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PPP Round One Forgiveness and PPP Round Two: What’s New? Expanded eligibility, expanded eligible costs, and new categories of costs that can be used toward forgiveness are all good news for borrowers - and may provide much needed relief for Colorado businesses and organizations
PPP Round One Forgiveness and PPP Round Two:
What’s New?
BY NATALIE ROONEY
In March 2020, the early days of the COVID-19 pandemic, the Coronavirus Response and Relief Supplemental Appropriations Act (CARES) provided some relief for businesses, dispersing more than $525 billion through the Paycheck Protection Program (PPP).
Now, while forgiveness of PPP round one is underway, business owners are getting another chance at $284 billion worth of potentially forgivable loans through PPP round two, aimed at keeping companies alive and employees on payrolls during the ongoing coronavirus pandemic. Business owners who received a loan last year and fully used those funds on eligible expenses may be eligible for a second loan if they meet certain requirements for size, revenue decline, and other criteria. This time, the loans cover more business expenses, are open to a wider range of businesses including destination marketing groups, newsgathering operations, and 501(c)(6) organizations (subject to certain restrictions). And, they come with the assurance that approved expenses paid for by the loan will be tax-deductible.
A special provision exists for hoteliers, food and beverage operators, and other entities with an NAICS code that begins with 72 (Food and Accommodation Services) which have been especially hard hit by the pandemic to receive a higher loan amount based on average monthly payroll than in the first round of PPP. The expanded eligibility could provide much needed relief for Colorado businesses and organizations, given the Centennial State’s reliance on tourism, says Lisa Simpson, CPA, CGMA, AICPA Vice President – Firm Services. “Expanded eligibility, expanded eligible costs, and new categories of costs that borrowers can use toward forgiveness are all good news,” she says. “For example, retailers who might have installed plexiglass shields can now use those expenses for loan forgiveness.”
ROUND ONE FORGIVENESS UNDERWAY
One of the key roles CPAs have played over the past year has been helping clients apply for PPP funds. Now, the work is in figuring out how and when to file for forgiveness. On Jan. 12, 2021, the Small Business Administration (SBA) announced it had granted nearly 85 percent of the applications for PPP loan for-
giveness to date. Borrowers of $50,000 or less have fared even better, with an 88 percent forgiveness rate. So far, the SBA has forgiven more than $100 billion of the $170.5 billion requested in applications. The initial run of the PPP, which ended Aug. 8, 2020, saw more than $525 billion loaned out to America’s small businesses.
As the new round of relief that began in January collides with the forgiveness process for many people who received funds in the first round, CPAs continue to help clients figure it all out. Kurt Oestriecher, CPA, partner in charge of accounting and auditing services with Oestriecher & Company, CPAs, teaches for state CPA societies around the country and assists his clients. “There is definitely a lot going on right now,” he says. “More than anything else, our clients need our time.”
Oestriecher predicts applications for forgiveness will ramp up sharply as entities that waited to see how the tax implications were going to fall out get clarity from the IRS and SBA. The Economic Aid Act signed on Dec. 27, 2020, answered a big question: Yes, businesses are able to deduct the expenses related to their PPP loans. “That was the single biggest reason people have been waiting to begin the forgiveness process,” Oestriecher says. Simpson cautions that while the deductibility issue has been resolved at the federal level, there might be some state conformity issues. “Some states may not adopt that same stance, which may present a challenge for taxpayers and their CPAs,” she says. (Editor’s Note: Colorado will follow the federal treatment for calendar year-ends. See the alert on page 11.) With the scramble to apply for forgiveness happening on the heels of an extended 2019 filing season, alongside the start of a new season, and also during a time when government audits were pushed back, Oestriecher says many practitioners are experiencing a backlog of work. Simpson advises, “Have patience on applying for forgiveness. Borrowers have until ten months from the end of their covered period to begin making PPP loan payments or apply for forgiveness. While firstround borrowers are closing in on that mark, if they can be patient and let CPAs get through this filing season, it will help.”
