Are PPP Funds Taxable by the State?

As previously communicated, Congress passed legislation in December 2020 that made Paycheck Protection Program (PPP) loans excluded from federal gross income and the related covered expenses deductible for tax purposes. However, the impact of debt forgiveness and deductibility of expenses for state tax reporting purposes is an increasingly dynamic and complex consideration.

Please recognize that this is still a moving target for many states, and we remind taxpayers that in many cases, specific state decisions have not been made with respect to the exclusion of loan proceeds from gross income and the deductibility of expenses paid with those proceeds.

Virginia: At this time, Virginia has decided to not follow the federal guidance regarding the treatment of the loan forgiveness. The forgiven loan would be included in taxable income on the Virginia return. As of Monday, January 25, 2021, the Virginia legislature has begun reconsidering this position. If there are any changes to this position, we will provide updates.

Maryland: At this time, Maryland will conform to the Federal tax rules thereby excluding PPP loan forgiveness from income and allowing the related covered expenses as deductions.

District of Columbia: At this time, DC will conform to the Federal tax rules thereby excluding PPP loan forgiveness from income and allowing the related covered expenses as deductions.

North Carolina: At this time, the amount of forgiven PPP loan is not included in the calculation of taxable income, however, expenses paid using the proceeds of the PPP loan are not deductible when calculating state taxable income.

We are actively monitoring the state requirements and will provide updates as additional guidance is made available. We are hopeful that guidance will be available during the current filing season, but if delays from the states continue, filing state extensions might be necessary if you have a PPP Loan that has or will be forgiven.

 

 

Does Your Business Satisfy the Needs Based Test for a PPP2 loan?

As most businesses contemplating a Paycheck Protection Program – Round 2 (PPP2) loan know, borrowers are required to demonstrate a decline in gross receipts of 25 percent or more in any quarter of 2020 compared to 2019 or on an annual basis. However, borrowers are also required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Some considerations that a business borrower may want to make are described below.

Borrowers under $2 million

While the SBA is not currently requiring the formal forgiveness questionnaire (Form 3509 for for-profit entities and Form 3510 for non-profits) to be completed by borrowers under $2 million, we would encourage all borrowers to contemplate and contemporaneously document their economic need giving rise to the additional, or first time, PPP funding. Here is a summary of some of the key questions currently asked by the SBA to document loan necessity, after-the-fact:

• Were any of the borrower’s employees compensated in an amount that exceeds $250,000 on an annualized basis?
• Did the Borrower directly receive any funds from any CARES Act program other than PPP, excluding tax benefits?
• As of the last day of the calendar quarter immediately before the loan application, how much did Borrower own in cash, savings, and temporary cash investments? Are there any restrictions on these funds?
• What were the changes in year-over-year gross revenues? Operating expenses?
• During the loan covered period, did the Borrower begin any new capital improvement projects not due to COVID19? What were the cash outlays for these projects?
• Has the Borrower prepaid any outstanding debts?

Borrowers over $2 million

Borrowers that received $2 million will be required to complete the loan necessity questionnaire provided by the SBA at the time of forgiveness. Upon receipt of the questionnaire (Form 3509 for for-profit entities and Form 3510 for non-profits), borrowers are given 10 business days to return the completed form and required supporting documents to the lender. In addition to addressing all of the questions posed above, we would encourage those receiving the questionnaire to be thoughtful in their responses and consider an enhanced narrative to accompany the questionnaire that addresses:

• the liquidity needs of the business requiring the PPP funding,
• how the business had to adjust to the COVID environment, and
• consider including the Freedom of Information Act (FOIA) exemption on this documentation if you believe the documentation would fall under “Exemption 4: Trade secrets or commercial or financial information that is confidential or privileged.”

Additional resources:
https://www.sba.gov/document/sba-form-3509-paycheck-protection-program-loan-necessity-questionnaire-profit-borrowers

https://www.sba.gov/document/sba-form-3510-paycheck-protection-program-loan-necessity-questionnaire-non-profit-borrowers

Congress Passes Bill Providing Critical Decisions on PPP Loans and Other Business Benefits

Congress Passes Bill Providing Critical Decisions on PPP Loans and Other Business Benefits

Yesterday, Congress passed the much-awaited COVID relief bill. The $900 billion bill provides more than $300 billion in small business aid as well as individual benefits through stimulus payments and extended unemployment benefits.

