Last Updated, April 1, 2021
Wedding and small business owners across the country have been anxiously awaiting additional support from the government and now that both the American Rescue Plan Act (ARP) and Consolidated Appropriations Act (CAA) are law, it can be hard to know what’s applicable to you and your business. Sure, there has been a lot of news coverage about it, but between the ARP being more than 600 pages on its own, and trying to figure out what you need to pay attention to requires time you likely don’t have. So, we chatted with Lisa Haffer, tax partner at BDO (a global accounting firm), to hone in on key provisions in both so you can more easily understand the stimulus. Read on to see the frequently asked questions as well as how important takeaways might affect your wedding business.
Are PPP expenses tax deductible?
The question of whether PPP (Paycheck Protection Program) expenses would be tax deductible was perhaps one of the most talked about tax provisions during 2020. And after much back and forth about whether or not there would be a tax deduction for these expenses (including but not limited to payroll, rent and utilities) the good news is that these designated expenses are now tax deductible!
What this means for you: If you received a PPP loan during 2020, you can deduct the expenses funded with this loan (like payroll or utilities) on your 2020 tax return. Similarly, if you receive a PPP2 loan (described below) in 2021, expenses funded with this loan can be deducted on your 2021 tax return.
What are the details on PPP second draw loans?
There is additional funding for a second round of the Paycheck Protection Program intended to cover payroll and other costs incurred by small businesses that are still struggling as a result of the pandemic (May 31, 2021 is now the deadline to apply after a recent extension of the PPP).
Here are some FAQs and answers about PPP2:
Can I get a second loan? Yes! The CAA allows hard-hit businesses to obtain a second PPP loan provided their first PPP loan has or will be fully used up by the time the new loan is disbursed.
What if I’m a first-time borrower? The second round of PPP loans is open to all eligible borrowers, including borrowers that did not receive a PPP loan previously.
Do I have to demonstrate a decline in business? Yes. Generally speaking, the new law requires businesses to demonstrate a 25% loss in gross receipts for any quarter of 2020 when compared to the same quarter in 2019.
How much can I borrow? According to the U.S. Small Business Administration’s website, the maximum loan amount for a second PPP loan is 2.5x the average monthly 2019 or 2020 payroll costs up to $2 million for most borrowers. For borrowers in the Accommodation and Food Services sector (those that use the NAICS 72 to confirm your business’ category), the maximum loan amount is 3.5x the average monthly 2019 or 2020 payroll costs up to $2 million.
What can I use PPP loan funds for to qualify for full or partial forgiveness? Under the prior CARES Act, forgivable costs were limited to payroll costs, rent, covered mortgage interest and utilities. The new law expands this list to include:
- Covered operations expenditures, including payments for business software or cloud computing services necessary to keep business operations running (i.e., HR, accounting, payables, inventory and other similar functions)
- Covered property damage costs attributable to looting and vandalism during public disturbances that occurred during 2020
- Covered supplier costs, including perishable inventory (e.g. food)
- Covered worker protection expenditures necessary to adapt a business so it complies with mandated COVID-19 sanitation, safety or social distancing standards (e.g. purchasing PPE or safety shields)
How long do I have to spend the PPP funds? Borrowers can elect to use either an eight or 24-week covered period.
Are loans issued under the second round of funding forgivable? Yes, if used for certain expenses! Similar to the rules applicable to the original PPP loans, borrowers can obtain full forgiveness if they spend at least 60% of the loan proceeds on payroll costs.
Should I retain my employees?
The ERTC (Employee Retention Tax Credit) is a fully refundable payroll tax credit designed to encourage businesses to retain and compensate employees during periods in which businesses are not fully operational. The ERTC is determined on a quarterly basis, and is applicable to wages paid after March 12, 2020. In good news, the ARP extended the ERTC through the 4th quarter of 2021. To be eligible for the ERTC, businesses must meet one of the following criteria:
- Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19;
- Or they experienced a significant decline in gross receipts during the calendar quarter when compared to 2019. Consult your tax advisor for details regarding the definition of “significant decline in gross receipts” for purposes of 2020 and 2021 ERTC.
What this means for you: Any sole proprietor, limited liability company (LLC), S Corporation or C Corporation that meets one of the two criteria above during a quarter are eligible for the ERTC. Eligible businesses may be able to claim 2020 ERTC credits of up to $5,000 per employee for all of 2020. Eligible businesses may also be able to claim 2021 ERTC credits of up to $7,000 per employee per quarter. The amount of credit that you can claim will depend on a number of factors including the average number of full time employees that you employed in 2019 and the amount of wages (including qualified healthcare expenses) that you paid your employees in 2020 and 2021. Sole proprietors can claim credits for wages paid to their employees but not for wages they pay to themselves. For more information about the ERTC, check out the IRS’ FAQ.
Can I claim the ERTC if I receive a PPP loan?
The good news is yes. One of the most favorable provisions in the CAA allows taxpayers to both receive PPP loans and claim the ERTC. This overlap was not permitted when the CARES Act was originally enacted, and businesses in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERTC. Importantly, the CAA makes the ability to claim the ERTC and receive PPP loans retroactive to March 12, 2020. As a result, businesses that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERTC credits for 2020 and 2021.
Want more info about the recent stimulus packages, tax extensions and other business strategies to set your business up for a successful year? Check out our Stimulus and Tax Resources for Your Wedding Business toolkit.
Information on COVID-19 relief measures is changing rapidly, and new details are still being released. Check the IRS, U.S. Treasury and SBA websites regularly for the most up-to-date information. This article is for informational purposes only, and is not intended to provide legal, financial or tax advice. We recommend that you consult with your legal, financial and tax advisors regarding your particular circumstances.
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