CLARITY AND CAUTION
Currently, PPP loans can be forgiven if at least 60 percent (down from 75 percent) of the money is spent on employee payroll costs, with the other 40 percent going for other allowable expenses, including qualifying mortgage interest, rent or lease payments, utilities, business operating costs, certain property damage costs, supplier costs, and worker protection expenditures. Ultimately, Oestriecher says a majority of his firm’s clients have found they are able to qualify for forgiveness using just wages alone, especially since Congress extended the time businesses have to spend their PPP funds from eight to 24 weeks. “Businesses are easily spending one hundred percent of their PPP funds just on wages,” he says. Oestriecher also advises S corporation shareholders and partners to be aware of tax basis related issues. PPP loan forgiveness is treated as tax exempt income, and the amount of the forgiveness would increase the tax basis in the S corporation stock and partnership interest. “I’m advising people attending my CPE courses of this situation,” Oestriecher says. “Once Congress resolved deductibility, basis became the number one issue.” Another area to consider: C corporations. “Now that you can deduct expenses related to a PPP loan, many C corporations may have a net operating loss,” Oestriecher explains. “Under the CARES Act, you can carry that back for five years. Practitioners need to be looking at whether it’s better to carry the loss back five years or carry it forward.”
YOU’VE GOT THIS
The AICPA has worked throughout the entire PPP process to engage with a broader ecosystem. “We’ve been working not only with the Treasury, IRS, SBA, and payroll providers but also with lenders to create a full circle of conversation so we’re all engaged in driving a common understanding of the process,” Simpson says. The AICPA relied upon state CPA societies and grassroots outreach to members of Congress to achieve deductibility. The result was the provision addressing tax deductibility in the Consolidated Appropriations Act of 2021. “It took a lot of work and involved a lot of people,” Simpson says. Additional advocacy efforts include advocating for a streamlined relief process for penalties when taxpayers couldn’t file on time and asking for quick guidance on how the PPP and the Employee Retention Credit work together, especially if PPP borrowers might have applied and used more payroll cost than needed. “We want to make sure the IRS and the SBA are producing guidance that makes sense and is beneficial to these small business owners,” Simpson says. Overall, Simpson says that most aspects of both rounds of PPP have been positive for borrowers. Even though forgiveness is still complex for loans above $50,000, there is now more flexibility. Borrowers can choose a covered period between eight and 24 weeks and can take advantage of an increased number of expense categories. “There’s no automatic forgiveness that many borrowers were looking for, but forgiveness is more achievable,” she says. “The changes have been designed to make it more streamlined and easier for the loan to be forgiven if the funds were used appropriately.” The economic crisis and opportunities to explore business relief funding have given members a better window into how their small business clients are really operating. “Now CPAs can step into the role of trusted advisor at a much higher level,” Simpson emphasizes. “Yes, you have to get the tax returns completed. And, at the same time, look for other opportunities to keep those client relationships strong and to support your business clients in meeting their business challenges. You’ve got this!”
The AICPA offers many resources to CPAs and the public at www.aicpa.org/sba, including a PPP Summary after Economic Aid Act at future.aicpa.org/resources/download/summaryof-ppp-after-enactment-of-the-economic-aid-act. You can access the information with a free AICPA website account. Additionally, AICPA experts discuss the latest on PPP and other small business aid programs during its virtual town halls. The webcasts, which provide CPE credit, are free to AICPA members. More information is available at www.aicpastore.com/ townhallseries.
Top Audit Challenges in 2021:
Peer Reviewers Weigh In
BY DEANA N. THORPS, CPA, MBA
The following article is excerpted from Deana Thorps’s guest blog originally published on AICPA Insights, Feb. 12, 2021. Read the entire post at
blog.aicpa.org/2021/02/top-audit-challenges-in-2021-peer-reviewers-weigh-in.
This year won’t be “business as usual” for auditors. Navigating a new revenue recognition standard and still dealing with pandemic-related disruptions, CPAs have worked hard to perform audits under uncertain circumstances since the pandemic began. That work will continue this year. We talked to more than 230 peer reviewers about the challenges auditors are facing. Here’s what they said.
TOP FIVE ASC 606 CHALLENGES: ACCOUNTING
The Financial Accounting Standards Board’s (FASB) new revenue recognition standard, FASB ASC Topic 606, Revenue From Contracts With Customers, is one of the most significant accounting standard changes in history. The surveyed peer reviewers identified these top ASC 606-related accounting challenges: • Identifying performance obligations (31% of respondents) • Recognizing revenue (28%) • Identifying relevant contracts (26%) • Identifying variable consideration, including material rights (22%) • Determining appropriate transaction price allocation (16%)
TOP FIVE ASC 606 CHALLENGES: AUDITING
The top ASC 606-related audit challenges peer reviewers identified were: • Determining whether management appropriately applied ASC 606 (48% of respondents) • Documenting the understanding of key contract terms where necessary (30%) • Evaluating management’s process for developing the estimate(s) (28%) • Determining whether assumptions used by management were reasonable (23%) • Assessing associated risks (21%) The AICPA Revenue Recognition Toolkit provides resources that can help. Go to www.
