loan forgiveness. Like the first PPP loan, the second draw loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%.

Application of exemption based on employee availability. ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees salaries in excess of 25%.

Clarification of tax treatment of Paycheck Protection Program loans. Sec. 276 clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

Interim Final Rules: Paycheck Protection Program Second Draw Loans under CAA, 2021:

The IFR states that Second Draw PPP Loans are 100% guaranteed by the SBA under the same terms, conditions, and processes as First Draw PPP Loans. Second Draw Loans are subject to the Consolidated First Draw PPP IFR, including the FAQs contained within and all PPP loan requirements.

The IFR notes the following terms and conditions that are the same as First Draw PPP Loans:

• Loan guarantee is 100%.
• Collateral and personal guarantees are not required.
• 1% interest rate, calculated on a noncompounding, non-adjustable basis.
• Maturity of five years.
• All loans will be processed by all lenders and lenders will rely on borrower certifications to determine eligibility and use of loan proceeds.

A borrower is prohibited from obtaining a Second Draw PPP Loan if it has not complied with PPP loan program requirements.

Revenue reduction requirement. To be eligible for a Second Draw PPP Loan, the borrower must have experienced a 25% revenue reduction in 2020 relative to 2019. The reduction is calculated by comparing the borrower's quarterly gross receipts for one quarter in 2020 with the borrower's gross receipts for the corresponding quarter of 2019.

The appropriate reference quarter depends on how long the Applicant has been in operation:

• For all entities other than those satisfying the conditions set forth below, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the same quarter of 2019. Alternatively, Applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019; Applicants choosing to use annual gross receipts must enter "Annual" in the 2020 Quarter and Reference Quarter fields and, as required documentation, must submit copies of annual tax forms substantiating the annual gross receipts reduction.
• For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than either the third or fourth quarters of 2019.
• For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
• For entities not in business during 2019 but in operation on February 15, 2020, Applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.

Gross receipts defined. The IFR defines gross receipts consistent with the definition of receipts in 13 CFR 121.104 of SBA's size regulations. Any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower s gross receipts with some exception.

Excluded entities. The IFR clarifies that borrowers who received a First Draw PPP Loan despite being ineligible to receive the loan are not eligible to receive a Second Draw PPP Loan. Further, the following are excluded entities:

• a business concern or entity primarily engaged in political activities or lobbying activities (e.g., think tank);
• borrowers that have already received a Second Draw PPP Loan; or
• businesses has permanently closed and has no intention of reopening.

Maximum loan amount and payroll cost calculation. Like First Draw PPP Loans, the maximum loan amount is the lesser of 2.5 months of the borrower's average monthly payroll costs or $2 million. However, the calculation method has been adjusted for Second Draw PPP Loans. The period to calculate payroll costs for a Second Draw PPP Loan is either 2020 or 2019. Borrowers may also use the precise one-year period before the date on which the loan is made to calculate payroll costs if they opt not use 2019 or 2020 to calculate payroll costs.

Business entities assigned an NAICS code beginning with 72 (including hotels and restaurants) may receive a maximum loan amount equal to 3.5 months of payroll costs rather than 2.5 months. Additionally, such businesses that are seasonal or new entities without 12 months of payroll costs may use this method.

Second Draw PPP Loan application. Second Draw PPP Loan applicants must submit documentation substantiating payroll costs calculation like First Draw PPP Loans.

However, these applicants are not required to provide additional documentation if:

1. the applicant used calendar year 2019 figures to determine its First Draw PPP Loan amount,
2. the applicant used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020)
3. the lender for the applicants Second Draw PPP Loan is the same lender that made the applicants First Draw PPP Loan.

The additional documentation is not required because the lender has the relevant documentation to support payroll costs. The lender is required to confirm the borrower's average monthly payroll costs based on prior documentation.

For loans of greater than $150,000, the applicant is required to provide documentation that substantiates at least a 25% revenue reduction in 2020 relative to 2019. Acceptable documentation may include relevant tax forms, quarterly financial statements, or bank statements.

