Despite the stated intentions of the laws, it has taken a long time for relief targeted at independent contractors and sole proprietors to become viable. While many of the programs are finally working, some complicated decisions and open questions remain. We highlight some of these in this edition of the newsletter, as well as address rising issues related to Paycheck Protection Program (“PPP”) loans. Finally, we highlight additional benefits that have either been added or may have been overlooked.
LESSONS FROM THE FRONT LINES
- Sustain a working relationship with your banker.
- Be persistent.
SOLE PROPRIETORS & INDEPENDENT CONTRACTORS (SCH C FILERS)
Sole proprietors and independent contractors are finally having success obtaining benefits under the Paycheck Protection Program (PPP) option, as well as under the new unemployment benefit expansion that finally went live on April 28th. If you tried to apply in early April but were not successful, try again.
Schedule C filers who haven’t checked out the new, expanded unemployment benefit (known as “Pandemic Unemployment Assistance” (PUA)), or who had tried applying under the traditional program and were turned down, should review the information at these links:
General information:
https://edd.ca.gov/about_edd/coronavirus-2019/pandemic-unemployment-assistance.htm
FAQs:
https://edd.ca.gov/about_edd/coronavirus-2019/pandemic-unemployment-assistance/faqs.htm
To make a claim (note that while the link can have temporary technical issues, it IS operational):
https://www.edd.ca.gov/Unemployment/UI_Online.htm
Q. As a schedule C filer, can I receive benefits under both the PPP and the PUA?
A. While guidance is limited, agencies have indicated that receiving a PPP loan (discussed further below) can disqualify you from receiving Pandemic Unemployment Assistance (PUA). It is unclear if the prohibition applies across the board, or just for the period covered by the PPP.
Q. As a schedule C filer, how do I decide which program (PPP or PUA) is best for me?
A. While there are several differences between the programs, one consideration is whether or not you are still working part time. Neither the PPP loan nor the related forgiveness amount are impacted by part time earnings. PUA benefits, however, may be reduced. Our staff has located an article which provides a good summary of the issues:
https://bench.co/blog/operations/ppp-vs-unemployment-benefits/
Similarly, Intuit offers a self-employed worker’s guide:
INDIVIDUALS WITH INSUFFICIENT WORK HISTORY OR WHO HAVE EXHAUSTED BENEFITS
California’s Pandemic Unemployment Assistance (PUA) benefits (discussed above), while primarily advertised for Schedule C filers, are also available to individuals without sufficient work history and to individuals who have exhausted their regular and extended unemployment benefits.
WORK SHARE PROGRAM
The state of California allows employers to apply for the Unemployment Insurance (UI) Work Sharing Program if reduced production, services or other conditions cause them to seek an alternative to layoffs. Under this program employees whose hours and wages have been reduced can receive UI benefits while keeping their current job.
Program link:
https://www.edd.ca.gov/unemployment/Work_Sharing_Program.htm
MORE PAYCHECK PROTECTION PROGRAM (PPP) GUIDANCE & OPTIONS TO EVALUATE
The SBA and US Treasury have been regularly updating their FAQs for the PPP. When looking up FAQs, be careful to find the latest version. Meanwhile, it is important to note that there still are many more questions than answers.
Recent FAQ updates have addressed
- the importance and meaning of the borrower certification (FAQ #31; note the apparent emphasis on the term “necessary”),
- extension of the date to return funds without penalty to May 14 (FAQ #43),
- plans for the SBA to review selected loan forgiveness applications (FAQ #39), and
- how to count employees who turn down your offer to rehire (FAQ #40; note the importance of having the offer in writing).
Link to the most recent FAQ update (May 6, 2020):
Link to the SBA webpage for the program:
https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program
Loan Forgiveness
To obtain the loan forgiveness offered by the program, you will have to complete a second application with your bank. Your bank will be in charge of determining your loan forgiveness. Be prepared to provide detailed documentation.
Remember the SBA has determined that no more than 25% of the forgiven amount can come from non-payroll costs.
Many open questions remain as to how the amounts to be forgiven will be calculated. One question still not resolved relates to the interaction of wages earned v. actually paid (cash basis) during the 8-week period. The phrase in the law, “costs incurred and payments made,” remains open to debate. If your business would normally issue checks for services within the 8-week period on a date that falls outside of it, you should strongly consider moving the pay date up so it falls within the 8-week period.
In general, the safest bet is to make sure all qualified expenses related to the 8-week period are actually paid in the 8-week period. We recommend that you project out your payments to make sure that you will be able to maximize the amount of loan forgiveness.
Schedule C filers substitute wages with “owner compensation replacement” based on 8 base weeks. The process for those who also pay wages to employees is more uncertain.