The abrupt shift to remote working, economic uncertainty, and new federal relief programs created numerous accounting and auditing complications for organizations this year: • Internal control (41% of respondents) • Compliance with CARES Act requirements (e.g., Paycheck Protection Program) (38%) • Going concern (33%) • Asset impairments (24%) • Revenue recognition (22%) The AICPA COVID-19 Audit & Assurance Toolkit, future.aicpa.org/topic/audit-assurance/ covid-19-audit-assurance, is another valuable source for information on auditing remotely as well as auditing clients affected by the pandemic. The resources cover topics such as fraud risk, issuing an appropriate auditor’s report, and Paycheck Protection Program implications.
Deana N. Thorps, CPA, MBA, is a Manager, Audit Quality Initiatives, with the Association of International Certified Professional Accountants.
The 2020 Teleworking Tax Nightmare
BY NATALIE ROONEY
For many people working remotely during the pandemic, tax season could get complicated if they’ve chosen to shelter in place in a different state. It’s a problem for both employees and employers, and few are aware of it.
I OWE WHAT? WHERE?
States currently have inconsistent standards and requirements for employees to file personal income tax returns when traveling to a nonresident state for temporary work periods, and for employers to withhold income tax on employees who travel outside of their state of residence for temporary work periods. More than half of remote workers polled by the AICPA said they were unaware that they could face tax consequences if they didn’t adjust their state tax withholding to reflect their work situation. Further, more than seven out of 10 remote workers were unaware that teleworking from a different state could affect the amount of state taxes owed. While remote work and state tax implications have been a problem for a long time – just ask anyone who has been traveling to client sites every week for years – Dustin Hubbard, CPA, Principal at CLA, says the problem was far more widespread in 2020 as we all worked from everywhere but the office. Over the course of his career, Hubbard has always had to file two or three different state returns because of his travel. “As a firm, we know we have to comply with these rules, but most companies don’t. They either aren’t aware of the rules or know about them and have determined that compliance costs are too burdensome.” In some places, like Colorado, workers could owe taxes to their temporary state after just one day of work. Other places tax only after a 30-day stay. Often, a taxpayer gets a credit from the home state for taxes paid to another, but it’s not always a break even situation. Hubbard says some states, especially those in the northeast, have reciprocity agreements because so many people commute from one to the other.
According to the AICPA, 13 states and the District of Columbia have addressed the 2020-specific situation by saying they won’t tax workers who’ve relocated there temporarily due to the pandemic. Instead, those people will pay taxes to the state where their employer is located, as usual. But even those policies can vary by state when it comes to how long the exemption is in effect. “So, when stay-at-home orders are rescinded, does that change the answer?” Hubbard questions. He gives an example of a Colorado company with an employee working from home in Wisconsin. “Does the rule change when Colorado rescinds the order? Or when Wisconsin does? And if that employee has been in Wisconsin since March, and you haven’t been withholding in Wisconsin or you’ve been withholding at Colorado rates, the Wisconsin return is subject to penalties, and you’re overheld in Colorado. It’s a rabbit hole.”
EDUCATING CLIENTS
CLA has been bringing this state tax issue to clients’ attention through social media and weekly webcasts. “At the end of the day, we don’t make the decisions for clients, but CPAs need to be aware of the issue and have conversations about it with clients,” he advises. “It’s a pretty big education process. For those small to medium business clients who have had sales reps who stayed put in 2020, it’s a big deal. They’re open to hearing about solutions. The solutions won’t be perfect, but it will show that you’re trying to solve a problem. Explain you’ve identified a risk and need to discuss it with them.” Proposed federal legislation to address the issue dates to the early 2000’s, but Hubbard says none of it ever moves very far. “It will be interesting to see if 2020 will force Congress to move something forward.” Hubbard says businesses are having to make decisions, sometimes by setting a minimum threshold across all the states. “They know it’s risky, but it’s hard for them to stay on top of 50 states. Thus, many decide they’ll do ‘X’ across the board and move on. It is something people need to think about. This problem isn’t going away anytime soon, and it’s getting more complicated.”
