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Loan Forgiveness Under the Paycheck Protection Plan

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, many small business owners were able to apply for – and receive – a loan of up to $10 million under the Paycheck Protection Program (PPP). Businesses – including nonprofits, veterans’ organizations, Tribal entities, self-employed individuals, sole proprietorships, and independent contractors – that were in operation on February 15 and that have 500 or fewer employees are eligible for the PPP loans. If the loan proceeds are used as specified, business owners may apply to have the loan forgiven.

Here’s what you need to know about loan forgiveness under the PPP:

Covered Period

The loan covers eight weeks (56 days) of payroll, rent, mortgage interest and utility expenses. Employers must keep employees on their payroll through June 30. Generally, the first day of the covered period is the same day as the loan disbursement. For example, if the loan proceeds were received on Wednesday, April 22, that is the first day of the covered period. The last day of the covered period would then be Tuesday, June 16.

Alternate Payroll Covered Period. If you pay your employees weekly or bi-weekly, you may elect to have the eight-week (56-day) period begin on the first day of the first pay period following the PPP loan disbursement date. In this case, if the loan proceeds were received on Wednesday, April 22, and the first day of the first pay period following the loan disbursement is Monday, April 27, the first day of the Alternative Payroll Covered Period is April 27 and the last day of the Alternative Payroll Covered Period is Sunday, June 21.

Eligible Expenses

PPP loans cover both payroll costs and nonpayroll costs; however, to be eligible for loan forgiveness, 75 percent of the PPP loan proceeds must go toward payroll costs, with the remaining 25 percent toward nonpayroll costs. For example, a business owner that received loan proceeds of $250,000 must use $187,500 of that amount on payroll costs to be eligible for loan forgiveness. The remaining $62,500 can be used to pay nonpayroll costs as specified below.

If your business does not meet the 75 percent requirement, there will be a proportionate reduction in loan forgiveness – not a complete loss.

Eligible payroll costs. Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. The total amount of cash compensation – payroll costs paid and payroll costs incurred – for each individual employee may not exceed $15,385 for the covered period of eight weeks (56 days) based on an annualized salary of $100,000.

Bonuses can be included as long as this threshold amount is not exceeded. Self-employed individuals and owner employees can use PPP loan funds to cover owner compensation costs for a period of eight weeks only (8/52 of 2019 net profit from Form 1040 Schedule C).

To count toward eligible payroll expenses, employer contributions for retirement plans as well as health insurance must be paid during the covered period.

Loan forgiveness is based on full-time equivalent (FTE) workers and a standard 40-hour work week. A simplified method allows 1.0 FTE for 40 hour work weeks and 0.5 FTE for less than 40 hour work weeks. Calculations can be done using either method to determine which one is most advantageous to the employer. Special rules apply for workers whose salary has been reduced by 25 percent or more. Please call if you have any questions about this.

Businesses that received PPP loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired.

Eligible nonpayroll costs. Specific nonpayroll costs are also eligible for forgiveness; however, they cannot exceed 25 percent of the total forgiveness amount. They must be paid or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period and can include costs that were paid and incurred one time.

  • Payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020. These amounts do not include any prepayment or payment of principal
  • Business rent or lease payments (including leases for vehicles and office machinery) entered into force before February 15, 2020; and
  • Business utility payments for services begun before February 15, 2020 such as electricity, gas, water, transportation, telephone, or internet access.
  • Interest payments on debt obligations incurred before February 15, 2020
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020

Self-employed individuals can use PPP loan funds to cover interest, rent and utility payments are also eligible as long as these amounts are deductible on Form 1040 Schedule C.

Loan Amounts not Forgiven

Any amounts that aren’t forgiven must be repaid in two years at an interest rate of 1 percent, which begins to accrue upon loan disbursement. Payments, however, are deferred for six months following the disbursement of the loan.

Tracking Expenses

Business owners need to keep accurate records of how PPP loans are used. Failing to document or falsely claiming eligible expenses could lead to criminal penalties.

