Small businesses—many PR agencies fall into this category—that have received loans through the Paycheck Protection Program should be aware of certain tax deduction rules. The IRS released guidance to clarify whether taxpayers receiving the loans may deduct otherwise deductible expenses.
On May 14, the SBA changed course and announced that borrowers, together with their affiliates, who received PPP loans of less than $2 million have been granted a safe harbor. The safe harbor means that anyone who received a PPP loan "under $2 million" is automatically deemed to have made a good faith certification of need. As a result, they are safe from having their initial need for the PPP loan second-guessed and challenged on audit. Borrowers with PPP loans greater than $2 million do not qualify for this automatic safe harbor protection.
Businesses can’t deduct the wages or other business expenses they paid for using the loan. The IRS has clarified that no deduction for any expense is allowed for an expense that’s otherwise deductible if both the payment of the expense results in forgiveness of a loan made under the Paycheck Protection Program and the income associated with the forgiveness is excluded from gross income pursuant to the Coronavirus, and Economic Aid, Relief and Economic Security (CARES) Act.
The Paycheck Protection Program provides small businesses with loans to pay payroll costs, mortgages, rent and utilities. The loans are forgiven for payments of payroll costs, and payment of interest on covered mortgage obligation, and payment on any covered rent obligation and any covered utility payment. However, see below!
Top Congressional tax writers disagree with IRS interpretation of expenses related to PPP Loans
Senate Finance Committee Chairman Chuck Grassley, ranking member Ron Wyden and House Ways and Means Committee Chair Richard Neal expressed disapproval of the recent IRS guidance (see above) regarding deductions for small businesses that receive PPP loans. The IRS guidance stated that business can’t take deduction for expenses, including wages, if the payment of the expenses results in forgiveness of a PPP loan.
The Congressional tax writers sent a letter to Treasury Secretary Steven Mnuchin requesting to reverse the guidance, as it goes against Congressional intent. The letter states, “We believe the position taken in the IRS Notice ignores the overreaching intent of the PPP, as well as the specific of Congress to allow deductions in the case of PPP loan recipients.”
The PPP loan issue is expected to be addressed in the next round of economic relief legislation.
Employee Retention Credit
The Employee Retention Credit is a refundable credit against employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021.
Can an employer that receives a PPP loan receive the Employee Retention Credit? The simple answer is no! An employer may not receive the Employee Retention Credit if the employer receives a PPP loan that’s authorized under the CARES Act. An eligible employer that receives a PPP loan, regardless of the date of the loan, cannot claim the credit.
Is an employer that repays its PPP loan by May 14, 2020, eligible for the Employee Retention Credit?
Yes. An employer that applied for a PPP loan, received payment and repaid the loan by May 14, 2020, will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer.
Is an employer eligible to receive an Employee Retention Credit after the PPP loan is forgiven?
No. An employer that receives a PPP loan may not receive an Employee Retention Credit regardless of whether and when the loan is forgiven.
Issues pertaining to the Secure Act and your retirement
The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the “Secure Act,” contains some significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
The following are key provisions of the Secure Act:
- The SECURE Act became law on December 20, 2019.
- Makes it easier for PR firms—small businesses—to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10 percent of wages to 15 percent of wages.
- Many part-time workers will be eligible to participate in an employer retirement plan.
- The Act pushes back the age at which retirement plan participants need to take required minimum distributions from 70.5 to 72 for those who are not 70.5 by the end of 2019 and allows traditional IRA owners to keep making contributions indefinitely.
- The Act mandates that most non-spouses inheriting IRAs take the distribution that end up emptying the account in 10 years. The Act allows 401(k) plans to offer annuities.
Other changes in the Act is the elimination of a provision known as stretch IRAs, which allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules require a full payout from the inherited IRA within 10 years of the death of the original account holder, raising an estimated $15.7 billion in additional revenue. This will apply to heirs of account holders who die starting in 2020.
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.