By Steve Cleland, CPA
First, a quick note on the calendar 2020 filing season. The Internal Revenue Service plans to open tax e-filing season on February 12th, 2021. While this normally begins late January, the ongoing pandemic, the distribution of the latest round of stimulus, a backlog of work from last year, and changes in the tax law have necessitated a delay.
Despite the delay, we will continue to prepare returns as normal so we are ready to e-file as soon as the system allows.
PPP Round 2 – Second Draw Loans
The U.S. Small Business Administration (SBA) re-opened the portal to accept Paycheck Protection Program (PPP) loan applications for small lenders and will be opening it to all lenders on Tuesday (January 19th). Below are a few quick reminders to help you calculate your loan request.
Borrowing Capacity (Loan Maximum $2,000,000)
For most applicants, the maximum loan amount of a Second Draw PPP Loan is 2.5x the average monthly 2019 or 2020 payroll costs. However, for borrowers in the Accommodation and Food Services sector, the maximum loan amount for a Second Draw PPP Loan is 3.5x the average monthly 2019 or 2020 payroll costs.
Step 1: Gather all payroll costs (see definition below) from 2019 or 2020 for employees whose principal place of residence is the United States.
Step 2: Subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs by 2.5 (3.5 if the applicant operates in the Accommodation and Food Services sector) up to $2 million.
Compensation - compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips; payment for vacation, parental, family, medical, or sick leave (except those paid leave amounts for which a credit is allowed under Families First Coronavirus Response Act, Sections 7001 and 7003) and allowance for separation or dismissal.
Employee Benefits - employee benefits (including insurance premiums) consisting of group healthcare coverage, group life, disability, vision, or dental insurance, and retirement benefits.
State and Local Taxes - paid on the compensation noted above.
Independent contractors/Sole Proprietors:
Wages, commissions, income, or net earnings from self-employment.
Required Documentation for Payroll Costs
On January 6, 2021, the SBA released Interim Final Rule on Second Draw Loans. The SBA’s intention is to provide administrative relief to applicants, stating "At the time an applicant submits its loan application form, it must submit the following unless the documentation was submitted to the lender for the First Draw PPP Loan".
Lenders are still required to confirm the dollar amount of average monthly payroll costs for 2019 or 2020 (whichever was used to calculate loan amount) by reviewing the payroll documentation submitted with the borrower’s application.
Generally, an applicant will be required to submit the following information:
Required Documentation for Gross Receipts
For loans with a principal amount greater than $150,000:
Sufficient documentation establishing that the applicant experienced a reduction in revenue must be provided at the time of application, which may include relevant tax forms, such as annual tax forms or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.
For loans with a principal amount of $150,000 or less:
The applicant must submit documentation sufficient to establish that the applicant experienced a reduction in revenue at the time of application, on or before the date the borrower applies for loan forgiveness or, if the borrower does not apply for loan forgiveness, at SBA’s request. Such documentation may include relevant tax forms, including annual tax form, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.
Contact Your Lender!
Many banks process applications with a unique approach. Contact your lender as soon as possible to determine any other requirements.