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An avid reader of fantasy novels who completes 1,000-piece puzzles in her spare time, it’s no wonder Kelly’s favorite part of her day includes playing make believe with two of her favorite people—her amazing kids.

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Rene Schaefer
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Introduction

Starting in 2018, under the Tax Cuts & Jobs Act (TCJA), all business meals were made 50% deductible. This included all employee, business, travel, and per diem meals, unless separately billed to a client. It also included meals incurred during entertainment (i.e. football games) if the meals were separately stated from the entertainment expense. The 50% meals limitation does not apply to employee parties. It was unclear whether employee office snacks (de minimis) and office meals were subject to the 50% limitation.

On October 9, 2020, the IRS issued final regulations that clarified the employee office snacks (de minimis) and office meals are subject to the 50% limitation. They are not 100% deductible.

Business Meal Expense Update

The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020. There were many significant new provisions, including individual stimulus payments, a second round of PPP loans, changing the deductibility of PPP related expenses, and a myriad of additional tax provisions.

One of the new tax provisions is that business meals provided by a restaurant will be 100% deductible after December 31, 2020 and before January 1, 2023 (for 2021 and 2022). This also includes meals for takeout and delivery.

Employee parties (holiday parties, annual picnics, summer outings, etc.) and expenses treated as employee compensation continue to be 100% deductible.

Entertainment expenses (sports events, golf outings, concerts, hunting trips, etc.) and skybox fees remain non-deductible.

We recommend meal expenses and entertainment expenses be separately broken out into different accounts so they can be easily identified for tax purposes.

Please consult your Clark Nuber professional or Rene Schaefer with any questions.

© Clark Nuber PS and Developing News, 2021. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Changes to the Employee Retention Credit

The Employee Retention Credit (ERC), introduced in March 2020 as part of the CARES Act, was a much-needed funding source for many employers. However, many were ineligible to claim the credit in 2020 as they opted to receive funding through the Paycheck Protection Program instead. With the recent enactment of the Consolidated Appropriations Act of 2021, the rules have changed. The ERC is now more favorable than ever and could yield a large refund for your organization. With the recent law changes, the restriction for PPP loans has been retroactively removed. This means employers can go back and claim the ERC for 2020, even if they received a PPP loan. Employers just need to make sure they aren’t double dipping on the wages. In other words, wages being characterized as qualifying expenses for PPP loan forgiveness can’t also be used for the ERC calculation. Additionally, there are enhanced benefits for Q1 and Q2 of 2021, including:
  • an expansion of the credit to $10,000 in quarterly wages (rather than the annual wage limit),
  • allowing up to 70% of wages as a credit (previously it was 50%), and
  • raising the employee threshold to 500 employees (previously the expanded credit was allowed for employers with 100 or less FTEs).
If your organization was, or is still, facing the inability to operate at full capacity due to government restrictions, or if it is experiencing a more than 50% (2020) or 20% (2021) decline in gross receipts when compared to that same quarter in 2019, do not ignore the employee retention credit. There is a potential for large tax savings that can provide immediate cash flow to your organization.

Summary of Changes for the ERC

Below is a summary of what has changed under the new Consolidated Appropriations Act for the ERC.  For a more detailed analysis of the ERC laws under the CARES Act, especially for employers considering a retroactive claim for 2020, please see our prior article on the topic. [table id=25 /]

ERC Example

To demonstrate how beneficial this credit may be, let’s walk through an example: A school typically has 75 full-time equivalent employees. It received a PPP loan in April 2020 and therefore didn’t claim the ERC during 2020. The school was remote for the end of the 2020 school year and started the 2021 school year in hybrid mode. Many of its extracurricular activities are still unable to continue due to COVID restrictions. Each employee is paid at least $10,000 per quarter in 2020 and 2021. [table id=26 /] Under this example, the school may be eligible for a 2021 credit of $1,050,000. The school may also retroactively file a refund claim for the credit in 2020 due to the eligibility changes to PPP loan recipients. The retroactive calculation for 2020 is as follows: [table id=27 /] Under this example, the school may receive a 2020 retroactive refund of $375,000 for wages paid. In the end, the school may be eligible for a total refundable credit of $1,425,000 as a result of the recent changes to the credit calculation.