While Hubbard appreciates the challenges of dealing with “this continued web of uncertainty” in inconsistent state tax laws, he says there needs to be some sort of level setting to make compliance easier for business owners. “Wayfair put a bright line in place for sales tax nexus,” he says. “Now, we need consistent tax treatment to overcome this patchwork of complicated, nonresident income tax laws.”
COLORADO TAXATION OF
NONRESIDENT WORKERS
Generally, there is not a minimum number of work days that a nonresident employee must work in Colorado before an employer is required to withhold from wages. There are three limited exceptions. Employers need not withhold from employees whose income is exempt under 39-22104(4)(t) (nonresidents performing disaster-related work) or 39-22-104(4)(u) (active-duty service by an individual who has reacquired residency in the state under section 39-22-110.5). Also, there is an exception in 69-22-604(2)(a) for a nonresident who performs services in connection with any phase of a motion picture, television, or television commercial production for less than 120 days during any calendar year. Otherwise, the statute does not provide any minimum number of work days before withholding is required.
New Research Reveals Significant Diversity Gap
On Feb. 16, the Institute of Management Accountants and the California Society of CPAs released groundbreaking research findings in their joint study, “Diversifying U.S. Accounting Talent: A Critical Imperative to Achieve Transformational Outcomes.” This diversity, equity, and inclusion (DE&I) research study examines three demographic focus areas: race and ethnicity, gender, and LGBTQIA (lesbian, gay, bisexual, transgender, queer, intersex, and asexual) orientation in the U.S. accounting profession, encompassing public accounting and management accounting (accountants and financial professionals in business). The study also examines the role of ethics in the profession’s overall progress around DE&I and presents solutions to drive expansive change. The report is available at
imanet.org/diversifying-accounting talent.
The first in a multi-part global series, this report is informed by results from an online survey of over 3,000 current and former U.S. accounting and finance professionals and interviews of nearly 60 accounting, human resources, and DE&I practitioners and academics. The study found there is a significant diversity gap between those in executive leadership ranks and the broader accounting profession as well as the U.S. population. For example, African Americans make up 8.5% of the profession but only 1% of partners at U.S. CPA firms and 1.5% of CFOs of Fortune 500 and S&P 500 companies. The survey revealed diverse talent believes they aren’t advancing in the profession because of a lack of equity and inclusion.
43-55%
The study found that 43% to 55% of respondents from groups underrepresented at senior levels left their employers due to a perceived lack of equitable treatment, and at least 30% left because of a lack of inclusion. As many as 18% of the respondents from diverse demographic groups left the profession altogether due to these factors. “The diversity gap between senior leadership and the broader accounting profession is a huge wake-up call that this needs to be fixed through real solutions,” said Anthony Pugliese, CPA, CGMA, CITP, former CalCPA President and CEO who becomes Institute of Internal Auditors President and CEO, March 8, 2021. “More diverse leaders are needed to connect people of all backgrounds to the profession and to serve as role models so we can retain and develop the next generation of talent.”
The study concluded that for the profession to continue to grow and succeed with a robust talent pipeline, actions to address DE&I issues need to be taken now. This includes bringing in and promoting talented people based on relevant and unbiased factors rather than demographics. The report acknowledges DE&I improvement efforts that already are underway and suggests action in four areas: awareness, attraction, promotion, and accountability. “If we collaboratively work to close the diversity gap, it will not only have a positive impact on the front-end pipeline of candidates coming into the profession, but also it will work to curb the loss of talent we are seeing,” said Brad Monterio, CalCPA Chief Learning Officer and CalCPA research lead on the project. Several partners worked with IMA and CalCPA on this research study, including The International Federation of Accountants (IFAC), the National Association of Black Accountants (NABA), the Association of Latino Professionals for America (ALPFA), the National Society of Black CPAs (NSBCPA), the PhD Project, Connecticut Society of CPAs, Colorado Society of CPAs, Florida Institute of CPAs, Illinois CPA Society, Maryland Association of CPAs, Massachusetts Society of CPAs, The Ohio Society of CPAs, Pennsylvania Institute of CPAs, and Texas Society of CPAs. For more information, visit imanet.org/diversifying-accounting-talent.
