the forensic toolkit: navigating the aftermath of covid-19

Shannon Christensen, Thomson ReutersTax & accounting specialist editor

Trenda Hackett, Thomson ReutersTax & accounting executive editor

The forensic toolkit: Navigating the aftermath of COVID-19 relief

Interplay between SBA loans and grant funds and IRS payroll tax credits2

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Welcome

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• COVID-19 legislation: SBA forgivable loans and grant programs and IRS payroll tax credits – what do they have in common?

• The Payroll Function, wages, payroll taxes• No Double Dipping of benefits on the same wages

• Enforcement efforts, IRS and SBA audits and proper substantiation

• Pitfalls to avoid in requesting loan forgiveness and advance refund payroll tax credits

• Likelihood of IRS or SBA Audit

Interplay between SBA loans and grant fundsand IRS payroll tax credits


Can IRS know whether a business received a PPP Loan?

How should PPP money be spent to obtain full forgiveness?

Can the SBA know if a business claimed the employee retention credit or other payroll credits?

What are the recordkeeping requirements for payroll tax credits and SBA loan/grant funds?

What is the likelihood of an audit by IRS or SBA?

Billions of dollars were provided to struggling businesses, early on and quickly, during the Coronavirus pandemic.Congress, IRS and the SBA are now taking the time to make sure those funds were used according to the rules.

INTERPLAY BETWEEN SBA LOANS AND GRANTS AND PAYROLL TAX CREDITS

No double dipping


• Small businesses

• First Draw LoansMax $10 million

500 or fewer employees

2.5 times average payroll

• Second Draw Loans, Max $2 million

300 or fewer employees

25% or greater revenue reduction (2019 and 2020 comparable qtrs.)

2.5 times (3.5 for food and accommodation)

Paycheck Protection Program - PPP


How should PPP loan money be spent to obtain full forgiveness?

• Covered expenses: 60% payroll wages; 40% rent, utilities, mortgage interest (prior to 2/15/20) AND Covered expenditures, including: human resource, accounting needs, supplier costs, property damage costs, worker protection expenses

• Covered Period: 8-24 weeks

• Employee compensation levels (not more than 25% reduction) or Safe Harbor

• Employee head count (not more than 25% reduction) or Safe Harbor

Note: CAA retroactively allowed additional covered expenses for loans not forgiven as of December 27, 2020. For first draw loans forgiven prior to December 27, 2020, covered expenses include only payroll, rent, utilities, and mortgage interest established as of 2/15/2020.

Paycheck Protection Program – Loan Forgiveness


Paycheck Protection Program - PPP


Consolidated Appropriations Act (CAA)

• PPP loan funds are not includible in income,

• Loans are fully forgivable

• Eligible expenses paid with loan funds are fully deductible

Tax Treatment of PPP Loan Forgiveness

Thomson Reuters PowerPoint Template Quick Reference Guide9

• Whether the borrower was eligible to receive the loan,

• Whether the funds were spent on covered expenses in the applicable covered period,

• Whether the borrower met loan necessity requirements,

• Whether the payroll costs (qualified wages) submitted for forgiveness were used to obtain ERC,

• Whether employee compensation levels were maintained during the covered period,

• Whether employee head count was maintained during the covered period.

SBA PPP Audit – What could they be looking for?

Thomson Reuters PowerPoint Template Quick Reference Guide10

Federal and State information sharing programs • IRS and SBA collaboration• Freedom of Information Act

Tax Filings and Reporting• Payroll tax filings (Form 941)

• State wage reporting and unemployment tax filings

• Tax Return transcripts (Schedule C)

Applying for PPP Loan Forgiveness • Certifications – Use of Funds/Loan Necessity• Loan Necessity Questionnaire• Supporting Documentation

Likelihood of SBA Audit – Where would they look for information?


YES!

YES!

YES!

Do IRS and the SBA share information on tax credits taken and PPP loan forgiveness or SBA grant funds?