Summary

Given recent law changes, do not ignore the employee retention credit. Many employers that were originally ineligible due to receiving a PPP loan are now able to utilize this credit as well. The ability to retroactively receive a refund for 2020 qualifying wages and expanded credit opportunities in 2021 may give your organization a sizeable refund and immediate cash flow. If you have additional questions, please contact your advisor at Clark Nuber for up to date information on the latest rules surrounding the Employee Retention Credit. ©2021 Clark Nuber PS. All rights reserved.

Provider Relief Funds: Reporting – Key Matters and Requirements as Guidance Continues to Evolve

Recipients of Provider Relief Funds (PRF) under the CARES Act have spent 2020 and the beginning of 2021 navigating the evolving guidance related to this program. There have been many questions related to PRF and, ultimately, the reporting that will be required. On Friday, January 15, 2021, the Provider Relief Fund Reporting Portal opened for registration and PRF recipients are now getting closer to final guidance on what will be necessary to include in the December 31, 2020 report that is due in early February. Given the guidance we now have available, this article will give a brief overview of the report and its requirements.

Who do the Reporting Requirements Apply to?

With the opening of the Provider Relief Fund Reporting Portal, the Health Resources and Services Administration (HRSA) also released a memo on Post-Payment Notice of Reporting Requirements - January 15, 2021. This new guidance supersedes the guidance issued on November 2, 2020. Any organization that received PRF funding in excess of $10,000 (in the aggregate) will be required to submit data elements in the post-payment reporting process, with the exception of PRF funding noted in the sections below that is excluded from this reporting requirement.

What Distributions do the Reporting Requirements Not Apply to?

While there has been guidance on certain types of PRF distributions, there are other types of PRF distributions that are not subject to the current reporting requirements and may have separate requirements. These include the distributions for Nursing Home Infection Controls; Rural Health Clinic Testing; and HRSA’s COVID-19 Claims Reimbursement to Health Care Providers and Facilities for Testing, Treatment, and Vaccine Administration for the Uninsured Program and the HRSA COVID-19 Vaccine Administration Assistance Fund. For guidance on these specific distributions, see the HHS Provider Relief Fund Reporting and Auditing website. For organizations that received the Nursing Home Infection Controls distribution, it is still recommended that you register on the Provider Relief Fund Reporting Portal.

What are the Current Reporting Requirements?

For organizations to which the reporting requirements do apply, there are key data elements that must be included in the report, including:

Use of Funds:

The report will require disclosure of the use of the funds. The organization should report this using the standard method of accounting they use for other reporting purposes or internally as applicable (accrual vs. cash basis). The use of the funds would first include healthcare related costs attributable to the coronavirus. Additionally, these costs cannot have been reimbursed or been obligated to be reimbursed by another source. Examples include payments received from insurance and/or patients and amounts received from federal, state, or local governments. If PRF payments remain after applying eligible healthcare related expenses, then the organization may apply the rest of the funds towards lost revenue. The current guidance notes that organizations must choose one of three options for calculating lost revenues:
  • First, the lost revenue can be calculated based on the difference between 2019 and 2020 actual patient care revenue.
  • Second, lost revenue can be calculated based on the difference between 2020 budgeted and actual 2020 patient care revenue. If budgets are used, the 2020 budget must have been approved prior to March 27, 2020 and further support will be required upon submission.
  • Lastly, lost revenue may be calculated based on any reasonable method of estimating revenue. However, if an organization uses this approach, there are further requirements that they will have to submit related to descriptions and explanations for the methodology. The organization also increases the likelihood of an audit by HRSA due to the subjective nature of this option. If HRSA determines that a reasonable method is not used, the organization must resubmit their report with 30 days using actuals or budgets for the lost revenue calculation.
Additionally, if not all of the PRF funding is expended by December 31, 2020, organizations have an additional six months to spend the funding and will have additional reporting requirements.

