To our Valued Clients and Associates,
At long last, the House and Senate have agreed to a second significant stimulus package. We will highlight some of the more salient points from the over 5,500-page bill. As is with most government bills, there is a lot to unpack here which means this email is a bit longer than most…
The bill provides another much needed, but smaller, round of individual stimulus payments, of 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. The payments once again phase out when adjusted gross income exceeds $75,000 for a single taxpayer and $150,000 for a married couple.
Deductibility of Expenses Paid with Forgiven PPP Funds
Ever since the IRS published Notice 2020-32, borrowers and tax professionals alike have put their faith in Congress to overrule the Service and provide a double benefit: tax-free forgiveness of loan proceeds AND deductible expenses paid with PPP funds. Section 276 of Division N of the latest bill does just that, providing 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.”
Importantly, this rule applies to ALL borrowers; even those who have already applied for forgiveness. Thus, expenses paid with PPP funds are now completely deductible.
Changes to the Existing PPP Program
The bill reopens the original Paycheck Protection Program by earmarking $35 billion for those who have not yet borrowed. For those who have already borrowed money and not yet applied for forgiveness, the bill makes several changes to the existing program; If a borrower has already applied for forgiveness, however, the below changes do not apply.
New Expenses Eligible for Use/Forgiveness – the bill allows borrowers to include four new additional non-payroll costs: covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection costs. As a reminder, the sum of all non-payroll costs cannot exceed 40% of the total costs eligible for forgiveness.
New Options for Covered Periods – the bill gives a borrower the right to choose ANY covered period beginning on the date a borrower receives the loan and ending on a date selected by the borrower during the period between 8 weeks and 24 weeks after origination of the loan. Simply put, 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.
Streamlined Forgiveness for Borrowers under $150,000 – The bill delivers streamlined forgiveness for loans of less than $150,000. These borrowers will only be required to submit a one-page online or paper form, and 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 slashing salaries or slashing headcount.
Second Round PPP Loans
The bill creates a SECOND round of loans for those who have already borrowed and fully extinguished their original PPP proceeds. For these borrowers, the loan is generally determined by multiplying 2.5 by the average monthly payroll for 2019, limited to $2 million. In addition, hard hit businesses in the hospitality industry (bars, restaurants, and hotels) – will be permitted to borrow 3.5 times average monthly payroll, again limited to $2 million. Additional computational rules are provided for seasonal employers.
To be eligible for the second round of borrowing, a borrower will have to have fewer than 300 employees (down from 500), and be able to establish, in general, that they experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019. There is no guidance on determining gross receipts, however, but the bill does require the SBA to issue regulations within 10 days of the passage of the bill.
Other Loan Forgiveness Issues
The bill provides that the receipt of an Economic Injury Disaster Loan advance will no longer be taxable, and any expenses paid with the advance will remain deductible.
Other Debt Relief Programs
The bill compels the SBA to pay an additional three months of principal and interest on an existing Section 7 loan (not a PPP loan), beginning in February 2021.
The bill extends the payroll tax credit under The Families First Coronavirus Response Act from December 31, 2020 through March 31, 2021.
The bill provides an additional $300 per week for all workers receiving unemployment benefits, through March 14, 2021. Additionally, the bill increases the maximum number of weeks an individual may claim benefits through regular state unemployment plus the PEUC program, or through the PUA program, to 50 weeks. The bill also provides an extra benefit of $100 per week for certain workers who have both wage and self-employment income but whose base UI benefit calculation does not take their self-employment into account.
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;” generally, either a quarter in which 1) the business had its operations fully or partially suspended by an 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. Qualified wages, in turn, are increased from $10,000 in TOTAL per employee to $10,000 per quarter per employee, while the change in 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 are now required to make a quarter an “eligible quarter,” rather than the 50% initially required by the CARES Act.
Perhaps most importantly, it appears that a taxpayer may now claim the ERC AND take out a PPP loan; they are no longer mutually exclusive. Any wages upon which an ERC is computed, however, would not be forgivable costs under the PPP program.
Full Business Meals Deduction Permitted in 2021 and 2022
Section 274(n)(2) has been modified to allow for full expensing of “restaurant” meals purchased in 2021 and 2022 provided the other requirements for deductibility under Reg. Section 1.274-12 are met; i.e., not lavish, the taxpayer is present, as is an employee or business associate, etc.
Changes to Charitable Contributions
The CARES Act permitted taxpayers who do NOT itemize their deductions to claim up to a $300 charitable deduction in arriving at adjusted gross income for 2020 only, provided the contribution were paid in cash to a public charity. The bill extends the provision to 2021 but increases the deduction to $600 for a married couple filing jointly.
The CARES Act also temporarily increased the limitation for deductible cash contributions to a public charity from 60% to 100%. The bill extends this treatment into 2021.
As always, we will advise you of any additional guidance as it becomes known. If you have any questions, please contact us directly.