The Paycheck Protection Program (PPP) was created in 2020 by the CARES Act to help small businesses withstand the economic fallout from the COVID-19 pandemic. The recently passed PPP Extension Act of 2021 extends the deadline for PPP applications from March 31 to May 31. This move also grants the Small Business Administration an additional 30 days beyond May 31 to process loans. Here’s what small businesses need to know.
New Deadline Provides Breathing Room
According to the National Federation of Independent Business (NFIB), nearly one in every six small business owners reported the likelihood of needing to close their doors forever if current economic conditions did not improve within six months. The extension to May 31 will benefit these businesses, as well as lenders and businesses that have experienced errors and delays from technical difficulties in the application process. The SBA has also increased security in order to detect fraud, which has delayed processing in some cases. It’s important to note that May 31 is Memorial Day, so borrowers should have their applications in by May 28, before the start of the long weekend.
Opportunities for New First Draw PPP Loan Borrowers
The additional time may also benefit small businesses that received their first PPP loan this year. Because typically eight weeks must pass between the loans in order to spend money on payroll, this may give businesses enough time to use up those funds and apply to a Second Draw PPP Loan. Keep in mind that in order for a small business to qualify for a second draw loan, additional criterion must be met, according to the SBA:
- no more than 300 employees
- must be able to show at least a 24% reduction in gross receipts between comparable quarters in 2019 and 2020
The PPP Extension Act does not provide for further funding of the PPP. At the time of signing, however, the SBA said there was about $80 billion in funding that had yet to be disbursed to small businesses.
The pandemic lockdowns led to many professional service firms closing doors and, wherever possible, moving staff to home offices in anticipation of a temporary mode of operation. One year later, however, health safety concerns and economic uncertainty are still prevalent, prompting firms to think about a “new normal” post-COVID-19. This article covers some important points to consider as the economy begins to recover.
Cash Flow and Liquidity
If the past year has proven anything, it’s that fiscal resilience is imperative, and that likely isn’t changing anytime soon. Preserve cash, review capital investments, and cuts costs where possible.
Things to consider when thinking about cash flow:
- Assess works in progress and make any necessary changes or improvements in the areas of management and billing.
- Review and improve upon, if necessary, your accounts receivable system
- Analyze upcoming projects with a keen eye to scaling back on staffing, keeping in mind the risk of potentially losing key workers and talent.
- With social distancing guidelines in mind (and not knowing what the future looks like in regards to this), aim to reduce costs by reassessing real estate needs, existing office space, and places where you might be able to consolidate. This is especially important if some or all of your staff will be switching to permanent remote work model.
Things to consider when thinking about liquidity:
- Work out an agreement with leases. If your firm is in a financial position to remain in your current space, think about negotiating your lease renewal early and possibly extending it. Depending on circumstances and the current state of your space, you could approach discussions by offering free or reduced rent in exchange for tenant improvements.
- Review your lease for tenant improvements. If your lease provides an allowance for tenant improvements, it may be possible to negotiate the elimination of that allowance in exchange for the cash value or rent credit.
- Rent relief may be an option. Typically handled on a case-by-case basis, financial statements may be required to determine need.
New Opportunities and Growth
If your firm is in the position to be able to jump on new opportunities as they become available, don’t delay. Once your cash flow, liquidity, integrated technologies, and business processes are in good standing, develop a game plan for organic growth and expansion into new areas, including acquisition. Be mindful of how the increased demand that comes with growth can potentially burden each department, and have a plan in place to deal with the increased demand.
You’ve likely had to lay off or furlough valuable workers over the last year. If staffing shortage has prevented you from exploring new ideas and establishing new business practices, check the state of your cash flow and liquidity to see if now might be the time to expand your organization’s talent and expertise.
IT and Communication
With a year of pandemic life behind us, you probably have a good idea of how to move your firm forward in the future. If a remote working model has worked for all or part of your staff, you might decide to make it permanent. Be sure that your IT and cybersecurity infrastructure are up to date. Also evaluate methods of communication so that staff can easily and securely communicate with clients and each other.