Demographic Information:

The report will also require organizations to submit certain demographic information. The information will include each reporting entity and the type of PRF funding received by the entity. Organizations will also include the Tax Identification Number, National Provider Identifier (optional), fiscal year end date, and federal tax classification. Additionally, if the Reporting Entity is a parent entity, the parent entity may transfer targeted distributions from one subsidiary to another subsidiary eligible health care provider of the parent organization, even if the targeted distribution was issued to the first subsidiary. However, the responsibility for reporting the reallocated reimbursement shall remain with the original recipient of such reimbursement, and these transfers do increase the likelihood of an audit by HRSA.

Additional Provider Payment Information:

Lastly, there is a number of other items that will be included in the report. If an organization held the PRF funding in interest-bearing accounts, the amount of interest earned on the PRF funds must be reported. Any interest earned will be applied to the uses of the PRF distributions. The report will also require details on the 2020 facility, staffing, and patient care on a per quarter basis for 2020. This will include personnel metrics, patient metrics, and facility metrics. The organization will need to report any changes in ownership, including entities that were acquired or divested. If the organization itself was acquired or divested, it should also self-report that change. The report will require disclosure of other assistance the organization received including, but not limited to, Treasury assistance (Small Business Administration and Paycheck Protection Program), Federal Emergency Management Agency, CARES Act testing, local/state/tribal government assistance, business insurance, and other federal/coronavirus related assistance. Finally, the reporting requirements also require the organization to report if they are subject to a Single Audit under 45 CFR 75.501 in 2020 and if the auditors selected PRF disbursements as a program under the audit, but only if known at the time of submission. See our previous article highlighting the PRF audit requirements here.

What is Included in Healthcare Related Expenses?

Healthcare related expenses under PRF consist of costs incurred to prevent, prepare for, and/or respond to coronavirus. Under the reporting requirements, the level of detail that is included for healthcare related expenses depends on the level of disbursements that were received. If under $500,000, then organizations need only to report expenses in two categories: 1) General & Administrative (G&A) expenses and 2) other healthcare related expenses. These would be net of any other reimbursed sources. If the organization received $500,000 or more in PRF disbursements, then the organization is required to provide more detail for the two categories. G&A would be broken down into mortgage/rent, insurance, personnel, fridge benefits, lease payment, utilities/operations, and other G&A. Other healthcare related expenses would be broken down into supplies, equipment, information technology, facility, and other healthcare related expenses. Again, these would be net any other reimbursed sources.

What is Included in Lost Revenues?

Even if the organization expends all of the PRF payments on eligibly expenses, the report will still require that the organization provide, at a minimum, the 2020 actual patient care revenue as compared to 2019 actual patient care revenue. If the organization additionally claims lost revenue to apply to PRF payments, there will be additional reporting required. Organizations will be required to report total revenue (net of uncollectible patient service revenue recognized as bad debts) or net charges from patient care related sources in 2020. It is important to note that the current guidance does not make reference of the implicit price concession. However, as patient revenue is reported net of the implicit prices concessions, and they specifically note backing out bad debt, organizations should anticipate reporting revenue net of any implicit price concessions. Additionally, patient care is meant to exclude insurance, retail, or real estate values and grants/tuition unrelated to patient care. However, there is an exception for skilled nursing facilities, where insurance, retail, and real estate values may be allowable as part of patient care. Organizations will report total revenue/net charges from patient care by quarter by payor mix. Payor mix will include Medicare Part A or B, Medicare Part C, Medicaid/Children’s Health Insurance Program, commercial insurance, self-pay, and other. Depending on which option the organization chose for reporting loss revenue, there will be different requirements for 2019 actuals, 2020 budgets, or reasonable estimate for revenue.

