Last Updated: September 25, 2020
This post was originally posted on Forbes on April 3, 2020 by Shehan Chandrasekera
COVID-19 has already compounded the difficult journey of creating a great company. Crypto & blockchain startups that previously had 2+ years of runaway before the COVID-19 outbreak are now struggling to stay open due to lack of revenue and delayed funding rounds. Fortunately, there are multiple tax relief opportunities available for those startups to increase cash flow and keep their teams intact. This post will discuss some of the startup friendly tax provisions included in the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and prior tax laws. We will sort them from the easiest to most difficult to implement.
1. Paycheck Protection Program (PPP)
This program allows businesses to get uncollateralized loans (without any personal guarantee) up to $10 million which will be fully forgiven if the proceeds are used to cover payroll, (most) mortgage interest, rent, and utility costs over the eight week period after the loan is made. This is by far the easiest way to rapidly increase your runaway and keep your team intact. Since the government has only allocated $350 billion to this program and grants are first come first serve, you should start the application process as soon as possible. The Small Business Administration (SBA) expects to open the application on Friday, April 3, 2020.
Benefits: Government money can be used to increase runaway. Money received under this program is not taxable to the company and loans are forgiven (effectively making them a grant) if they are used for qualified expenses within the eight week period.
2. Research & Development (R&D) Tax Credit
If you represent a startup in the physical sciences, biological sciences, engineering or computer science, you may already be aware of the R&D tax credit. This credit can be applied against your income taxes or payroll taxes. Since many early stage startups are not profitable and have no income taxes to pay, it is more useful to apply this credit against one of the biggest cash outflow items, payroll taxes.
To apply this credit against your payroll taxes, your business should have gross receipts for five years or less, and the gross receipts should be less than $5 million for 2019. The maximum credit you can use to offset your payroll taxes is $250,000. The calculation of the credit is somewhat complex and you need a specialized provider to help you with this.
For example, a startup with $1,000,000 in engineering wages owes $62,000 ($1,000,000*6.2%) in payroll taxes. By leveraging $80,000 in R&D tax credits (6% - 8% of wages), you could eliminate payroll taxes completely and save much needed cash right now.
Benefits: You can save up to $250,000 on payroll taxes, annually.
Action items: Consult with your R&D credit provider to calculate your R&D credit sooner so you can apply the credit towards payroll tax liability. Ask your accountant to close your 2019 books and file the tax return immediately so you can apply the R&D credit to the next payroll tax quarter.
3. §139 Qualified Disaster Relief Payments
§139 of the IRS code allows employers to give out money to employees who are affected by federal disasters such as COVID-19. These payments should be intended to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.
Benefits: Qualified Disaster Relief Payments (QDRPs) are not included in employees’ gross income so they don't have to pay taxes on this. Employers don't have to pay payroll taxes on these payments either. At the same time, employers do get to deduct these payments from the company income which will result in lower overall taxes. The ability to give out money to employees without paying payroll taxes and being able to fully deduct these payments from company income would increase employee morale and reduce cash burn.
Action items: See if your employees are qualified for these payments by having conversations with them. Then, talk to your accountant to see if your payments are qualified under §139. If yes, consult with your payroll provider to initiate these payments properly.
4. Employee Retention Credit
The Employee Retention Credit is available for all employers regardless of the size. If your business falls into one of the categories below, you are a qualifying employer who can get benefit from this credit:
- Your business is fully or partially suspended by government order due to COVID-19 during the calendar quarter
- Your business's gross receipts are below 50%of the comparable quarter in 2019
The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit.
Benefits: Once again, you can save money on payroll taxes. If the credit is more than your payroll taxes, you can get cash back by filing Form 7200.
Action items: Review the IRS criteria to see if you qualify. If you qualify, work with your payroll provider on how to initiate these credits.
5. Paid Sick Leave Credit
If your employees are unable to work because they are quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis, employers can receive a refundable sick leave tax credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days. This is applicable for any employee who takes sick leave after April 1, 2020
Benefits: Payroll tax savings on qualified wages
Action items: Consult with your employees and see who is eligible to take sick leave and family leave. If you have eligible employees, talk to your payroll provider on how to initiate these payments
6. Child Care Leave Credit
If your employees are unable to work because of a need to care for a child whose school or child-care facility is closed or whose child care provider is unavailable due to the coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate.
Benefits: Payroll tax savings on qualified wages
Action items: Talk to your employees who have kids and see who is eligible to take child care leave credit. If you have eligible employees, talk to your payroll provider on how to initiate these payments.
7. Apply for Economic Injury Disaster Loan (EIDL)
EIDL can provide up to $2 million of financial assistance (actual loan amounts are based on the amount of economic injury) to startups. This loan can be used to cover day-to-day operations of your business. Note that you can apply for both EIDL and PPP. However, the proceeds can not be used to cover the same expenses.
Benefits: You can get up to $10,000 of advance payment within three days of applying! The remaining amount will be credited to your account once the SBA reviews your documents. The interest rate is capped at 4.00% and the loan term can be a maximum of 30 years.
These are some provisions in the newly passed acts and prior tax codes which you can use to increase your runaway. We recommend prioritizing on PPP, R&D, and §139 as they are the easiest to implement with the least amount of exposure. Other items should be considered depending on your facts and circumstances.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional. Reach out to us @cointracker