2020 PPP tax treatment
Reminder, if you were a PPP borrower, the amount of your PPP take a look at the site here loan (forgiven or reasonably expected to be forgiven) has been non-taxable gross income since PPP was created in the CARES Act last spring. However, the IRS stepped in this summer and said because income associated with PPP was tax-excluded they would not allow expenses associated with PPP to be deducted on your 2020 federal taxes. The new Dec 27 law usurps the IRS’s old interpretation and very clearly states at the federal level PPP expenses are tax deductible (Division N, Title II, Section 276). For sole proprietors without employees, owner’s compensation is non-deductible to begin with, so the new law’s treatment of PPP expenses should not affect your expense deductions for the owner’s compensation portion of the loan. Furthermore, the new IRS tax treatment for 2020 PPP will also apply to 2021 PPP funds .
PPP borrowers under $150,000 may use a new simplified forgiveness process, which requires less documentation (Division N, Title III, Section 307). SBA has modified its existing forgiveness forms and updated information on the modification of covered periods from anywhere from 8 to 24 weeks. In particular, there is a new form for $150,000.
January 20 Update: SBA released new forms on January 19, which are available here . Lenders may choose not to use these SBA forms and may offer a lender equivalent form instead. But looking at these new forms at least offers guidance as to what information your lender may request.
Employee Retention Credit (ERC)
Under the CARES Act (old legislation), ERC provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5000 per employee. The ERC , and before . Eligible employers include private-sector businesses and tax-exempt organizations whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts (sometimes referred to as a significant decline in gross receipts), measured on a year over year basis [source RIA Checkpoint].
- The refundable payroll tax credit increased from 50% to 70% of qualified wages each quarter.
- The limit on per employee credible wages increased from $10,000 for the year to $10,000 for each quarter.
- The credit now includes wages paid or incurred from .
- The safe harbor was created allowing employers to use prior quarter gross receipts to determine eligibility.
- The required reduction in gross receipts changed from 50% to 20% of the same calendar quarter’s receipts in the prior year.
- The number of employees counted when determining the relevant qualified wage base increased from 100 to 500.
- New employees who were not in existence for all or part of 2019 are now eligible to claim the credit
Retroactive ERC provisions
- Reaffirms prior IRS guidance that group health plan expenses can be considered qualified wages even when no wages are paid to an employee; and
- Provides that employers who receive a paycheck protection program (PPP) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds.
Summary of ERC
Employers could qualify for the credit if their gross receipts for a calendar quarter are less than 80% of the same calendar quarter’s gross receipts in calendar year 2019.
The recent COVID-19 relief law allows employers who received PPP loans (in 2019 or 2020) to qualify for the ERC as long as the PPP loan wages are not used to claim the ERC.