SBA Questioning PPP Borrowers with Loans Over $2 Million

When Congress initially authorized the Paycheck Protection Program, its intent was to provide loans that would be partially or completely forgiven if used for the intended purposes of helping businesses affected by COVID-19 stay afloat and to help those businesses maintain payroll. As part of the Small Business Administration’s (SBA’s) loan application, Form 2483 or lender’s equivalent form, borrowers had to certify under penalty of imprisonment and monetary penalties to the following:

  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. 
  • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud. 

Needless to say, the contemplation of free money had businesses scrambling to take out PPP loans, whether they were impacted by economic effects of COVID-19 or not.

The secretary of the treasury had initially indicated the need for all PPP loans to be audited, but later specified only those of $2 million or more would be subject to audit.

After a long wait, and as long anticipated, the SBA has initiated a compliance program to evaluate the good-faith certifications that borrowers made on their PPP Borrower Applications stating that economic uncertainty made the loan requests necessary. Accordingly, each borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater will be required to participate in this compliance program, and will soon be receiving one of the following multi-page forms from their lender:

Sometimes referred to as a “loan necessity questionnaire,” the form and requested supporting documents must be submitted to the lender servicing the borrower’s PPP loan. The completed form is due to the lender within ten business days of receipt. Among other things, the forms request:

  • Whether the borrower’s business was shut down as a result of a government order. 
  • Whether any of the business’s owners were compensated in excess of $250,000. 
  • The borrower’s liquidity before and after receipt of the loan funds and during the covered period.
  • The business’s gross revenue amounts for 2019 and 2020. 

The SBA says it is reviewing these loans to maximize program integrity and protect taxpayer resources. The information collected will be used to inform SBA’s review of each borrower’s good-faith certification that economic uncertainty made their loan request necessary to support ongoing operations. Receipt of this form does not mean that SBA is challenging that certification. After this form is submitted, SBA may request additional information, if necessary, to complete the review. The SBA’s determination will be based on the totality of the borrower’s circumstances.

Failure to complete the form and provide the required supporting documents may result in SBA’s determination that the borrower is ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.

If you have any questions related to this issue or need assistance completing the form and assembling supporting documentation, please give our office a call.

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Preparing for 2021: Tax Planning Strategies for Small Business Owners

If you are a small business owner, every penny of your income counts. This means that you not only want to optimize your revenue, but also minimize your expenses and your tax liability. Unfortunately, far too many entrepreneurs are not well-versed on the tricks and tools available to them and end up paying far more than they need to. You don’t need an accounting degree to take advantage of tax-cutting tips. Here are a few of our favorites.


When you started your business, one of the first decisions you needed to make was whether you wanted to operate as a sole proprietor, partnership, LLC, S corporation or C corporation. But as more time goes by, the initial reasons for structuring your business the way that you did may no longer be applicable, or in your best interest from a tax perspective. There is no requirement that you stick with the business structure you initially chose.

Ever since the Tax Cuts and Jobs Act of 2017 (TCJA) changed the highest corporate income tax rate from 35% to 21%, sole proprietorships, LLCs, partnerships and S corporations can realize significant tax savings by electing to be taxed as a C corporation. This simple change can make sense if the owner of these pass-through businesses is taxed at a high tax bracket. If so, all you need to do is fill out and file Form 8832. Before doing so, make sure that the tax savings you can realize are a reasonable tradeoff for the other reasons that you may have originally selected the structure you are currently in.


One of the most impactful changes that the TCJA made for pass-through businesses whose income is passed through for taxation as their owners’ personal income is a valuable tax break known as the qualified business income (QBI) deduction. For those that are eligible, this deduction is worth a maximum 20% tax break on the income they receive from the business – but determining whether or not you are eligible can be a challenge.

There are several restrictions on taking advantage of the deduction, particularly with reference to specified service trade or businesses (SSTBs) whose owners either earn too much income or rely specifically on their employees’ or owners’ reputation or skill. Though architecture and engineering firms escape this limitation, other business models – including medical practices, law firms, professional athletes and performing artists, financial advisors, investment managers, consulting firms and accountants – fall into the category that lose out on the deduction if their income is too high. In 2020 single business owners of SSTBs began phasing out at $163,300 and are excluded once their income exceeds $213,300, while those who are married filing a joint return phase out at $326,600 and are excluded at $426,600. To calculate the deduction, use Part II of Form 8995-A.

