This credit was part of the March 2020 COVID Relief bill, but folks had to choose between the credit or the PPP loan. However, the December 2020 Economic Aid Act changed that restriction so that folks who received a PPP loan may take the credit too, but the earnings submitted on the PPP Forgiveness Application are excluded from this credit calculation.

This credit is significant for the wine industry because you qualify if your operations were fully or partially suspended due to government orders. Thus every winery in California was shut down beginning March 17th, and some were shut down on March 15th. It is also available for businesses with a 50% revenue decrease, but please check the IRS website for the details on those rules.

Recent updates are at the end of the post.

Here are the IRS rules

This is how I calculate the potential credit:

1. Create a report showing the earnings for each employee on a row and each pay run in separate columns.
2. Exclude any close relatives who are not owners (sorry, this is a thing … see the IRS rules)
3. Calculate the total wage earnings for March 17 to December 31, 2020
4. Map the dates the tasting room was fully open and not required to close or partially close. At this time we are counting outdoor only sales and limited indoor seating as partially closed. Calculate the total for the open dates (you might need to allocate days within a pay period, but it is likely that you were never fully open after March 17)
5. Calculate the earnings for the PPP covered period – this is the period you will include on your Forgiveness Application**
6. Take the total from Step #2 and subtract Steps #3 and #4
7. For each employee that earned over $10,000 calculate $5,000
8. For each employee that earned under $10,000 calculate half of their earnings
9. The total of Steps #7 and #8 is your total credit
10. Contact your payroll service and request an amended 941. This will need to be broken up for each quarter, but they can calculate that. Your payroll service with charge a fee for the amended forms, but it is well worth the aggravation.

Other notes

1. The earnings may include certain health plan costs, but I have found that most full time employees exceed the $10,000 limit. Go ahead and include it if needed.
2. Spouses are not on the list of “excluded relatives”. The owner has to own at least 50% of the business to have relatives excluded. This means that minority owners’ relatives are not excluded. And if, say 3 family members own an equal share of the business, then no one owns at least 50% so no family members are excluded.
3. In 2021, the credit is $7,000 max per employee, per quarter. (yes, per quarter!)
4. You might want to submit the maximum 40% of other expenses on your PPP Forgivingness application so that your payroll earnings are higher, BUT if you have a loan over $150k, this will likely create a lot more paperwork. If your loan is under $150k, the application is supposed to be a simple one-page submittal (but I haven’t seen this yet)
5. For 2021, you could apply to have the credit reduce your 941 payments, but I think this will cause a lot of extra time and effort, because you have to request it for each payrun. If you miss one payrun you will need to submit an amended 941 anyway, so might as well just plan on it.

3/21/21 Updates

1. The activity that was shut down had to have accounted for at least 10% of your total revenue. So even if you were able to pivot to online sales or continue your winemaking operations, if you sold me than 10% through the tasting room, then your entire payroll may be used towards this credit. Most of you were able to keep your key employees and your winery crew, and that is why this credit is adding up t a lot of money.
2. If the covered period on your PPP Forgiveness Application included more wages than you needed, the wages that are excluded are only the wages needed to match the loan amount. So the maximum exclusion due to the PPP Loan is the amount of the PPP Loan itself.
3. Remember that on the PPP FA, you had to reduce the wages paid to high salary folks. That limit does not apply to the ERC. However, you can only claim $10,000 of wages per employee, and those folks likely earned much more than that.
4.  For 2020, you will need to submit an amended 941 for each quarter. You cannot combine quarters.
5. Some CPAs have interpreted the rules such that on your 2020 Income Tax Return, you need to count the credit AS IF you had received it. The ERC is a reduction of your payroll taxes, and you will receive a check from the IRS for having over-paid your payroll taxes.
6. Many of these “rules” only apply to businesses with less than 500 employees.

Good luck!

Links to the government websites

SBA PPP 2.0

SBA PPP First Round

SBA PPP Forgiveness

Treasury.gov PPP (both)

1/8/21

Alan Gassman and his team summarized the 116 pages that the SBA wrote to support the $900 Billion stimulus package. Here is their 1/7/21 Forbes.com article that covers many more details than I have listed.

Despite the government rules, we are seeing that the banks all have slightly different requirements. So just be methodical.