What Resources are Available?

HHS has a website dedicated to PRF and all the requirements. The website includes a section for the reporting and auditing requirements under PRF. As new guidance is released, this website is updated for all changes. It also includes additional resources for providers, frequently asked questions (FAQs), and overall data on the distributions. The FAQs are routinely updated with further information and should be reviewed by each organization that receives PRF. Organizations should also reach out to their auditors for any further guidance. Auditors are additionally waiting on guidance on the PRF report and what items will be subject to audit under the Single Audit or Financial-related audit. This guidance is expected to be released by the Office of Management and Budget’s Office of Federal Financial Management in early February 2021. Lastly, HRSA has given notice that it plans to have Question and Answer Sessions available via webinar before the reporting deadline.

What are the Next Steps?

If you haven’t already, register your organization on the Provider Relief Fund Reporting Portal if the organization received more than $10,000 in PRF payments. The registration process is estimated to take about 20 to 30 minutes, and it is the first step in the reporting process. It is important to note that the portal does not save information if closed mid-registration. As such, the registration should be completed in one session. Once registered, HRSA will notify you via email when the second step is available. The second step will be the actual submission of the December 31, 2020 report. If you have any questions on PRF reporting, please contact a Clark Nuber advisor. ©2021 Clark Nuber PS. All rights reserved.

Roadmap to Paycheck Protection Program Loan Forgiveness – Part V: The Application

On August 10, 2020, the Small Business Administration (SBA) opened up its Paycheck Protection Program (PPP) loan forgiveness portal to lenders, which means banks may now process loan applications from borrowers. Unfortunately, given the ever-changing standards and large volume of loans, many lenders have been hesitant to broadly open their own forgiveness platforms until the rules are well established and final guidance has been issued. Additionally, some banks are prioritizing the loan forgiveness process, focusing first on the large balance loans. Based on what we know so far, this article will provide an overview of the application process and the documents and forms borrowers should have on hand when applying for loan forgiveness.

Which Loan Application to Choose?

Form 3508 is the SBA form that must be submitted to the lender to apply for forgiveness. However, certain borrowers may be eligible for the Form 3508EZ. If the borrower can meet at least one of these requirements, Form 3508EZ may be submitted instead:
  • No employees: The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and included no employee salaries in the computation of average monthly payroll in the Borrower Application Form.
  • No salary or FTE reductions: The borrower did not reduce the salary or wage for any employee by more than 25% and experienced no FTE reductions (see Part III for a detailed discussion on this).
  • No salary reduction but full operations suspended: The borrower did not reduce the salary or wage for any employee by more than 25% and could not operate at the same pre-COVID activity levels due to compliance with agency imposed restrictions for sanitation, social distances, or other COVID-19 safety requirements (see Part III for a detailed discussion on this).
For borrowers that received $150,000 or less, Form 3508S is available. Previously the threshold was $50,000, but under the revised form issued January 19, 2021, the threshold increases to $150,000. Note, if the borrower is affiliated with other businesses and the PPP loan total for all affiliated organizations is $2 million or more, the borrower is ineligible for Form 3508S. Form 3508S is much more simplified than the other forms. Instead of showing the calculations for forgiveness, Form 3508S simply asks you to provide the forgiveness amount requested and the loan forgiveness amount is not reduced for FTE reductions. Furthermore, no additional documentation is required when submitting Form 3508S to the lender. However, borrowers should maintain records and be prepared to provide documentation if requested.

