During the height of the epidemic, the federal government of the United States adopted a number of economic stimulus programs, one of which was the Paycheck Protection Program, in an effort to kickstart the country’s flagging economy (PPP). A business was able to receive a loan through the PPP, and that loan had the potential to be forgiven if it was used in accordance with the guidelines that had been established for loans. These guidelines were established to assist businesses in maintaining employment for their workforces during the COVID crisis.
Although many businesses in the architecture, engineering, and construction (A/E/C) industries were able to successfully participate in the program, obtain the loan, and then later apply for and receive forgiveness of the loan, the tax ramifications of receiving a PPP loan were initially somewhat unclear. This was due to the fact that many of these businesses had successfully participated in the program in the past. The tax deductibility of costs covered by the PPP was one area of concern. This would also have an effect on and lower the amount of expenses that could be claimed for the Research and Development (R&D) tax credit.
Companies in the architecture, engineering, and construction industries that create and develop new or better products, processes, methods, techniques, or materials are eligible for research and development (R&D) tax credits. Research credits may be made available to businesses who, in addition to “revolutionary” activities, are engaged in “evolutionary” activities or make incremental improvements to their goods and manufacturing processes.
Organizations in the architecture, engineering, and construction business can produce additional cash flow via the use of R&D tax credits, which is an effective approach for these companies to innovate and increase their capacities to satisfy continually growing new technical market needs. The amount of time that employees spend coming up with novel solutions while working on difficult architectural design and structural engineering problems has the potential to be counted as a research cost for the firm, which may then help the company qualify for the R&D tax credit.
A new Revenue Ruling stipulates that taxpayers are now permitted to deduct costs that are paid for by a PPP loan. Because of this, it will also be possible to factor in such expenditures when calculating R&D for the year 2020.
The Consolidated Appropriations Act (The Act), which enhanced the Employee Retention Credit (ERC) for the year 2021, gave additional help to businesses that were having difficulty surviving. As a result of the new law, qualifying companies in the A, E, and C industries are now allowed to claim a refundable tax credit that is equivalent to 70 percent of the qualified wages they pay to employees, with a ceiling of $7,000 per employee for each quarterly quarter. Taxpayers may be eligible for a refund in 2021 if their business was adversely affected by either a complete or partial shutdown of the federal government, or if there was a revenue decline of 20 percent when compared to the same quarter in 2019. Although the ERC credit provides qualifying taxpayers with a welcome payroll tax reduction, A/E/C businesses that are also pursuing the R&D tax credit are not permitted to consider wage expenditures as acceptable expenses when calculating their R&D tax credit eligibility. For taxpayers who will be claiming both the ERC and R&D tax credits in 2021, extra computations and evaluations will be necessary to separate salary costs that are used for each credit.
Businesses that are interested in taking advantage of the tax credits and incentives that are available to them should undertake a detailed review in order to balance the benefits of each option given the specifics of their business and the conditions under which they operate. As usual, we are available to lend a hand. If you have any questions, feel free to contact PHILLIP ROSS, who serves as the A/E/C Leader, GLEB GORKHOVER, who serves as the Senior Manager of Tax Credits, or your Anchin Relationship Partner.
What Does the New COVID-19 Economic Stimulus Package Mean for Small and Medium-Sized Businesses?
The passage of a comprehensive new COVID-19 stimulus package by Congress last week was an event that had been anticipated for quite some time. On Sunday evening, President Trump put his signature on the document. This blog touches on a number of topics that are relevant to the operation of small and medium-sized businesses (SMBs), which are also referred to as “SMBs.”
The $900 billion stimulus package was merged with an omnibus spending package known as the Consolidated Appropriations Act of 2021 in order to provide funding for the federal government until the conclusion of the current fiscal year, which is on September 30, 2021. The most recent stimulus package includes provisions for a fresh round of funding for the Paycheck Protection Program (PPP), the establishment of a method by which small businesses can receive a second round of PPP loans (referred to as a “second draw”), the extension of the Employee Retention Tax Credit and the Families First Coronavirus Response Act credits, and various other significant program modifications. As a result of the fact that Congress has mandated that the Small Business Administration (SBA) publish implementing rules within ten days of the act being signed into law, extra information is on the way.
PPP Alterations, as well as the New PPP Loans Called “Second Draw”
The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Act”), which is a component of the stimulus package, appropriates $284.5 billion dollars to revive the PPP loan program for first-and second-time borrowers and extends the program through March 31, 2021. The Act reserves a total of $35 billion for first-time borrowers, of which $15 billion is to be applied to loans for smaller businesses with 10 or fewer employees, or loans of less than $250,000 in low-income areas; the remaining $25 billion is designated for second-draw PPP loans for smaller borrowers with 10 or fewer employees, or loans of less than $250,000 in low-income areas.
