PPP Forgiveness for Loans $50,000 or Less

Recipients of Paycheck Protection Program (PPP) loans of $50,000 or less will be able to apply for forgiveness using a simplified application that was released Thursday by Treasury and the U.S. Small Business Administration (SBA).

The new application form, SBA Form 3508S, can be used by PPP borrowers applying for forgiveness on PPP loans with a total loan amount of $50,000 or less, unless those borrowers together with their affiliates received loans totaling $2 million or more. Instructions for Form 3508S also were released.

Borrowers of $50,000 or less still will have to make some certifications and provide documentation to the lender for payroll and nonpayroll costs.

The borrower is responsible for providing an accurate calculation of the loan forgiveness amount. The borrower will attest to the accuracy of the reported information and calculations on the loan forgiveness application.

Whether a borrower submits SBA Form 3508, 3508EZ, or 3508S, or a lender’s equivalent form, the lender is required to confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs.

Borrowers of $50,000 or less are exempted from any reductions in forgiveness based on:

  • Reductions in full-time-equivalent (FTE) employees; and
  • Reductions in employee salary or wages.

The application can be found:

https://www.sba.gov/sites/default/files/2020-10/PPP%20Loan%20Forgiveness%20Application%20Form%203508S.pdf

If a company receives an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount.

To illustrate, say a company gets a $30,000 PPP loan and a $5,000 EIDL advance. The amount of the advance would be deducted from the forgivable amount of the PPP loan. So even if the company follows all of the loan forgiveness rules, the most that can be forgiven is $25,000. The company would need to repay the remaining $5,000 to the lender.

The SBA has requested that a company ask for forgiveness for the full amount of the PPP loan. For example, the company would request for forgiveness for $30,000 and the SBA will deduct the $5,000 after receiving the application. If the company requested forgiveness for $25,000, the $5,000 would still be deducted and they would receive forgiveness for a maximum amount of $20,000.

Posted in IRS, Taxes

Connect for Health Colorado

HB20-1236, which was recently signed into law, creates a program that will allow Coloradans to ask on their state income tax returns for Connect for Health Colorado (Exchange) to assess whether uninsured household members are potentially eligible for free or subsidized health care coverage.

If they elect for the Exchange to check their eligibility for insurance affordability programs, the Exchange will receive their information from the Department of Revenue and will check their eligibility.

Posted in Colorado, Taxes

Colorado Workers’ Compensation Insurance

Colorado’s Division of Workers’ Compensation requires workers’ compensation insurance for all Colorado employers with at least one employee (even if the one employee is you, the owner). Workers’ compensation insurance protects businesses and employees from the costs of a workplace injury.

Posted in Colorado

PPP Forgiveness

Small businesses wanting to submit their forgiveness applications for PPP loans may have to wait. According to many banks and experts, while the SBA officially opened its forgiveness portal to lenders August 10, most lenders will likely delay. The potential for new legislation, changing directives, and the desire to adequately prepare give banks little incentive to launch immediately.

Posted in IRS, Taxes

IRS Simplified Tax Accounting Rules for Small Businesses

The IRS issued proposed regulations to adopt the simplified tax accounting rules for small businesses under the Tax Cuts and Jobs Act (TCJA).

For tax years beginning in 2019 and 2020, these simplified tax accounting rules apply for taxpayers having average annual gross receipts of $26 million or less (known as the gross receipts test).

Prior to the TCJA, certain taxpayers could determine whether they were eligible to figure taxable income under the cash method of accounting by meeting a different gross receipts test.  That gross receipts test was met if the taxpayer’s average annual gross receipts for all prior taxable years did not exceed $5 million.

After the TCJA, a taxpayer that meets the gross receipts test can use the cash method if average annual gross receipts for the three-taxable year period ending immediately before the current taxable year are $25 million (adjusted for inflation) or less, can be exempt from the uniform capitalization rules, and can be exempt from the requirement to use an inventory method.

Posted in IRS, Taxes

Missing the July 15 Deadline

For those who missed the July 15 tax deadline, some taxpayers may have extra time to file and pay any taxes due without penalties and interest. These include:

File to get a tax refund
The only way to get a refund is to file a tax return. There is no penalty for filing after the deadline if a refund is due. The IRS reminds taxpayers that, while they continue to process electronic and paper tax returns, issue refunds, and accept payments, they’re experiencing delays in processing paper tax returns due to limited staffing. Taxpayers can track a refund using the “Where’s My Refund?” tool on IRS.gov, IRS2Go, and by phone at 800-829-1954.

File to reduce penalties and interest
Normally taxpayers should file their tax return or request an extension and pay any taxes they owe by the deadline to avoid penalties and interest. Remember that an extension to file is not an extension to pay. Penalties and interest will apply to taxes owed after July 15. Even if a taxpayer can’t afford to immediately pay the taxes they owe, they should still file a tax return as soon as possible to reduce possible penalties.Ordinarily, the failure-to-file penalty is 5% of the tax owed for each month or part of a month that a tax return is late. But if a return is filed more than 60 days after the due date, the minimum penalty is either $435 or 100% of the unpaid tax, whichever is less. The basic failure-to-pay penalty rate is generally 0.5% of unpaid tax owed for each month or part of a month.Taxpayers who have a history of filing and paying on time often qualify for penalty relief. A taxpayer will usually qualify if they have filed and paid timely for the past three years and meet other requirements. For more information, see the first-time penalty abatement page on IRS.gov.

