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IRS Issues Ruling on Paycheck Protection Program Forgiveness

IRS Issues Ruling on Paycheck Protection Program Forgiveness

This week, the Internal Revenue Service issued guidance on PPP loan forgiveness via Revenue Ruling 2020-27, which can be found here: https://www.irs.gov/pub/irs-drop/rr-20-27.pdf. Don’t worry, I will summarize it for you with examples. First a little background.

BACKGROUND

In April 2020, Congress passed the CARES Act that allowed for a Paycheck Protection Program (PPP) loan from the Small Business Administration (SBA). If used properly, those loans may be forgiven and not required to be repaid. At the same time, the SBA began issuing Economic Injury Disaster Loans (EIDL). The EIDL loans are required to be paid back. However, the SBA issued an emergency advance on that loan to applicants equal to $1,000 for every employee on the payroll, up to $10,000. This advance is not required to be paid back.

HOWEVER…

If you received both the PPP loan and the EIDL Advance, you will have a loan to repay. The EIDL Advance will reduce your forgiveness on the PPP dollar for dollar. For example, if your PPP loan was $100,000, and you received an EIDL Advance of $8,000, your potential forgiveness for the PPP loan is $92,000.

PPP Loan Proceeds                          $100,000

Less:  EIDL Advance                             (8,000)

Maximum PPP Forgiveness           $  92,000

On May 2, 2020, the IRS released Notice 2020-32 which clarified that NO DEDUCTION IS ALLOWED for any eligible expense if the payment of that expense results in forgiveness of a covered loan.

Translation: If you received a PPP loan and used it to pay salaries, then had that loan forgiven, those salaries are not deductible on your tax return.

 

Under the terms of the CARES Act, the forgiveness of the loan will not be treated as taxable income to you. Therefore, technically, you did not pay for the salaries mentioned in the previous paragraph and cannot deduct it on your tax return.

This was the first time we learned the PPP loans would increase tax liabilities.

On June 5, Congress expanded the scope of PPP funds usage and increased the covered period through the end of the year. As the months dragged on without any further movement from Congress on the matter, banks across the country dragged their feet on offering forgiveness application portals to their borrowers. Of the few that did accept forgiveness applications, the SBA took 90 days or longer to approve them.

THE ACCOUNTING ISSUE

Fast-forward to October. PPP loans are starting to come due. Banks don’t know what to do and are not prepared for forgiveness applications to begin flooding in. Congress is busy with things that have nothing to do with this loan package. Accountants across the country are scratching heads.

What do we do if the loan expenses are in one year and the forgiveness is in another? The PPP loan money has all been spent as instructed. Forgiveness applications are elusive, and taxpayers have to begin preparing for their 2020 income taxes to ensure they have enough tax paid in.

IRS REVENUE RULING 2020-27

Rev. Rul. 2020-27 states:

“A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”

Translation:  If you have a PPP loan and plan to apply for forgiveness now or in the future, you may not deduct the expenses paid with those funds in 2020.

WHAT DOES THIS MEAN FOR YOU?

Months ago, I wrote a blog post about how to restructure your chart of accounts to separate the expenses paid with PPP loan proceeds. Regardless of whether you changed your chart of accounts around or something similar, consider taking the following steps.

  1. Make a decision about your company books.
    1. Do you want your Income Statement (P&L) to reflect normal operations and show the non-deductible expenses for management use and budgeting? OR
    2. Do you want your accounting system to reflect your income tax filings?

There are good arguments for both situations. I have no intention of trying to persuade you in one direction or another. Neither is right nor wrong. Once you decide, continue on for further steps.

  1. Get a tax projection completed now. We now know that the expenses in 2020 will not be deductible in 2020. If you have not planned for this before, this will dramatically affect your taxable income for 2020. Before getting caught with an extra $100,000 in net taxable income, you need to know how this will change your taxes. Here is an example of the potential impact.
    Tax Based on 2020 Rates
    2020 Net Operating Income Before Forgiveness $  85,000.00 $ 11,762.00
    Reduction of Expenses (PPP Loan Forgiveness)     92,000.00
    EIDL Advance Received       8,000.00
    2020 Taxable Income $185,000.00 $ 36,247.50
  2. If you received the EIDL Advance, be sure to record that as Other Income on your Income Statement. This money is taxable.
  3. If you choose 1a, prepare a schedule of non-deductible expenses to present to your tax preparer at tax time and keep it with your permanent income tax records so you have a clean “Book-to-Tax” reconciliation to refer to years from now when you wonder why your income tax return shows higher income than your accounting system.
  4. If you choose 1b above. Read on for specific suggestions for your accounting system.

PREPARE YOUR ACCOUNTING SYSTEM

For the following, we will assume:

PPP Loan of $100,000

EIDL Advance of $8,000

Year-to-Date Salary Expense of $250,000

  1. Create a Long-Term Liability account called PPP Loan Payable.
  2. Reclassify your PPP loan proceeds to that account, if it is not already there.
  3. Create an Other Income account called EIDL Advance
  4. Reclassify your EIDL Advance to the new account, if it is not already there.
  5. Calculate your potential forgiveness. For simplicity, we will assume the entire loan is forgivable except for the EIDL Advance.
  6. Reduce the PPP Loan Payable account by the amount of potential forgiveness.

