The cash method is the simplest and most common for small businesses to use. With the method, the business reports income in the tax year is is actually received and deducts expenses in the tax year that they are actually paid (for example the date a check is written)
However, expenses paid in advance can only be deducted in the tax year it covers, not necessarily when it is received.
The CARES Act AND the Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act (signed into law on 12/27/20) lists the items that can be used to calculate Payroll Costs for a new loan request and “Eligible payroll costs” and “Eligible nonpayroll costs” for a forgiveness request. This means that a PPP loan is forgivable to the extent the proceeds of the loan are spent on these two categories, headcount and salaries of employees are maintained at the same pre-Covid-19 level. Another important requirement is that these expenses are paid during the “covered period” or “alternative covered period”. At least 60% of the PPP Loan must be spent on “Eligible payroll costs” and up to 40% can be spent on “Eligible nonpayroll costs”.
Eligible Payroll Costs – For New Loan and Forgiveness Request
- Compensation to employees including salary, wages, commissions or similar compensation
- Cash tips or the equivalent
- Vacation, parental, family, medical, or sick leave (except those paid leave amounts for which a credit is allowed under FFCRA Sections 7001 and 7003)
- Allowance for separation or dismissal
- Employer contributions for employee group healthcare coverage, group life, vision, or dental (including insurance premiums paid by employer)
- Employer contributions to employee retirement plans
- Employer state and local taxes assessed on employee compensation
- For Independent Contractors and Sole Proprietorships - wage, commissions, income, or net earnings from self-employment of similar compensation
Eligible Nonpayroll Costs – Appropriate Use of Loan Funds to Support Forgiveness Request
- Interest on covered mortgages
- Expenses for rent or lease payments
- Utility expenses
- Covered operations expenditures
- Covered property damage costs
- Covered suppliers costs
- Covered worker protection expenditures
Covered Period: The Covered Period begins on the date the loan was originally disbursed. It ends on a date selected by the Borrower that is at least 8 weeks (56 days) following the date of loan disbursement and not more than 24 weeks (168 days) after the date of loan disbursement. For example, if the Borrower received their PPP loan proceeds on Monday, April 20, 2020, the first day of the Covered Period is Monday, April 20, 2020 and the final day of the Covered Period is any date selected by the Borrower between Sunday, June 14, 2020 and Sunday, October 4, 2020.
The SBA is launching a new round of Economic Injury Disaster Loan (EIDL) Advances – called Targeted EIDL Advance – which provides eligible businesses with $10,000 in total grant assistance. If you received the EIDL Advance last year in an amount less than $10,000, you may be eligible to receive the difference up to the full $10,000. The combined amount of the Targeted EIDL Advance and any previously received Advance will not exceed $10,000.
Businesses eligible for the Targeted EIDL Advance must meet ALL the following eligibility criteria:
• Located in a low-income community, as defined in section 45D(e) of the Internal Revenue Code. The SBA will map your business address to determine if you are in a low-income community when you submit your Targeted EIDL Advance application.
• Suffered economic loss greater than 30 percent, as demonstrated by an 8-week period beginning on March 2, 2020, or later, compared to the previous year. You will be required to provide the total amount of monthly gross receipts from January 2019 to the current month-to-date.
• Must have 300 or fewer employees. Business entities normally eligible for the EIDL program are eligible, including sole proprietors, independent contractors, and private, nonprofit organizations. However, agricultural enterprises, such as farmers and ranchers, are not eligible to receive the Targeted EIDL Advance.
To help applicants determine if they are located in a low-income community, as defined in section 45D(e) of the Internal Revenue Code, the SBA is making available a mapping tool at https://sbaeidl.policymap.com/app. Note that the business address must be located in a low-income community to qualify for the Targeted EIDL Advance. You are encouraged to check the map to see if your business address meets the low-income community eligibility requirement before you apply.
To assist you in completing the Targeted EIDL Advance questions, have available a copy of your 2019 Federal Tax Return and the business’ monthly gross receipts for each month from January 2019 through the most recent month-to-date period. The information you provide will be used to determine if your business meets the economic loss greater than 30 percent requirement above. You will also be asked to confirm that the information provided in your original EIDL application is still accurate. If there are any changes, you may be asked to provide documentation to determine if you are eligible for a Targeted EIDL Advance. Applicants that pass the initial eligibility requirements will also be required to electronically sign an IRS Form 4506-T allowing the SBA to obtain tax transcripts directly from the IRS.
All application decisions will be communicated via email. If your request is approved, you will receive an email notification and an ACH deposit to the bank account you provided in your application.
The Treasury Department and the Internal Revenue Service issued Notice 2021-25 providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020. The Act added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100% deduction for food or beverages from restaurants.
1/1/2021 – 12/31/2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.
Restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. Restaurants do not include grocery stores and convenience stores.
Colorado’s unemployment system (and unemployment systems across the country) has been targeted by complex and sophisticated criminal rings in an attempt to take advantage of the pandemic by fraudulently collecting benefits.
In 2019, Colorado saw 88 fraudulent claims, while 2020 saw around 900,000, and there is continued increased fraudulent traffic attempting to access the Colorado unemployment insurance system. The sheer volume of claims presents itself not just to CDLE, but also to employers who continue to receive vast amounts of unemployment insurance related fact finding and other correspondence for claims filed against the employer, either using identities of people who never worked there or using identities of employees without their knowledge.
