Monthly Archives: May 2020

SBA’s Inspector General Reports SBA Failed to Follow Guidelines on PPP Loans

Think the FAQs Released by the SBA and IRS give the definitive answer on how the PPP loans are to be made, used and forgiven? Think again. According the SBA’s Inspector General report the SBA has failed to follow guidelines on PPP loans included in the law.

In a report released May 8th the SBA’s Office of Inspector General (OIG), led by Inspector General Hannibal Ware, told Congressional leaders that the agency failed to follow several congressional mandates in implementing the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The report stated that borrowers “including rural, minority and women-owned businesses may not have received the loans as intended” even though Congress had specifically required the SBA to give clear guidance to lenders about under-served and rural markets. It also found that the rules issued by the SBA requiring borrowers to use 75% of the PPP funding on payroll costs in order to qualify to receive full forgiveness of their loan were not consistent with the law, as the Cares Act didn’t mandate any specific amount be dedicated for payroll expenses. According to the National Society of Accountants many members have heard from their clients that the 75% requirement created a hardship as their businesses were not yet in operation or only in limited operation and they really needed the loans to enable them to pay rent, utilities and other ongoing expenses that were due regardless of the fact that they operations were limited by government action.

As we draft this article, the SBA has yet to comment on the report’s findings, however, the report does include a statement on the original intent of the SBA regarding the 75/25 Rule; the agency said it did so “in light of the act’s overarching focus on keeping workers paid and employed.”

Click here to read the full SBA Inspector General’s Report https://www.sba.gov/sites/default/files/2020-05/SBA_OIG_Report_20-14_508.pdf

Do you have an SBA 7(a) or 504 loan?

The CARES Act gives debt relief to business with 7(a) and 504 SBA loans. The Small Business Administration will automatically pay the principal, interest, and fees on these loans for a period of six months.  This relief also applies to new 7(a), 504, and microloans issued prior to September 27, 2020. To get this relief you do not need to take action unless according to the SBA website you have preauthorized and recurring payments (auto debits or ach payment through your bank) as the SBA says these payments will not be automatically canceled and will be applied to your loan in lieu of the debt forgiveness offered under the CARES act. To get the debt relief you will need to cancel any preauthorized payment of debts. For additional information see the SBA’s website at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/sba-debt-relief.

 

COVID-19 Paid Leave Tax Credits for Small and Midsize Businesses

Small and midsize businesses can swiftly recover the costs of providing Coronavirus-related paid leave for employees. This is done by using one or two new refundable payroll tax credits. The Paid Sick Leave credit and the Paid Family Leave credit are designed to immediately and fully reimburse eligible employers for the cost of providing COVID-19 related leave to their employees.

Here are some key things to know about these credits.

Coverage

  • Employers receive 100% reimbursement for required paid leave
  • Health insurance costs are also included in the credit
  • Employers do not owe their share of social security tax on the paid leave and get a credit for their share of Medicare tax on the paid leave
  • Self-employed individuals receive an equivalent credit

Fast funds

  • Reimbursement will be quick and easy
  • The credit provides a dollar-for-dollar tax offset against the employer’s payroll taxes
  • The IRS will send any refunds owed as quickly as possible.

To take immediate advantage of the paid leave credits, businesses should use funds they would otherwise pay to the IRS in payroll taxes. If those amounts are not enough to cover the cost of paid leave, employers can request an expedited advance from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

For details about these credits and other relief, visit Coronavirus Tax Relief on www.IRS.gov or contact the tax professionals at RMS Accounting.

Tax-excluded Education Payments by an Employer Temporarily Include Student Loan Repayments

The CARES Act extends the traditional ability of employers to exclude payments on behalf of an employee for educational expenses of up to $5,250 per year to include the repayment of employee student loans. In both cases, payments are deductible to the employer while excluded from the gross income of the employees. Student loan payments may not exceed $5,250 per employee and made before January 1, 2021. When an employer makes a payment on a student loan on behalf of an employee that employee may not deduct any student loan interest paid in the year of the payment.

What can I Deduct Since I Have Been Forced To Work From Home?

One of the questions we are getting the most right now is regarding what those who have been forced by their business or company to work at home can deduct. The truth is if you are an employee working from home as the tax law currently stands, deductions for employee business expenses are no longer allowed.

Employees should speak to their employers about the possibility of being reimbursed for business related expenses; reimbursements would be deductible to the employer and not taxable to the receiving employee. Reimbursements can include things like internet service fees, office supplies, cell phone fees, and even business use of auto. Employers can also provide things like funds to purchase computers, printers and software and deduct them while excluding the payments under code section 139. Disaster Relief Payment also allows the payment of certain other expenses for employees due to a presidentially declared disaster, like COVID-19. These include reimbursement or payment of reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

Those that are self-employed may deduct all ordinary and necessary expenses related to the operation of their self-employed business and of those of working from home. If you are a shareholder and employee of a S or regular corporation, the corporation can use the reimbursement rules stated above to reimburse you and any other employees it designates necessary to the ongoing operations of its business and to deduct those reimbursement.

IRS Clarifies PPP (Paycheck Protection Program) Loan Tax Consequences

The IRS recently released Notice 2020-32 which explains that while amounts forgiven under PPP loans are not taxable to the recipients of the loan, the expenses used to qualify for said loan forgiveness are also not deductible.

The CARES Act provides for PPP loan forgiveness when the use of proceeds meets certain conditions. If the recipient of a covered loan uses the proceeds to pay (1) payroll costs, (2) certain employee benefits relating to healthcare, (3) interest on mortgage obligations, (4) rent, (5) utilities, and (6) interest on any other existing debt obligations, and meets all other qualifications then loan will be forgiven. The CARES Act also excludes this loan forgiveness for income. It makes no reference however to the deductibility of the expenses paid with the loan fund forgiven.

The IRS however, in Notice 2020-32 has determined that based on the existing tax code these expenses will NOT be tax deductible, as in effect they are not being paid with the funds of the taxpayer and are in effect being paid with loan forgiveness funds provided by the government.

The notice spells out the revenue sections and other information on which the IRS has based the notice. Since the CARES Act does not make specific reference to the deduction of these expenses, and there is no way to determine congressional intent or court decision to rely on, this would seem to be the best guidance on how these expenses will be handled for now.

For example: If ABC Company receives a PPP loan for $100,000 which is forgiven based on $80,000 in payroll expenses and $10,000 in rent and $10,000 in utilities during the 8 week qualifying period, and total expenses for these items for the tax year of $1,000,000 for payroll, $100,000 for rent and $120,000 for utilities, then the tax deductions for these items would be payroll ($1,000,000 – $80,000) = $920,000, rent ($100,000- $10,000) = $90,000 and utilities ($120,000-$10,000)=$110,000.

For a closer look at IRS Notice 2020-32 click here.