Check out my post on PPP Forgiveness here

PPP 2.0

Deadline to apply is March 31, 2021

If you received a PPP loan in the first round, you qualify for a second PPP loan if any quarter in 2020 had a decrease of 25% revenue compared to 2019. Be careful: with all of these programs, the devil is in the details. For the PPP 2.0 program, you must calculate the revenue the same way you calculate the revenue on Line 1.c. on your tax return. So if you file your tax return on the cash basis, this needs to be a cash basis revenue. Also, Line 1.c. does not include random income like sale of equipment and interest income.

Once you determine that you qualify, to calculate the amount of the loan you may choose either your 2019 labor or 2020 labor expense, divide this by 12, then multiply by 2.5. This is the same formula as the first round, however,  you may include a few more expenses. Please refer to the SBA guidelines for the exact inclusions.

If you submit your loan application to the same bank as the first round, and you apply for the same loan amount, you can use the same documents that you submitted the first time. We have not heard from any banks yet whether you have to actually upload all of the documents again. Fingers crossed.

My recommendation is that unless you will get a significant increase in your loan amount, stick with your original loan and keep things simple. You are likely to qualify for a significant Employee Tax Retention Credit, so save some brain cells for that.

You don’t have to have applied for Forgiveness, but you have to have used all of your loan funds. I don’t know anyone who didn’t spend all of those funds, so this should be a moot point.

PPP First Round

If the rules changed, you can now apply for a PPP First Round loan. If the rules changed such that your loan would have been higher with the new rules, you may submit an amended application.

Farmers and  Schedule F filers may now based on their GROSS income (yes, that is GROSS, not NET). Many farmers were not able to apply during the first round because they did not have payroll and used a vineyard management company.

Partners of LLC may now use their Net Profit based on the K1 as the owner “payroll”.

Both of these are limited to 100k “payroll”.

Links to the latest news from the source

Treasury.gov PPP Program

SBA.gov PPP Program

PPP Forgiveness Application Update 12/27/20

The COVID Relief bill that Congress passed included these details:

• The 12/14/20 IRS ruling was soundly reversed by Congress. This means that no part of the PPP Loan is taxable: the forgiven loan is not taxable as income, and the expenses paid by the forgiven loan are deductible on your tax return.
• A Simplified One Page Forgiveness Application for loans under $150k – we have heard this promise before. Hopefully the banks will follow through. Unfortunately we have seen many banks add their own forms and requirements to the forgiveness process.
• EIDL grant is now fully forgiven – if you submitted your Forgiveness Application and deducted the EIDL grant, check with your bank to confirm whether you should submit an amended forgiveness application or if the correction will be made automatically. Did I mention that the banks seem to act independent of the SBA rules….
• Make sure you understand the rules around the Employee Tax Retention Credit – this credit is now available to folks who received PPP loans. The caveat is that the expenses that were covered by the PPP Loan are excluded from allowable earnings for the credit. That suggests that you might want to maximize the 40% of other allowable PPP expenses so that you minimize the payroll that is included with PPP Forgiveness.

PPP  Loans & IRS Rulings Update 12/14/20

A few days before Thanksgiving, the IRS issued a ruling that took many people by surprise. Here is the link to the press release on the Treasury website. Here is the detail of the IRS guidance:

If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.

As if the PPP Program has not be complicated enough, we were all exasperated when this was issued because it complicates your year end tax planning. You and your tax team will need to discuss whether to plan for the worse (that the IRS ruling will stand as is) or plan for the best (that Congress will pass legislation based on their original intent that the PPP Loan will have no effect on taxable income). Only time will tell how this  will settle down.

In the meantime, we now recommend that you apply for forgiveness sooner rather than later.

