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Edsel

Forgiveable Loan vs PRTax Credit?

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I read a post from CBSLee - seems like he has been informed that an applicant cannot receive BOTH a forgiveable loan AND a payroll tax credit.

Any more on this?  A good readable link, maybe?

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"Yes. Employers receiving a PPP loan may defer payment of the employer’s share of Social Security tax for the period beginning March 27, 2020 through the date the lender issues a decision on the forgiveness of the loan.  At that time, the employer is no longer eligible to defer payment. The Social Security tax that is deferred from March 27, 2020 until the date of the forgiveness will be due 50% by December 31, 2021 and 50% by December 31, 2022."

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Thanks.  Where am I going wrong?

I was under the impression that there would be a pure credit (not a deferral to pay later) available to some employers and was referred to Form 7200.  I was wondering whether a forgiveable loan would disqualify an employer from taking this credit.

From the post above, I'm reading that a PPP loan would entitle the employer to take the credit, but would have to pay it back over two years.

Are we talking about two different things, or am I just messed up in my head?  I have read the sticky post above from Dan with the link to everything - this should be considered the gospel on these subjects.  But even the sections 1102, 1106, and 1110 are so full of cross-references it is impossible to understand.

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12 hours ago, Edsel said:

Where am I going wrong?

Only in trying to understand it all NOW.  It's a big, complex program, with little gotchas and glitches scattered throughout.  I am hoping that by next year's filing season they have the basic issues worked out.  Until then, Magic 8-Ball keeps saying, "Answer hazy; Ask again later!"

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16 hours ago, Edsel said:

I was under the impression that there would be a pure credit (not a deferral to pay later)

There is both.

Section 2301 is the credit and section 2302 is the deferment.

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I appreciate the time, patience, and savvy intelligence of DANRVAN to familiarize with all the various sections and verbage in the Act. 

However, it appears to my pea-sized brain that if an entity takes out a forgiveable loan, they cannot take either the credit or the deferment.  The credit does not apply due to section 2301(j) and the deferment does not apply due to 2302(a)(3).

I began the post hoping for a clear answer, and I am now convinced I am just as lost as I would be in Rita's corn maze.

 

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The short answer is you can't use the same wages or expenses for two different loan/credits/grants. As long as you have enough employees or you use 8 weeks' worth of payroll for forgiveness of one type but prior to that/after that (?) you deferred employer taxes or roll your EIDL grant into your PPP forgiveness or.... The shorter answer is that your bank will determine forgiveness based on its interpretation of the SBA regulations, so ask your bank. And, the long answer is expected in regulations due out in May.

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It would appear that one of the following would apply, and I would think they are mutually exclusive.

  1. A company has a PPP with loan forgiveness and is thus disqualified from taking the 941 credit.
  2. A company has a PPP with loan forgiveness and is thus disqualified from taking the 941 deferral.
  3. A company has a PPP with loan forgiveness and may take the 941 credit or deferral.

Lion, your reply is perhaps based on the latest and greatest, except the banks will not be filing 941s.  We will have to do that.  The regulations you refer to may give conclusive answers.

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I haven't been following much of this, but I'll just say I'll be happy with the loan forgiveness, no matter how the rest of it sorts out.  Personally I think as a matter of fairness, free money would override & exclude the use of any other tax benefit regarding that particular expenditure, but maybe I'm missing something in the conversation. 

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But the loan forgiveness as the SBA regs currently state, has to be used up in 8 weeks.  I have been getting with clients to discuss... Now the SBA may change the regs, but really hard to spend the extra 1/2 month in 8 weeks...

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It really depends on the $ amount of leases/rent/utilities.

What I am doing is having my clients pay bonuses to their employees.

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Bonuses might be a good solution if there aren't any restrictions in the final qualifications.  Not to work against the interests of the employees, but is it a better business practice to give away money if one would not have otherwise done so, or to spend the $ on other expenses which do not qualify for forgiveness and just allow that portion to convert to a 1% loan?  (After meeting the 75% standard, of course).  Presumably a business applying for the PPP is in need of cash - can't afford to spend it needlessly. This PPP presents some very unusual decision-making scenarios.

 

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To me, the process is interesting as it requires projections based on the impossible to know.  Personally, my "hit" will not be until Q4 2020 and Q1 2021 because of the timing of my income.

So in my case, it makes sense to spend more now, to try to alleviate the income loss later.  Thus, hiring someone to free me for more programming raises costs now, but could lower income loss later (assuming I come up with something to generate more income).  Works well for PPP expenses.

---

Reading opinion from "experts" is also interesting.  Getting to the max forgiveness seems to be a hot topic, and at least one online book.  For instance, paying reasonable bonus amounts, giving short term raises, opening a SEP IRA and making deposits, etc.  There is a sub specialty of information (opinions) for those who are self employed in some form.

