ABC Solutions

Managing Your PPP Loan for Maximum Forgiveness

Congratulations! You are one of the lucky recipients of the Paycheck Protection Program Loan. Not everyone can say the same. Once you receive approval, the bank has ten calendar days to disburse the money. As soon as you receive those funds, the 8-week clock begins to tick. Do not waste time.

For the eight weeks immediately following your loan funding, your expenses must meet certain criteria if you hope to have the loan forgiven. Loan forgiveness is not automatic. You will have to apply for it prior to repayment in six months. Currently, there are no guidelines for the forgiveness application. They will share that information as they develop it.

Using the Loan Proceeds

The entire purpose of the PPP Loan is to maintain payroll. Naturally, using the money for payroll is high on the government’s agenda. Therefore, you must use 75% or more of the money for payroll costs. If payroll costs in the eight-week period do not exceed 75% of the loan proceeds, the amount of loan forgiven will be reduced by the shortage. Payroll costs include:

  • Salary, wages, commission, and similar compensation
  • For Partnerships – Guaranteed Payments to Partners AND partner’s share of income subject to self-employment tax
  • Vacation, sick, family leave
  • Severance pay
  • Group health insurance premiums
  • Company portion of retirement benefits
  • State and local tax assessed on employee compensation, such as unemployment, SDI, etc.

WARNING: You may think, well, if I cannot make the 75% in regular payroll, I’ll just bonus myself the difference. Be very careful about unusually high bonuses or commissions to trick the system. You will need documentation. I anticipate random audits and reviews of PPP loan proceeds over the next two years. Free money from the government is a prime opportunity for rampant fraud.  Additionally, your employee count must not dip below 25% of your January 31, 2020 employee count.

Not more than 25% of the loan forgiveness may be attributable to non-payroll costs, such as rent, utilities, and mortgage interest. All expenses made in the eight-week period must be for “costs incurred and payments made” within that eight-week period. While this hasn’t been clearly defined, we can assume that you cannot pay your rent six months in advance with the money, nor pre-pay your utilities.

TIP: If you have rent, mortgage, or utilities on autopay, take them off now. Be sure to pay the bills inside the eight-week period for periods included in that eight-week period.

Documentation

If you do not keep accurate time records of your employees’ work, now is a great time to start. You will need proof of commissions, bonuses, pay raises, and vacation/sick time. You will also need to prove that any time off does not overlap with the payroll tax credits of the Families First Coronavirus Response Act (FFCRA). Have all time accurately recorded. Salaried employees do not need to keep time unless they are taking paid time off. Those hours should be clearly documented as to the purpose and length of leave. The FFCRA has more detailed documentation requirements for the employment credits.

Keep and store copies of your rent and utility bills. Utilities include gas, water, electric. Utilities do not currently include internet or cloud hosting at this time. You are required to maintain these records for four years.

Update Your Accounting System

Create a separate account in your accounting system for COVID-19 Expenses and create a list of sub-accounts. Here is a picture of mine:

Be very careful over the eight-week period to carefully post information into the correct category. You want to be able to easily run reports to track your expenses for forgiveness. A quick rundown of the sub-accounts above.

  • Employee Family Leave and Employee Sick Leave were created to track FFCRA time off for employment credits. You must keep this separate from other payroll records.
  • Group Health and Salaries are to track payroll in the eight weeks separate from payroll in the other parts of the year.
  • Rent and Utilities for tracking those expenses during your eight weeks and separating it from other regular expenses
  • Optional items for your use only are Internal Costs and MSP Tools for Customers. You will not use these for loan forgiveness, but items purchased specifically for the pandemic can be tracked here to not interfere with other metrics in future/past years for comparison purposes.

Forgiveness – What to Expect

There is another really great reason to separate these expenses. The portion of the loan that is forgiven is technically income to you. The federal government has stipulated this will not be taxable for federal tax purposes. Sounds great, right? Of course! However, there are other considerations.

Be aware that not all states follow the Internal Revenue Code and unless your state specifically excludes the loan forgiveness, you may find yourself paying state income taxes on it.

Also note that it is entirely possible that the expenses that allow the forgiveness of the loan may not be deductible on your tax return, thereby making the loan a complete wash. You (or your tax preparer) will want a nice easy way to find the expenses that are not deductible. Using my method above will go a long way to identify the non-deductible expenses.

It is not clearly stated at this point if those expenses will be non-deductible. At the same time, it is not clearly stated that they will be. We can expect future guidance from the Internal Revenue Service on this. Until then, play it safe and segregate your costs as much as possible. It’s better to be over prepared and not need it, than need it and not be prepared at all.

 

Stay safe out there!