Below are highlights from IRS Issue Number: IR-2020-186
Many employers outsource their payroll and related tax duties to third parties. This streamlines business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.
Though most of these businesses provide quality service, there are, unfortunately, some who do not have their clients’ best interests at heart. Each year, a few of these third parties fail to remit the payroll taxes entrusted to them and close their doors abruptly. The damage hits their unsuspecting clients hard.
Like employers who handle their own payroll duties, employers who outsource this function are in most instances still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee shares of Social Security and Medicare taxes. This is true even if the employer forwards tax amounts to the third party to make the required deposits or payments.
The IRS urges employers to take a number of steps to protect themselves from unscrupulous third parties.
The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days.
Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.
This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15.
The federal tax filing deadline postponement to May 17, 2021 does not apply to state tax payments or deposits or payments of any other type of federal tax. State filing and payment deadlines vary and are not always the same as the federal filing deadline.
On March 3, the SBA released an interim final rule which officially implements changes to the Paycheck Protection Program that had previously been announced by the White House on February 22. One of the most impactful changes applies to borrowers who file an IRS Form 1040, Schedule C.
On Friday, March 5, the SBA began accepting new application forms which provide borrowers the choice to use either gross income or net profit in their calculation of total payroll costs.
Those with an application in process (that has not yet funded), can update the loan calculation in accordance with this guidance.
It is important to note:
- These changes are not retroactive and only apply to loans approved after the rule’s effective date. Borrowers that have already received their PPP loan cannot increase their PPP loan amount based on the new calculation.
- Single-Member LLCs that file a Schedule C are covered under this change.
- Partners and Partnerships are not covered under this change.
The Biden administration updated PPP guidelines to help smaller businesses access emergency funds. February 24-March 9 was designated as a priority window for businesses with fewer than 20 employees. The formula for calculating loan amount eligibility has also been adjusted from net to gross income, allowing for more forgivable money beginning the last week in March.
A busiess can apply for second-draw PPP loans if they’ve applied for loan forgiveness for the first PPP loan.
Small businesses, non-profits, sole proprietors, independent contractors, self-employed individuals, agricultural co-ops, and veterans organizations all qualify for PPP funding so long as they:
- Have 300 or fewer employees
- Can demonstrate a 25% reduction in revenue in at least one quarter of 2020 compared to 2019
For most businesses, the 25% reduction in revenue calculation is a simple comparison of gross revenue for a quarter in 2020 compared to the same quarter in 2019. If the business wasn’t in operation for the entirety of 2019, but was in operation before February 15th, 2020, any subsequent quarter of 2020 can be compared to the revenue of the first quarter to demonstrate reduction in revenue.
During the PPP loan application process, basic calculations will suffice. However, full documentation of revenue calculations will be needed for disbursement and forgiveness applications.
The general rule of thumb with a PPP loan is 2.5x monthly payroll costs. Businesses will calculate this average by adding up monthly costs and dividing by twelve (seasonal businesses can use a modified 3 month period).
Like the CARES Act, this round of funding features loan forgiveness. The Small Business Administration has a simplified one-page loan forgiveness application for loans smaller than $150,000, which makes forgiveness much easier to obtain with this round of funding.
To qualify for forgiveness, 60% of the loan needs to go to payroll costs, with the remaining 40% going to approved operating costs such as rent, utilities, and costs associated with COVID-19 or the public disturbances of 2020 (employee protection upgrades, repairs, etc.). This expands the usage of PPP funds from the original requirements to remain eligible for full forgiveness.
El Paso County is working with the Pikes Peak Area Council of Governments (PPACG) to distribute additional relief funding locally, through a new grant program, the 2021 Pikes Peak Small Business COVID-19 Relief Program. Grant awards will be a maximum of $7,000 each.
All applications are due by January 29, 2021 at 5:00 PM.
The objective of the 2021 Pikes Peak Small Business COVID-19 Grant Program is to provide additional financial assistance to El Paso County small businesses considered to be especially hard-hit by the COVID-19 pandemic. Eligibility for the funding is limited to restaurants, bars (including breweries, wineries, and distilleries), caterers, movie theatres, gyms, and recreation centers.
To qualify, businesses in those categories must have experienced at least a 20% reduction in revenue due to the COVID-19 pandemic since March 26, 2020.
This grant opportunity is available for businesses:
- Operating before Jan 1, 2020, with annual receipts of less than $2.5 million for the 2019 calendar year, OR
- For a small business that began operating on or after Jan 1, 2020 and on or before March 26, 2020, with annual receipts of less than $2.5 million in the 2020 calendar year.
- Businesses with annual receipts greater than $2.5M are eligible to apply and will be considered only if PPACG is unable to distribute all available funds to businesses with annual receipts less than $2.5M.
- Businesses must have at least one full-time employee W2 unless they are structured as a sole proprietorship.
- Businesses must operate in El Paso County, including any city or town in El Paso County and the unincorporated areas of the county.
- Business must be in compliance with current public health orders.
For more information on eligibility requirements, a comprehensive list of FAQs and further details on the grant program, visit the 2021 Pikes Peak Small Business Relief Program website.