“Patience is not the ability to wait, but the ability to keep a good attitude while waiting.”
Patience is a virtue when it comes to PPP loans and forgiveness applications, it needs to be done right and that takes time. Matters have been complicated by changing guidance and regulations that continue to be published weekly, and now the Consolidated Appropriations Act 2021 (CAA), has changed the game and many of the prior ground rules.
We do urge businesses who missed out on the first round of PPP loans to apply now that additional funding has been made available. But keep in mind that the CAA made changes from the original PPP which must be examined in the light of day, understood and communicated to clients. That too takes time.
Clients may be concerned about missing out on “2nd draw” loans. Remember the 2nd draw PPP loans require analysis and documentation to show a 25% revenue reduction, which also takes time. The AICPA has been told there is sufficient PPP funding for the current application window, which is due to close on March 31st. We understand a large percentage of applications are being held up by the SBA due to technical glitches in their systems, and asked to be patient.
We recommend, in certain circumstances, that instead of rushing to file for forgiveness clients consider delaying forgiveness applications for 1st round loans. This might be wise because borrowers have until 10 months after the end of their covered period to begin making payments. Recently the CAA clarified that certain additional expenses now qualify for forgiveness, and that eligible expenses are now deductible for federal tax purposes. See our prior article here: https://www.fuoco.cpa/drill-down-on-2nd-round-ppp-loans/. More changes might even be on the way!
It has also been brought to our attention that the SBA’s PPP portal does not allow a lender to upload a borrower’s application for a second-draw PPP loan if the borrower has submitted a first-draw PPP loan forgiveness application that is still pending with the SBA. However, the interim final rule for second-draw loans appears to allow borrowers to apply for a loan if they can certify that they have spent or intend to spend all first-draw funds by the time they receive a second-draw loan. More patience needed.
CAA 2021 amended the CARES Act to allow employers that received a PPP loan to retroactively claim the ERC for wages paid after March 12, 2020, but not for the wages used to obtain PPP loan forgiveness. We are preparing advice on the application of the Employee Retention credit (ERC) so it is done in a manner that will not diminish PPP benefits, and it takes time to make sure we maximize these 2 opportunities for clients.
The new provisions in the CAA indicate that employers who receive PPP loans may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds. This has raised questions and several possible scenarios.
- One scenario worth considering is where a client might hold off applying for the PPP to maximize their ERC for the 1st and 2nd Q of 2021. PPP funds could be used after ERC wage thresholds are met. Striking the right balance depends on a client’s ERC eligibility and whether or not they need PPP funds immediately.
- A second scenario might be that those who did not get their PPP loan forgiven can claim the ERC when they file their 4th Quarter 941 employment tax return. In the guidance posted to its website, the IRS says that “…if an employer received a PPP loan and included wages paid in the second and/or third quarter of 2020 as payroll costs to support an application for loan forgiveness, instead of claiming the ERC for those wages, and whose request for forgiveness was denied, it can claim the ERC for those qualified wages on its fourth quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return.”
The CAA also made many other changes to the ERC besides how the wages interact with the PPP program. We are waiting patiently on guidance from the IRS and Treasury that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.
The CAA also expanded the ERC and made technical corrections. The expansions of the credit include:
- An increase in the credit rate from 50% to 70% of qualified wages;
- An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- A reduction in the required year-over-year gross receipts decline from 50% to 20%;
- A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
- A provision to allow certain governmental employers to claim the credit;
- An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
- Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit.
We ask for your patience as we continue to sort through changing legislation and guidance. We will continue our efforts to timely communicate important information as it becomes available.
Reach Out To Us: There was a plethora of tax changes in the CAA along with the announcement of new PPP forgiveness rules and additional PPP loan funding for both 1st time and 2nd draw clients. We are advising that our clients not rush to obtain PPP forgiveness until they’ve had the opportunity to maximize their ERC. We are also recommending clients with these issues to talk to us about filing an extension. Patience is in order as the situation remains fluid due to a new President, Democrat controlled legislature, and each client’s situation being unique. We need to get it right. Please call us toll free at 855-542-7537 or email CPA@Fuoco.com.