Buying and Selling a Business with a PPP Loan

 

The SBA has recently began the process of forgiving PPP loans. Some businesses, however, are being bought and sold with these loans still unforgiven. The SBA has provided requirements regarding how businesses with outstanding PPP loans are to proceed when selling the ownership interest or assets of the business.

The SBA considers there to be a “change in ownership” if at least 20 percent of the common stock or other ownership interest of the borrower or at least 50 percent of the businesses’ assets, measured at fair market value, are sold or otherwise transferred, or if the business is merged with or into another entity.

The PPP borrower remains responsible for performance of all obligations, certifications, and compliance requirements of the PPP loan, including preparing and retaining all required PPP forms and supporting documentation. The borrower must notify the lender in writing of any contemplated change of ownership transactions and provide the lender with a copy of the proposed agreement(s). The only instance when this is not required is if the PPP note is fully satisfied; that is, the PPP loan has been repaid in full either by the borrower and/or by the SBA remitting the funds to the lender.

SBA prior approval is not required in the following scenarios, although lender approval is still required:

·         Sale or Other transfer of common stock or other ownership interest or a merger

o   The sale or other transfer is of 50% or less of the common stock or other ownership interest of the borrower

o   The borrower completes and submits a forgiveness application and an interest-bearing escrow account controlled by the lender is established with funds equal to the outstanding balance of the loan

·         Sale of assets

o   The sale of 50% or more of the assets (measured by fair market value)

o   The borrower completes and submits a forgiveness application and an interest-bearing escrow account controlled by the lender is established with funds equal to the outstanding balance of the loan

SBA prior approval is required if none of the above scenarios can be achieved. The lender must submit the request to the appropriate SBA Loan Servicing Center, along with additional information regarding the potential sale and why the borrower does not meet one of the above scenarios. If the SBA is to approve a sale of 50 percent or more of the assets, the buyer is required to assume all responsibility of the PPP loan and compliance with the terms of the loan.

The PPP Lender is required to notify the SBA of the sale completion within 5 business days, including information regarding the new owners, percentages of ownership, tax identification of owners of more than 20 percent equity, and the location and amount of funds in the escrow account if it was required.

The rules surrounding the PPP program are complex and changing often. Contact us so we can help navigate this important time in your business.

Employee Payroll Tax Deferral

 

On August 8, 2020, President Donald Trump issued a Presidential memo allowing for the deferral of certain payroll taxes. This deferral can be applied to wages beginning on 9/1/2020 and ending on 12/31/2020.

The deferral is limited only to the employee’s share of Social Security taxes during the deferral period for employees earning $4,000 or less during a bi-weekly pay period (or the equivalent threshold amount for other pay periods). However, any amounts deferred must be repaid between 1/1/2021 and 4/30/2021. In essence, the employer could stop withholding (and stop remitting) the employee portion of Social Security tax beginning 9/1/2020, but after 12/31/2020, would have to withhold (and remit) current Social Security taxes as well as any Social Security tax deferred during the deferral period.

The repayment of the deferred taxes would be withheld ratably from wages paid between 1/1/2021 and 4/30/2021. Employee take-home pay would increase for the remaining four months of 2020, but would dip below normal starting 1/1/21 due to repayment. If not all of the deferred taxes are paid by 4/30/2021, then they will start to accrue interest and penalties.

As for employers, the deferment of employee’s Social Security taxes is OPTIONAL. The employer is ultimately responsible for the withholding and depositing of the additional withholding during the repayment period. There are administrative issues in achieving the deferral and repayment, such as increased payroll fees. There is also no financial benefit to the employer, as the deferred taxes will be passed through to the employees as higher net pay. In addition, the employer may have to make up the difference out of their own pocket if an employee quits or is terminated before the entire deferral amount is repaid.

The main benefit to deferring taxes would be increased employee satisfaction due to receiving higher net pay. However, this could backfire in early 2021 if employees don’t understand that their net pay will decrease below normal due to the additional withholding due to deferral repayment.

If you would like to discuss the optional deferral of employee Social Security taxes or would like additional information, please contact us.

Qualified Tuition Program - 529 plans

If you have a child (or a grandchild) who's going to attend college in the future, you've probably heard about qualified tuition programs, also known as 529 plans (for the Internal Revenue Code section that provides for them), which allow prepayment of higher education costs on a tax-favored basis.