Businesses that are not SSTBs are eligible to take the deduction even when they pass the upper limits of the thresholds, but only for either half of the business owners’ share of the W-2 wages paid by the business or a quarter of those wages plus 2.5% of their share of qualified property.

These limitations and specifications for what type of business is and is not eligible are head-spinning, and though it is tempting to simply take the deduction, it’s a good idea to confirm whether you qualify and how to claim it with our office before moving forward.


It is incredibly rewarding to live the dream of owning your own small business, but the hard work required to generate revenue makes paying taxes extra painful. This is especially true because of the “pay as you go” tax system that the United States uses, which asks business owners to make quarterly estimated payments. While employees pay their taxes ahead via payroll deductions withheld by their employers, there is no such automatic system set up for small business owners, and that leaves many with the temptation of delaying making payments in order to maintain liquidity.

Unfortunately, failing to pay taxes quarterly can put you in the uncomfortable position of still having to pay at one point, with the additional burden of penalties and interest as a result of your delay. Though setting aside the money to pay taxes requires discipline, doing so will save you from the penalties charged by the IRS, which are calculated based on the amount you should have paid each quarter multiplied by both your shortfall and the effective interest rate during the specific quarter (established as 3 percent over the federal short-term rate – C corporations pay a different rate). Even if you don’t calculate your quarterly estimated rates correctly, the safe harbor rule allows small businesses to pay the lower amount of either 90% of the tax due on your current year return or 100% of the tax shown on your last filed tax return. For those whose AGI was over $150,000 in the previous tax year, the safe harbor percentage is 110% of the previous year’s taxes.

While it is always a good idea to increase the amount you send in if you are having a higher-income year, by doing a simple calculation of your safe harbor number and dividing it by four, you have a reasonable quarterly payment that you can safely send in on the due dates (April 15th, June 15th, September 15th and January 15th of the following year). By setting aside the appropriate percentage that you will owe from each payment you receive, you can easily set aside the money you will need to pay and entirely avoid concerns about penalties or interest. Payment is most easily submitted using the online link for IRS Direct Pay, though many people opt for sending in the paper vouchers for IRS Form 1040-ES, along with a check. There is also an EFTPS system available for C Corporations’ use.


Each small business owner calculates their income and revenue differently, with many using a method of accounting that is based on when money is received rather than when an order is placed and counts expenses when they are paid rather than the item or service ordered. This is known as the cash method of accounting.

Whatever method of accounting you use, smart business owners can strategically adjust their approach, reporting their annual income based on cash receipts in order to reduce their end-of-year revenues, especially if there is reason to believe that next year’s income will be lower or, for some other reason, they anticipate being in a lower tax bracket.

An example of how this approach would be helpful can be seen in the case of a business that expects to add new employees in the new year. Between that expense and other improvements planned, it makes sense to anticipate that net income will be down and the tax bracket for the business will be lower, so any work done or orders placed towards the end of the current tax year should be accounted for when payments arrive so that the income can be taxed at a lower rate. The contrast to this is if you are anticipating your business revenue increasing and being forced into a higher tax bracket in the new year: in that case it makes sense to try to collect monies for work done in the current year early, so that you can take advantage of your current, lower tax rate. The same can be done for business expenses such as office supplies and equipment, which can be deferred and accelerated in the same way so that you can take advantage of tax deductions in the way that is most advantageous.


One of the smartest ways to lower your taxable income is to contribute to a retirement account. Not only does doing so lower your business’ tax liability, but also ensures a more secure future. As a small business owner, either a 401(K) plan or a Simplified Employee Pension (SEP) plan will do the trick while benefiting both you and those who work for you in the future.

While a 401(k) that is established prior to year-end will let you deduct any contributions you make (with contributions limited to the lower of $57,000 or the employee’s total compensation), business owners who fail to set up this type of plan by December 31st can still turn to the SEP as an alternative. Though SEP contributions are restricted to 25% of the business owner’s net profit less the SEP contribution itself (technically 20%), a SEP can be established, and contributions made up until the extended due date of your return. If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.


Many small businesses took advantage of the PPP loans that were offered by the government in the face of the COVID-19 crisis. While these loans were attractive because they are forgivable and gave businesses a chance to survive the dire circumstances, in April of 2020 the IRS issued Notice 2020-32, which indicated that despite the fact that the forgivable loans can be excluded from gross income, the expenses associated with the moneys received cannot be deducted. This effectively erases the tax benefit initially offered because losing the employee and expense deduction increases the business’ income and profitability.