PPP Forgiveness Application Update 10/10/20

On October 8th, the SBA released a new form for loans under $50,000. This is just a “simpler” form and is still not  automatic forgiveness. For the details check out this article on Forbes.com

On October 7th, the SBA said that interest on the PPP loan would not begin until either 10 months after the end of the covered period or until the SBA remitted funds to the lending bank. Check out FAQ #52 (previously the deferral period was 6 months) Check out Alan Gassman’s 10/8 article on Forbes.com

On October 3rd, the SBA released new guidelines for businesses that had a change in ownership, either by selling or transferring. Here is Alan Gassman’s 10/4 article on Forbes.com 

PPP Forgiveness Application Update 9/11/20

For the latest update by Alan Gassman read his article on Forbes.com here

On August 24th, the SBA issued some new guidelines around the allowable expenses. Two issues are critical

1. Rent expense to related party is only partially allowed. If the landlord has a mortgage on the property, only the interest portion of the rent payment is allowed. This affects many wineries because they often “rent” the space from a related party that owns the land. Yes this is unfair and illogical, but as with all things PPP, it is par for the course.
2. Medical and retirement payments for owners is more complicated, because depending on the legal structure of the business, the rules are very different.

My recommendation is to extend your covered payroll period to 24 weeks. Remember back when we only had 8 weeks of expenses to earn full forgiveness so we were tracking every expense possible? (I barely remember.) Now that you have up to 24 weeks to earn full forgiveness, most of you will have plenty of payroll wages to cover the entire PPP loan. I think that your Forgiveness Application will be processed smoother and with less hassle if you only use wages for your payroll number and don’t use any other expenses.

My second recommendation is that if your loan is over $150k, go ahead and submit your Forgiveness Application now if your bank has opened their portal and is accepting them. The SBA began accepting FAs on August 10th, but not all banks have opened their portals at this time.

If you are under $150k, you might want to wait for the official ruling around the “automatic forgiveness“. The Rubio/Collins bill called “The Continuing Small Business Recovery and Paycheck Protection Program Act”. This bill was introduced on July 27th and initially had strong bi-partisan support. But it has now become political and has stalled. The banks are the ones pushing for the automatic forgiveness, and many are waiting for this to pass before opening their portals.

PPP Forgivneness Application Update 8/12/20

I am guessing that most of you gave up tracking the guidances issued by the Treasury and the SBA, because there have been so many. Even the Treasury stopped  giving them numbers.

Here are the highlights. For the forms go to Treasury.gov & PPP

• Loan Forgiveness Application, revised 6/16/20
  • If the State or other entity issued an order to close the tasting room, they you have an automatic exemption to the FTE calculation. This means that for most wineries, the FTE calculation is no longer an issue, and you probably qualify for the EZ Loan Forgiveness Application form
• EZ Loan Forgiveness Application, issued 6/15/20
  • Read the instructions first to see if you qualify. Most of you will qualify because the FTE or the average paid hours is essentially “N/A” due to the exemption caused by the mandated closing of the tasting rooms.
  • Pay attention to the “hourly wage” detail. If your tasting room crew is paid by a combination of regular wage, commissions, club signup fee, or other random payment, then you will need to calculate their TOTAL earnings divided by their hours worked for the “effective” hourly wage for a given pay period. This detail could disqualify you from using the EZ form
  • If you do qualify for the EZ form, you must still save all of your documents and worksheets. The distinction is that you do not have to submit them with the application.
• FAQs, updated 8/11/20
  • There have been many changes to the medical, retirement, and “transportation” allowable expenses. However, since the covered period has been extended to 24 weeks, you should have enough regular payroll to achieve full forgiveness without including those problematic expenses.
  • They explain how the EIDL Grant is handled – this is super goofy and convoluted. See my post on handling this detail Go Here

As of today not one bank has opened their portal to begin accepting Forgiveness Applications, although they all have sent out emails saying that it is coming soon. I recommend that you hold off submitting your paperwork a month or so, because the rules are going to change again. The banks will be flooded with applications, and I prefer that someone else’s application gets stuck in that mess. You have a full 10 months after the end of your covered period to submit your application so there is no immediate hurry. However, if you happen to be in a situation where the FTE calculation is critical to meeting full forgiveness, then go ahead and submit now so that you stop the clock.

Once again, my thanks to Alan Gassman and his team. They are providing clear and concise updates in the PPP and EIDL world. Check out his articles on Forbes.com Gassman & PPP 8/4/20

Tyler Willis, CPA and I had a zoom chat where we discussed various issues that are unusual in 2020 due to COVID-19 shutdowns, successful pivots, and the PPP program. And if that wasn’t enough, many wineries had lower production due to the fires. All of these issues are affecting your tax return in a way that you might not have anticipated.

