April 21, 2020
Q&A COVID-19 Update: Navigating the CARES Act Regulations and the SBA Loans Process
Posted by Jenn McCabe
Two members of Armanino’s COVID-19 Rapid Response Team, Gerry Clancy and Jenn McCabe, recently partnered with CalCPA to co-host a webinar on CARES Act regulations and the SBA loan process. Here are some of the most frequently asked questions from the presentation. You can view the full webinar on the CalCPA website.
- Is the forgiveness of the PPP loan based on reduction of employees before the eight-week period or after? If you had a $25K payroll before the eight-week period and a $5K payroll during, how much does your payroll need to be at June 30, 2020 — 75% of $25K or $5K?
- The forgiveness will be based on the loan amount, which in turn was based on the average compensation and headcount in the look-back period you used. The SBA is saying 75% of the loan amount must be used on payroll expenses to get maximum forgiveness.
- There has been a lot of discussion about whether FICA/Medicare (the employer portion) can be used in calculating PPP. What is the story as of today?
- The employer portion of FICA was never to have been included in the loan basis calculation.
- If an employee makes more than $100K, can they still be included but only up to $100K or are they excluded from the calculation for the PPP loan?
- They can be included for up to $100K in salary.
- For the PPP, can those who are self-employed factor in their medical insurance and retirement benefits?
- The self-employed owner can include staff benefits, not their own health or retirement benefits.
- Can you comment on your experience with foreign-owned U.S. businesses applying for and receiving PPP loans?
- If a business has more than 50% foreign ownership, it is ineligible for the PPP.
- How should a business treat guarantee payments for services?
- Guarantee payments, and payments to partners in a partnership, can be included up to $100K provided they are designated on the Form K1 as earnings from self-employment or guaranteed payments. Note, this specifically excludes distributions of earnings and profits.
- Is guaranteed payments one of the forgivable amounts?
- Yes, up to $100K.
- Is it true that as long as all affiliated companies have in aggregate less than 500 employees, each separate entity with an Employer Identification Number can apply for the PPP?
- No, affiliated companies are counted as one company if there is control of the entities by one major stakeholder. This is a complicated area and we recommend further counsel to determine “control.”
- What should you do if you were self-employed (Schedule C) in 2019, became an employee in 2020, but are now not working due to COVID-19?
- You could get a PPP loan based on 2019, provided you re-started the business.
- Do benefits include workers comp insurance?
- No, workers comp is not an employee benefit to include in the loan basis.
- Do entities owning disregarded entities file PPP and EIDL on a combined basis reflecting elimination entries?
- The loan basis is compensation of all headcount in affiliated entities. Documentation is payroll records. Loan forgiveness will be the same (plus other forgivable expenses) and it is unlikely financial statements will ever come into play.
- Can a business furlough staff and keep employee benefits going?
- Yes, during a furlough, employees can continue to be on active payroll rosters and benefits can continue. Some employers also pay 100% of the fringe during a furlough and cease deductions for employee portions. Generally, the only benefit that doesn’t continue is accruals for paid time off.
- Don’t you have to use the money from the PPP to pay for sick pay, or are you assuming that you have fired those employees?
- If you already have a policy that covers sick time, those wages would be included. You will have to adhere to all paid sick time laws in your city/state, too. However, if your question is about COVID-19 sick leave, that is not included, as that leave is covered by other sections of the CARES Act.
- Can employers claim the Employee Retention Credit (ERC) for any wages paid between March 13 and March 31, 2020, so long as they have 100 employees or less, due to Governor Newsom’s stay-at-home order? If so, I understand that we fax in an IRS-7200 for an advanced credit. I assume if the Form 7200 is accepted, the IRS will send a refund check via snail mail, correct?
- Each employer’s eligibility should be documented and reviewed. Once eligibility is confirmed, yes, all wages paid after March 12 for an employer of 100 or less staff qualify. The IRS will apply the Form 7200 to your next payroll tax deposit, and you can immediately benefit by short-paying it by the amount of the advance credit you claim on the Form 7200.
