The Focus - Our Tax E-Newsletter
Reminders: PPP Loan Program and Employee Retention Credit (ERC)
Although the PPP loan program ended May 31, 2021, there are many loans that have not gone through the forgiveness process. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan, even if repayment has begun. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. As a reminder, borrowers can use a covered period between 8 and 24 weeks from the date of the loan disbursement.
Costs eligible for forgiveness include payroll costs as well as non-payroll costs such as mortgage interest, rent, utilities and other covered expenditures listed below. Please keep in mind that non-payroll costs cannot exceed 40% of the total forgiveness amount.
Covered operations expenditures:
- Payment for any business software or cloud computing service that facilitates business operations
- Product or service delivery
- The processing, payment or tracking of payroll expenses
- Human resources
- Sales and billing functions
- Accounting or tracking of supplies, inventory, records and expenses
Covered property damage costs:
- Costs related to property damage, vandalism or looting due to the public disturbances that occurred in 2020, but could not be reimbursed by insurance
Covered supplier costs, including payments made to a supplier of goods for supply that meets the following criteria:
- Is essential to operations of the business, AND
- Payment made pursuant to a contract, order, or purchase order that was either:
- In effect any time before the covered period, OR
- For perishable goods only, in effect any time prior to the end of the covered period
Covered worker protection expenses:
- Operating or capital expenditures to facilitate the change of business activities related to COVID. This may include purchases, maintenance or renovation of assets that create or expand:
- Drive-through window facilities
- Indoor, outdoor, or combined air or air pressure ventilation or filtration systems
- Physical barriers such as a sneeze guard
- Expansion of additional indoor, outdoor, or combined business space
- Onsite or offsite health screen capabilities
The Employee Retention Credit (ERC) is coming to an end in 2021. Due to the infrastructure legislation recently signed by President Biden, beginning October 1, 2021, the ERC will be considered terminated, except for eligible recovery startup businesses. The credits end for recovery startup businesses on December 31, 2021. There is good news. The credit is subject to a five-year statute of limitations period, so there is time to file amended returns for all eligible quarters.
Highlights of the ERC include:
- It is a refundable payroll tax credit claimed quarterly. For 2020, the maximum credit is $5,000 per employee for the year. For 2021, the maximum credit is $7,000 per employee, per quarter ($21,000 per year).
- There are two tests for eligibility. An eligible employer is an employer carrying on a trade or business whose: (a) business operations are fully or partially suspended due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19, or (b) that experiences a significant decline in gross receipts, A significant decline in gross receipts is defined as more than 50% for 2020, and more than 20% for 2021 as compared with the same quarters in 2019.
- Both for-profit and not-for-profit employers may qualify.
There is more to know about business operations that are fully or partially suspended due to orders from a governmental authority. Factors to consider under the shutdown rules include supply chain interruptions, inability to access equipment, limited capacity to operate, inability to work with vendors, and reduction in services or goods offered to customers.
Also, a recently issued notice provided guidance in regards to whether wages paid to an employee who is a majority owner (more than 50%) of a corporation are qualified wages for purposes of the ERC. In most circumstances, the owner’s and related individuals would not be considered qualified wages. Related individuals are defined as:
- A child or a descendant of a child;
- A brother, sister, stepbrother, or stepsister;
- The father or mother, or an ancestor of either;
- A stepfather or stepmother;
- A niece or nephew;
- An aunt or uncle;
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; and
- An individual (other than an individual who at any time during the tax year was the spouse of the taxpayer) who, for the same tax year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.
There is one caveat to these rules. If neither the majority shareholder nor his or her spouse has no brother, sister or other lineal descendant, then the wages for the shareholder and spouse are qualified ERC wages.
If any questions arise concerning PPP loans or the ERC, please do not hesitate to contact your tax advisor at Dermody, Burke & Brown.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.