The critical business provisions include:

 Deductibility of Business Expenses Paid with Paycheck Protection Program (PPP) Loans: A key to year-end planning for clients, the bill specifies that business expenses paid with forgiven PPP loans are tax-deductible. The bill clarifies this highly contested question stating that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided.” This supersedes IRS guidance that such expenses could not be deducted.

Extension of the PPP loan program: For small businesses with 300 or fewer employees who can show a 25% gross revenue decline in any 2020 quarter compared to the same quarter in 2019, the SBA can provide additional PPP funding as first or second PPP loans. In addition, now Sec. 501(c)(6) not-for-profit organizations are eligible for the PPP loan program.

Simplified PPP Forgiveness Applications Under $150,000: The bill creates a simplified forgiveness application for loans of $150,000 or less. We anticipate this will be similar to the current Form 3508S which is available for loans under $50,000. This does not eliminate the borrower requirement to retain records related to employment for four years and other records for three years. The bill also repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.

Employee Retention Tax Credit: The bill extends the employee retention tax credit and temporarily allows a 100% business expense deduction for meals when the food and beverages are purchased from a restaurant (through the end of 2022).

For additional details, consider these sources:

https://www.journalofaccountancy.com/news/2020/dec/covid-19-relief-bill-addresses-key-ppp-issues.html

https://www.forbes.com/sites/anthonynitti/2020/12/21/stimulus-payments-paycheck-protection-program-expense-deductibility-headline-tax-changes-in-latest-covid-relief-package/?sh=7fa26ac3168c

On Demand Recording Available: Year-End Tax Planning for Individuals and Businesses

 

View this on demand webinar as we review year-end tax planning items for both individuals and businesses to consider as 2020 comes to a close. In this webinar, we will:

• review various SECURE Act and CARES Act provisions, and the impact on your personal and business tax scenario;

• explain the new Revenue Ruling 2020-27 which provides guidance on the non-deductibility of expenses paid with PPP loan proceeds;

• and discuss potential tax implications and changes under the Biden tax plan.

Register below to view the recording:

https://us02web.zoom.us/webinar/register/WN_g86TEdGASMaeEq2WoEFRbw

 

Webinar Series: Year-End Tax Planning for Individuals and Businesses

It’s hard to be believe 2020 is almost over! Join us as we go over some year-end tax planning items for both individuals and businesses to consider as 2020 comes to a close. In this webinar, we will:

• review various SECURE Act and CARES Act provisions, and the impact on your personal and business tax scenario;

• explain the new Revenue Ruling 2020-27 which provides guidance on the non-deductibility of expenses paid with PPP loan proceeds;

• and discuss potential tax implications and changes under the Biden tax plan.

There will be time for questions and answers at the end.

When: Friday, December 4, 2020 10:00 AM Eastern Time (US and Canada)

Register in advance for this webinar:

https://us02web.zoom.us/webinar/register/WN_g86TEdGASMaeEq2WoEFRbw

After registering, you will receive a confirmation email containing information about joining the webinar.

On Demand Recording Available: Understanding QuickBooks Rules and GL Maintenance

 

View this on demand webinar recording to learn best practices as they relate to utilizing the tools within QuickBooks Online to make the accounting process more efficient. We will be covering how to create QuickBooks “Rules” that can be used to recognize common transactions and assign the appropriate account and class detail. We will discuss best practices as they relate to accepting transactions and steps to be aware of before matching transactions. We will also review best practices around reviewing the general ledger and what steps you can take to streamline your year end accounting process.