Reminder: the 8-week period for determining how much of the loan can be forgiven started on the origination date of your loan.
Intuit has a loan relief eligibility calculator you may find helpful, although it is important to remember that different lenders may interpret rules differently due to lack of guidance:
https://aidassist.intuit.com/app/home?cid=DR_em_46898_001_Text2_US_QBOA#/home
Please feel free to discuss your situation with us so we can help you identify potential pitfalls and planning opportunities.
Decreased Payroll in the 8 Week Forgiveness Period / Option to Return Funds
While businesses have until June 30, 2020 to restore their workforce without incurring mandatory reductions in the amount of loan forgiven, they may still have trouble generating enough payroll in the 8-week calculation period to maximize their loan forgiveness. Such businesses have begun to consider whether or not the Employee Retention Credit might create a larger overall financial benefit. Taxpayers who wish to switch to using the Employee Retention Credit can do so if they return their PPP loans by the safe harbor deadline of May 14th, 2020 (FAQ #45). Additional information on the Employee Retention Credit follows.
Deductibility of Expenses used to Support Loan Forgiveness
The IRS has clarified that the expenses traced to your non-taxable loan forgiveness will not be deductible. A bill has been introduced in the Senate that would change this.
REMINDER: EMPLOYEE RETENTION CREDITS
Employers impacted by COVID-19 who do not participate in the PPP loan program may be able to claim employee retention credits on their payroll tax returns.
Caution: the credit is only available for payroll paid in quarters that meet strict criteria.
Employee retention credits allow an employer to claim a refundable 50% payroll tax credit of up to $5,000 per employee for wages and qualified health care paid between March 12, and December 31, 2020 provided the wages are paid during a calendar quarter in which the business is either (1) shut down by government order, or (2) experiencing a large drop (at least 50%) in gross receipts.
IRS FAQ page:
https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
Summary from ADP:
http://communications.adpinfo.com/taxcreditsfaq
REMINDER: TAX CREDITS FOR WAGE PAYMENTS PURSUANT TO MANDATORY PAID LEAVE
IRS FAQ page:
REMINDER: DEFERRAL OF EMPLOYER SOCIAL SECURITY
Until a business has received a PPP loan forgiveness decision, it may defer paying the employer half of social security taxes:
DIG DEEPER
Articles by Tony Nitti, a CPA who writes for Forbes, are a favorite of many of our staff for the clear writing, solid technical skills, and sense of humor: https://www.forbes.com/sites/anthonynitti/#5ac61a577a36
KEY RESOURCES
All our past newsletters have been uploaded to our webpage:
https://smithcpas.com/category/covid-19/
IRS Master Coronavirus page with updating links:
https://www.irs.gov/coronavirus
SBA master benefits summary page:
https://www.sba.gov/funding-programs/loans/coronavirus-relief-options
California Unemployment (UI):
https://edd.ca.gov/Unemployment/Filing_a_Claim.htm
California Self-Employed Unemployment (PUA):
https://edd.ca.gov/about_edd/coronavirus-2019/pandemic-unemployment-assistance.htm
Franchise Tax Board COVID-19 page:
https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/index.html
California Department of Tax and Fee Administration COVID-19 page:
https://www.cdtfa.ca.gov/services/covid19.htm
California COVID-19 page for businesses:
Employment Development Department coronavirus page:
https://www.edd.ca.gov/about_edd/coronavirus-2019.htm
San Francisco website, resources for businesses and employees:
https://oewd.org/resources-businesses-and-employees-impacted-covid-19
San Francisco website, general COVID-19 resources for the public:
https://sf.gov/topics/coronavirus-covid-19
City of San Rafael website, general COVID-19 resources for Businesses:
https://www.cityofsanrafael.org/coronavirus-business-resources/
City of San Rafael website, general COVID-19 resources for the public:
https://www.cityofsanrafael.org/coronavirus/
NOTE: Links to resources are evolving and often get moved or updated. While we have attempted to link to the most recent pages, we cannot guarantee how long any link will remain active.
1527 5th Avenue, San Rafael, CA 94901
82 West Portal Avenue, San Francisco, CA 94127
Tel 415-458-5100
Fax 415-458-5105
smith@smithcpas.com
DISCLAIMER
While we hope the contents of these alerts are helpful to our clients, these alerts are not intended to be advice upon which you should rely. Tax advice contained in these alerts is not intended to be used for, and cannot be used for, the purpose of avoiding penalties under the US federal tax laws. Inclusion of topics outside the scope of our normal service areas is intended to serve solely as a general starting point and should not replace consultation with experts in the related fields.