On July 9, 2020, the IRS sent out a newsletter announcing a new letter which will change things if you have payroll. Letter 2800C, aka the “lock-In” letter, instructs employers to follow a specific federal income tax withholding arrangement for an employee who doesn’t have enough income taxes withheld from their wages.  This letter gives the employee 60 days from the date of the letter to discuss the determination with the IRS before the withholding arrangement takes effect. After the 60-day period. The withholding rate in Letter 2800C is locked in and the employer must begin withholding from the employee at that new rate.

What does this mean?

As an employer may you receive a 2800C form for one of your employees. You may receive two forms, one for you and one for your employee. You have 10 days to give your employee their form, if they still work for you.

If you receive this form, it means your employee did not fill out their W4 Form in a way deemed satisfactory by the IRS and you must withhold the corrected amount provided by the 2800C form. Your employee has 60 days to request the IRS to grant them a waiver from this new withholding amount. If this happens you, as the employer, may continue withholding as stated on their original W4 form.

Your employee can request this waiver in two ways: submitting a new W4 which gets approved by the IRS or submit a new W4 with a withholding rate higher than the “lock-in” letter.

Regardless of the situation with your employee, it is your responsibility as the employer to follow the IRS guidance and ensure your payroll team (whether outsourced or inhouse) is up to date on all changes.

The Too Long Didn’t Read

Employers may see a 2800C form from the IRS. This form states you must start withholding more federal income tax from the employee’s paycheck. As the employer, you have 10 days to give the employee part of this form to your employee. The employee has 60 days to request a waiver on this new withholding amount. It is your responsibility to follow IRS guidance and ensure you are withholding the correct amount.

If you or your employees have more questions you can view the IRS video here or read their Withholding Compliance Q&As here.  Remember, it is your responsibility as a business owner to make sure your business is following IRS guidance and to keep your accounting team informed of any changes in your business.

On May 15th The SBA and Treasury released the Paycheck Protection Forgiveness application along with new guidelines on what qualifies as forgivable. These clarifications simplify the process for borrowers and may allow more people to have the loan forgive. The clarifications include:

• Options for borrows to calculate the cost using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles.
  • This means that if your eight-week funding period interrupts your normal pay period, there may be some opportunities to change the calculated period.

• Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan

• Much like being able to calculate the cost using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles, you may have some opportunities to change the calculated period as it relates to the eight-week funding period for eligible expenses.

• Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness

• They now have provided instructions on performing the calculations to determine how much of your loan is forgivable.

• Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30

• You must be back to 100% of the original FTE count no later than June 30^th

• Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that were declined
• If you had any employees who you had laid off, offered to rehire, and they declined this situation will now be considered during the loan forgiveness process.

The “To Long Didn’t Read”

The SBA and Treasury have released the PPP Loan Forgiveness Application along with new information around the loan. This information includes flexibility for the eight-week funding period for both payroll and eligible expenses, step by step instructions for forgiveness calculation, ability to rehire your staff with the PPP funding by June 30^th, and new consideration for businesses who offered to rehire staff but were declined.  JFS will continue to dive deeper into this update and provide more information later this week.

Remember to meet with your financial team early to ensure you have had proper reporting for your PPP funding. Do not wait until the last minute as you risk your eligibility for forgiveness.

If you were in the first rounds of the PPP Loan recipients, your eight-week period of funding is coming to a close. Whether you spent it all on keeping your staff on payroll, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, or interest on any other existing debt obligations it is likely that you want the loan forgiven. Depending on how you set your books up after receiving the loan, getting the loan forgiven should be relatively easy. However, you should start thinking about reporting now otherwise you’ll be asking yourself “Is it too late now to say Sorry?” like Justin Bieber.

What qualifies as a forgivable expense?

As mentioned in previous posts the loan will be forgiven if spent on payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, or interest on any other existing debt obligations. According to SBA.Gov forgiveness of the loan is also based on “the employer maintaining or quickly rehiring employees and maintaining salary levels”. 75% of the loan must have been spent on payroll-related costs, allowing for 25% of it to be used on the other listed expenses. So, if you had to make the hard decision to lay people off your forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. If that is the case, don’t worry! Loan payments are deferred for six months with the loan having a maturity of 2 years and an interest rate of 1%. Not having it forgiven will not be the end of the world but will require some extra budgeting. If you used more than 25% of the loan on non-payroll related costs, then your maximum forgivable amount will be equal to payroll costs divided by 0.75.

