Again, as I have mentioned in the past, all of this is just conjecture at this point. We are still waiting on final guidance from the SBA and the IRS. Given the fact that everything I’m about to say could turn into nothing but a great big bologna sandwich, let’s jump in.
PPP Loan Borrowers Can Now Receive the Employee Retention Credit
This is retroactive back to March of 2020, so if you got a PPP Loan, you can put in for an ERC for the 4th Quarter of 2020. You must be able to prove that your revenues are down 50% from the same period in 2019 and the credit is 50% of the first $10,000 per qualifying employee.
New Round of PPP Loans
Given the new round of PPP Loans, it might be good planning to increase your payroll in the fourth quarter of 2020 if you can qualify. This would ultimately increase your PPP Loan. If you’re an S Corp, reclassing distributions to payroll will only cost you the additional 15.3% in payroll tax since you would be paying income tax on the distributions anyway.
Expenses Used In Forgiveness Can Be Deducted
The IRS affirmed this morning that the expenses used for forgiveness on both rounds of PPP Lending are deductible. This makes the money affectively free.
Retirement Plans Can Now Be Established Up To The Income Tax Return Date
If you had wanted to set up a plan, and thought that you missed the deadline, in many cases you haven’t. You can in some cases still set up a plan that could be used to reduce your 2020 income taxes as long as it is funded before the due date of the return.
I need all of you thinking about these things before we do your 4th Quarter Payroll Tax Returns. There are significant planning opportunities. If your returns were already electronically filed, they can be amended.
We are still waiting for the final findings from the services, which will put us into a major planning bind. The final findings aren’t due out until January 21st, and the returns are due January 31st, but we’ll get it done.
Let me leave you with this.
We’re going to set up a scenario to better explain some of these planning opportunities.
Our business owners Joe and Jane have a business that was established ten years ago. They are in the highest income tax bracket which is 36% federal and 5% state. They have already taken out a reasonable salary from their S-Corp of $90,000. The total payroll from their company is $350,000 and they have taken distributions of $200,000.
Given the planning opportunities from PPP2, what can they now do?
They are going to set up one of the qualified retirement plans that allow them to put away an additional $100,000 income tax free. It will cost them payroll taxes only if done properly. Since they have already paid the payroll taxes on $90,000, it will be roughly another $8,900. Since their affective income tax rate is 41%, they just saved $32,100 in income taxes.
Now they can also get a larger PPP Loan in the second round. Before the increase in the payroll, they would have qualified for $72,916 in free money. Now they can get $93,750.
They can also get the employee retention credit on them and their five employees. That’s 50% on the first $10,000 in payroll from the 4th quarter. seven employees with a $5,000 credit is another $35,000.
That’s an additional $160,850 this year, and we haven’t even finished the first week of 2021.
That’s before we get into the first two quarters of 2021, when the employee retention credit increases to 70%. If any of you ever wondered why you chose me as your accountant, wonder no more.
It’s beginning to look a lot like Christmas.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. If there is anything you need, whether you are a current client or not, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
www.AccountingSolutionsLtd.com
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