The relief package legislation highlights include $325 billion in business relief, $275 billion for another round of Paycheck Protection Program funding, and an extension of federal unemployment benefits of up to $300 per week.
President Trump signed the Consolidated Appropriations Act that marks spending for business relief and another round of Paycheck Protection Program (PPP) funding, an extension of federal unemployment benefits and miscellaneous needs, such as $45 billion for transportation services subsidized by the state and Amtrak; $82 billion for schools; $20 billion for vaccine distribution; and $13 billion for food stamps.
Similar to the CARES Act, direct stimulus payments will be made up to $600 for individuals and $1,200 for a married couple filing jointly, plus $600 for each dependent child under the age of 17 (no payment is available for an adult-dependent). Taxpayers eligible to be claimed as a dependent on another’s return are not eligible to receive a payment. Individuals earning between $75,000 and $99,000 receive smaller payments. Payments phase out entirely for individuals earning over $99,000 and phase out once adjusted gross income exceeds $150,000 for married couples filing jointly. President Trump was holding out on the Relief Package in an attempt to increase the direct stimulus payments to $2,000.
Unemployment benefits for qualified unemployment recipients would receive an additional $300 of federal benefits for 11 weeks through mid-March 2021.
Additionally, The Pandemic Unemployment Assistance (PUA) for gig workers, freelancers, independent contractors, self-employed, and certain people affected by the coronavirus will be extended. The PUA compensation will continue to provide an additional 13 weeks of payments to those who exhaust their regular state benefits.
Both programs will close to new applicants in mid-March 2021 and phase out in early April for existing claimants.
Individual and Business Provisions
Clarification of the “above the line” charity deduction is $300 for individual filers and $600 for married filing jointly (MFJ). In addition, 100% business meals deduction returns for tax years
2021 and 2022.
FFCRA Extended to March 2021 FFCRA Credits
The Families First Coronavirus Response Act (FFCRA) required certain small employers to pay up to 10 weeks of qualified family leave when an employee can’t work due to child care facilities and school closings. Employers are also expected to provide up to 2 weeks of sick leave for various COVID-related reasons. The employer is entitled to receive a fully refundable dollar-for-dollar payroll tax credit equal to the wages paid. The bill extends the credit provisions from December 31, 2020, through March 31, 2021.
Funding for Schools and Child Care
$82 billion in aid for K-12 schools and colleges and $10 billion to support child care providers that have been affected.
Is extended through January 31, 2021. $25 billion in rental assistance is given to individuals who lost their source of income during the pandemic.
$13 billion is to be used for the Supplemental Nutrition Assistance Program, Pandemic-EBT Program, The Emergency Food Assistance Program, Meals on Wheels, and the Commodity Supplemental Food Program.
$48 billion in funding is available for vaccine purchase, distribution, and testing. $20 billion is earmarked for the purchase of vaccines to be available at no charge, $8 billion is for vaccine distribution, and $20 billion is to assist states with testing.
Relief for Small Businesses through PPP and Additional Loans
The bill would reopen the Paycheck Protection Program so small businesses can apply for a second loan. $12 billion is designated for minority-owned and very small businesses. $15 billion in funding is specifically for live venues, independent movie theaters, and cultural institutions that demonstrate a 25% reduction in revenues quarter-over-quarter comparing 2020 to 2019. The taxpayer had to be fully operational as of February 29, 2020. Nonprofit organizations, local newspapers, TV and radio broadcasters are also eligible.
Deductibility of Expenses Paid with Forgiven PPP Funds
According to the stimulus bill, the PPP borrowers can deduct PPP expenses from the first round and second round of PPP loans that are forgiven. The relief package allows for the deduction of expenses and loan forgiveness to be excluded from income. However, there is debate about whether or not PPP borrowers who have already received final forgiveness will be able to deduct the expenses prior to this stimulus package being signed into law. Section 276 of Division N of the latest bill provides that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.” This rule applies to ALL borrowers, even those who have already applied for forgiveness. Therefore, expenses paid with PPP funds are now completely deductible. PPP forgiveness increases the borrower’s basis. However, this does not occur until forgiveness is actually granted. Therefore, 2020 losses may not be deductible due to basis limitations if the PPP Forgiveness is not processed until 2021.
Streamlined Forgiveness for Borrowers under $150,000
The bill delivers streamlined forgiveness for loans of less than $150,000. Borrowers will only be required to submit a one-page online or paper form. Borrowers will only be subject to audit if they commit fraud or use the proceeds for improper purposes. It appears a small borrower will not be subjected to the required reductions in forgiveness amounts generally caused by reducing salaries or headcount. In summary, for loans of up to $150,000, the borrower can simply certify their revenue loss when they apply, but on or before they apply for forgiveness. The business will still have to produce documentation to prove how the funds were spent.
New PPP Loan Guidance
The maximum loan amount is $2 million with the second draw of PPP loans (down from $10 million in the CARES Act). An eligible entity may receive only one second draw loan. Funding is available for three categories of PPP loans:
- New PPP loans for businesses that qualify under the CARES Act but did not apply the first time around
- Second draw PPP loans for businesses that obtained a PPP loan but need additional funding
- Additional funding for businesses that returned their first PPP loan or did not get the full amount for which they qualified
Second Draw PPP Loan Eligibility
Small businesses and independent contractors that may be eligible for the second draw PPP loans even if they received funds in the first round of PPP may include small businesses, nonprofit organizations, veterans organizations, tribal business concerns, and small agricultural cooperatives that meet the SBA size standards, sole proprietors, self-employed individuals, or independent contractors.
