Tax Relief and Loan Forgiveness: Updates on PPP, PPPFA
Whether the tumultuous events of 2020 led to you closing your shop doors temporarily, or your business remains open with a reduced workforce, or you’ve pivoted operations to something else entirely, you’re likely contemplating how to lock in the long-term success of your business.
We face a long journey of recovery ahead. But we’re all striving to find productive ways of settling into our new reality. Now is the time to not only renew, restart and rebuild, but also re-imagine all that can be.
To do this, financial viability and stability are more important than ever. Businesses must consider payroll and working capital concerns as well as their access to funding and strategies for loan forgiveness.
Let’s take a closer look at two ways businesses can dial in their accounting and cashflow solutions: securing Paycheck Protection Program (PPP) loan forgiveness and identifying tax relief.
More than 4.8 million U.S. businesses have received loans through the PPP, which was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. PPP loans have been a lifeline to businesses, many of them here in northern Michigan.
The covered period for PPP loans is up to 24 weeks or Dec. 31, 2020. Most banks began to accept these loan forgiveness applications mid-August and have 60 days to review and determine the level of forgiveness.
A business’s goal is to receive full loan forgiveness if possible. While businesses can apply for forgiveness up to 10 months after the coverage period ends without required payments, applying sooner rather than later may be wise given these uncertain times – a continual downturn in the economy, for example, could lead to having to reduce your workforce, which in turn could impact the amount of forgiveness granted.
It’s also important to have solid documentation of how you spent your loan dollars, and to be aware of how you can remedy any shortfalls in employee salaries and wage reductions as a result of the pandemic. Taking these steps will increase your chances of total loan forgiveness.
In early June, President Donald Trump signed the Paycheck Protection Program Flexibility Act (PPPFA) of 2020, which provides more flexibility for participants in the PPP program, including allowing those participants to defer the payment of certain payroll taxes that the CARES Act prevented them from deferring.
Other, non-tax highlights in this new law that provide businesses with more PPP loan flexibility include:
- Under the original CARES Act guidance, businesses had to spend a minimum of 75% of the PPP loan fund on payroll to receive full forgiveness. PPPFA lowers that to 60%.
- PPPFA allows businesses 24 weeks, instead of the eight weeks contained in the original CARES Act, to use the loan money. PPPFA also does not require businesses to wait for 24 weeks to apply for forgiveness; they can still do so after eight weeks if they prefer, or when the funds have been fully spent.
- PPPFA pushes back a June 30 deadline to rehire workers to Dec. 31, 2020.
- The CARES Act required a business to rehire the same number of full-time employees or full-time equivalents by June 30, 2020. It provided one exception to that requirement. PPPFA provides additional exceptions if an employer is unable to rehire the required number of employees. For example, there is an exception if the employer is able to demonstrate an inability to hire similarly qualified employees on or before Dec. 31, 2020.
- For any PPP loan that is not forgiven and originates after June 5, 2020, a business will have five years to repay the loan. PPPFA also allows borrowers and lenders to mutually agree upon the five-year repayment period for loans issued prior to June 5, 2020 (as compared to the original two-year term.)
Tapping into Tax Relief
Several potentially powerful sources of cash have been created through changes to the tax law in response to the COVID-19 crisis. Consider the following:
- Eligible businesses can take advantage of payroll tax credits for paid sick and family leave under the Families First Coronavirus Response Act (FFCRA) and for employee retention under the CARES Act. This could come into play even more this fall, as school districts grapple with in-person, virtual and hybrid teaching scenarios.
- For 2018, 2019 and 2020, net operating losses can now be carried back five years. For businesses that incur losses during these years, this can be a way to recapture taxes paid in prior periods, sometimes under a higher marginal rate structure.
- Similarly, changes were made to the rules allowing accelerated depreciation of certain qualified improvement property retroactive to 2018. In the case of many companies, this can be a significant change that would warrant a superseding or amended return or a change of accounting method to secure a decrease of taxes paid in prior periods.
- Existing opportunities pre-CARES Act, such as the research and development credit, may have newfound applicability as businesses retool their operations.There are also expanded tax accounting method changes introduced with the Tax Cuts and Jobs Act of 2017 that can reduce taxable income. These opportunities are not only ways of reducing current tax liabilities but can potentially produce refunds on taxes paid in prior years. Along with assessing your current cash situation, consider these ideas for ensuring your business’s success throughout the reopening phase — and beyond.
If you’re selling or acquiring a business or looking to relinquish ownership of investment/business property, there are strategies available to maximize after-tax benefits of these transactions. A trusted advisor can assist in providing strategic planning to maximize your cash flow with unique strategies that offer liquidity, diversification and significant tax savings.
Kimberly C. Schwaiger, CPA, is a principal at Rehmann, working out of the Traverse City office. She provides a variety of tax consulting services, as well as income tax planning and preparation services to individuals, corporations and partnerships. She is a member of the firm’s real estate advisory team and serves clients in the construction, oil and gas, agribusiness, manufacturing, retail and service industries.