Debit PPP Loan Payable $92,000

Credit Salaries Expense  $92,000

  1. Check the ending balances
    1. PPP Loan payable $8,000
    2. EIDL Other Income $8,000
    3. Salaries Expense $158,000

FREQUENTLY ASKED QUESTIONS

QUESTION ANSWER
What if my loan forgiveness is denied or I decide to just pay back the loan? Rev. Proc 2020-51 provides a safe harbor to allow those expenses to be deducted.
Is the EIDL Advance Taxable? Yes, in all cases the EIDL Advance is Taxable Income
Is the EIDL Taxable? No, the EIDL is a loan that must be repaid and is not taxable.
I received CARES grants from my state/local government. Are they taxable? Yes, those grants are taxable income

5 Signs You Need to Upgrade Your Accounting System

To maximize profits in your business, all of your business functions need to run smoothly, including your accounting department. Your accounting system is at the core of your accounting function. If it is old or lacks the features you need, your business may suffer.  Here are five warning signs you can look for to determine if it’s time to upgrade or replace your current accounting system with something more cost-effective.

1. Not enough users

If your current system limits the number of users you can have in the system at any one time, this could be a major enough reason in itself to switch to a larger option. Luckily, most accounting software companies include an accountant user for free, so at least this type of user doesn’t have to count toward your total requirements.

If you’re not sure how many users you currently have a license for, we can help you check on that. It might be as easy as buying more licenses if you’re not at the maximum capacity.  But if you are at maximum, it may be time to look for a better accounting system with room for you and your business to grow.

2. Outdated

If your accounting system runs on desktop-based software that’s upgraded every year and you have not paid for or installed the upgrades, then your system is outdated.  If it’s been sunsetted, that means the software vendor no longer supports the software. You are at major risk for the software crashing, getting buggy, getting hacked, or worse, permanently breaking.

The cost of getting the system current may be better spent looking for a new alternative, or moving to a cloud-based system where updates occur automatically.

3. Lack of functionality or scale

It is commonly the case that your business has grown so much that it’s outgrown your original accounting solution. That’s good news!  It’s time to find a solution that will scale better for your business.

You might be missing important features that are costing you more time and money than if you were on a system that offered those features. Common time-wasting activities in accounting include too much time spent on data entry and/or Excel spreadsheets to make up for what the accounting system can’t do.

4. Lack of reporting and analytics

If you’re unable to receive the reports and analytics you want to run your business better from your current accounting system, it may be time to switch. With better data comes better decision-making and if lack of data is costing you money, then it’s time to find a more robust system.

5. Lack of integrations

Thousands of apps exist to expand accounting systems’ core functionality. If your current accounting system lacks integration capabilities or does not have apps that are built to integrate with it, you may be missing out on additional functionality.  This include mobile apps; it’s quite common now to do much of your accounting work from your mobile phone.

Does your current accounting system have any of these red flags?  If so, please reach out. We can help you find a best fit for your accounting needs.

Mobile Accounting? It’s Here, Now

That’s right: The future is here! Now that it’s officially 2020, it may be time to jump on that accounting app bandwagon if you haven’t already done so. The exciting news is you can actually do a lot of your accounting tasks from your phone instead of your computer.

Here are just a few examples of accounting things you can do on your phone.

Banking

Are you still trudging to the bank to make your deposits?  If so, there is a better way! Simply download your bank’s mobile app, login, and look for the Make Deposit function. Get the check you want to deposit, write “For Electronic Deposit Only” on the back and endorse it. On your phone, enter the amount, then take a picture of the check. Presto! Hit Deposit and the money will be in your account in no time.

Receipts

Shoeboxes of receipts are a thing of the past. (Thank goodness, we say, as we wipe our forehead!) Send your receipts to your accountant simply by taking a picture of them and sending them via email or through a document entry system like Receipt Bank or AutoEntry.  You’ll need to set this up to connect with your accounting system, but once it’s set up, it’s a real time-saver.

Accounting

Wondering how much income you made last month? Download your accounting app on your phone and login to get many of the features that you have on your computer onto your phone. You’ll need to be on a cloud system like QuickBooks Online or Xero, or possibly have a hosted desktop solution in order to have this functionality.

Payroll

There’s no need to be tied to your desk on payroll day if you can submit or approve payroll from your phone.  Many payroll systems have apps you can download so you can be free of your computer.

Add-ons

There’s a mobile app for almost any add-on you might need, such as TSheets for time tracking or Square for taking payments.

Artificial Intelligence

There are even some apps where you can talk in plain English and get a plain English answer back. These apps are using artificial intelligence which is exploding in the accounting space.  You can ask questions about your cash flow or check a metric that you like to follow.

Feel free to reach out to us if you’d like to find out more or get help moving some of your accounting functions to your mobile phone.

If you find yourself on the go more often than not, having constant access to your business accounts and these features will be beneficial.