During the PPP loan application process, Forms 941 and FUTA information provided

IRC Code Sec. 6103 – authorizes IRS to share information with other government agencies

Freedom of Information Act – authorizes the sharing of information publicly

Edit presentation title on Slide Master using Insert > Header & Footer12

PPP Loan Certification – Loan Necessity/Use of Funds


PPP Loan Forgiveness Certification – Use of Funds

“The dollar amount for which forgiveness is requested (which does not exceed the principal amount ofthe PPP loan):

• was used to pay business costs that are eligible for forgiveness (payroll costs to retain employees;• business mortgage interest payments; business rent or lease payments; business utility payments;• covered operations expenditures; covered property damage costs; covered supplier costs; or covered• worker protection expenditures),• includes all applicable reductions due to decreases in the number of full-time equivalent employees

and salary/hourly wage reductions,• includes payroll costs equal to at least 60% of the forgiveness amount,• for any owner-employee (with an ownership stake of 5% or more) or self-employed individual/

general partner, does not exceed 2.5 months’ worth of compensation received during theyear used to calculate the PPP loan amount, capped at $20,833 per individual in total acrossall businesses.”


Business Activity Assessment• Revenue reduction?• Business Restrictions?

Liquidity Assessment• Dividends and distributions? • Prepayment of Debt?

PPP – Loan Necessity Questionnaire (Form 3509/3510)


What supporting documentation should be kept and for how long?

* Separate Bank Accounts for PPP and SBA grants separate from normal operating accounts

* Payroll reports with unique wages codes * Payroll tax filings, FUTA & SUTA* Receipts or cancelled checks for employer

contributions, employee health insurance costs, retirement plan contributions

Supporting documentation

Statute of limitations period on SBA loans and grant funds6 years after the loan is forgiven or grant funds should be fully utilized


1. Employee paid sick leave credit, 2. Employee paid family leave credit, 3. Employer’s (and employee’s) payroll tax

deferral, 4. The employee retention tax credit, and 5. The COBRA (Consolidated Omnibus

Budget Reconciliation Act) premium assistance tax credit.

Reduced payroll tax deposits and advance refund credits5 COVID-19 Payroll Tax Relief Programs

1) Employee paid sick leave credit,

2) Employee paid family leave credit,

3) Employer’s (and employee’s) payroll

tax deferral,

4) The employee retention tax credit,

and

5) The COBRA (Consolidated

Omnibus Budget Reconciliation Act)

premium assistance tax credit.


To avoid penalties employers must:• Pay qualified wages in the calendar quarter before the due

date of the required deposit• Reduce the deposit by no more than the anticipated credit,

and• NOT file Form 7200 seeking payment of an advanced credit• Form 7200, Advance Refund Credits, cannot be requested by

new businesses formed after 12/31/2020

Advance Payroll Tax Offset - Employers may reduce their quarterly EFTPS payroll deposits in anticipation of the credit on quarterly Form 941 (or equivalent)

Where credits exceed the employment tax due, employers may either:

Request a refund of the excess using Form 7200 Reduce the next calendar quarter deposits by the

excess

IRS Notice 2020-22 provides relief from failure to deposit penalties under IRC 6656Payroll Tax Penalty Relief

IRS COVID Tax Tip 2021-64, 5/10/21

Don't use Form 7200 to simply claim the ERCOnly use Form 7200 to request advance payment of ERC

Claim the actual ERC on an employment tax return (Form 941).

Don't forget to inform any third-party payroll agentof any requested or received advance payment credits

using Form 7200.

When amending Form 941 to retroactively request ERC, where PPPloan funds were also received, complete ALL the lines on Form 941-X that relate to both qualified wages and qualified health plan expenses.


