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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COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

Background on the credit 

The CARES Act, enacted in March of 2020, created the ERTC. The credit:

• Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
• Was subject to an overall wage cap of $10,000 per eligible employee, and
• Was available to eligible large and small employers.

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.

In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven.

What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax saving opportunity.

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The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.

Business meal deduction increased 

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

• The food and beverages can’t be lavish or extravagant under the circumstances, and
• You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

PPP loans

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

1. Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
2. Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).

Much more

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation.

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The best choice of entity can affect your business in several ways, including the amount of your tax bill. In some cases, businesses decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.

Here are four issues to consider:

1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.

2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.

3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.

4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.

Other considerations

When a business switches from C to S status, these are only some of the factors to consider. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.

If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 15

• Pay the final installment of 2020 estimated tax.
• Farmers and fishermen: Pay estimated tax for 2020.

February 1 (The usual deadline of January 31 is a Sunday)

• File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
• File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 (The usual deadline of February 28 is a Sunday)

• File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

• If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans.

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Are you considering replacing a car that you’re using in your business? There are several tax implications to keep in mind.

A cap on deductions

Cars are subject to more restrictive tax depreciation rules than those that apply to other depreciable assets. Under so-called “luxury auto” rules, depreciation deductions are artificially “capped.” So is the alternative Section 179 deduction that you can claim if you elect to expense (write-off in the year placed in service) all or part of the cost of a business car under the tax provision that for some assets allows expensing instead of depreciation. For example, for most cars that are subject to the caps and that are first placed in service in calendar year 2020 (including smaller trucks or vans built on a truck chassis that are treated as cars), the maximum depreciation and/or expensing deductions are:

• $18,100 for the first tax year in its recovery period (2020 for calendar year taxpayers);
• $16,100 for the second tax year;
• $9,700 for the third tax year; and
• $5,760 for each succeeding tax year.

The effect is generally to extend the number of years it takes to fully depreciate the vehicle.

The heavy SUV strategy

Because of the restrictions for cars, you might be better off from a tax standpoint if you replace your business car with a heavy sport utility vehicle (SUV), pickup or van. That’s because the caps on annual depreciation and expensing deductions for passenger automobiles don’t apply to trucks or vans (and that includes SUVs). What type of SUVs qualify? Those that are rated at more than 6,000 pounds gross (loaded) vehicle weight.

This means that in most cases you’ll be able to write off the entire cost of a new heavy SUV used entirely for business purposes as 100% bonus depreciation in the year you place it into service. And even if you elect out of bonus depreciation for the heavy SUV (which generally would apply to the entire depreciation class the SUV belongs in), you can elect to expense under Section 179 (subject to an aggregate dollar limit for all expensed assets), the cost of an SUV up to an inflation-adjusted limit ($25,900 for an SUV placed in service in tax years beginning in 2020). You’d then depreciate the remainder of the cost under the usual rules without regard to the annual caps.

Potential caveats

The tax benefits described above are all subject to adjustment for non-business use. Also, if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Contact us if you’d like more information about tax breaks when you buy a heavy SUV for business.

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