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Your mention of the SEP IRA is an interesting angle as well.  I usually fund my prior-year SEP IRA just prior to the extended filing date for the corporate tax return. Wondering if I could designate money toward the current-year SEP IRA within the 8-week window from PPP funds in May, then designate funds for the prior-year SEP IRA later in the year (late Aug or early Sept).  It all goes into the same SEP IRA account, but I am able to designate the year at the time the money is transferred into the account.

This might work well for a couple of my clients if it's possible to do within the constraints of the SBA rules. 

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I think retirement contributions as mentioned by the PPP or other programs refers to employER match of retirement contributions for employEEs only. But, they have totally blurred together in my brain now.

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That question definitely needs to be settled.  Thanks for the heads up.  The examples I've seen use the SEP as one of the permissible items to be used in the PPP loan calculation and also in the calculation of the exclusion.  They even go so far as to say that the full SEP contribution counts even when the annualized compensation exceeds $100K and is capped (which doesn't apply to me, BTW ).   

But obviously the final answer will be based on what SBA says is correct.  Definitely keeping an eye on this one. It offers some interesting & unique financial planning opportunities for a sole owner.

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Please remember that a SEP IRA is an employER plan, and contributions to SEP IRAs are funded with only the employer's funds.  It is a defined contribution plan where the employee sets up an IRA account to accept the employer funds.  There are no contributions by employees into the SEP, and there is no match by the employer. 

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Yes, functionally the SEP is a benefit identical to a Medical Insurance plan, and there's no question that the MIP is subject to PPP forgiveness.  That's part of what makes me inclined to think the SEP contribution would be subject to PPP forgiveness. 

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Yes, it will be helpful to see the forgiveness regulations. Although, the banks will interpret them. I included my SEP and my SEHI when applying for PPP, included them on my P&L. But my bank would NOT use them because they don't appear on my Schedule C; used line 31 only. If I paid health insurance and SEP contributions for employees and those amounts appeared on my Schedule C, then my bank would've counted them for application purposes.

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I have a customer who is on their 8 week clock, but cannot open.  They hope to open during week 8.  For them, paying a retention bonus makes sense for PPP forgiveness, as well as to entice some employees to get off the dole.  It is a fine line as some want to stay on their 39 weeks of dole, as it is more income, but a rehire offer ends their UI eligibility.  The employer is likely to "ask" who wants to work, with the retention bonus, rather than just rehire or quit option.  Those who do not return will never be offered their position back.

They are rehiring some now, and working them part time, with full time payment, doing things they can do while closed.

--

EmployER paid retirement contributions are plainly countable as forgivable expenses.  The dilemma is a moral one, as it is with any item you pay in your 8 week window which is not normal during that specific 8 weeks.  If, for example, you would have paid into an SEP at some point during the year, and pay the same amount during the 8 weeks, that is just a timing issue, which many can live with (unknown about the bank auditor).  If you start a new SEP plan, as a way to maximize, then it gets grey (at least).  If you start an SEP or make an extra contribution, just to maximize, it may be harder to live with. If there is a deeper audit, by someone who gets payroll processing, then any out of cycle items could be flagged.

Many employers will be altering their payroll cycle to weekly, with a payday on or about day 1.  Many employers will be paying three months of health care expenses during their 8 weeks.  Easy, and probably will not be questioned, as it is just a matter of paying the third item a little earlier than normal, such as the day the bill comes in instead of the due date.  Watching out for easy to see prepayments will likely be needed.

I suspect, but we cannot know yet, banks will have a set of audit guidelines.  They will want actual tax type forms, check stubs/direct deposit records, and other actual documents, lease, retirement plans, etc.  The bank has no incentive either way, as they are fully insulated (and paid well) as long as they perform good faith.  I have been approached by a few people looking to back build payroll records, which I kindly decline (there are experts saying use some sort of payroll software, not hand done payroll).

PPP forgiveness, can be easy, if one just pays as normal and does not worry about forgiveness maximization.  Those that seek to optimize will work at it a little.  Those that want to maximize will work at it a bunch, and take some risks.

Likely, by judging carefully the bank's application process details, one can make a reasonable guess as to their forgiveness "details".

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1 hour ago, Lion EA said:

Yes, it will be helpful to see the forgiveness regulations. Although, the banks will interpret them. I included my SEP and my SEHI when applying for PPP, included them on my P&L. But my bank would NOT use them because they don't appear on my Schedule C; used line 31 only. If I paid health insurance and SEP contributions for employees and those amounts appeared on my Schedule C, then my bank would've counted them for application purposes.

I went through a similar thought process when applying for the PPP.  I'm operating as an S Corp, so I could have easily included the SEP.  But I couldn't get any clear guidance at the time so I elected to use S&W without the SEP.  It lowered the amount I could borrow but I didn't want to jeopardize the entire application with a potentially insupportable entry.  In retrospect I should have run with it.  But now at least I have sufficient flexibility to help meet & exceed the 75% requirement.

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Medlin's analysis is awesome.  Thanks for sharing your knowledge and recommendations on this.  I think I'll switch from my erratic "as cash is available" payroll frequency to a weekly payroll for the next 8 weeks.

 

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