Paycheck Protection Program Loan Forgiveness Quick Reference Guide

Now that many small businesses have received their Payroll Protection Program loans, the next question becomes: "How much of my loan is eligible for forgiveness?"

The below guide provides an overview of the steps to determine the amount of loan forgiveness an entity is eligible for under the Paycheck Protection Program. The information below is subject to change as additional details emerge around how the loan forgiveness will be implemented.

The loan amount will be forgiven in its entirety as long as the following conditions are met:

  • The loan proceeds are used for permissible costs (i.e. payroll costs*, mortgage interest, rent, utilities, etc.) paid and incurred over the 8 week covered period, which begins on the date the lender makes the first disbursement of the PPP loan to the borrower. Note: Mortgages and leases must have been in place by February 15, 2020. Payroll costs in excess of $100,000 annual salary for an employee are not eligible for forgiveness.
  • Employee headcount is maintained.
  • Compensation levels for employees earning less than $100,000 per year are maintained.
  • Not more than 25% of the forgiveness amount is used for non-payroll costs.

If these factors are not fully satisfied, a portion of the loan will not be forgiven and must be repaid. In order to determine the amount eligible for forgiveness, the following three-step analysis should be followed.

*Payroll costs are defined as the sum of payments of any compensation with respect to employees that is a salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees. Payroll costs does not include the compensation of an individual employee in excess of an annual salary of $100,000 or any compensation of an employee whose principal place of residence is outside of the United States. Payroll costs also doesn't include any qualified sick leave wages or qualified family leave wages for which a credit has been allowed under the Families First Coronavirus Response Act.

Step 1:

Multiply the amount of loan which qualifies for forgiveness by the following fraction:

Average number of full-time equivalent employees (FTEEs) per month employed
by the company during the 8 week covered period

Lower of (i) average number of FTEEs per month employed by the company during the period from February 15, 2019-June 30, 2019 or (ii) average number of FTEEs per month employed by the company during the period from January 1, 2020-February 29, 2020

Step 2:

Subtract a dollar amount computed as follows:

  • Identify all employees earning less than $100,000 who are still employed during the 8 week covered period.
  • For each of those employees, take their wages/salary rate during the 8 week covered period and compare it to their wages/salary rate for the most recent full quarter during which the employee was employed before the covered period.
  • For any of those employees whose wages/salary rate dropped by more than 25%, take the wages/salary rate for the most recent full quarter during which the employee was employed before the covered period multiplied by 75% and subtract the amount the employee received during the 8 week covered period.
  • Combine all salary reduction amounts and subtract from the loan forgiveness amount.

Step 3:

Correct decreases from Step 1 or Step 2 as follows:

  • Restore any reduction in FTEEs for the period between February 15, 2020 and April 26, 2020 before June 30, 2020.
  • Restore any reduction in wages/salary rate to the rate employees were earning as of February 15, 2020 by
    June 30, 2020.

NOTE:  Records to substantiate all amounts must be maintained.

We understand that this is a complex calculation.  Additionally, lenders are still waiting for clarification from Treasury on many aspects under the loan forgiveness formula.  You should work with your lender to ensure that you are compiling accurate information to ultimately determine the amount of loan forgiveness under this program.


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Answers to Questions You May Have About Economic Impact Payments

Millions of eligible Americans have already received their Economic Impact Payments (EIPs) via direct deposit or paper checks, according to the IRS. Others are still waiting. The payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some answers to questions you may have about EIPs.

Who’s eligible to get an EIP?

Eligible taxpayers who filed their 2018 or 2019 returns and chose direct deposit of their refunds automatically receive an Economic Impact Payment. You must be a U.S. citizen or U.S. resident alien and you can’t be claimed as a dependent on someone else’s tax return. In general, you must also have a valid Social Security number and have adjusted gross income (AGI) under a certain threshold.

The IRS also says that automatic payments will go to people receiving Social Security retirement or disability benefits and Railroad Retirement benefits.

How much are the payments?

EIPs can be up to $1,200 for individuals, or $2,400 for married couples, plus $500 for each qualifying child.

How much income must I have to receive a payment?

You don’t need to have any income to receive a payment. But for higher income people, the payments phase out. The EIP is reduced by 5% of the amount that your AGI exceeds $75,000 ($112,500 for heads of household or $150,000 for married joint filers), until it’s $0.

The payment for eligible individuals with no qualifying children is reduced to $0 once AGI reaches:

  • $198,000 for married joint filers,
  • $136,500 for heads of household, and
  • $99,000 for all others

Each of these threshold amounts increases by $10,000 for each additional qualifying child. For example, because families with one qualifying child receive an additional $500 Payment, their $1,700 Payment ($2,900 for married joint filers) is reduced to $0 once adjusted gross income reaches:

  • $208,000 for married joint filers,
  • $146,500 for heads of household,
  • $109,000 for all others

How will I know if money has been deposited into my bank account?

The IRS stated that it will send letters to EIP recipients about the payment within 15 days after they’re made. A letter will be sent to a recipient’s last known address and will provide information on how the payment was made and how to report any failure to receive it.

