After months of negotiations, Congress has passed, and the President is expected to sign another round of COVID-19 related stimulus. The Consolidated Appropriations Act, 2021 provides numerous components aimed to aid in the nation’s recovery from the impacts of COVID-19 throughout its 5,500 plus pages. The components include stimulus checks, rent & food assistance, continuations of the enhanced unemployment benefits through March 14, 2021 ($300 per week), and COVID sick-pay, as well as numerous other items such as funds for vaccine testing, development, and distribution.
Paycheck Protection Programs
We’ll focus first on two business components – revisions to the initial round of PPP and a second round of targeted PPP funding. Key provisions of these PPP related items are summarized below.
PPP Round 1
- The widest-reaching provision is the restoration of Federal tax deductions related to forgiven PPP loans. There appear to be “no strings attached” to the restoration of the deductions as was feared at the 11th hour.
- This allows companies to retain a larger portion of their round 1 PPP funds and continue to fully benefit from wage driven tax attributes such as the R&D tax credit and the qualified business income deduction.
- Questions still remain as to how the states will treat the forgiven PPP funds for state income tax purposes.
- The EIDL emergency grants of up to $10,000 were also noted to be exempt from taxation and were revised to no longer count as an advance on PPP loan forgiveness.
- Another welcome change is the further simplification of the PPP forgiveness process. The changes include:
- Simplified forgiveness for loans under $150,000 – one-page certification as to compliance with PPP requirements.
- The new certification, requiring only the number of employees retained, estimated total amount of covered loan spent on, and total loan value be provided; is to be published within 24 days from the enactment of the bill. This simplification likely makes it worth waiting a few more weeks to apply for forgiveness.
- Instructions to lenders that they should focus on completeness of the forgiveness application only (as opposed to verification of the data)
- Reducing the record-keeping requirements to 4 years for employee records and 3 years for other records (down from 6 years)
PPP Round 2
- A second round of PPP funding is available to the hardest hit small businesses (now including 501(c)6 organizations). The final rules for Round 2 of the PPP are to be set within 10 days after the enactment of the Act.
- Eligible businesses who participated in round 1 of PPP must have:
- Fewer than 300 employees
- Revenue reductions of at least 25% in any calendar quarter in 2020 (as compared to the same quarter in 2019)
- Note that if borrowers did not previously participate in PPP round 1 they can apply for funding with up to 500 or fewer employees.
- Companies that did borrow under PPP round 1 but did not take the full loan amount or returned funds are also eligible to reapply for PPP funding.
- The calculation of the maximum loan amounts and the available uses of the funds remains similar to round 1 in that the loan is 2.5 months of payroll up to maximum loans of $2 million, and 60% of the funds must again be spent on payroll. Borrowers have between 8 and 24 weeks to use the round 2 funds.
- Note that for businesses in the accommodation and food service industry (NAICS Code 72), the multiple of payroll for determining the PPP loans has been increased to 3.5 months.
- Eligible expenses for both PPP Rounds were expanded to include certain operations expenditures, property damage costs, covered supplier costs, and covered worker protection costs. Also, the definition of group insurances was revised to specifically note that group life, disability, vision, and dental insurance all qualify for forgiveness. A brief overview of the nature of the new expenses eligible for forgiveness follows:
- Covered operations expenditure – software or service that facilitates business operations, product or service delivery, or processing of information.
- Property damage costs – property damage due to “vandalism or looting occurring during 2020” not covered by insurance.
- Supplier Costs – very vague – payments to suppliers for goods that are essential to operations made pursuant to a contract or purchase order.
- Worker protection costs – operating or cap-ex to facilitate the adaption of business activity to comply with HHS, CDC, or OSHA guidance from March 1, 2020, until the national emergency due to COVID expires.
- Similar SBA review and self-certification requirements as those noted above in the revised PPP Round 1 changes apply to PPP2 loans under $150,000. The existing PPP forgiveness process would remain in place for larger loans.
- The final rules for Round 2 of the PPP are to be set within 10 days after the enactment of the Act.
With the simplifications of the first round of PPP, most businesses with PPP loans under $150,000 should be well-positioned to achieve forgiveness with less effort. Further, businesses experiencing the most significant impacts from COVID-19 receive a much-needed opportunity for additional funding. We are available to assist with wrapping up PPP1 matters or with pursuing PPP2.
Please contact Steve Snyder at email@example.com for assistance with PPP related matters.
Onto the tax-related provisions of the act! These include stimulus checks as well as a mix of new provisions and extensions of existing items nearing expiration. A summary of the significant tax provisions include the following:
- A second round of stimulus checks, $600 per person (even for children) are available, in full, for those with an adjusted gross income of $75,000 (single) and $150,000 (married filing jointly). The checks are subject to a phase-out above those income levels.
- Similar to the first round of stimulus checks, the final amount is determined by your 2020 adjusted gross income, but the checks mailed will be based on your 2019 income tax return. If you end up above the earnings limit in 2020 you are not required to repay the funds.
- Checks are expected to start being issued as early as next week (per the U.S Department of Treasury).
- Families First Coronavirus Response Act sick payments period end extended from December 31, 2020, to March 31, 2020 – these payments are available as credits on payroll tax returns.
- The election was added to enable self-employed taxpayers to use net earnings from prior years, which may lead to higher payments.
- Employee retention credit extended for wages paid through January 1, 2021, and enhanced to 70% of wages (from 50%) for a maximum amount of $10,000 per quarter (was previously $10,000 annually).
- Extension of the payroll tax deferral for employee payroll taxes to December 31, 2021 (from May 1, 2021).
- Charitable giving related items include the removal of the suspension on the AGI limits on cash gifts for 2021 as well as the above the line deduction increasing from $300 per joint return to $600 in 2021.
- Medical-related items include FSA amounts being able to be carried forward to 2021 & 2022 (dependent care can be carried forward as well) and medical expense deduction floor being held at 7.5% of adjusted gross income (was scheduled to increase to 10%).
- Ability to utilize 2019 tax information to determine Earned Income and Child Tax Credits for 2020 – in this case, higher-income generally leads to higher amounts for these credits.
- Meals deductions increased from 50% to 100% for 2021 & 2022 in an effort to aid the restaurant industry.
- Increased income limits on the Lifetime Learning and American Opportunity Education Tax Credits (coupled with the removal of the above-the-line tuition deduction).
- The 6-month SBA loan payment relief was clarified as being a tax-free benefit and also extended by at least 3 months for all industries (some industries, defined by NAICS code, were extended by 8 months).
- Various other extender tax provisions including:
- Section 179d commercial building energy efficiency deduction made permanent.
- Five-year extension for New Market & Work Opportunity Tax Credit programs
- Mortgage debt forgiveness exempt from tax extended for additional 5 years
- Various energy-related incentives
We look forward to seeing you during our upcoming webinar, where our panel of experts will look at many of these provisions and the impact they will have on your business.
Chad Bumbaugh, CPA | Managing Director, Entrepreneurial Services Group
During his career, Chad has worked with many different types of businesses on a wide range of tax and accounting issues. Beyond the traditional compliance work, he assists clients with tax and general business consulting matters, as well as implementations of new accounting pronouncements. He particularly enjoys opportunities to strategize with clients on how to more efficiently conduct operations, improve cash flow, and minimize tax burdens. The relationship which develops when you partner with clients to identify practice solutions is one of the highlights of his position.