Accounting Tasks at Year-End

You might wonder why there are so many extra tasks at year-end. While the government requires much of the work, there is clean-up work and adjustments that need to be done to make the books accurate. It’s not always cost-effective to perform all of these updates monthly, so you’re actually saving money by doing some of them at year-end.

Here are just some of the items that are performed at year-end.

Tax-related:

  • If you have payroll, employees need to be sent their W-2s, and the federal and state government need a copy of the W-2s with a W-3 transmittal.
  • For employees, you must also have an up-to-date W-4 signed by them.
  • For employers, your federal unemployment 940 return is due.
  • If you have contractors, they need to be sent their 1099s, and the IRS needs the 1099s and the 1096 transmittal.
  • For contractors, you must also have an up-to-date W-9 form from them. You may also need to request an insurance certificate, or you may get a surprise at your workers compensation audit.
  • For vendors that claim exemption from sales tax, you’ll need to be sure you have an exemption certificate in your files from them.
  • If you pay sales tax annually, your return and payment are due.
  • Your personal federal, state, and local income tax and returns are due in the spring, and they can be extended until later in the year.
  • Depending on the type of entity your business is organized as, you may have franchise, federal and state tax returns to file. This deadline comes up sooner than the individual tax return due date.

Books-related:

  • Just about every asset on your balance sheet needs to be verified in some way or other:
    • Petty cash accounts need to be reconciled and reimbursed as of year-end
    • Bank accounts need to be reconciled with the bank statements. This includes PayPal.
    • Accounts receivable balances and all other receivables need to be tied to each customer and any amounts determined to be uncollectible need to be written off.
    • A physical inventory count needs to be taken and the inventory account should be adjusted accordingly.
    • Fixed assets need to be reconciled to their fixed assets ledger and depreciation should be properly recorded.
    • Goodwill accounts need to be checked and amortization adjusted.
    • Accruals, deposits, deferred accounts and all other asset accounts need to be adjusted if necessary.
  • Liabilities and equity need to be adjusted too:
    • Accounts payable balances and all other payables need to be tied to each vendor.
    • Liabilities that haven’t been recorded need to be added to the books.
    • Loans need to tie to lender statements, and interest paid on loans needs to be properly expensed.
    • The Equity accounts need to be checked and tied out to prior year balances.
  • Corrections and adjustments need to be made:
    • Any misclassifications and corrections need to be made on the books with adjusting journal entries or other classification tools.
    • If the client is a cash-basis taxpayer, a reversing journal entry needs to be made to get the correct tax numbers.
  • A clean set of reports can now be run and used.

Documents-related:

  • This is a good time to file and store your receipts in case you are ever asked for them. For long-term storage, thermal receipts should be copied or scanned in before the ink fades.

If you’re wondering why we’re so busy this time of year, it’s all of the extra work we have to do over and above the normal monthly load. If you have questions about any of this, just ask anytime!

Add Functionality to Your Accounting System with Apps

Did you know that you can add apps to help increase the functionality of your core accounting system? The process will save you time and frustration. It is because every business is different that you may—and likely will—need these add-on features that aren’t already included in the accounting system you currently use. That’s where the apps come in: They provide a deeper functionality in the areas you need them. Take a look below at some examples we’ve put together.

  1. Payroll

Payroll apps help to simplify how you pay your employees. These payroll apps were created to help you implement an easy and automated method of managing payroll and all things HR-related.

Popular payroll options include Intuit’s many options, Gusto, ADP, OnPay, and Patriot.  Explore the different features of each app and find which one works best for you and your needs.

  1. Time Tracking

The best and most accurate way to keep track of an employee’s time is with an app. A wide range of apps can make not only tracking but scheduling your employees’ time simple, too. These apps include:

  • ClockShark
  • BigTime
  • Time Tracker
  • TSheets
  • And more!

Again, each app will offer different features. For example, most have timers, but only one might offer geofencing, so find the one that’s best for your business. Regardless of which one you choose to use, though, you will quickly discover how much time and energy you save without having to do time tracking manually.

  1. Inventory

Need more functionality to better manage your inventory? If you run an ecommerce, retail, or wholesale operation, you may need an inventory app to give you more features. Back order functions, drop ship handling, and recall functionality may be required depending on what you sell.  Here are some popular apps for inventory:

  • SOS Inventory
  • BigCommerce
  • Unleashed

There are also many ecommerce apps in this space: WooCommerce and Shopify, to name a few.

  1. Cash Flow

Dozens of apps exist to help you manage your cash flow as well as get funded:

  • CashFlowTool
  • Cash Flow Frog
  • PayPie
  • Chata.ai
  • FUndbox
  • Blue Vine
  • Fundera
  • And too many to list

Managing your cash and debt are important areas and ones that are easy to find to help you get quicker answers to your questions.

Now that it’s 2020, try working smarter, not harder. Add-on features can help! Remember, the examples listed above are just a few apps currently available. Determine what you need for your company to make better decisions, and then look around for the perfect app.

And, if we can help you implement your ideas faster, feel free to reach out to us anytime.