Author: Leon Clinton

As you likely know by now, the Paycheck Protection Program (PPP) loan and its forgiveness process have been an ever-changing (and often confusing) ride so far. 

With the new rules for PPP loans of $50,000 or less, you escape from the most difficult part of the loan forgiveness if you had to consider employees. 

And you may even obtain more loan forgiveness than you would have otherwise.

Before

Before the $50,000-or-less rule, you had to either suffer a reduction in loan forgiveness or meet one of the many exceptions that allowed you to

• cut annual salaries or hourly wages by more than 25 percent, and/or
• reduce the average number of employees or average hours paid.

After

Now, with a PPP loan of $50,000 or less, you don’t have to consider the myriad rules about employees. Regardless of what you did with your employees, you qualify for full forgiveness if

• your PPP loan is for $50,000 or less,
• you spent the PPP money on costs that are eligible for forgiveness, and
• at least 60 percent of the forgiveness is for qualified payroll costs (including defined payroll for owners).

Example. Henry obtained a PPP loan of $34,000 based on his 2019 Schedule C income and pay to his part-time employee. When COVID-19 hit, Henry laid off his part-time worker and has not rehired him. Using SBA Form 3508S and the 24-week covered period, Henry qualifies for 100 percent forgiveness of his $34,000 loan because he spent $20,833 (61 percent) on the deemed payroll to himself and the remainder on five months’ rent and utilities.

Planning note. Henry is not an employee of his Schedule C business. He receives no W-2 income. But the PPP rules deem Henry’s 2019 Schedule C profits as his payroll for PPP loan purposes. The rules cap the Schedule C taxpayer’s loan amount and forgiveness at a maximum of $20,833 when Schedule C income is $100,000 or more.

If you would like my help with your PPP loan forgiveness application, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 17, 2020

Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan? These include: 

• 7(a) loans: general small business loans of up to $5 million,
• 504 loans: loans of up to $5.5 million to provide financing for major fixed assets such as equipment or real estate, and
• microloans: short-term loans of up to $50,000 for small businesses.

If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Congress appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes six monthly loan payments on behalf of borrowers. There is no need to file an application.

Are the SBA loan subsidies taxable income to you?

Unfortunately, the CARES Act is silent on this subject and the IRS has yet to issue any guidance on this particular loan subsidy program. In the past, the IRS advised that similar loan payments were includible in income by the taxpayer-borrower.

It’s unclear whether the IRS will follow this prior guidance.

The IRS could instead conclude that these loan subsidies are not taxable under the general welfare exclusion. The general welfare exclusion has often been used to exempt from tax SBA disaster payments made to individual taxpayers. The exclusion ordinarily does not apply to payments to business. But the IRS could make an exception due to the extraordinary nature of the COVID-19 pandemic.

It’s also possible that Congress will act to make the SBA loan payments tax-free. This could be done in a future stimulus bill.

Right now, the prudent course is to assume that the SBA loan subsidies are taxable income and plan accordingly. 

If you have any further questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 10, 2020

Have you established a 105-HRA, Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), or Individual Coverage Health Reimbursement Arrangement (ICHRA) to reimburse your employees for medical expenses?

If so, congratulations! These HRAs are a great way to pay your employees’ medical expenses and obtain a tax deduction.

But all three types of HRAs come with a pesky IRS filing requirement: Each year, you must pay a Patient-Centered Outcomes Research Institute (PCORI) fee that is used to help support the Patient-Centered Outcomes Research Institute.

The fee is small—currently, $2.54 times the “average number of lives covered” by your HRA during the previous plan year. There are various ways to calculate the number of lives covered.

You must pay the fee by filing Form 720 with the IRS by July 31 of the calendar year following the end of your plan year. 

Paying the PCORI fee is a bit of a nuisance. But on the plus side, the fee is tax deductible.

If you need my assistance or would simply like to discuss HRAs, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 5, 2020