by Laura Phillips, EA, Co-Founder and CEO, The Phillips Group
There is no doubt that the Covid-19 pandemic affected every dental practice in America. Here in California, an unprecedented shutdown led to fear and uncertainty for dental practice owners. In addition to a concern for their health and the health of their families, the shutdown led to a concern for their financial futures and their staff’s financial futures. Thankfully, we quickly saw numerous, much-needed programs open to help protect business owners. These programs provided financial assistance to keep dental practices afloat over the past year and a half. However, their quick rollout led to confusion. How should these funds be used? Are they taxable? What reporting requirements do they have? Below we will answer these questions and more regarding these assistance relief programs.
Paycheck Protection Program
The Paycheck Protection Program (PPP) was one of the first programs to provide financial assistance. This SBA-backed loan has been released over two rounds. Both rounds (aka “draws”) were eligible for complete forgiveness if appropriately used by business owners. At this point, most dentists have seen Round One forgiven. For Round Two, the forgiveness process should be straightforward, as applying for this forgiveness is very similar to Round One. The main difference is that funds can now be used for PPE and certain supplies in addition to payroll costs, rents, utilities, and mortgage interest.
The SBA has opened a direct portal to apply for forgiveness. There are over 1,400 lenders who are participating in this portal. We recommend checking with your lender to see if this is the forgiveness application process that should be used.
One should apply for forgiveness after all funds have been used on eligible expenses. Borrowers have 24 weeks to use the funds and then an additional ten months to apply for forgiveness. For a dentist who received funds on May 1, 2021, they would have until October 16, 2021, to use the funds and until August 16, 2022, to apply for forgiveness. Thankfully, legislation finally passed that made all forgiven funds non-taxable to both the IRS and the state of California.
Economic Injury Disaster Loan
This program consisted of two distinct parts: a grant and a loan, each initiated by the same application. First, a grant was issued, and later (if approved), a loan was to be issued as well. The Economic Injury Disaster Loan (EIDL) has had a few rule changes in the past months. The grant portion was originally calculated at $1,000 issued for each employee, with a maximum of $10,000 given. This has now been changed to be a “Targeted EIDL Advance” of $10,000 for each employer regardless of how many employees they have if they meet specific other qualifications. There is also an additional $5,000 available for those located in a low-income community, had more than a 50% loss from one 8-week period to the same eight-week period in the previous year, and have ten or fewer employees. This grant is nontaxable and does not need to be repaid.
Some have viewed the loan proceeds as a very attractive loan. The terms are 3.75% interest over 30 years. For cash flow, a lower monthly payment may appear at a glance to be the correct route. However, one should consider the overall cost of the loan. For example, a dentist who gets a $500,000 EIDL loan will pay more than $333,000 in interest over the loan term. By contrast, if that same dentist chooses a traditional ten-year loan at even a higher interest rate of 5%, they will end up paying only about $136,000 in interest, saving them nearly $200,000. Receiving these funds in large amounts should be reviewed on a case-by-case basis.
It is important to remember that these were disaster loans to ensure that cash was in the bank during the shutdown so that the business would not close permanently. However, for many, the time may have come to start returning them. Because these funds are loans that are not eligible for forgiveness and must be repaid with interest. They are non-taxable.
HHS Provider Relief Fund
This program has been offered through phases. Most recently, Phase 4 closed on November 3, 2021. The HRSA has said they are planning to distribute Phase 4 in December 2021. Dentists do need to set aside some of the funds received for taxes. While the amount of funds received has varied from dentist to dentist, the funds are taxable for every provider. For funds received in 2020, these should have already been reported as “other income” on income tax filings.
A reporting portal will open for those who received funds based on when the funds were received. For funds received from July 1, 2020, to December 31, 2020, the dentist will need to report the use of the funds from January 1, 2022, to March 31, 2022. The reporting portal asks how the funds were used, what other assistance funds have been received, and information about collections from 2019 through 2021. These funds could be used for healthcare-related, general, and administrative costs that are traceable to Covid expenses. They also could be used as loss revenue reimbursement. A dentist would need to prove that their 2020 collections have been reduced from 2019 by the same amount or more as the Provider Relief Funds received.
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was first introduced with the PPP. At that point, dentists had to choose which program they wanted to use. It was generally more advantageous to apply for PPP. As part of the Consolidated Appropriations Act, this changed. Employers were now allowed to receive PPP funds and the ERTC. As a result, dentists should review their 2020 activity to see if they should file amended payroll returns to claim this credit. These credits do have two separate eligibility limits and regulations for 2020 and 2021. As most dentists were eligible in 2020, we will discuss that year below.
For 2020, an employer can receive 50% of the amount paid to each employee up to a maximum credit of $5,000 per employee annually. If a dentist paid five employees $10,000 each, they could be eligible for a credit of $25,000. There are eligibility requirements. Employers must have paid these wages either (a) during a government shutdown or (b) when gross receipts were reduced by at least 50% in one quarter from 2020 to the same quarter in 2019. With the shutdown from March 2020 through June 2020, most dentists will find they experienced a 50% reduction in the second quarter of 2020 versus the second quarter of 2019.
It is essential to mention that any credit received directly reduces any deductions taken on the income tax return for those expenses. If amended payroll returns are filed to claim the ERTC, the business returns also need to be amended. For example, a dental partnership claims the ERTC for employee wages paid. Therefore, the partnership return will need to be amended to reduce the employee wage expense claimed by the amount of the credit. If the dental partners are both S-Corporations, those returns will also need to be amended. Finally, their personal returns will need to be amended to reflect the amended S-Corporation return. In the end, the taxpayer may have a small tax bill to pay after the credit is received. While this may create a slight headache, the ERTC can still be a very profitable credit and should be reviewed.
It is important to note that while these programs have provided much-needed assistance, they are complex. As business owners, dentists’ financial reports need to reflect the program funds properly. Did you receive an EIDL? Is it set up as a loan on the balance sheet? How about the EIDL grant? Is it reported as nontaxable income? Please be sure to consult with your accountant that the financial reports are accurate. With year-end tax planning, business owners must report these programs correctly.
In summary, each dentist should review their situation and decide, with assistance from their financial team, what their next steps should be. Dentists want to make sure they are on top of all reporting requirements, using the funds properly, and making the most out of these programs. If you have any further questions, please feel free to contact The Phillips Group.