The second draw provisions will make it possible for a small business to receive a second PPP loan of up to $2 million if the small business has less than 300 employees, has used or will use the full amount of the first PPP loan, and can demonstrate a revenue reduction of 25 percent as determined by gross receipts during the first, second, third, or, only with regard to loan applications submitted on or after January 1, 2021, the fourth quarter in 2020, as compared to the same quarter in 2019. Borrowers have the potential to receive a loan amount that is up to 2.5 times the average monthly payroll expenditures incurred throughout the preceding calendar year or the year immediately before the loan.
Borrowers can submit a certification attesting that they fulfill the revenue loss requirements for loans of $150,000 or less if the amount of the loan is less than $150,000. Gross revenues can be used by veterans’ groups and other nonprofits to assess whether or not they have met their revenue loss criteria.
The Act established a streamlined application process for the PPP loan forgiveness program for loans of less than $150,000. It is essential that the borrower sign and submit a one-page certification that details the amount of the loan, the number of employees that the borrower was able to keep because of the loan, and an estimate of the total amount that the loan was spent on payroll expenditures. There is no possibility of requesting any further material. Within twenty-four days following the implementation of the Act, the Small Business Administration is tasked with developing this form.
Other modifications to the PPP loan program include the following: an expansion of the list of funds that are eligible for loan forgiveness to include covered operations, property damage costs due to public disturbances that occurred during 2020 that are not covered by insurance, covered supplier costs, and covered worker protection expenditures including Personal Protective Equipment (PPE); an expansion of payroll costs to include group life, disability, vision or dental insurance; permitting borrowers whose loan balance is less than $30,000 to refinance their loans at a lower loan loan; and increasing the
Significantly, the Act clarifies the intent of Congress regarding the loan of deductions for otherwise deductible expenses paid with the proceeds of a PPP loan that has been forgiven; repeals the provision of the CARES Act that requires PPP borrowers to deduct their Economic Injury Disaster Loan (EIDL) loan advance from their PPP loan forgiveness amount; requires the SBA to issue rules that ensure borrowers are made whole in the event that they received forgiveness and their EDIL was deducted from that amount; and requires the
Tax credits for retaining valuable employees
The extension of the Employee Retention Tax Credit (ERTC) for wages earned until June 30, 2021, was one of the other measures included in the stimulus package.
The ERTC program will also benefit from the adjustments in that:
- Raising the amount of the ERTC credit from fifty percent to seventy percent of the amount of salaries that qualify
- Raising the amount of earnings per employee that are eligible for the ERTC credit from a total of $10,000 to a maximum of $10,000 every calendar quarter
- Lowering the bar for reporting a drop in gross receipts in order to be eligible for ERTC credits, from a decline of fifty percent to a decline of twenty percent, and
- Increasing the threshold for “small employers” to be eligible for the full range of ERTC credit options, including advance payments, from businesses that have up to 100 employees to businesses that have up to 500 employees
In addition, the stimulus package does away with some of the limits that were placed on the ERTC program for businesses who were already in possession of a PPP loan. The ERTC is now available to companies that have been granted a PPP loan, provided that the same salaries are not utilized for the forgiveness of PPO loans and the credits for the ERTC.
Alterations Made to Taxes and Benefits for People Seeking tax
Additional tax relief provisions included in the stimulus package are as follows:
- Extending, through March 31, 2021, tax credits for paid sick and family leave under the Families First Coronavirus Response Act (FFCRA), but eliminating the FFCRA leave obligation after December 31, 2020
- The expansion of employer tax credit choices for paid family and medical leave as part of the tax reform measure passed in 2017 (Section 45S credits)
- Increasing the advantages provided by the CARES Act’s Section 127 Student Loan Repayment Program;
- Extending until the year 2025 the period during which certain work opportunity tax credits (WOTC) can be claimed by eligible companies
- Providing up to $600 more in direct stimulus payments in a subsequent round
- Increasing the amount of the weekly unemployment compensation by $300 for the period beginning December 26, 2020 and ending March 14, 2021.
TriNet will continue to give updates on the new COVID-19 stimulus package, and they will also be hosting a webinar on Thursday, January 7 at 12pm PT/ 3pm ET in order to provide further information and address some of your most urgent issues. Simply click on this link to sign up for the webinar.
In the meanwhile, you may visit the TriNet COVID-19 Preparedness Center to obtain information that is both essential and up to current, as well as to learn about the impact that shifting laws have on small and medium-sized businesses. We will continue to keep an eye on what’s going on with COVID-19 and share updates as they become available.