There is some chance that this issue will be resolved by Congress, as it clearly contradicts the original intent of the tax benefit that accompanied the PPP funds, but that action has not yet been taken. It’s a good idea to talk to our office about this as soon as possible, as having to pay taxes on expenses incurred may be particularly challenging in the face of the difficulties the pandemic has imposed. Being financially prepared to pay more taxes than you originally intended may be a bitter pill to swallow but will still be better than having to pay penalties and interest if you fail to pay what the government says that you owe.

Though all of these strategies can be helpful, they may not all be appropriate for your situation. Keep them in mind as you go into the end of the year and be prepared to ask questions to determine which apply to you when you speak with our office. Contact us to discuss tax planning for your business today.

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Don't Fall Behind in Saving for Retirement

Some folks have been tapping or suspending their retirement savings to make ends meet during this COVID-19 pandemic, and although understandable, it is important that they continue making contributions to their savings as quickly as financially possible.

Still other people have simply been ignoring the need to save for their retirement, which can have an unpleasant result when it comes time to retire. That tends to be the case with younger individuals who perceive retirement to be far in the future and therefore believe they have plenty of time to save for it. Some will postpone the issue until late in life and then must scramble during their last few working years to fund their retirement. Other people ignore the issue altogether, thinking their Social Security income (assuming they qualify for it) will take care of their retirement needs.

By current government standards, a single individual with $12,490 or a married couple with $16,910 of annual household income is at the 100% poverty level. If you compare those levels with potential Social Security benefits, you may find that expecting to retire on just Social Security income may result in a bleak retirement.

You can predict your future Social Security income by visiting the Social Security Administration’s Retirement Estimator. With the Retirement Estimator, you can plug in some basic information to get an instant, personalized estimate of your future benefits. Different life choices can alter the course of your future, so try out different scenarios – such as higher and lower future earnings amounts and various retirement dates – to get a good idea of how these scenarios can change your future benefit amounts. Once you’ve done this, consider what your retirement would be like with only Social Security income.

If you are fortunate enough to have an employer-, union-, or government-funded retirement plan, determine how much you can expect to receive when you retire. Add that amount to any Social Security benefits you are entitled to and then consider what retirement would be like with that combined income. If this result portends an austere retirement, know that you will be better off the sooner you start saving for retirement.

With today’s low interest rates and up-and-down stock market, it is much more difficult to grow a retirement plan with earnings than it was 10 or 20 years ago. With current interest rates not even, or just barely, covering inflation rates, there is little or no effective growth. That means one must set aside more of one’s current earnings to prepare for a comfortable retirement.

Because the government wants you to save and prepare for your own retirement, tax laws offer a variety of tax incentives for retirement savings plans, both for wage earners and for self-employed individuals and their employees. These plans include the following:

  • Traditional IRA – This plan allows up to $6,000 (or $7,000 for individuals aged 50 and over) of tax-deductible contributions each year. In the past, you could no longer make contributions after reaching age 70½. However, beginning in 2020 and for future years, contributions can be made at any age as long as you have work earnings for the year that the contribution applies. The amount that can be deducted phases out for higher-income taxpayers who also have retirement plans through their employers. 
  • Roth IRA – This plan also allows up to $6,000 (or $7,000 for individuals aged 50 and over) of nondeductible contributions each year. The amount that can be contributed phases out for higher-income taxpayers; unlike the Traditional IRA, these amounts phase out even for those who do not have an employer-related retirement plan. Note the difference: the phaseout applies to the deductible amount for Traditional IRAs, whereas the contribution amount phases out for Roth IRAs. 
  • Spousal IRAs – Spouses with no compensation for the year may contribute to their own IRA based upon their spouse’s compensation. If the unemployed spouse chooses a traditional IRA and the working spouse participates in an employer’s plan, the contribution’s deductibility phases out when adjusted gross income is between $196,000 and $206,000; if a Roth IRA is chosen, the contribution limit also phases out between $196,000 and $206,000, even if the working spouse isn’t covered by an employer’s plan 
  • Employer 401(k) Plans – An employer’s 401(k) plan generally enables employees to contribute up to $19,500 per year, before taxes. In addition, taxpayers who are age 50 and over can contribute an extra $6,500 annually, for a total of $26,000. Many employers also match a percentage of the employee’s contribution, and this can amount to a significant sum for those who stay in the plan for many years. 
  • Health Savings Accounts – Although established to help individuals with high-deductible health insurance plans pay their medical expenses, these accounts can also be used as supplemental retirement plans if an individual has already maxed out his or her contributions to other types of plans. Annual contributions for these plans can be as much as $3,550 for individuals and $7,100 for families. 
  • Tax Sheltered Annuities – These retirement accounts are for employees of public schools and certain tax-exempt organizations; they enable employees to make annual tax-deferred contributions of up to $19,500 (or $26,000 for those aged 50 and over). 
  • Self-Employed Retirement Plans – These plans, also referred to as Keogh plans, allow self-employed individuals to contribute 25% of their net business profits to their retirement plans. The contributions are pre-tax (which means that they reduce the individual’s taxable net profits), so the actual amount that can be contributed is 20% of the net profits. 
  • Simplified Employee Pension Plan (SEP) – These are plans that are relatively easy for a self-employed individual to set up and can be established in the following year up to the due date of the tax return, including the extended due date if an extension is filed. They are quite commonly used by self-employed individuals without employees and may also be used by self-employed individuals who are willing to make contributions on behalf of their employees. The contribution limit for the self-employed individual is the lesser of 25% of their compensation (which equates to 20% of the net profits from self-employment, after deducting the SEP contribution) or $57,000 for 2020. Contributions made on behalf of employees are deductible as a business expense, while the contributions for the self-employed individual are deducted as an above-the-line deduction on the individual’s income tax return.

Multiple Plan Limitations – If individuals wish to maximize their retirement contributions, they may become involved in more than one plan and end up with a combination of plans. This is where some overall limitations apply and where individuals can unknowingly make excess contributions, resulting in penalties and requirements to make corrective distributions.

  • 401(k)s – It is not uncommon for individuals to have multiple employers, each with a 401(k) plan. This can possibly create a situation in which the employee makes an excess elective-deferred compensation contribution. The annual maximum limit applies to all 401(k) contributions combined.
  • Combinations of Deferred Income Plans – There is also a $57,000 limit for 2020 on the aggregate amount of all elective deferrals made by an individual during the year. Plans affected by this limit include the following:
    • 401(k) plans,
    • SEP plans,
    • SIMPLE plans, and
    • Tax-sheltered annuities (TSAs, also referred to as 403(b) plans)

However, Code Sec. 457 plans (government plans) are not included in the overall deferral limitations 

  • IRAs – The IRA limits apply to the aggregate contributions to traditional and Roth IRAs. However, an individual can have both an IRA and deferred income plans.

Saver’s Credit – To help lower-income taxpayers save for retirement, Congress several years ago included a provision in the tax law that allows a 10%, 20%, or 50% tax credit on up to $2,000 of retirement plan and IRA contributions per year. The percentage of the credit depends on the taxpayer’s filing status and income (when the income is lower, the percentage is higher). For 2020, the maximum AGI at which a credit can be claimed is $64,000 for taxpayers filing a joint return, $48,000 for head-of-household filers, and $32,000 for all other filing statuses. For example, a single individual with an income of $30,000, who made an IRA contribution of $2,000 in 2020, would be eligible for a Saver’s Credit of $400 ($2,000 x 20%). Thus, their $2,000 IRA contribution would actually cost them only $1,600.

Qualified 2020 Distributions – For 2020, the Congress did provide relief from the early 10% distribution penalty on up to $100,000 for distributions from IRAs and qualified retirement plans. Individuals who qualify for these distributions include the following:

  • Those diagnosed with the virus SARS-CoV-2 or coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, 
  • A spouse or dependent who is diagnosed with such virus or disease by such a test, or 
  • An individual (or the individual’s spouse or household member) that experiences adverse financial consequences as a result of being quarantined, being furloughed/laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care resulting from such virus or disease, or closing or reducing hours of a business owned or operated by the individual due to such virus or disease.

If you were eligible and took a distribution, you can either include the income all in 2020 or include one-third in each of the years 2020, 2021, and 2022. You also have the option to return the distribution to your retirement plan or IRA and restore your retirement savings. The recontribution would need to be made within three years of the date of the distribution. You don’t have to return all of the distribution, but what you can return will certainly help your retirement savings. Plus, the IRS will refund the taxes you paid on the amount you returned to your retirement plan.