Payroll Wage Earnings Codes ~ Example CodesSpecific payroll wage earning codes should be assigned to each employee's paycheck stub to assist in the tracking of paid sick or family leave,payment of ERTC on wages and allocable healthcare benefits as well as SBA PPP Loans and Grants for eligible payroll expenses. EXAMPLE CODES:

Recommended Payroll earnings and Memo Codes* Act/Definition Qualified Wage Paid DatesERTC 70% Qualified employee wages for the employee retention credit Jan. 1, 2021 - Dec. 31, 2021ERTC 50% Qualified employee wages for the employee retention credit Mar. 13, 2020 - Dec. 31, 2020ERTC NB New business after Feb. 15, 2020 Effective Jul. 1, 2021ERTC ADV Small employer = > 500 full time employees in 2019 Jan. 1, 2021 - Dec. 31, 2021FF ER Heatlh Credit Families First Corona Virus Relief Act Paid sick and Family Leave credit Apr. 1, 2020 - Dec. 31, 2020FF EFMLEA Expansion Families First Emergency Family Medical Leave Act Expansion Apr. 1, 2020 - Dec. 31, 2020FF EPSLA Families First Employee Sick Leave Pay Apr. 1, 2020 - Dec. 31, 2020FF CARE Pay Families First CARES Pay Apr. 1, 2020 - Dec. 31, 2020ARP FMLA Expansion American Rescue Plan Act - family medical leave act expansion (i) 1/1/2021 - 3/31/2021; (ii) 4/1/2021 - 9/30/2021ARP ESP American Rescue Plan Act - employee sick pay (i) 1/1/2021 - 3/31/2021; (ii) 4/1/2021 - 9/30/2021ARP FLP American Rescue Plan Act - family leave pay (i) 1/1/2021 - 3/31/2021; (ii) 4/1/2021 - 9/30/2021Draw 1 PPP 6/5/20 First draw paycheck protection program funds, prior to 6/5/20 (within 8 weeks of disbursment)Draw 1 PPP First draw paycheck protection program funds, (within 24 weeks of disbursment)Draw 2 PPP Second draw paycheck protection program funds (within 24 weeks of disbursment)RRG Restaurant Revitalization Grant eligible expenses - wages through March 11, 2023EIDL ADV Economic Injury Disaster Loan AdvanceTEIDL ADV Targeted Economic Injury Disaster Loan AdvanceSTEIDL ADV Supplemental Targeted (EIDL) Advance SVOG Shuttered Venue Operator's Grant eligible expenses - wages one year from date of receipt of funds

FTC ¶ S-3175.9 Required Form W-2 reporting for wages qualifying for the refundable payroll tax credit for paid COVID-19 leave* IRS Notice 2020-54, 2020-31 IRB - required reporting on employees W-2 of qualified sick and family leaveSelf-employed individuals report the families first qualified sick or family leave wages on Form 7202

Payroll Tax Credit Codes – W-2 Box 14, statement


Paid Family LeaveApr. 1, 2020 – Mar. 31, 2021.

The daily wage limit for employees described below, was capped at $200/dayi. is caring for someone quarantined or in medical isolation

advised by a health care provider,ii. is caring for a child because the child’s school or daycare

facility is closed, or daycare provider is unavailable due to COVID-19 precautions,

iii. is experiencing any other substantially similar conditions (related to COVID-19).

10-week bank from Apr. 1, 2020 –Mar. 31, 2021

Apr. 1, 2021 – Sept. 30, 2021 (credit sunset)iv. is caring for someone (personal relationship tie) obtain the COVID-19 vaccination or recover from the vaccination.

12-week bank reset, extended from Apr. 1, 2021 – Sept. 30, 2021

Paid Sick LeaveApr. 1, 2020 – Mar. 31, 2021.