Is there a way to check on the status of a payment?

The IRS has introduced a new “Get My Payment” web-based tool that will: show taxpayers either their EIP amount and the scheduled delivery date by direct deposit or paper check, or that a payment hasn’t been scheduled. It also allows taxpayers who didn’t use direct deposit on their last-filed return to provide bank account information. In order to use the tool, you must enter information such as your Social Security number and birthdate. You can access it here:

I tried the tool and I got the message “payment status not available.” Why?

Many people report that they’re getting this message. The IRS states there are many reasons why you may see this. For example, you’re not eligible for a payment or you’re required to file a tax return and haven’t filed yet. In some cases, people are eligible but are still getting this message. Hopefully, the IRS will have it running seamlessly soon.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act, the third item of federal legislation enacted in response to the unprecedented COVID-19 pandemic, was passed by Congress on March 27th and swiftly signed into law the same day.

The scope of the relief bill is far-reaching, providing financial assistance through channels ranging from additional funding for medical institutions to emergency grants for small businesses to targeted relief via federal tax law changes. These tax law changes, many of which were given retroactive effect, will help taxpayers and businesses cope with cash flow issues over the coming weeks and months by reducing the tax burden and/or providing a larger refund than would be allowed under pre-CARES Act law.

In this article, we are focusing on some of the business provisions within the law.

Payroll Tax Due Date Delays

The CARES Act delays the due date for the employer's share of Social Security taxes. Under the Act 50% of the employer's share of Social Security taxes may be deferred until December 31, 2021, and the other half may be deferred until December 31, 2022.  Similarly, for self-employed taxpayers, the Act delays payment of 50% of 2020 self-employment taxes until 2021 and 2022. The relief isn't available if the taxpayer has had debt forgiveness for certain loans under the Small Business Act as modified by the CARES Act.

Loss Carryback

Taxpayers can carryback 100% of net operating losses (NOLs) realized in 2018, 2019, and 2020, to the prior five years. Such carryback had been eliminated by the Tax Cuts and Jobs Act of 2017 ("TCJA"). The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).

As a result of the CARES Act changes there are now three different NOL regimes:

   1.      NOLs generated on or before December 31, 2017

    • Two-year carryback
    • 20- year carryforward
    • Eligible to offset 100% of taxable income

   2.      NOLs beginning after December 31, 2017 and before January 1, 2021

    • Five-year carryback
    • Indefinite carryforward
    • Eligible to offset 100% of taxable income prior to 2021 and 80% of taxable income after 2020

   3.      NOLs beginning on or after January 1, 2021

    • No carryback
    • Indefinite carryforward
    • Eligible to offset 80% of taxable income

Interest Deduction

The CARES Act temporarily increases the net interest deduction limitation to 50% of adjusted taxable income (ATI) (previously limited to 30%). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. There is a special carve out rule for partnerships so that a partnership may not use the increased limitation in 2019, thereby deferring any potential benefit from the 50% threshold to 2020.

Deprecation of QIP

The CARES Act corrects an error in the TCJA by decreasing the depreciation life of "qualified improvement property" to 15 years, thus making such property eligible for 100% bonus depreciation. QIP is defined as any improvement made by the taxpayer to the interior of a non-residential building that is placed in service after the building's initial placed in service date other than improvements attributable to elevators, escalators, building enlargements, or the building's internal structural framework. In giving QIP 15-year MACRS status, it restores the 15-year MACRS write-off, making it eligible for 100% bonus depreciation.

This correction is retroactive to January 1, 2018. Taxpayers may change their depreciation of QIP by filing an automatic accounting method change with the IRS, though, if a QIP asset was only depreciated on a single tax return—e.g., it was placed in service in 2018 and the 2019 return has not yet been filed—the taxpayer may change the asset's depreciation method by filing an amended income tax return

Charitable Contribution Deductions

The limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required. 

For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Student Loan Payments Permitted

For employers with qualified educational assistance programs under Internal Revenue Code Section 127, the CARES Act provides a much sought-after change to permit employers to pay employees up to $5,250 per year on a tax-free basis for student loan debt expenses.  Importantly, this change only applies for payments made between March 27, 2020, and December 31, 2020. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principal and interest on any qualified higher education loan for the education of the employee but not of a spouse or dependent.

Employers with qualified educational assistance programs must amend their plans to permit these tax-free student loan payments.  Employers who do not currently maintain a qualified educational assistance program may adopt such a program, but to be qualified, the program must be maintained under a written plan document and otherwise be compliant with Code Section 127.  We recommend consulting with your employee benefits counsel before adopting a qualified educational assistance program to ensure compliance with the Code.

Employee Retention Credit

Eligible employers (including non-profits) may qualify for an employee retention credit equal to 50% of qualified wages paid to employees beginning March 12, 2020, through December 31, 2020, up to $10,000 per employee.  Thus the maximum credit is $5,000 per employee. The tax credit is applied against the employer's Social Security payroll tax obligation but is reduced by any credits the employer receives under the Families First Coronavirus Response Act (FFCRA).

