How the New Tax Law Affects Family Child Care Providers
Update #2: On December 27th, President Trump signed this bill into law!
Update: President Trump is threatening to veto this bill. He wants to increase stimulus payments to individuals. We will have to wait to see what happens next.
On December 21, 2020 Congress passed a new tax bill (the Consolidated Appropriations Act, 2021) that will benefit family child care providers in numerous ways:
Stimulus checks worth $600 per person
New money in the Paycheck Protection Program (PPP) with simplified forgiveness
$10 billion in new money for child care assistance administered by the states
$300 per week in extra federal unemployment assistance
New money in the Economic Injury Disaster Loan (EIDL) program
Stimulus Checks
Under this new law, each eligible person will receive $600 (or $1,200 per married couple). Children age 16 or under will receive $600. This money is not taxable income.
You are eligible if your adjusted gross income is less than $75,000 (single), $112,500 (head of household), or $150,000 (married filing jointly). Your adjusted gross income can be found on your 2019 tax return, Form 1040, line 8b. If you make more than these amounts, the amount you receive will be reduced.
These are the same eligibility rules as the first stimulus checks from last March. They will be distributed by the IRS in the same way as last time. You do not have to apply to receive this money. It will either be electronically deposited into your bank account or mailed to you. It is expected this will take a few weeks or months before you will receive it.
Paycheck Protection Program (PPP)
Congress has allocated new money into this program, administered by the Small Business Administration (SBA). The PPP is a forgivable loan that is not taxable income.
If you did not receive a PPP loan in 2020, you are eligible for what is called the First Draw in 2021. If you did receive a PPP loan in 2020, you may be eligible for what is called the Second Draw in 2021.
To be eligible for the Second Draw, you must have at least a 25% reduction in your gross income in any quarter in 2020 as compared to 2019. Your gross income is your total revenue before subtracting any expenses. For 2019, your annual gross income will be shown on Schedule C, line 7.
Here's how this works. You can pick any quarter in 2019 and multiply your gross income for that quarter by 25%. If your gross income is lower by this amount for the corresponding quarter in 2020, you are eligible. The first quarter of the year is January – March. The second quarter is April – June. The third quarter is July – September. The fourth quarter is October – December.
Let’s look at an example: If your gross income for the second quarter of 2019 was $12,000, your gross income for the second quarter of 2020 must be at least 25% less than this, or $4,000 ($12,000 x 25% = $4,000). So, your gross income for the second quarter of 2020 must be less than $8,000 ($12,000 - $4,000 = $8,000) to be eligible for the PPP loan.
Note:
If you began your business after May 30, 2019, compare your gross receipts of any quarter in 2020 with your gross receipts for the third or fourth quarters of 2019.
If your business started in the fourth quarter of 2019, compare your gross income of any quarter in 2020 with your gross receipts for the fourth quarter of 2019.
If your business began in 2020, but before February 15, 2020, compare your gross income from the first quarter of 2020 with the second, third or fourth quarters of 2020.
When comparing quarters, you can pick the one quarter that makes you eligible, even if other quarters would make you ineligible.
How do you determine your gross income for any quarter? Add up all your revenue for the relevant months. This includes parent payments and fees, CACFP reimbursements, subsidy payments, parent copays, and all grants. Do not include any PPP loans or Economic Injury Disaster Loan (EIDL) loans or advance. Also, do not include any federal or state unemployment benefits. If you use the online KidKare software program, print out the Schedule C Worksheet Report. This report will show your annual or quarterly income.
How much can you apply for with the PPP forgivable loan?
Take your profit from your 2019 Schedule C, line 31 and divide it by twelve. Note: You may also use your 2020 Schedule C even if you have not filed your 2020 tax return. Use the higher amount from either year. This represents your average monthly profit (or “payroll” in the language of the law). Then multiply this by 2.5. That represents the maximum you can apply for with this loan. So, if your yearly profit was $36,000, your monthly profit was $3,000. $3,000 x 2.5 = $7,500 is the maximum you can apply for. This is the same calculation you had to follow in the previous round of the PPP.
Another way you can determine your average monthly profit, is to use your average monthly profit during the one year period before the date you applied for the loan. In other words, if you applied for the PPP loan in January 2021, you can use the average monthly profit from 2020. However, if you made a higher profit in 2019, you will probably want to use this amount to get a bigger loan.