The daily wage limit for employees described below, was capped at $511/day

i. is subject to a federal, state, or local quarantine or isolation order related to COVID-19,

ii. has been advised by a health care provider to self-quarantine,

iii. is unable to work or telework due to experiencing symptoms, and seeking a medical diagnosis, of COVID-19,

10-day bank from Apr. 1, 2020 –Mar. 31, 2021

Apr. 1, 2021 – Sept. 30, 2021 (credit sunset)

iv. is obtaining the COVID-19 vaccination or recovering from illness related to immunization,

10-day bank reset from Apr. 1, 2021 – Sept. 30, 2021

Paid sick and family Leave ~ (Employers with fewer than 500 employees)


Employer’s can deferSocial Security/ RRR equivalentMar. 27, 2020 – Dec. 31, 202050% due Dec. 31, 202150% due Dec. 31, 2022

Employees had the option to deferSocial SecurityPenalties and interest won’t accrueUntil Jan. 1, 2022

Deferred Payroll TaxesPPP forgiveness and tax deferrals on the same wages is allowed


Many employers experienced steady revenue or even increases in revenue during the pandemic and may erroneously believe they aren’t eligible for the ERC.

This is false.

Employee Retention Tax Credit - ERCExamples of ‘more than a nominal disruption’ under the Government Order test:

Was commerce impacted by restrictions on clients or customers?

Were workplace modifications required that caused more than a nominal effect on business operations? Facts and circumstances based.• Limiting the amount of customers in your store at one time,• Shutting down operations so that you could build furniture and

rearranging displays for social distancing measures• Installing dividers near the point of sale system,

• Group meetings and travel that was prohibited

Were there supply chain delays in materials, inventory?

Eligibility Requirements:

1. Suspended by a Government Order, OR

2. Experiencing a “significant decline” in gross receipts, OR

3. A Recovery Start-up Business (post Feb. 15, 2020)

4. Severely Financially Distressed (90%+ decline)

Employers of ANY size may be eligible for ERC

(note: Employers with fewer than 500 employees only applies to the paid sick/family leave credit)


COBRA Premium Tax Credit

100% COBRA premium subsidy for COBRA continuation coverage due to an involuntary termination.

Apr. 1, 2021 – Sept. 30, 2021

Premium is advanced by the employer, plan or insurer

Fully reimbursable to employer through refundable credits against Social Security and Medicare tax

COBRA premium assistance ends when the individual becomes eligible for other coverage or Medicare

Not includable in the individual’s taxable income


• High risk industry where employee and independent contractor lines blur?

• Amended 941X returns with significant refunds

• Congress retroactively repealed the rule allowing PPP forgiveness and ERC

• Whistle blower

• TD 9953 Effective Sept. 10, 2021 Temp. Reg. allowing IRS to recapture erroneously filed Form 941’s where COVID-19 payroll tax credits resulted in erroneous refunds.

• Biden’s fiscal 2022 budget $1.8 billion to Treasury – Treas. Sec. Yellen $900 million to increase audit enforcement

Payroll Tax Audits are a stand-alone process

Likelihood of IRS Audit ~ Putting it altogether


The statute of limitations time period to which an SBA or IRS auditor can look back

~ SBA – up to 6 years after the loan is forgiven, or grant funds were supposed to be fully used.

~ IRS – For 2021 ERC and payroll tax credits, 5 years from the Form 941 return filing due date.

Evidence supporting your eligibility for credits, forgiveness and grant fundsRecord Keeping Requirements - Substantiation


What payroll taxes are offsetable when taking an advance payroll tax credit for the ERC after June 30, 2021?


What payroll taxes are offsetable when taking an advance payroll tax credit for the ERC after June 30, 2021?

Answer: After June 30, 2021, the ERC is offsetable against the employer’s share of Medicare taxes only (1.45% rate) and the credit is increased for Medicare tax as well.

FYI: From March 2020 – June 30, 2021, the ERC was offsetable against both the employer’s share of Medicare tax and the employer’s share of Social Security tax (6.2% rate).


What is the deadline to apply for PPP loan forgiveness?


What is the deadline to apply for PPP loan forgiveness?

Answer: the maturity date of the loan. Borrowers can apply for forgiveness at the end of the 24-week covered period, the date all funds should’ve been used. The covered period begins the day of disbursement of the funds. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, the loan is no longer deferred, and payments will be due.


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