If the available tax credits exceed the employer's total Social Security tax obligation, the employer may qualify for a refund in the amount of the excess.  Furthermore, the employer's tax credits under the CARES Act may be increased by the employer's qualified health plan expenses allocable to qualified wages paid.

Wages don't include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit. An employer can elect to not have the credit apply on a quarter-by-quarter basis. 

Employers eligible for this tax credit include employers who were carrying on a trade or business during the 2020 calendar year, and either (a) whose operations are partially or fully suspended during any applicable quarter due to orders from the appropriate governmental authority limiting commerce, trade, or group meetings due to COVID-19; or (b) beginning January 1, 2020, whose gross receipts for any quarter are less than 50% of gross receipts for the same quarter in the prior year. Credits will continue until gross receipts exceed 80% of the same quarter's gross receipts in the previous year.

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COVID-19: IRS Announces More Relief and Details

In the midst of the coronavirus (COVID-19) pandemic, Americans are focusing on their health and financial well-being. To help with the impact facing many people, the government has provided a range of relief. Here are some new announcements made by the IRS.

More deadlines extended

As you probably know, the IRS postponed the due dates for certain federal income tax payments — but not all of them. New guidance now expands on the filing and payment relief for individuals, estates, corporations and others.

Under IRS Notice 2020-23, nearly all tax payments and filings that would otherwise be due between April 1 and July 15, 2020, are now postponed to July 15, 2020. Most importantly, this would include any fiscal year tax returns due between those dates and any estimated tax payments due between those dates, such as the June 15 estimated tax payment deadline for individual taxpayers.

Economic Impact Payments for nonfilers

You have also likely heard about the cash payments the federal government is making to individuals under certain income thresholds. The Coronavirus Aid, Relief, and Economic Security (CARES) Act will provide an eligible individual with a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).

On its Twitter account, the IRS announced that it deposited the first Economic Impact Payments into taxpayers’ bank accounts on April 11. “We know many people are anxious to get their payments; we’ll continue issuing them as fast as we can,” the tax agency added.

The IRS has announced additional details about these payments:

  • “Eligible taxpayers who filed tax returns for 2019 or 2018 will receive the payments automatically,” the IRS stated. Automatic payments will also go out to those people receiving Social Security retirement, survivors or disability benefits and Railroad Retirement benefits.
  • There’s a new online tool on the IRS website for people who didn’t file a 2018 or 2019 federal tax return because they didn’t have enough income or otherwise weren’t required to file. These people can provide the IRS with basic information (Social Security number, name, address and dependents) so they can receive their payments. You can access the tool here:

This only describes new details in a couple of the COVID-19 assistance provisions. Members of Congress are discussing another relief package so additional help may be on the way. We’ll keep you updated. Contact us if you have tax or financial questions during this challenging time.

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IRS Section 139 - Qualified Disaster Relief Payments

As the impact of the Coronavirus pandemic continues to grow some businesses may be inclined to provide additional assistance to their employees on top of the current relief bills, especially in cases where businesses have shifted to a remote workforce.  There may be a way to provide such assistance while doing so in a tax efficient way. When the President declared a national emergency, the door to Internal Revenue Code Section 139 was opened.  

Section 139 allows "qualified disaster relief payments" to be excluded from employees' taxable wages which includes amounts paid for "reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster."  Employers are also allowed to deduct payments under Section 139 as a normal business expense.

Usually, Section 139 is applied in the context of a natural disaster in which property needs to be repaired or replaced, or people need to find temporary housing while they are unable to use their residences. All of those types of expenses are clearly covered by Section 139. The Coronavirus pandemic is causing different types of economic damages, including increased medical and child care expenses as a result of schools being closed, expenses for setting up home office, increased expenses related to obtaining normal living items etc. To the extent that an employee incurs additional reasonable and necessary personal, family, or living expenses as a result of the disaster, they would qualify under Section 139. It's also important to remember that Section 139 doesn't apply to any expenses that are reimbursed, such as by insurance or to normal living expenses (such as mortgage payments, utilities, or food). Types of expenses that may qualify as additional reasonable and necessary personal, family or living expenses as a result of the Coronavirus may be:

  • Over-the-counter medications, hand sanitizer and home disinfectant supplies.
  • Child care or tutoring due to school closings.
  • Work-from-home expenses such as setting up a home office, increased utilities expenses and higher Internet costs.
  • Increased commuting costs, such as taking a taxi instead of using public mass transit.
  • Unreimbursed health-related expenses.

Section 139 does not impose any limit on the amount or frequency of qualified disaster payments nor are employees required to provide receipts or other proof supporting their expenses, provided that the amount of the payments can be reasonably expected to commensurate with the expenses incurred.

It is recommended that the employer have a written qualified disaster relief payment plan along with other documentation, which would include:

  • The amounts paid and to whom;
  • The start and end date of the program;
  • A general listing of the expenses that will be paid or reimbursed on behalf of the employees, and;
  • The maximum amount the employer will pay per-employee or in the aggregate.

Payments for lost wages are not covered under Section 139.

Please consult your tax advisor or attorney for more information if you are interested in learning more about disaster relief payments to employees.

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