Posted in IRS, Taxes

Converting an LLC to an S Corporation

Maybe your business situation has changed and now you need to change your entity from a Limited Liability Company to an S Corporation.

Below are 2 options for converting your LLC to an S Corporation:

–Change ONLY the tax status of the entity, but not change the entity

–Change the tax status AND the entity

Change ONLY the tax status: An election can be made to be taxed as an S Corporation while retaining the structure of an LLC. To change an entity’s tax status to be treated as an S Corporation but stay an LLC, file a Form 8832 (Entity Classification Form) with the IRS.  Once it is classified as a Corporation, it can file a Form 2553 to be taxed as an S Corporation.

Change the tax status AND the entity: To change your entity’s structure from an LLC to a corporation requires the LLC to actually convert to a Corporation with the formation state’s agency that handles corporate filings.With this option, the LLC is converted a Corporation with the state.  Then it can also request to be an S Corporation for tax purposes.In Colorado the conversion process for converting an LLC to a Corporation includes filing with the state a new corporation with the same name & simultaneously canceling the LLC, sending a letter to the IRS telling them of the change in structure, and electing to be an S Corp (by filing an S Election Form 2553).

Posted in Colorado, Taxes

S Corporation Taxes

Much like owners of a partnership, shareholders of an S-corporation are taxed on their allocated share of the business’s profits — no matter whether or not those profits were actually distributed to them.

The main reason for being recognized as an S Corporation is for the tax savings.  By allowing the corporation’s profits or losses to pass through to the shareholders, the shareholders avoid double taxation which is an issue with a regular corporation (C Corporation).

One of the best methods of saving taxes for the S Corporation is to reduce FICA or Self Employment Taxes.  For example, if a contractor were paid $100,000 per year, the contractor would have to pay self-employment taxes of about $15,000 per year.  However, if the contractor’s S Corporation were paid $100,000 and the S Corporation paid the contractor a $50,000 salary (this must be considered a fair wage) for services, the contractor would only have to pay FICA (same as self-employment taxes) on his $50,000 wages or about $7500, saving the contractor about $7500 each year in taxes.

However, running a salary through payroll includes extra costs and the addition of unemployment tax.  The rules are that the owners must pay themselves a “realistic” salary and can take the rest in dividends.

Posted in Colorado, Taxes

Payroll Protection Program Loan Forgiveness Changed as Senate passes House bill

The U.S. Senate passed the House version of Paycheck Protection Program (PPP) legislation Wednesday night, tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.  The Senate approval sent the House bill to President Donald Trump who signed it Friday.

The Paycheck Protection Program Flexibility Act of 2020 modifies several provisions of the Paycheck Protection Program (PPP) and amends the Small Business Act and the CARES Act:

  • The “covered period” is extended from 8 weeks to 24 weeks from the date the loan proceeds were deposited into the borrower’s bank account or Dec. 31, 2020 whichever occurs first.  This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • Earlier in the year, SBA and Treasury issued an interim final rule which required borrowers to spend at least 75% of the PPP loan proceeds on payroll. The PPPFA reduces the payroll spending requirement to 60%.  The SBA and Treasury clarified on June 8 that the 60% threshold is not a cliff and that partial forgiveness is available under 60%.
  • CARES allows the deferral of the employer’s 2020 Social Security tax. Half of the deferred amount is due Dec. 31, 2021 and the remainder is due Dec. 31, 2022.  HR 7010 now allows the PPP loan borrower to deferral social security taxes even though the loan is forgiven.
  • The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
  • Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
  • To the extent the loan is not forgiven, the maturity date of the loan has been extended from two years to five years.

It is still not clear how “salary” is treated for owner employees – 8/52 or 24/52 of 2019 wages? How does the calculation of “payroll expense” for the self-employed work, 8/52 or 24/52 of 2019 net Schedule C income?
Congress also did not address the deduction of expenses paid with the proceeds of the PPP. Thus, it seems that expenses paid with PPP loan proceeds are not deductible.

Posted in IRS, Taxes, Tips

S Corporations

An “S Corporation” is a for profit corporation which elects to be treated as an S Corporation.  S Corporations typically do not pay taxes and instead file an informational return Form 1120S showing net profit or loss which flows through to the owners (shareholders).  Instead of the S Corporation paying income tax, the shareholders show the net profit or loss on their personal tax returns.  An S Corporation starts as a regular corporation, and only by requesting the S Election to the IRS can it act as an S Corporation.

Profits and losses must be distributed to the shareholders in proportion to the shareholder’s interest. For example, if a shareholder owns 10 percent of the S corporation, he or she must receive 10 percent of the profits or losses.

Shareholders must adhere to the requirements at all times. If they don’t, they risk disallowing the S corporation election, the corporation would be treated as a C corporation with its corresponding restrictions and be subject to double taxation.

To become an S Corporation, the corporation must submit a completed Form 2553 (S Corp. Election) to the IRS 2 months and 15 days after the beginning of a corporation’s tax year.  For most S Corps, that would be on March 15th since most tax years begin on January 1st.  For newly formed corporations, the first tax year would start on the earliest of the date it first had assets, the date it first had shareholders, or the date it first operated.

For example, if a corporation was formed on March 12th, it issued stock on April 10th, it opened a checking account on April 17th, and started business operations on July 1st, the beginning date of the S Corporation’s first tax year is April 10th.  Therefore, the IRS must receive the S Corp election no later than June 25th for the S Corporation election to take effect during its first tax year.  If received after this, the corporation wouldn’t be able to operate as an S Corporation until January 1st of the next tax year.

Posted in Colorado, Taxes