Proving your Forgivable expenses

A lender will not simply take your word for it during the reporting process. You will have to prove every expense paid for by the PPP funding should be forgiven. Documentation matters, especially now. If you had set up a separate bank account for the PPP funding, then your documentation will be easy. When applying for forgiveness, you should the following:

• Clean Books– This should be obvious. When bringing your finances to a lender. It will make the whole process quicker for you and the lender as well as making them more likely to want to work with you in the future.
• Payroll Documentation– You need to bring documentation verifying the full-time employees as well as their salaries/wages for the period you used the loan to pay them. This documentation could be payroll tax filings, income/payroll/unemployment insurance filings from your state, and paperwork that verifies retirement and health insurance contributions. Get with your payroll provider early to get this documentation.
• Expense Documentation- Clean Books should make providing this easy. You must provide clear documentation showing payments of mortgage interest, rent, and utilities. This documentation could be account statements, receipts, or canceled checks.
  Remember to double-check with your lender. They may have specific requirements outside of this. Do not wait until the last minute to check with them, they may require documentation that takes longer to get.

The “to long didn’t read”

As the eight-week funding period ends, it is time to start thinking about applying for loan forgiveness. Your PPP loan qualifies for total forgiveness if you used at least 75% of it for payroll costs and at most 25% for expenses like certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, or interest on any other existing debt obligations.

Forgiveness of your PPP is also dependent on maintaining the same “headcount” on your payroll, meaning if you let go of any full-time staff during this time your loan may not be totally forgiven.

When applying for forgiveness you need to bring clean books, payroll documentation, expense documentation, and any other documentation your specific lender requires. Should your loan not be forgiven, loan payments are deferred for six months with the loan having a maturity of 2 years and an interest rate of 1%. If you used more than 25% of the loan on non-payroll related costs, then your maximum forgivable amount will be equal to payroll costs divided by 0.75.

If you are looking for help calculating the amount of forgiveness you will get on your loan, please contact JFS at 970-623-3752 or zshanahan@jfsconsultingco.com for access to a forgiveness calculator.

If you were one of the lucky recipients of the Paycheck Protection Program (PPP) or other CARES ACT funding you’ll want to hear what the IRS just said about deductions. This notice, which was brought to our attention 04/30/2020, clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.

What does this actually mean?

With this new notice, businesses cannot deduct expenses that were paid for using the PPP loan. The PPP loan can cover payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations. Next year, when filing 2020 taxes businesses cannot deduct any of the above-mentioned expenses that the PPP loan was covered. This new development will drastically change the tax strategy for your organization.

What can you do next?

Now more than ever it is important to keep track of your spending and have clean books. Not only will you be required to prove what you used your PPP loan for, in order to have parts (or all) of it forgiven, you will now need to keep track of those expenses for proper reporting on your taxes. This is not something you should wait to start. As we saw with the initial rollout of the PPP Loan and other CARES Act Loans, the early bird got the worm. Those with clean books from the get-go were able to make it to the top of the list before anyone else, while those who had to produce clean books were left out in the cold.

If you are someone who utilizes a tax strategy throughout the year, now is the time to make adjustments. Business owners should meet with their financial advisors now to change or start a tax strategy to adapt to the new changes. It is imperative to do this now rather than waiting for the end of the year when there is very little financial advisors can do to guide you. A tax strategy is not for sweeping up a mess after a fact, it is to prevent the mess in the first place. A tax strategy, regardless of the time, can be used to save you a large sum of money during tax season.

The “to long didn’t read” 

According to the IRS, expenses paid for by the PPP or other CARE ACTS Loans are not deductible for your taxes in 2020. Expenses that can be paid for by the PPP include payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations.

In order to save yourself time, in the long run, you should work throughout the year to keep your books clean. You are required to prove what you used your funding for in order for it to be a forgivable loan and should also keep track of where the funding went for tax purposes later on.

You can utilize a tax strategy to find new deductions or other adjustments in order to save yourself money during tax season. If you have an existing tax strategy, now is the time to ask about changes.

Most importantly, as a business owner, you should be proactive during this time. Whether you got the PPP Loan or not, be proactive about keeping your books clean. Without clean books you may miss out on other funding opportunities or worse, you may not be able to withstand an audit.

To read this notice for yourself visit https://www.irs.gov/pub/irs-drop/n-20-32.pdf

To schedule, a tax strategy meeting click here