Whether or not you foresee changes brought on by the pandemic as affecting lasting change to your business, one thing remains true: the key to success and growth is knowing the specifics and statistics of your organization in order to make wise decisions that will optimize business outcomes.
The Consolidated Appropriations Act, 2021 (the Act) signed into law by President Trump on Dec. 27, 2020 includes significant modifications to the Employee Retention Tax Credit (ERC) enacted under the CARES Act. The credit originally provided a 50% refundable tax credit for businesses that maintain employee payroll, even amidst temporary business closures due to government-mandated lockdowns, or considerable downturns in gross receipts due to loss of business. This article will highlight changes to the ERC for 2021.
Period of Credit Availability
The CARES Act originally provided credit for qualified wages paid after March 12, 2020 and before Jan. 1, 2021. The new law extends availability of the credit for qualified wages to the first two quarters of 2021 (before July 1, 2021).
Amount of Credit
Under the original law, the credit amount was set at 50% of the qualified wages paid to the employee, plus the cost to continue providing employee health benefits. The Act increases the credit amount to 70% of qualified wages, which is intended to include the cost of employee health benefits.
Maximum Credit Amount
The CARES Act capped the credit at $5,000 per employee for all qualified wages paid during 2020, but the Act increases the maximum credit to $7,000 per employee for each of the two quarters in 2021, so the maximum credit for 2021 will be $14,000.
Eligibility Requirements for the Credit
In order to qualify for the ERC under the original law, businesses must have been experiencing full or partial suspension of operations due to a Covid-19 lockdown order. They could also qualify if, for any quarter in 2020, gross receipts were less than 50% of gross receipts for the same quarter in 2019. With the passage of the Act, businesses whose operations are either fully or partially suspended by a government-mandated lockdown order due to Covid-19 or whose gross receipts are less than 80% of gross receipts for the same quarter in 2019 can qualify for the ERC.
Credit Eligibility Whether or Not Employees Are Working
For a company with more than 100 employees, the original law under the CARES Act did not provide credit for wages paid to employees who were performing services for the employer in some capacity. However, a company with 100 employees or less did qualify for the credit, even if the employee was working. The Act raises this threshold to 500 employees, so that for the first two quarters of 2021, a company with 500 or fewer will be eligible for the credit, even if employees are working.
PPP Loan Eligibility
A company that received a Paycheck Protection Program (PPP) loan was not eligible for the ERC under the original CARES Act. With the passage of the Act, companies that received a PPP loan in 2020 may also qualify for the ERC. To prevent double dipping, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. However, amounts paid that were either not forgiven or are over and above the PPP loan amounts can be included for ERC purposes.
President Trump recently signed a second stimulus package—called the Consolidated Appropriations Act, 2021 (Act)—into law. The legislation includes over $300 billion in aid for small businesses. Below is a breakdown of some of the business tax changes and extenders in the new COVID-19 relief bill.
Payroll Tax Credit for Paid Sick and Family Leave
The refundable payroll tax credit for paid and sick family leave, established in the Families First Coronavirus Response Act, is extended until March 31, 2021. The tax credits are modified so that they now apply to practically any payments made to workers for these purposes.
Payroll Tax Repayment
The time frame for employees to repay deferred employment taxes under the President’s executive order, which was issued in August 2020, has been extended from April 2021 to December 31, 2021.
Employee Retention Credit
The Employee Retention Credit (ERC) under the CARES Act has extended to July 1, 2021. Further, the refundable tax credit has increased from 50% to 70%, the per-employee wages limitation has increased from $10,000 per year to $10,000 per quarter, and the determination of a large employer for purposes of the ERC has increased from 100 to 500 employees.
30-Year Depreciation of Certain Residential Rental Property
The new law determines that the recovery period relevant to residential rental property placed in service before Jan. 1, 2018, and held by an electing real property trade or business, is 30 years.
Business Meal Deduction
Rather than the current 50% business expense deduction for meals, the bill temporarily allows a 100% expense deduction for meals provided by restaurants in 2021 and 2022.