A year like this year is a good year for a deep dive and to make sure that you’re taking advantage of everything you can. TW

Remember, Tyler is a CPA, but he is not your CPA. Our conversation is intended to highlight some topics for you to discuss with your tax preparer.

Topics and time stamp for part 1

• PPP Impacts at 2:00
• EIDL Grant at 7:00
• Higher net income in 2020 than prior year at 9:00
• Crop insurance at 11:00
• Lower production at 13:00
• New barrels but not all in use at 14:00
• Cash vs Accrual on Tax Return at 15:00

Topics and time stamp for part 2

• Loss Carryback Opportunity at 0:00
• Section 139 Deduction at 3:00
• Impact of the election at 6:00
• Key things needed to do a tax return quickly at 9:00
• Adjustment from Book to Cash at 12:00

Now is your opportunity to get access to an exclusive report of over 50 charts, summary analysis and detailed responses of wine industry metrics and trends. You can use these numbers to benchmark your own performance. But hurry, you only have until October 30th before the portal closes.

Each year Rob McMillan and his team at Silicon Valley Bank prepare an annual report called the State of the Wine Industry Report. This is a thorough report that discusses micro and macroeconomic trends that affect the wine industry. It is also a really fun read. The team added some questions about how you handled the  issues around COVID-19

One of the key components to the report is information and metrics submitted by wineries through the Annual Survey.  As a thank you for your time, you will receive a full set of the results which is only available to folks who participate in the survey. Everyone else only gets to download the final report.

To make it easier to complete the survey, I made a video to show you how to pull the reports so you can answer the financial questions. Of course, these reports assume that you have set up your QuickBooks file using our Fundamental Five.

Here is the link to submit the survey SVB Wine Industry Survey

Download these questions to the survey so you can prepare your answers 2020 SVB Survey Questions

This video will walk you through how to pull the answers to the financial questions

Did you try to follow our Using QuickBooks in the Wine Industry course, but you got stuck and never finished? Or did you consider doing the course but are still on the fence?

If so, I would like to ask you some questions about your experience. In exchange, I will answer whatever questions you have for me.

Let’s trade 20 minutes of questions for 20 minutes of answers.

The reason I am asking is because we will be launching a new course on November 2 called The Fundamental Five: Setting up QuickBooks for a Winery.

The original course showed what the system looked like, but it didn’t explain how to get from mess to success. I would like to ask you questions to make sure that we cover all of the details and include the elements that are most important to you.

I only have time for 5 of these sessions. Please complete this survey by Saturday, October 3rd to apply for an appointment.

On June 15th the SBA resumed accepting applications for the EIDL program. If you missed this during the early days of the pandemic, it is not too late to apply.

I recommend that you consider getting this loan, because it provides you with working capital in case the economy collapses. The re-opening of the economy has not gone smoothly, and the earliest that we might be back to “normal” is sometime in 2022. This is my full recommendation:

1. Obtain the largest loan you are comfortable with (the maximum seems to be $150,000). You may need to pledge some assets
2. Park all of this in a savings account and do not spend it unless it is absolutely necessary (see the restrictions below)
3. Pay the monthly interest that is incurred. Technically you do not need to make this payment, but if you pay it each month when it is time to return the funds you will only owe the original principal.

This is a true loan, and it must be paid back in full with interest. The interest rate is 3.75% and the loan term is 30 years. To qualify, you must have “suffered significant economic injury”. Right now, many of you have been able to pivot to online sales and you have cut back on expenses, so things are not as bad as we imagined when the shelter-in-place orders began, and having a smaller profit than the previous year does not qualify. However, if the economy tanks then you might experience “significant economic injury”.  That is why I am calling this “crash protection”.

Be aware that the fine print of the loan documents lists many restrictions. Here is a list of a few of them (there are more) and these are in place until the loan is repaid:

• No payments of dividends or bonuses
• No disbursements to owners (except for services), no repayment of stockholder loans
• No expansion of facilities or purchases of fixed assets (barrels are ingredients, so they are OK)
• No repair or replacement of physical damages
• No refinancing of long term debt

For a more complete discussion about the EIDL program check out Alan Gassman’s 7/28/20 article on Forbes.com

Again, the concept is that these are rainy day funds. Even though the virtual tastings and email marketing programs did remarkably well during the first three months of the pandemic, nobody knows yet if we have seen a permanent shift in wine buyer’s habits. Since there is a cost to this ($470 per month for a $150k loan), plan carefully. Only you can decide your level of pessimism with the future state of things and whether this loan will give you some peace of mind. Let’s hope for the best, but plan for the worst.

