2020 Year-End Tax Guide

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Q2

Q3

How does wage reduction impact the research and development credit and the qualified business income deduction?

How do I know which loan forgiveness application to use?

The short answer is that there is an impact, but we don’t have guidance on exactly what that impact is. The longer answer is that we have some ideas to consider while we await guidance. We recommend planning for the conservative approach, while recognizing potential options in case one of them becomes viable. Both the research and development credit (R&D) and the qualified business income (QBI) deduction rely heavily on wages to determine taxpayer benefits. Since one of the non-deductible expenses for PPP forgiveness is wages, there will likely be a reduction in one or both of these calculations. Unless other guidance is issued, we recommend using as many costs as possible in the PPP forgiveness application to minimize the amount of wages that might be subject to reduction. For example, 60% of PPP eligible expenditures must be payroll costs, which for PPP forgiveness purposes include company- paid health and retirement benefits. Since health and retirement benefit costs are not utilized to determine the R&D credit or QBI, these can be utilized in the forgiveness computation to the maximum extent and limit the inclusion of wages that might be subject to non-deduction. Other questions arise pertaining to the allocation of remaining wages that might be used for R&D and QBI after the expense disallowance. For the R&D credit, there is no guidance related to wage reduction, since not everyone employed works in an R&D role. We suggest utilizing an allocation approach that would spread the impact across multiple departments. For example, if wages used for the PPP forgiveness calculation represent 15% of total wages, then reduce R&D wages by 15%. For the QBI deduction, wages are one of several limits in place. The total deduction is 20% of net income and cannot be more than 50% of wages. A reduction in wages may not have a large impact this year because 20% of net income may still be lower than 50% of a reduced wages number. As this expense reduction may impact some businesses, we suggest potentially impacted businesses consider year-end tax planning.

There are three different applications available for PPP loan forgiveness: the Standard Form, the EZ Form, and the S Form. All applicants can use the Standard Form, so the real questions surround when to use the EZ Form or the S Form. The S Form can be used by a borrower with a PPP loan of $50,000 or less. However, if the borrower is affiliated with other companies, the total loans among those companies must be less than $2 million in order for the small borrower to be eligible to use this form. The EZ Form can be used by borrowers if they can pass one of the three following tests: 1. The borrower is self-employed with no employees and did not include any employee salaries in its PPP borrower application form. (This borrower will likely file an S Form.) 2. The borrower did not reduce hourly rates or salaries by more than 25% when compared to the first quarter of 2020 hourly rates or salaries AND did not reduce the number of full-time equivalent employees between January 1, 2020, and the end of the covered period. (Note that the borrower may ignore reductions from an inability to rehire individuals for the unfilled positions or employees who refused employment restoration offers.) 3. The borrower did not reduce hourly rates or salaries by more than 25% when compared to the first quarter of 2020 hourly rates or salaries AND the borrower was unable to operate at the same level of business activity due to guidance issued by the CDC, HHS, or OSHA. (Note that local governments acting in accordance with guidance issued by the CDC, HHS, or OSHA is used to determine ability to operate.) Borrowers who do not meet the requirements for either of the above two forms will be required to file the standard loan forgiveness form.