Deduction for Energy Efficient Commercial Buildings
The deduction for energy-efficient improvements to commercial buildings, such as lighting, heating, cooling, ventilation, and hot water systems was made permanent. The amount will be inflation-adjusted after 2020.
Changes to the Work Opportunity Tax Credit
If employers hire workers who are members of one of more of ten targeted groups under the Work Opportunity Tax Credit (WOTC) program, they are permitted to use an elective general business tax credit. Previously applicable to hires before 1/1/2021, the TCDTR extends the credit through 2025.
Employer Payments of Student Loans
Section 127, which permits employers to provide certain educational assistance to employees on a tax-free basis, was modified under the CARES Act to authorize the payment by an employer of principal or interest on specific employee qualified education loans through December 31, 2020. The Consolidated Appropriations Act expands this through December 30, 2025. As the pandemic subsides, employers may want to consider this valuable tax-free benefit.
Health and Dependent Care Flexible Spending Arrangements
The bill allows taxpayers to roll over unused funds in their health and dependent care flexible spending accounts from 2020 to 2021 and from 2021 to 2022. This arrangement also permits employers to grant employees a 2021 midyear prospective adjustment in contribution amounts.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act Provider Relief Fund was initially established to provide funding to healthcare service providers impacted by the COVID-19 pandemic. While the financial support has provided much-needed relief, the programs introduced some additional rules and reporting requirements for healthcare providers. On October 22, 2020, the Department of Health and Human Services (HHS) updated its guidance on how providers should report their Provider Relief Fund (PRF) payments that have been allocated for expenses and lost revenues as a result of the pandemic. Below is an overview of what you need to know.
Key Clarifications to Instructions
Addressing some of the ambiguity present in the previous September 19 update, two key clarifications were set forth.
- Method of accounting: The HHS has clarified that PRF payments should be reported using the provider’s normal method of accounting (cash or accrual basis).
- Lost revenue definition: In a twist from prior instructions, which defined lost revenue as a negative change in year-over-year net patient care operating income, recipients may now apply PRF payments up to the amount of the differences between their 2019 and 2020 actual patient care revenue.
If recipients do not use PRF funds in full by the end of the 2020 calendar year, they will have a further six-month period in which to utilize leftover amounts for expenses attributable to the pandemic but not repaid by other sources, or to apply toward lost revenues in an amount not greater than the difference between 2019 and 2021 actual revenue.
PRF Reporting Requirements
The deadlines from here on out are as follows:
- January 21, 2021: HHS portal opens for PRF reporting
- February 15, 2021: Reporting deadline for all providers on use of funds, assuming all proceeds were accounted for in 2020
- July 31, 2021: Final reporting deadline for providers who did not fully spend PRF funds before December 31, 2020
- September 30, 2021: Due date for the single audit or program-specific audit reports for a December 31 year-end or the earlier of 60 days from the date of the issuance of the audit report
PRF recipients can start submitting PRF reports documenting how funds were spent or attributed beginning January 15, 2021. The level of reporting requirements differs by the amount received as follows:
- Entities that received less than $10,000 in total from the PRF do not have to file a report
- Entities that received more than $10,000 but less than $500,000 must submit a simplified report with only these broad expense categories: general administrative expenses and other healthcare-related expenses.
- Entities that received more than $500,000 in PRF must submit a detailed report described below.
- Entities that received over $750,000 in PRF may also be subject to an audit per federal regulations.
If an entity received more than $750,000 in PRF, they may be subject to an audit per federal regulations. Audits are required for entities (non-profit and commercial as it relates to PRF per HHS guidelines) that spent over $750,000 from federal grant funds in a reporting period. Note the difference between receiving $750,000 and spending $750,000. Some funds could have been received in cash but not yet spent.
Let MKR CPAs & Advisors help
Our trusted advisors are equipped with the expertise to help you unravel the complexities of these reporting requirements. If you need assistance, contact an MKR advisor today to get the conversation started.