What Documents to Gather

Form 3508 and Form 3508EZ include several documents that must be submitted with the forgiveness application and others that should be maintained. As mentioned previously, no additional documentation is required when submitting Form 3508S. Information that must be submitted with Form 3508 or Form 3508EZ may include:
  • Bank statements or third-party payroll reports that document cash compensation paid during the covered period or alternative payroll period;
  • Tax forms (or equivalent payroll provider reports) during the covered period, such as Form 941 and quarterly state payroll and unemployment filings;
  • Documentation supporting any employer contributions to employee health insurance and retirement plans that are part of the loan forgiveness calculation;
  • Records that show the average FTE calculations for the relevant periods in 2019, 2020, and seasonal employees (if applicable);
  • Amortization schedules and checks showing payments for mortgage interest from February 2020 through the covered period;
  • Copies of current lease agreements and payment documentation from February 2020 through the covered period; and
  • Copies of utility invoices from February 2020 and those paid during the covered period, along with payment documentation records.
Other information that a borrower should maintain records for, but is not required to submit to the SBA at the time of application, include:
  • Documentation to support the calculations in Form 3508, Schedule A (Table 1, Table 2, and FTE Reduction Safe Harbor);
  • Documentation to show salaries or hourly wages were not reduced by more than 25% during the covered period (Form 3508EZ);
  • Information regarding employee job offers and refusals, voluntary resignations, firing for cause, reductions in work schedules, and inability to rehire individuals; and
  • Documentation, by business location, of any government order that caused a full or partial shutdown between February 15, 2020 and the end of the covered period.
These records must be maintained for six years after the loan is deemed forgiven or repaid in full.  Additionally, borrowers must permit authorized representatives of the SBA to access such files upon request.

Be Prepared for an SBA Audit

If the PPP loan amount exceeds $2 million, the SBA intends to review the forgiveness application when the lender submits the application to the SBA for final approval. Loans of $2 million or less will not automatically be subject to the compliance audit, however, the SBA still has the right to audit them. We anticipate those selected will be in effort to “spot check” compliance with the forgiveness requirements. If the SBA selects a borrower for audit, it will notify the lender in writing. The lender is required to subsequently notify the borrower in writing within five business days. If the SBA determines the borrower did not meet requirements for the loan or its forgiveness, the borrower may appeal the decision. As far as how the audit process will work, there are two key areas we are seeing the audits focus on:
  1. Verifying the borrower was eligible for the PPP loan; and
  2. Verifying the calculations are correct.
For verifying eligibility, the focus is on the good faith certification made when the loan application was submitted. This is why documentation of all facts and circumstances at the time of application is critical.  The SBA also may evaluate how a borrower’s business was negatively affected by COVID-19. This may include providing government orders that indicate the borrower was subject to a full or partial shutdown. Additionally, the evaluation of liquidity is an important factor. This includes access to a line of credit or other funding sources to sustain the borrower during the pandemic. Regarding the calculation review, the SBA has been issuing Form 3509 (for-profit borrowers) or Form 3510 (not-for-profit borrowers) to gain further details on operating income and liquidity. Borrowers generally must submit tax forms, bank statements, and payment records to support the calculations for qualifying expenses. As borrowers are working through the forgiveness application, it is critical these documents are gathered and maintained to make the SBA audit process smooth. Because of the looming risk of an audit, all borrowers should maintain detailed records of all paperwork during the PPP loan process. As mentioned previously, the paperwork must be retained for six years from the date the loan was forgiven or repaid in full.

What is Made Public?

Previously, only the contact information for borrowers who received more than $150,000 was released to the public. However, in early December, the detailed records for all borrowers was made available. It isn’t unusual for this type of information to be subject to public access. However, borrowers should be aware the information is public, and they should be prepared to tell the story of why they applied and accepted a PPP loan. It is possible that the media, owners, customers, and competitors may look at this information with speculation and questions. If you have any questions regarding the PPP loan forgiveness process, please contact a Clark Nuber advisor. This is the fifth post in a series of articles on Paycheck Protection Program loan forgiveness. Click here to read Part I: The Covered PeriodPart II: Eligible Expenses, Part III: Maintaining Wages and Employees, and Part IV: Accounting for PPP Loans. © Clark Nuber PS, 2021. All Rights Reserved.

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