PPP Loan and Employee Retention Credit: Your top 5 questions answered

Accountalent is breaking down the latest stimulus bill – specifically the PPP Loan and Employee Retention Credit – into easy-to-digest answers… instead of making you read the full 5,600-page bill. Here are some FAQs we’ve received since Congress passed the latest stimulus bill.

1. Is it too late to apply for a PPP loan?

No! There is now PPP2. The forgivable loan amount is the same formula as PPP1 –2.5X your average monthly payroll. To be eligible, though, you need a 25% reduction in revenue in any 2020 quarter compared to the same 2019 quarter.

2. Is it too late to claim the 2020 Employee Retention Credit (ERC)?

No! The new stimulus bill allows businesses to retroactively claim an ERC for 2020. You’ll also need to show a reduction in revenue similar to the PPP requirement above. This can be worth up to $5K per employee.

3. Is there a new ERC for 2021?

Yes, and this one is even better than the one above… and you can get both of them! It can be worth up to $14K per employee, based on Q1 2021 and Q2 2021 payroll.

4. Can I claim the ERC if I already received a PPP loan?

Yes! The new stimulus bill now allows businesses that previously borrowed a PPP loan to go back and claim the ERC for 2020 and apply for the one for 2021. However, no “double dipping” on payroll – you cannot use payroll for PPP forgiveness and in the calculation of the ERC. Considering most PPP loans only covered a limited amount of payroll, there is a good chance you may qualify for the ERC as well.

5. Are my payroll expenses deductible on my tax return if my PPP loan is forgiven?

Yes! Previously under the CARES Act, you could not take a deduction for payroll expenses covered by a forgiven PPP loan. However, under the new stimulus bill, those expenses are now deductible.

There are many moving parts to the PPP Loan and Employee Retention Credit and how they interact, so be sure to reach out to Accountalent before making any final decisions. Our team can help you navigate these complex requirements so your startup doesn’t leave any money on the table.

How the latest Stimulus Bill will impact your startup

Last night, Congress came to an agreement on the latest Stimulus Bill (finally). In it are a couple key provisions that could impact startups.

1. Additional funding for the Paycheck Protection Program (PPP)

The program hasn’t taken any new applications since August. If you haven’t taken advantage of this program, check out our article reflecting on the first week after it was enacted.

2. Clarity on whether PPP loan expenses are deductible, even if the loan is forgiven.

The CARES Act clearly stated that forgiven PPP loans would not be included as income. However, it was previously unclear whether the expenses covered by the PPP loan would be deductible on the recipient’s tax return. This new legislation clears up that confusion and indicates that expenses paid with a forgiven PPP loan will still be deductible.

For example: If you previously received a $100,000 PPP loan and spent it all on payroll, and then the loan was later forgiven, you would not be able to deduct that $100,000 of payroll expense on your tax return. This treatment could leave you with a surprise tax bill of $21,000 (assuming a 21% corporate tax rate). The new stimulus bill eliminates this scenario by allowing you to deduct the full $100,000 in payroll expense.

Side Note: If you have not already applied for PPP forgiveness, wait until this new legislation is signed into law. There is no guarantee that this new bill will apply retroactively.

A note from our founder, Joe Faris:

3. Two-year tax break for business meals.

Typically, businesses are only allowed to deduct 50% of meals. The added proposal would allow businesses to deduct 100% of meals for 2021 and 2022.

Stay tuned, as this is unlikely to be the last Stimulus Bill we see come out of Washington in the coming months.

“Our startup is moving from California to Texas – What do we need to do?”

Since COVID, we receive several emails per week with this exact question about a startup moving out of the Golden State. The “from” tends to always be San Francisco, CA and the “to” is often Austin, TX.

The following list gives some good pointers on the “to-dos” for a startup moving out of CA:

  1. If you are TOTALLY moving out of CA (meaning all employees leaving) and will have less than $600K in sales to customers located in CA (or 25% or less of your total sales) going forward, file a SURC with the CA Secretary of State to surrender your CA Foreign Qualification. You will then have no Income Tax or Secretary of State filing requirements going forward in CA.
  2. File a Final Income Tax return in CA and ensure that that “FINAL RETURN” is selected.
  3. If you have a CA Sales Tax registration, file CDTFA-65 to close out your sales tax account and file a Final Sales Tax return on the regular filing date subsequent to filing CDTFA-65.
  4. Instruct your payroll provider to file Final payroll tax returns in CA.
  5. File a Change of Address with the IRS (click here).
  6. Instruct your local Post Office to forward your mail to the new location (click here).