9/2/20 UPDATE

On 8/31/20 Intuit sent out a letter saying that they were still in discussions with the IRS on how to implement the Executive Order. As of 9/2/20 (which is 2 days after the order went into place) their answer was still “we will get back to you”. Here is the post.

The IRS issued a notice on 8/28/20 that did not answer all of the questions the payroll providers asked. Here is IRS notice 2020-65

The recommendations fromAccountingToday.com and SHRM.org are:

1. The deferral is not mandatory
2. Employer makes the election whether they will implement the deferral, not the employee
3. Employers should consider whether not implementing the deferral would affect their employee relations
4. Few companies are participating because of the complexity of the tracking
5. This is not a “tax holiday” but rather a “deferral” of tax payments. If this program converts to a “tax holiday” everyone will benefit at that time.

Here is the article on SHRM.org

8/20/20 ORIGINAL POST

On September 1st, an Executive Order signed by the President to defer the payment of some payroll taxes is expected to become effective. Unfortunately, there are many details that have not been clarified. The AICPA sent a letter to the Treasury listing their recommendations. As of 8/19 there has been no response. The payroll providers are also waiting for guidance, because the payroll software and the IRS forms will need to be modified.

These are the key points

• The deferral is for the employee’s portion of Social Security taxes only (not the medicare) that would have been incurred between Sept 1 and Dec 31, 2020
• This is a “deferral” which means that the tax would need to be paid at a later date, although the President said that he would ask Congress to forgive the tax liability.
• If the forgiveness does not happen, the AICPA and others are concerned that the employers could be left holding the bag.
• Many are hoping that the deferral will be voluntary. Again, some are recommending that the employers make the election, others are recommending that the employees make the election.

Stay tuned for more updates. They will be rolling in at the last minute.

Here are a few resources

Executive Order by the President

US Chamber of Commerce letter to Secretary Mnuchin

Secretary Mnuchin’s Comments

AICPA letter to the Treasury

 

There has been nothing easy about the PPP Loan, and how the SBA is handling the EIDL Grant continues in this same fashion. THIS IS SUPER IMPORTANT: If you received an EIDL Grant  (if one day the SBA deposited into your bank account $2,000 to $10,000 and you got no other paperwork, that’s the EIDL Grant), your PPP forgiveness will be reduced by this amount. That means that your PPP Loan will have a balance due and interest will start accruing. You will still owe this to your lender.

Here is the step-by-step on how to handle the EIDL Grant. Let’s say that you received $120,000 PPP loan and $3,000 EIDL Grant

1. Create a current liability account called “PPP Loan”. Use this account when you record the deposit of the funds.
2. Create a current liability account called “EIDL Grant”. Use this account when you record the deposit of the funds.
3. If you also received an EIDL Loan, create a long term liability account called “EIDL Loan” (more on this later). Use this account when you record the deposit of the funds.
4. Create an account called “Grant Funds”. If you have a group of expenses called “Other Expenses” that are regular expenses, put it in that group. Otherwise, create an Other Income account for this.
5. When you receive the notice that your PPP Loan is forgiven, record a journal entry DR PPP Loan/CR Grant Funds for $117,000. (Assume you received full forgiveness) This will leave $3,000 as a balance in the PPP Loan.
6. Write a check to the bank that gave you the PPP Loan for $3,000, and use the PPP Loan account when you record this check. The PPP loan account is now zero.
7. Record a journal entry DR EIDL Grant/CR Grant Funds for $3,000. The EIDL Grant account is now zero. And the Grant Funds account will show $120,000 ($117,000 from the PPP and $3,000 from the EIDL)

I recommend using the date 12/31/20 for the journal entries so that your Profit & Loss reports for the rest of the year are not goofy, but this is a minor detail. Your tax preparer will handle the grant funds when the tax return is completed. And of course, we are still waiting for rulings on exactly how the expenses related to the PPP program will be handled.

For my comments about the EIDL loan see this post.