Don’t Delay. Start Planning Now to Maximize PPP Loan Forgiveness

If you’ve received a PPP loan and want to make sure your loan is forgiven, help is just a phone call away.

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Avoid These Common Errors When Filing a Tax Return

When filing a tax return, mistakes such as the common errors listed below can result in a processing delay – and increase the amount of time it takes to receive a tax refund. Using a reputable tax preparer such as a certified public accountant, enrolled agent or another knowledgeable tax professional is usually the best way to avoid this. With this in mind, here are eight of the most common errors taxpayers make when filing their returns:

1. Missing or inaccurate Social Security numbers. Each SSN on a tax return should appear exactly as printed on the Social Security card.

2. Misspelled names. Likewise, a name listed on a tax return should match the name on that person’s Social Security card. This applies to spouses and dependents as well.

3. Incorrect filing status. Some taxpayers choose the wrong filing status. A tax professional can help taxpayers choose the correct status, especially if more than one filing status applies.

4. Math mistakes. Math errors are one of the most common mistakes. They range from simple addition and subtraction to more complex calculations. Using a professional tax preparer ensures an accurate return.

5. Figuring credits or deductions. Taxpayers can make mistakes figuring things like their earned income tax credit, child and dependent care credit, and the standard deduction. Taxpayers should always follow the instructions carefully. For example, a taxpayer who’s 65 or older, or blind, should claim the correct, higher standard deduction if they’re not itemizing. Also, remember to attach any required forms and schedules.

6. Incorrect bank account numbers. Taxpayers who are due a refund should choose direct deposit because it is the fastest way to get their money. They should remember, however, to include the correct routing and account numbers on the tax return. No bank account number means no direct deposit.

7. Unsigned forms. An unsigned tax return isn’t valid under any circumstance. Also, keep in mind that when filing a joint return, in most cases, both spouses must sign. Exceptions may apply, however, for members of the armed forces or other taxpayers who have a valid power of attorney. Taxpayers can avoid this error by filing their return electronically and digitally signing it before sending it to the IRS.

8. Filing with an expired individual tax identification number. If a taxpayer’s ITIN is expired, a tax return should be filed using the expired number. The IRS will process that return and treat it as a return filed on time; however, be aware that the IRS won’t allow any exemptions or credits to a return filed with an expired ITIN. Taxpayers will receive a notice telling the taxpayer to renew their number. Once the taxpayer renews the ITIN, the IRS will process a return normally.

If you haven’t filed your tax return yet, a tax professional can help expedite the process and ensure you file an accurate tax return. If you need help with your tax return, don’t hesitate to call.

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Cash Management Tips for Small Businesses

Cash is the lifeblood of any small business. Here are some tips to help your business maintain a sufficient cash flow to meet its financial goals and run efficiently:

1. Toughen up your credit policies. Review the payment terms you offer to customers and tighten them up if slow payment is a problem area for your business. For instance, how long are customers given to pay? What action will be taken if a payment is missed? Be sure your credit terms are communicated effectively to customers before transactions are entered into.

2. Routine Credit Check. For many businesses, a routine credit check should be performed before a sales or service transaction is entered into with a new customer. Consider requiring advance payments – at least in part – for new customers.

3. Create a Budget. A budget can be extremely effective in helping you keep track of whether cost and revenue-related goals are being met, but surprisingly, many small businesses do not engage in the budgeting process. Depending on the size and complexity of the business, the budget process might be informal or formal, lengthy, or simple. Projected revenues and expenses should be broken down by months. Budget for next year’s revenues and expenses near the end of each year and review budgeted to actual results monthly.

4. Tighten up billing. If collecting bills has become a problem for your business, you might want to consider increasing the intervals at which customers are billed, e.g., from three months to one month, or from one month to two weeks. Review your accounts receivable weekly or even daily to make sure slow payers are not allowed to slide.

Please call the office if you need help creating a budget or have any questions regarding your company’s cash flow and credit or collection policies.