The following list gives some good pointers on the “to-dos” for a startup moving into TX:

  1. Register for Employer Unemployment Tax in TX (click here).
  2. Secure TX Workers’ Comp insurance. TX is the only state where Workers’ Comp is not required – if you do not secure it, though, there is too much risk on the Company. It is cheap, costing about $250 per year per $100,000 in salary.
  3. Instruct your payroll company of your new TX work location for your employees – TX has no personal income tax, so you want to ensure the payroll company does not continue to withhold CA income taxes.
  4. Instruct your lawyer or DE Registered Agent to file a foreign qualification with the TX Secretary of State.
  5. Register for TX Franchise Tax (TX does have a corporate tax) once you receive your letter from the TX Secretary of State. Click here to register.
  6. Register for TX Sales Tax (click here). (Note: All software sales to TX customers are subject to TX sales tax. For SaaS sales, though, only 80% of the sales price is subject to TX sales tax.)

Shortcut: You can use a service like CorpNet to register for Unemployment Tax (#1 above) and Sales Tax (#6 above). Their fee is $200 per filing and will save you a TON of time.

Good luck, and enjoy the Lone Star State.

7 Ways Your Taxes Will Change Under a President Biden

Calling all startups and startup founders: now that the election is almost finalized, the time to start tax planning is now. Although many specifics are not yet fully developed, here is what we know right now about how a President Biden plans to change your taxes:

1. Corporate Tax Rate

Joe Biden plans to increase the corporate tax rate from 21% to 28%.

2. Foreign Subsidiary Tax Rate

Per Biden’s campaign website, he will double “the rate of the Trump offshoring tax rate and it will apply to all income.” This would increase the Global Intangible Low-Tax Income (GILTI) tax rate on foreign subsidiary income from 10.5% to 21%.

3. Manufacturing Tax Credit

Biden will seek to implement a 10% “Made in America” tax credit for certain costs of businesses that invest in “revitalizing closed or nearly closed facilities, retooling or expanding facilities, and bringing production or service jobs back to the U.S. and creating U.S. jobs.”

4. “Claw Back”

A startup that moves jobs overseas that could have been offered to Americans will be denied certain tax benefits and will need to return any public investments previously received.

5. Qualified Business Income Deduction (QBID)

IRC Section 199A currently provides a 20% deduction that reduces LLCs’, contractors’ and consultants’ taxable income. Biden plans to eliminate this deduction. However, you may still qualify if your taxable income is less than $400,000.

6. Capital Gains Tax

When you sell your startup and your gain exceeds $1M+, your long-term capital gains tax rate will increase from 20% to 39.6%.

7. Estate Tax

When you die, your estate tax rate will increase from 40% for estates over $11.6M to 45% for estates over $3.5M.  Therefore, an estate of $10M will now pay estate taxes of about $3M instead of $0. This change will make estate planning more important than ever.

As of right now, Biden has not indicated whether he will change the R&D Credit. However, with the amount of changes on the table, there is no telling what could happen next year.

In tax year 2019 alone, Accountalent helped 250+ clients claim over $10 million in PATH Act R&D Credits. Don’t leave cash on the table. Contact us now for a free consultation before these changes take place.

Header photo courtesy JoeBiden.com.

$1.7M Mistake for FILING an 83(b)

This is a very rare case when FILING an 83(b) Election made a bad situation worse:

Got a call last week from the CEO of a small, publicly-held company.  He had an easy-to-answer 83(b) Election question.  He was not a client, so we discussed other 83(b) Election issues to ensure it was done properly.

Some background:  the company hired a top executive and, as part of the compensation package, granted him 4M shares of Restricted Stock that vested over 48 months.  The grant was made a few months ago when the stock was trading at $0.85 per share.  The employee paid $400 for the shares, which was the par value ($0.0001 multiplied by 4M shares).  The employee filed the 83(b) Election timely and correctly.

Now the shocker – this employee now has $3.399M in taxable income and will owe about $1.7M in Federal and State (CA) income tax when he files his 2015 Income Tax return.  This is a result of the “bargain” purchase price ($400) he paid for $3.4M in stock (4M shares at $0.85 per share).  This “bargain” amount becomes taxable income, per IRS regulations.

To worsen matters, an 83(b) Election was filed.  Remember, that by filing an 83(b) Election, you are telling the IRS that you will pay them now, rather than later.  So, the IRS is expecting $3.399 in taxable income for this employee when he files his 2015 Income Tax return.

There is a procedure to rescind an 83(b) Election Form.  Though, if it is not done within 30 days of the grant, though, it is almost impossible to get it approved, as it needs the approval of the Commissioner of the IRS and “reasonable cause” is very, very narrowly defined.

It would have been much more advantageous not to file the 83(b) Election, thus choosing the “pay me later” option. Thus, when the stock vested, income tax would be owed on the value of the stock vested.  The employee, though, would have the opportunity to sell part of the stock (the Company is publicly traded) to pay the taxes.


IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.


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