MSPs: Stay Ahead of the Curve

As the global pandemic brings business and the economy to a grinding halt, you may wonder what steps you can take now to protect your business, your employees, and your customers. CISA.gov lists the Information Technology Sector as one of 16 critical infrastructure sectors needed to stay open and operable during a national crisis. Here are some steps you can take right now to alleviate stress on your business.

Payroll

The IRS outlined provisions for the Families First Coronavirus Response Act (FFCRA). The new law will take effect on April 2, 2020 and remain in effect until December 31, 2020. Here is a quick rundown of the provisions. Consider finding a way in your PSA or payroll system to track COVID-19 related leave separate from normal PTO.
– For COVID-19 reasons, employees receive up to a maximum of 80 hours paid leave
– Employers receive 100% reimbursement for the wages
– Employers face no payroll tax liability
– Self-Employed individuals receive an equivalent credit
– Employers with fewer than 50 employees are eligible for an exemption, but can voluntarily comply. Employers with 50 – 500 employees are mandated to comply within 30 days. Employers with over 500 employees do not qualify for the credit.

Complete details can be found in IR-2020-57 at: https://www.irs.gov/coronavirus. If your employees are forced out of work, please take advantage of this program to keep them paid.

Income Taxes

The IRS has announced the April 15 tax filing date has been moved to July 15, 2020. If your return has been filed and you wish to cancel your automated payment, you can call the IRS e-file Payment Services at 1-888-353-4537. This is an automated service available 24 hours a day, 7 days a week. This relief also includes estimated tax payments for 2020 that are due on April 15. Take advantage of this extra time to save for the tax balance due. Contribute to a SEP or IRA, since those deadlines are extended, too.
For information on your state income tax response, please see this link: https://www.taxadmin.org/state-tax-agencies.

Inventory Purchases

Dust off your crystal ball and peer into the future for this one. There are two possible outcomes that will invoke Economics 101 – Supply and Demand. Hardware and computer supplies may become limited and pricing could return to that of a 1991 personal computer. Therefore, it may be tempting to stock up on computers now when the price is low. However, if the economy continues to sink, you could be left holding those computers with no one to sell them to. It may be a waste of valuable company resources.

Reduce stock and inventory purchases to keep on hand. You may need that cash in the coming weeks. Consider keeping only one or two computers on hand for a quick turnaround. Otherwise, only order equipment that your customers have paid for.

If you are not already doing this, immediately implement a policy in your company to collect on all hardware invoices prior to ordering. Now is not the time to extend credit needlessly. You will only harm yourself by charging the purchase to a credit card and paying interest on those charges if your customer slow-pays the invoice. If they want to slow-pay the invoice, they can slow-wait for the hardware.

The End of AYCE Managed Services

For those working around the clock to get your customers’ employees set up to work remotely from home, this is for you. You may have an all-you-can-eat managed service agreement that covers everything, and you may struggle with whether you should charge your customers for this extra work that no one saw coming.

The answer is, “Yes! Absolutely charge them.” These are new installations, new connections, and far outside the normal course of your managed services agreement. To be expected to connect 100 remote workers in 48 hours for free is unreasonable.

Explain to your customers how securing remote connections and the home offices of their employees is time-consuming and you want to devote all the resources possible to getting it right. This cannot be done for free. Offer to spread the cost over future months if it will help the customers, but remind them that you are still required to pay your people overtime for working to keep them safe and operational.

We already knew that the all-you-can-eat concept is going out of style. This pandemic may pave the way for AYCE to go the way of the leisure suit.

Check Your Subscriptions

You should do this on a regular basis anyway. Review the subscriptions you purchase and make sure you have a customer being invoiced for it. Often, we switch subscriptions like AV or security and fail to cancel the old vendor when the new one is implemented. Check each vendor to ensure you have a legitimate reason for sending them money each month. Are the bills accurate? Do you have any services you can consolidate for a lower monthly cost?

Stay Connected with your Financials

With so many other things needing our attention, it is easy to let your accounting system go. Don’t do it. If there is a problem with profits, you want to know that now, not later. Stay on top of the accounting reports, financial metrics, and any slump in revenue. Any changes should be scrutinized and corrected as quickly as possible.

Five Ways to Streamline Your Payroll Process

For business owners with employers, payroll is a necessary task that can slow your day and tie you down if you let it.  If you’re looking for a way to make payroll less time-consuming, here are five ideas you can put to good use:

  1. Employee Onboarding

If you hire a lot, empower your new hires by letting them do their paperwork for you.  A good payroll system allows employees to “onboard” themselves, completing the I-9, W-4, and direct deposit authorizations electronically, even before they show up for their first day. You’ll still need to ask for ID on their first working day, but at least you won’t have to do their paperwork for them.