Register below to view the recording:

https://us02web.zoom.us/rec/share/w16u0K_dDUrxKeAPEPPxmnTc_oOC3OlYBsPTBXOdCBayrhRm1fopk1EUBNb4Fcm1.l_CBF0EMlMyxSPuC?startTime=1605625198000

 

Several CARES Act Tax Provisions Will Soon Expire

The CARES Act granted several valuable federal tax breaks for individuals and businesses. But most will expire at the end of 2020 or at the end of tax years that begin in 2020. Here’s a roundup of tax breaks scheduled to go off the books soon, unless Congress extends them. (more…)

Webinar Series: Understanding QuickBooks Rules and GL Maintenance – November 17, 2020 10:00 am EST

 

Join us to learn best practices as they relate to utilizing the tools within QuickBooks Online to make the accounting process more efficient. We will be covering how to create QuickBooks “Rules” that can be used to recognize common transactions and assign the appropriate account and class detail. We will discuss best practices as they relate to accepting transactions and steps to be aware of before matching transactions. We will also review best practices around reviewing the general ledger and what steps you can take to streamline your year end accounting process.

When: November 17, 2020 10:00 AM Eastern Time (US and Canada)

Register in advance for this webinar:

https://us02web.zoom.us/webinar/register/WN_I3r28qM3SsieROV0ouMRPg

After registering, you will receive a confirmation email containing information about joining the webinar.

KWC’s Client Advisory Services Group Featured in Accounting Today Report

Client Accounting Services (CAS) is a relatively new service line niche for the accounting industry. In short, CAS is a service customized for each client to provide an all-in-one accounting resource.

Accounting Today identifies CAS as follows:

Traditionally, client accounting services meant that you, the accountant, do most (if not all) of the accounting work for your clients. That means you perform:

  • After-the-fact financial statement preparation (write-ups);
  • Transaction processing, bill payment, processing of AP, AR, and bookkeeping;
  • Payroll and payroll compliance;
  • Periodic tax payments/compliance (sales tax, etc.); and,
  • Outsourced CFO and/or controller services, which entail ongoing, higher-level services to review financial performance and provide input on strategies to improve business.

Connie Hammell, KWC’s Managing Principal and head of the firm’s CAS group, was recently interviewed for Accounting Today‘s special report, CAS: Beyond Bookkeeping. Along with other industry specialists in CAS, she detailed the unique services offered and their alignment with clients’ operational goals.

“CAS has morphed from being seen as ‘bookkeeping’ and a relatively low-value service to being one of the premier service offerings in many firms. This has been driven by our desire to provide our clients with information that they can use to effectively manage and grow their businesses. … In order to go to that next step of advising our clients, we need to have solid, real-time accounting data that can be used to analyze results and provide insight into trends (whether good or bad), assist in creating strategic plans, and providing a roadmap on how to execute,” she said.

All of KWC’s CAS engagements begin with a systems and process analysis, said Hammell, which is a critical step both for the firm and its prospective clients.

“The clients see very early on that this is not after-the-fact general ledger maintenance. We want to understand the accounting cycle (or lack thereof) within the client’s business to make sure that proper internal controls are implemented, that there is backup for each step to ensure continuity, and that there is transparency at every step. We assist in building an accounting platform that is centered around QuickBooks Online that removes pain points in the process and allows for real-time data collection resulting in up-to-date records every single day instead of 20 days after the end of the month. This approach allows us to then provide the advisory and analysis services that business owners are looking for and place a premium on,” Hammell said.

To learn more about the firm’s CAS offerings visit https://kwcadvisors.com/ or contact your KWC advisor. 

Register to read the full Accounting Today report at https://www.accountingtoday.com/report/cas-as-the-core-of-an-advisory-practice.

To view Accounting Today’s overview of CAS click here

PPP Forgiveness Rules Clarify Rent-Related Costs and Owner-Employee Compensation

On Monday, the U.S. Treasury and Small Business Administration (SBA) issued an interim final rule further clarifying Paycheck Protection Program (PPP) forgiveness considerations.

The interim final rule states that rent or lease payments to a related party are eligible for loan forgiveness provided that the amount of loan forgiveness requested for those payments is no more than the amount of mortgage interest owed on the property during the covered period.

In addition, the interim final rule addresses considerations for owner-employees with less than a 5% stake in a C or S corporation exempting them from the PPP owner-employee compensation rule. Taken literally, this should relax the restrictions on retirement and health benefits for these individuals, but we await further guidance from the SBA.

For the SBA’s new rules, click here

For the AICPA’s article on the new rules, click here.

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