Loans to borrowers with unresolved First Draw PPP Loans. The IFR contains procedures on how to handle a Second Draw PPP Loan application when the borrower's First Draw PPP Loan is under review ("unresolved borrower").

Loan forgiveness. Generally, Second Draw PPP Loans are subject to the Consolidated First Draw PPP IFR with some exception. Second Draw PPP Loan borrowers of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.

Application process. Applicants must submit SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender's equivalent form in addition to required certifications and documentation.

Required documentation. Unless the applicant used calendar year 2019 figures to determine both its First Draw PPP Loan amount and its Second Draw PPP Loan amount (as noted above), and the lender for the applicant s Second Draw PPP Loan is the same as the lender that made the applicant s First Draw PPP Loan), the applicant must provide the following:

• Form 941 (Employer's Quarterly Federal Tax Return) or other tax forms with similar information;
• State quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, as applicable or equivalent payroll processor records;
• Evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions;
• For partnerships, Form 1065, Schedule K-1s (Partner's Share of Income, Deductions, Credits, etc.);
• For self-employed applicants who have employees, the 2019 or 2020 (the applicable year used to determine the loan amount) Form 1040, Schedule C and items listed above in a, b, and c. Additionally, a payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
• For self-employed applicants with no employees, the 2019 or 2020 (the applicable year used to determine the loan amount) Form 1040 Schedule C, a 2019 or 2020 (whichever was used to calculate loan amount) IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed; a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020. The IFR refers to Form 1099-MISC box 7 nonemployee compensation. Note that beginning with the 2020 tax year, nonemployee compensation is reported on Form 1099-NEC.
• For loans of greater than $150,000, documentation must be provided to establish the applicant experienced a reduction in revenue at the time of application that may include annual tax forms or quarterly income statements or bank statements.
• For loans of $150,000 or less, documentation must be provided to establish the applicant established a reduction in revenue at the time of application, on or before the date the borrower submits an application for loan forgiveness, or, if the borrower does not apply for loan forgiveness, at SBA s request. Documentation may include annual tax forms or quarterly income statements or bank statements.

Certifications. Applicants must certify that they:

1. have not and will not receive another Second Draw PPP Loan;
2. experienced a 25% revenue reduction with the necessary substantiating documentation;
3. have used the full First Draw PPP Loan amount (including any increase) only for eligible expenses; and
4. are not an ineligible business concern (listed under "Excluded entities").

Average Monthly Payroll. This section differs to reflect that for Second Draw PPP Loans, applicants with NAICS Code of 72 (Accommodations and Food Services) may multiply the average monthly payroll costs by 3.5 rather than 2.5 for other industries. The maximum loan request is $2 million as opposed to $10 million for a First Draw PPP Loan. The number of employees may not exceed 300 for a Second Draw PPP Loan.

PPP First Draw SBA Loan Number. The applicant must supply their First Draw PPP Loan number.

Reduction in Gross Receipts of at Least 25%. The applicant must supply the quarters in 2020 and 2019 used to determine the reduction and provide the gross receipts in those quarters. Additionally, the form notes that applicants requesting $150,000 or less are not required to complete section, but may be asked for this information when seeking loan forgiveness.
Certifications. In addition to similar certifications on the First Draw PPP Loan applications, applicants must also certify they experienced a 25% reduction in gross receipts and that the applicant has used the full loan amount of the First Draw PPP Loan (including any increase) for only eligible expenses. Also, the applicant does not fall under certain listed prohibited entities.

Instructions. The Instructions clarify how to determine whether an applicant has experienced a 25% reduction in gross receipts. The appropriate reference quarter depends on how long the Applicant has been in operation:

1. For all entities other than those satisfying the conditions set forth below, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the same quarter of 2019. Alternatively, Applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019; Applicants choosing to use annual gross receipts must enter "Annual" in the 2020 Quarter and Reference Quarter fields and, as required documentation, must submit copies of annual tax forms substantiating the annual gross receipts reduction.
2. For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than either the third or fourth quarters of 2019.
3. For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
4. For entities not in business during 2019 but in operation on February 15, 2020, Applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.

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by Dukhon Tax