  1. Integrate Employee Benefits

Rather than hire several separate companies to handle benefits, some payroll systems allow you to integrate benefits solutions right in their dashboard.  That way, you won’t have to re-enter employee data in multiple systems, which often gets out of sync.  Deductions and payments can also be integrated to save accounting time.

  1. Delegate Timesheet Entry

Require non-exempt employees to enter their own time; all you should have to do is approve it.  The right timesheet application can take care of that, and a great timesheet application will allow employees to enter time from multiple options, including timecard, cell phone, and others.

  1. Eliminate the Annual Worker’s Compensation Audit

Tie your worker’s compensation vendor to your accounting system, and you’ll be able to avoid that time-consuming annual reconciliation report required by your worker’s compensation insurance company.  You can also avoid the large annual payment because the insurance will be taken out each payroll cycle.

  1. Reduce the Frequency of Payroll

It’s not always possible, but if you can pay employees less frequently, you might be able to cut your payroll time in half.  Pay weekly employees every two weeks or pay bi-weekly employees monthly.  Reducing payroll frequency boosts cash flow as well.

Try one of these five ideas to streamline your payroll time and costs in your business.  And as always, let us know if we can help.

Do the New Overtime Rules Affect You?

Effective December 1, 2016, federal overtime regulations will change and may affect how you are paying your employees.  These overtime updates will affect 4.2 million workers across the country.

The new rules will raise the salary overtime-eligibility threshold from $455/week to $913 ($47,476 per year).  This new threshold will increase every three years.  Salaried workers already entitled to overtime will get increased protection.

Employers have a choice of three actions they can take to employees who become eligible for overtime that weren’t before.

  1. Pay time-and-a-half for overtime work.
  2. Raise worker’s salaries above the new threshold.
  3. Limit worker’s hours to 40 per week.

Let’s say you have an employee that earns $500 per week and works 50 hours a week.  Previously, you didn’t pay overtime, but beginning December 1, 2016, you will need to.  At $12.50 per hour, you would owe them the regular $500 plus 10 hours of overtime at $187.50.

Let’s say you have an employee earning $800 per week and they work 50 hours.  Previously, you didn’t pay overtime, but now you will need to consider it.  You could pay them overtime, which works out to a weekly pay of $1100.  Or you can choose to give them a raise to $913 per week – the new threshold – and continue to exempt them from overtime.  The latter is the lowest cost alternative.

In both cases above, it may be cheaper to hire an additional part-time worker to work the 10 extra hours per week.

You can find more about the new overtime law here:
https://www.dol.gov/featured/overtime/

And if you have any questions about your payroll, feel free to reach out anytime.

Are Your Workers Contractors or Employees?

If you have workers in your business, you likely made a decision when you hired them as to whether they should be an employee or a contractor. If all you hire are employees, then you have nothing to worry about. But if you hire contractors, there may be some financial risk you may be taking that you may not know about.

Any person that runs a business as a sole proprietor that you pay money to for services rendered is considered a contractor. One difference between an employee and a contractor is that an employee receives a W-2 and a contractor that you have paid more than $600 per year by check receives a 1099. There are many other paperwork differences, but that’s the major one.

One of the biggest mistakes when a business owner hires a worker is thinking that they can decide to classify the worker as a contractor if they simply want to. Unfortunately, it’s the IRS that decides on the classification, not the worker or the business owner.

What’s the Risk?

There is no risk from an IRS standpoint to classify a worker as an employee instead of a contractor. There is significant financial risk if you incorrectly classify a worker as a contractor when they should be classified as an employee. You may be liable for back employment taxes if the IRS re-classifies a worker from contractor to employee, and this can go back many years.

To calculate your risk, take roughly 20 percent of the payments you made to contractors. This amount plus late fees and penalties can add up to what you could owe the IRS if you are mis-classifying workers and the IRS finds out.

IRS’s Employee vs. Contractor Rules

The IRS focuses on three factors to determine whether a worker should be a contractor or an employee: behavioral control, financial control, and type of relationship.

If you control both what and how a task is to be done, you should probably classify your worker as an employee. If you can control only the results you want, you may be able to classify the worker as a contractor.

There are many other rules about this classification, so be sure to check with your tax accountant for more information. Also, for those of you that love tax research, here’s a link that gives the full details of the IRS rules: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

Having a successful business is all about taking calculated risks; however, you may not have known the risk you’ve been taking with contractors that you’ve employed. For the IRS, misclassifying workers is a “red flag” area, meaning they are paying extra attention to it. If you feel like you might be taking a risk that you don’t want to, please reach out and let us know how we can help you with this.