There are two types of programs: prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won't be starting college for some time; and savings plans, which depend on the investment performance of the fund(s) you place your contributions in.

You won't get a federal income tax deduction for the contribution, but the earnings on the account aren't taxed while the funds are in the program. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.

Distributions from the program are tax-free up to the amount of the student's "qualified higher education expenses." These include tuition (including up to $10,000 in tuition for an elementary or secondary public, private, or religious school), fees, books, supplies, and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.

Distributions from a 529 plan can also be used to make tax-free payments of principal or interest on a loan to pay qualified higher education expenses of the beneficiary or a sibling of the beneficiary.

Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax is also imposed.

Eligible schools include colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This includes nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions.

However, "qualified higher education expenses" also include expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

A school should be able to tell you whether it qualifies.

The contributions you make to the qualified tuition program are treated as gifts to the student, but the contributions qualify for the gift tax exclusion amount ($15,000 for 2020, adjusted annually for inflation). If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account ratably over a five-year period starting with the year of the contributions. Thus, assuming you make no other gifts to that beneficiary, you could contribute up to $75,000 per beneficiary in 2020 without gift tax. (In that case, any additional contributions during the next four years would be subject to gift tax, except to the extent that the exclusion amount increases.) You and your spouse together could contribute $150,000 for 2020 per beneficiary, subject to any contribution limits imposed by the plan.

A distribution from a qualified tuition program isn't subject to gift tax, but a change in beneficiary or rollover to the account of a new beneficiary may be.

If you'd like to further discuss how the qualified tuition program might help to meet your child's future college costs, please contact us.

Small Employer Health Insurance Credit for Taxable Employers

Did you know there is a tax credit available for certain small employers providing health insurance coverage for their employees? The credit is specifically targeted to help certain small businesses that primarily employ moderate- income workers and lower-income workers. The credit can offset a taxable employer's regular tax liability or its alternative minimum tax (AMT) liability.

The amount of the credit is generally 50% of the employer's nonelective contributions. The amount of the credit is subject to a phase out (described below).

An employer qualifying for the credit (i.e., an eligible small employer or ESE) has to meet all of the following requirements:

(1)  The employer can't have more than 25 full-time equivalent employees (FTEs) for the tax year. An employer's FTEs are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number).

(2)  The average annual wages of the employees can't exceed $55,200 in tax years beginning in 2020. The average annual wages are determined by dividing the total wages he employer pays by then number of its FTEs and then rounding that number down to the nearest $1,000.

(3) The employer has to contribute at least 50% of the premiums for the employees' health insurance coverage on a uniform basis.

                 

The amount of the credit gradually phases out if the number of an ESE's FTEs exceeds ten, or if the average annual wages of the employees exceed a dollar limitation ($27,600 in tax years beginning in 2020), as adjusted for inflation. Under the phase out, the full amount of the credit is available only to an employer with ten or fewer FTEs and whose employees have average annual wages of less than $27,600 in tax years beginning in 2020. However, an employer with exactly 25 FTEs or average annual wages exactly equal to $55,200 is not in fact eligible for the credit in tax years beginning in 2020. Since the eligibility rules are based in part on the number of FTEs, not the number of employees, in certain circumstances, a business that uses part-time help can qualify for the credit even if it employs more than 25 individuals.

For purposes of determining whether an employer is an ESE and determining the amount of the credit, self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer and certain relatives of these individuals are not treated as employees for purposes of the small employer health insurance credit. There are also special rules that apply to seasonal workers, leased employees, and employees who have more than 2,080 hours of service during a tax year.

The credit is only available if the ESE purchases health insurance coverage for its employees through a small business health options program exchange (SHOP Exchange). Also, the credit is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified health plans to its employees through the SHOP exchange. The maximum two-year coverage period does not take into account any tax years beginning before 2014. Thus, an ESE can potentially qualify for the credit for six tax years, four years before 2014 and two years after that date.

An employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an ESE pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost, the employer can claim a deduction for the remaining 50% of the premium cost. Any unused credit can be carried back for one year (but not before 2010) and forward for 20 years to offset future taxes.

Please contact us if you have any questions concerning the credit or if we can assist you in determining whether your business can benefit from claiming the credit.