- If your PPP does not meet your payroll needs, can you use employer tax credits?
- No. PPP recipients can’t claim the Employee Retention Credit.
- Do we file first-quarter 2020 941 forms as normal?
- Yes. Claim the credit in the second quarter when forms are issued.
- How does the Tax Credit Deferral work for one-member sole proprietors with no wages?
- It won’t work for a sole proprietor on a Schedule C, or for an LLC owner because there are no wages. It will work for an S Corp owner on payroll in a company with less than 100 staff.
- The form doesn’t have a box for first-quarter 2020 wages paid between March 13 and March 31, 2020. How does an employer file a credit for this time period?
- Use the Form 7200 to claim a credit against your second-quarter Form 941. File your first-quarter 941 the usual way.
- For the extension deadline, are fiscal filers that are due or on extension now due July 15, 2020?
- Notice 2020-23 stipulates that all taxpayers with a filing or payment deadline falling on April 1, 2020, or later have until July 15, 2020, to file returns or make payments, including fiscal years.
- Can you elaborate on the impaired securities deduction?
- This Treasury decision amends §1.165-11 to make clear that a taxpayer may elect to deduct any disaster loss for the taxable year immediately preceding the year in which the disaster occurs, if the loss is deductible under other provisions of section 165. Losses to property used in a trade or business or in a profit-seeking transaction are deductible under section 165 whether or not the loss arises from a casualty.
- Does or will California conform to PPP non-taxable loan forgiveness?
- No, California does not conform.
- Can you still take a loss on disposal of inventory in 2020?
- Yes, or in 2019 if the inventory was damaged or became unsalable.
- Have you seen the guidance on the 3115 being allowed for QIP?
- IRS Revenue Procedure 2020-25 provides important procedural rules for qualified improvement property (QIP) to allow taxpayers to file Form 3115 or, alternatively, amend tax returns to reflect the retroactive, technical amendment provisions of the CARES Act that allow 100% bonus depreciation for QIP. The guidance generally permits a taxpayer to file an amended return, administrative adjustment request (AAR), or a Form 3115 for its 2018, 2019 or 2020 tax year. The revenue procedure addresses:
- Changing the depreciation of QIP placed in service after December 31, 2017 (generally from 39-year to 15-year).
- Making a late election out of bonus depreciation, or revoking an election out of bonus depreciation.
- Note this revenue procedure’s late election relief and revocations are not limited to QIP assets — allowing taxpayers to reassess all classes of assets.
- Making a late election to use the alternative depreciation system (ADS).
- Note: withdrawal of an ADS election must be done via an amended return or AAR.
Additionally, the guidance modifies Revenue Procedure 2019-43 to add two new automatic method changes when filing a Form 3115. These include:
- DCN 244, to change the depreciation of QIP placed in service after December 31, 2017.
- DCN 245, to make a late election out of bonus depreciation or to use ADS, or to revoke an election out of bonus depreciation.
You need to determine the tax brackets/tax that you are taking the QIP to. So say you have a 2018 QIP. What is the best tax result year? Then you choose to amend versus file a 3115. And also timing of refunds/cash flow is a determinate.
- Can an LLC (filing as a partnership) take an “accelerated deduction” (i.e., 2020 losses deducted on the prior year’s tax return)?
- Yes, per IRC section 165i.
- Where can I find state and local COVID-19 related relief opportunities?
- You can view the State Relief Matrix on the Armanino website.
Jenn has more than 25 years of outsourced accounting and finance experience, with a particular expertise in startups and the advertising and creative production industries. She is passionate about seeing companies utilize the latest accounting technology to maximize their efficiency, productivity, and ultimately, success.
Before joining Armanino, Jenn founded and led Team Jenn Corp., a firm dedicated to the strategic financial management of startups and small businesses, offering a comprehensive back office solution with accounting, finance and HR solutions. Previous roles include stints at advertising giant Ogilvy and Mather, and in the cash management industry.
Jenn has a bachelor’s degree in economics from Pepperdine University and is a member of several professional associations including the National Society of Accountants, ProVisors and the Women’s Business Enterprise Network.