New to the eligibility are certain small news organizations, destination marketing organizations, housing cooperatives, and 501(c)(6) nonprofits may now also be eligible.
In addition, the new PPP loans are meant to assist smaller businesses impacted by COVID-19. As a result, applicants who qualify generally must also meet the following criteria:
- The business may not have more than 300 employees (businesses with multiple locations may not employ more than 300 employees at each location) and
- The business must have at least a 25% reduction in revenues in at least one quarter in 2020 when compared to previous quarters
- Any business that got a first PPP loan must have used, or plan to use, their full PPP loan already received.
Most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with at least 20% ownership by China. Publicly traded companies are also not eligible to receive the new PPP loans.
How is the 25% Reduction in Revenues Calculated?
Business owners will compare gross receipts of the business (before expenses are subtracted) for any quarter in 2020 to the same quarter in 2019 to determine if revenues decreased by at least 25%. After January 1, 2021, loan applicants who apply for a loan may use the fourth quarter for comparison purposes. Remember, a business must have been in operation by Feb. 15, 2020, to be eligible. If you were not in business during the first or second quarter of 2019, but you were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%. The same rule applies to a business that wasn’t in business in 2019 but was in business before February 15, 2020. At this point, guidance on determining gross receipts is absent, but the bill requires the SBA to issue regulations within 10 days of the bill’s passage.
Second Round PPP Loan Amounts
In addition to expanding upon the first round of PPP loans, the bill creates a SECOND opportunity to apply for loans through Section 7(a)(37) of the Small Business Act (the original PPP loans were available through Section 7(a)(36)) for those who have already borrowed and fully exhausted their original PPP proceeds. The loan is generally determined by multiplying 2.5 by the average monthly payroll for 2019, limited to $2 million for these borrowers. In addition, hard-hit businesses in the hospitality industry – such as bars, restaurants, and hotels will be permitted to borrow 3.5 times the average monthly payroll, limited to $2 million. Additional computational rules are provided for seasonal employers.
New Expenses Eligible for Use/Forgiveness
The bill gives PPP borrowers who have not yet applied for forgiveness the opportunity to spend proceeds on four new types of expenses. The expenses are subject to the non-payroll costs, have limitations, and therefore cannot exceed 40% of the total costs eligible for the forgiveness. Along with payroll costs, damage from riots, food loss due to lockdown, reimbursing employees for transitioning to remote working are all considered eligible expenses for forgiveness.
Covered operations expenditures:
Payments for the processing, payment, or tracking of payroll expenses, human resources, any business software or cloud computing service that facilitates business operations, product or service delivery, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
Covered property damage costs:
Costs related to property damage by vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
Covered supplier costs:
An expenditure made by an entity to a supplier of goods that are essential to the operations of the entity at the time at which the expenditure is made or is made pursuant to a contract, order, or purchase order that was either in effect at any time before the covered period for the loan, or concerning perishable goods, in effect before or at any time during the period.
Covered worker protection:
Eligible costs are related to the maintenance of standards for sanitation, social distancing, or any other employee or customer COVID -19 safety requirement items.
However, not included in the definition of covered worker protection costs are residential real property or intangible property.
Changes to Covered Periods
The bill gives a borrower the right to choose ANY covered period beginning on the date of the disbursement and ending between 8 and 24 weeks later. In other words, a borrower is no longer locked into an 8 or 24 week period; instead, they can choose any period lasting between 8 and 24 weeks as well.
PPP borrowers may now also claim the Employee Retention Credit; however, any wages for which a credit is computed will not be treated as forgivable payroll costs for purposes of the PPP.
Other Loan Forgiveness Issues
The receipt of an Economic Injury Disaster Loan advance (EIDL) will no longer be taxable, and any expenses paid with the advance will remain deductible.
Extension of the Employee Retention Tax Credit
The CARES Act gave rise to the Employee Retention Credit (ERC), a mutually exclusive option to a PPP loan. The credit was only available for 2020 and offset a taxpayer’s payroll tax liability. The credit was equal to 50% of the first $10,000 of qualified wages paid to an employee during an “eligible quarter.” An eligible quarter is either a quarter in which 1) the business had its operations fully or partially suspended by appropriate government order, or 2) the business had a precipitous drop in gross receipts quarter-over-quarter when comparing 2020 to 2019. The credit was computed differently if the business had more than 100 employees above that threshold; the employer could only claim the credit on wages paid to employees, not to work.
The bill extends the ERC through July 1, 2021, and greatly expends several aspects of the credit for amounts paid in the first two quarters of 2021. First, the credit percentage is increased from 50% to 70% of qualified wages. In turn, qualified wages are increased from $10,000 in total per employee to $10,000 per quarter per employee. In contrast, the change in the treatment of qualified wages that once occurred above 100 employees now does not kick in until employees exceed 500. In addition, a mere 20% drop in quarter-over-quarter receipts is now required to make a quarter an “eligible quarter,” rather than the 50% initially required by the CARES Act.
Employee Payroll Tax Deferral
President Trump used an executive order to allow certain employees to defer the 6.2% share of Social Security tax on wages paid from September 1, 2020, through the end of the year until the first four months of 2021. The bill extends the due date for that deferral to be repaid from April 30, 2021, until December 31, 2021.
We will continue to provide additional updates regarding this legislation. There is a lot of available information available to assist taxpayers experiencing COVID-19 related financial difficulties to be aware of these options and get assistance. Contact us today to review your options.
Maria is a Partner at Wilke & Associates servicing closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.