The SBA is again accepting and processing applications for PPA loans. Joining us today is Nigel Nabuurs, product manager at Patriot Software Payroll and Accounting, sponsors of our COVID-19 Round Tables.
The COVID-19 Advisor Resource Page on our website contains valuable information for you and your clients in navigating through these difficult waters as well as recordings of previous round tables. And articles about our round tables are being published on the Woodard Report website. There is a five-article series about our January 5 round table with Gene Marks on the Woodard Report website.
Joe Woodard: What constitutes a shutdown for government contractors now? It's not just government contracts. It's all qualifying businesses that were shut down. We don't know yet on a lot of the specifics, but my understanding is inability to operate to actually function as a business. I don't think it's diminished revenue or diminished operations. I think it is complete non-operation. Now I cannot speak specifically about government contractors.
Nigel Nabuurs: I'm not showing the government contractors piece, specifically, but I agree. I think one of the examples that came up last week was: If somebody had to move their offices and all their employees to work remotely, does that constitute a shutdown? My understanding is that as long as you’re able to continue working, that doesn’t constitute a shutdown. But you're right. There really haven't been clear guidelines on what that exactly means. We are still hoping for a little more clarification on that.
Joe Woodard: Yes. And then what about guaranteed payments for an LLC? Are they considered income for the purpose of calculating PPP? I can understand how that's a gray area because guaranteed payments are distributions to the owners. So I guess that would come down to whether they’re included on the K-1.
Also, are the entire amounts of EIDLs forgivable? I don't think any of those amounts are forgivable. Nigel, do you know the answer to that? I know 7As are.
Nigel Nabuurs: I don't believe the EIDLs are forgivable. One of the big changes from this last act was that originally those proceeds were being subtracted from the amount of forgiveness you could get on your PPP loan. That’s no longer the case. I know that that's been an issue that's been talked about a lot with this new act.
Joe Woodard: Now there's accounting guidance that says that it can be booked as passive income, but I don't know anything about it actually being forgiven. As you can imagine, we were hit hard with COVID as a conference host. We took the EIDL. No one – not our lender, not the SBA, not anyone else – has come back to us saying that it’s forgivable. So I think I would be the first to know and I’d be delighted not to pay that back.
But my understanding is that to be eligible for forgiveness of the EIDL, your business has to be totally closed. If it’s partially operational, you don’t have a shutdown. COVID had a strong impact on Scaling New Heights, but we didn’t have a shutdown. We still had 300 people on the ground and a remote layer. We were monetizing. If you’re a restaurant that’s providing carry-out service, you don’t have a shutdown. But I want to stress that this is my understanding.
As Nigel pointed out, we don’t have specific guidance on what it means to have a shutdown. There is still a need for further guidance on how to define a shutdown. We’re hoping that will come soon. If you want to err on the side of caution ahead of that guidance, I would say, don’t consider your client as having shut down. You can always subsequently amend any forms or applications.
If you have a client who should have received the ERC in the second and third quarters of 2020 but did not, can your client use Form 941 to claim the credit for those quarters in the fourth quarter? Or does your client have to amend Form 941 for a previous quarter?
Nigel Nabuurs: You'll have to amend because it's on the returns specific for that quarter. So you'd have to amend those Forms 941.
Joe Woodard: One of our guests has given us a really good resource. The AICPA.org website has a coronavirus resource center. You can find many resources and CPAs who can give you answers you need.
How should the client report their 2020 PPP amount when the client used their loan proceeds as intended, and is confident the PPP will be forgiven? Should the client book it as “other income” or “PPP forgiven”? This is an accounting question if you're confident it's going to be forgiven. Can the client go ahead and book the forgiveness to other income, or does the client need confirmation of forgiveness first? Now, to me, that's an accounting question.
Nigel Nabuurs: Yes, I haven't seen anything about whether you can do it with projected forgiveness. I do know any amounts that are forgiven will not be considered taxable.
Joe Woodard: Another ERC question. Can we go back to 2020 with the 70% of $10,000? And Nigel, can you address the revenue limitation on the Economic Aid Act?
Nigel Nabuurs: Great questions. The changes to the qualified wages per quarter and the percentage of the credit are only for 2021. For 2020, the cap is still $10,000 per employee for the whole year with 50% of that being the credit. But for 2021, the cap is $10,000 per employee per quarter and 70% of that is the credit.
The revenue amount also changes for 2021. For 2020 you either had to be shut down or have a 50% revenue reduction. For quarters in 2021 you need a 20% revenue reduction to qualify. So if for the first quarter of 2021 your revenue is 20% less than it was 2019, then you can use the employee retention credit for that quarter.
Joe Woodard: I want to stress that Gene Marks told us at the last round table that if the business was in existence in 2019 only in the fourth quarter, you could compare that quarter’s revenues to any quarter in 2020. But it may not help your client if the revenues of all four quarters of 2020 are greater than the revenues of the fourth quarter of 2019. If that’s the case, you don’t have an option.
Round Table Guest: If you use the accrual basis of accounting, then do you record the PPP when you’re certain of receiving it?
Joe Woodard: Yes, but that's calculated, though not actually approved.
Round Table Guest: So it's only when the third party has approved the loan that it should be considered “income.”
Joe Woodard: Yes.
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