Note: If you were not in business before February 15, 2020, you are not eligible for this second round of the PPP.
What can you use the PPP money for?
Under the previous PPP program, you could use this money for payroll for yourself and your employees. You could also use it for the business portion of utilities, mortgage loan interest, rent, and transportation. Under the new PPP program, you can also use it for food and expenses associated with meeting the Centers for Disease Control (CDC) and your state health department guidelines to address COVID-19. This includes protective equipment (masks, face shields, room dividers, cleaning supplies and renovations to meet health/safety standards). You cannot use the money for furniture, appliances, fences, and other fixed assets.
Note: An earlier IRS guidance memo said that items purchased with PPP money could not be deducted on your tax return. In other words, if the business portion of your utility bill was $4,000 and you spent $1,000 using PPP money, you could only deduct $3,000 on your taxes. This new law overrules this guidance. This means you can deduct expenses on your tax return that were purchased with PPP money.
How can I get forgiveness from my PPP loan?
The new law greatly simplifies the process for getting forgiveness whether you received money under the old or new program. To get forgiveness if you received less than $150,000 from a loan, you need only submit a simple one-page letter. This letter must contain:
A description of the number of employees you were able to retain because of the loan. You can count yourself as an employee. Therefore, you need only say that you were able to stay in business because of receiving the loan.
The estimated amount of the loan spent on payroll costs. You can spend all the money on payroll for yourself. You can do this by either writing yourself a check (put “payroll) in the memo line), or transfer money from one bank account to another.
The total loan value. List the amount of money you received.
Attest that you have accurately provided the required certification and complied with the law. State in your letter that you have followed the law in spending the money.
Keep records to show compliance for 4 years for employment records (payroll for yourself or any employees), and 3 years for other records (utilities, mortgage loan interest, etc.)
Nothing else is required! Simple!
Note: Your lender may ask for other documentation, but it’s not required under this law.
Note: Under the previous round, you had to reduce the amount of forgiveness by any amount you received from the EIDL $1,000 "advance." This new law eliminates this. In other words, under the old law if you received $10,000 from the PPP and $1,000 from the EIDL "advance", you would reduce the $10,000 by $1,000 and would only receive forgiveness on $9,000. Now, you can receive forgiveness on the full $10,000. If you previously returned the "advance" to the SBA, you can ask it to be returned to you. If you kept it as a loan, you can ask for it to be forgiven.
How do I apply for the new PPP forgivable loan?
You must be in business as of February 15, 2020 to be eligible for this loan. You can apply through your bank or use one of a number of online companies such as PayPal, BlueVine, or Funding Circle. It's not clear when these lenders will start accepting applications for this loan.
Child Care Assistance
This new law added $10 billion dollars for child care assistance. This money will be distributed through each state. Each state will have a lot of leeway as to how they can use this money. States can decide to use it for grants and payments for subsidized children based on enrollment rather than attendance as well as parent copays. In addition, states can use it for expenses associated with protecting your business from COVID-19 (cleaning supplies, PPE equipment, and more). The money can also be used for fixed assets such as furniture, appliances, fences, etc.
Each state will set its own rules on how they want to spend the money. You can have input on how this money is spent by contacting your state child care agency, Child Care Resource and Referral agency, union, family child care association or state or local child care advocate organizations.
Federal Unemployment Assistance
The new law adds an extra $300 per week in federal unemployment assistance through March 14, 2021. To be eligible for this money you must be receiving state unemployment benefits. Each state has its own rules about who is eligible for state unemployment benefits. If you think you might be eligible, apply online to your state unemployment office. Federal and state unemployment benefits are taxable income.
Economic Injury Disaster Loan
The new law puts additional money into this program. You can apply for this loan directly through the SBA. You do not apply for this loan through your local bank. It's not clear when the SBA will start accepting new loan applications. The new law also clarifies that money received through the EIDL program is not taxable income. This is true for the $1,000 “advance” you might have received earlier in 2020 as well as any “loan” you received.
I expect there will be many questions associated with this new law. When I receive further clarifications, I will post them.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://commons.wikimedia.org/wiki/File:United_States_Capitol_Building.jpg