Each individual’s financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college are exemplary events that can limit an individual’s or family’s ability to make retirement contributions; these events must be accounted for in any retirement planning.

If you have questions about any of the retirement vehicles discussed above, please give our office a call.

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Employee Holiday Gifts May Be Taxable

It is common practice this time of year for employers to give their employees gifts. Where a gift is infrequently offered and has a fair market value so low that it is impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee, and its cost would be tax deductible by the employer.

De Minimis Benefits - In general, a de minimis benefit is one that, considering its value and the frequency with which it is provided, is so minor as to make accounting for it unreasonable or impractical. De minimis benefits are excluded from income under Internal Revenue Code section 132(a)(4) and include items not specifically excluded under other sections of the Code. Examples of de minimis benefits include such items as:

  • Controlled, occasional employee use of a company photocopier. 
  • Occasional snacks, coffee, doughnuts, etc., furnished to employees. 
  • Occasional tickets for entertainment events given to employees. 
  • Holiday gifts from the employer to the employees. 
  • Occasional meal money or transportation expenses paid for by the employer for employees working overtime. 
  • Group-term life insurance on the life of an employee’s spouse or dependent with a face value not more than $2,000. 
  • Flowers, fruit, books, etc., provided to employees under special circumstances, such as a birthday or illness. 
  • Personal use of a cell phone provided by an employer primarily for business purposes.

In determining whether a benefit is de minimis, you should always consider its frequency and value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.

Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously that items with a value exceeding $100 cannot be considered de minimis, even under unusual circumstances.

Holiday Gifts - A gift of cash, regardless of the amount, is considered additional wages and subject to employment taxes (FICA) and withholding taxes. Caution: If the gift recipient is a W-2 employee, the employer may not issue them a Form 1099-NEC or a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income.

When an employer gives gift certificates, debit cards or similar items that are convertible to cash, the value is considered additional wages regardless of the amount. However, if the gift is a coupon that is nontransferable and convertible only into a turkey, ham, gift basket or the like at a particular establishment, the gift coupon is not treated as a cash equivalent.

Holiday group meals, cocktail parties, picnics or similar events for employees are also treated as de minimis fringe benefits.

If you have questions about the tax treatment of holiday gifts to employees, please give our office a call.

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IRS Releases Anticipated Guidance Regarding PPP Loans and Expense Deductibility

On November 18, the Internal Revenue Service (IRS) released Revenue Ruling 2020-27 and Revenue Procedure 2020-51. The two releases offer clarification regarding the non-deductibility of expenses that contribute to the forgiveness of loans from the Paycheck Protection Program (PPP).  Author Sally Schreiber breaks down the contents and significance of the two releases in an article from the Journal of Accountancy.


The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the PPP program to support qualifying businesses through the coronavirus pandemic via forgivable loans. Loan recipients are permitted to use loan funds to cover a variety of expenses including payroll costs, payment of mortgage interest, rent, and utility payments. Section 1106(i) of the CARES Act excludes forgiven PPP loan amounts from gross income.

In a May 2020 follow-up notice, the IRS clarified that PPP loan recipients may not deduct expenses whose payments result in PPP loan forgiveness. This is an area not directly addressed by the CARES Act. The American Institute of Certified Public Accountants (AICPA) has voiced the opinion that the IRS clarification is counter to the intent of the CARES Act authors.

Revenue Ruling 2020-27

This ruling “addresses the issue of borrowers who pay expenses in 2020 but whose PPP loan is not forgiven until 2021.” It offers two scenarios to illustrate how the IRS expects loan recipients to handle PPP-eligible expenses, citing Sec. 265(a)(1). Both scenarios determine that the deduction of expenses is inappropriate. The tax bureau concludes that “the fact that the tax-exempt income may not have been accrued or received by the end of the taxable year does not change this result because the disallowance applies whether or not any amount of tax-exempt income in the form of covered loan forgiveness and to which the eligible expenses are allocable is received or accrued.”

Revenue Procedure 2020-51

This procedure “provides a safe harbor for PPP borrowers that have their loan forgiveness denied or who choose not to request loan forgiveness.” In the event that previously anticipated PPP loan forgiveness does not happen, this revenue procedure offers a path for taxpayers to retroactively deduct some or all of the expenses that they previously did not deduct because they expected to have their PPP loan forgiven. This procedure goes into effect with the 2020 tax year.

For further details, click here to read the article in full at the Journal of Accountancy.

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