On Monday December 21, 2020, the House and Senate approved the Consolidated Appropriations Act, 2021. The contents of the five thousand plus page bill include government spending provisions, COVID-19 related relief to small business and individuals and additional funding to fight COVID-19. After some pushback from the President and speculation of a possible veto, the bill was eventually signed into law on December 27th. Key COVID relief provisions include clarification on the taxation of forgiven CARES Act loans, additional funding for a second round of Paycheck Protection Program (PPP) loans and individual relief payments. Similar to the Cares Act, additional information and regulations will be needed before certain provisions can be taken advantage of. A summary of the key provisions, as outlined in the bill, are below.
Taxation of Forgiven PPP loans and other Cares Act Loans
The Cares Act intended that forgiven PPP loans would not be taxable to a recipient. As we all know, the IRS put their two cents in and declared that expenses paid with forgiven PPP loan proceeds would be non-deductible. Their stance essentially made the PPP loan a taxable event and went against the original intent of congress. The recent bill clarified this issue by stating that no deduction shall be denied in the result of a forgiven loan. This is a huge relief for many taxpayers that were expecting a larger tax bill than originally thought.
Taxation of grants and loan assistance provided in the Cares Act
Clarification that the Economic Injury Disaster Loan (EIDL) advance grant is nontaxable and expenses paid for with those funds are deductible. The Act also removes the requirement to decrease the amount of PPP loan forgiveness by the amount received as an EIDL emergency grant.
Business with preexisting SBA loans had their monthly payments paid on their behalf by the SBA for 6 months. The Act clarifies that the amounts paid on behalf of the loan recipient are not taxable and associated expenses are deductible. Additional loan assistance will be made available starting in February 2021
PPP Loan Provisions
A second round of PPP Loans (PPP2) will be made available to eligible businesses. Eligible businesses must have 300 or less employees and show a 25% decrease in gross receipts from any 2020 quarter as compared to the same 2019 quarter. You may qualify for the PPP2 loan if you meet the requirements above and have or will use all of original PPP loan proceeds. Similar to the first round of PPP loans, additional regulations and details will need to be made available on the process for requesting the PPP2 loan.
- Qualifying costs now include certain operation expenditures, supplier costs, and worker protection costs
- Loans will be based on 2.5 times the average monthly payroll for 2019 and capped at $2 million.
- The process to apply is expected to be available later this month, but businesses can begin prepping quarterly gross receipts comparisons to determine eligibility.
- Expands the simplified loan forgiveness process to borrowers with PPP loans of $150,000 or less.
- First-time borrowers will be eligible if they have 500 employees or less and are eligible for other SBA 7(a) loans.
- Certain organizations that did not qualify for the first round of PPP loans were added as eligible entities in the bill. Newspaper and certain media organizations are now eligible as well as 501(c)(6) member organizations. Limitations may apply if lobbying activities are present.
Direct Stimulus Payment
- Single individuals earning up to $75,000 will receive $600, while married couples earning up to $150,000 will receive $1,200 — exactly half of the amount paid out earlier this year through the CARES Act. Payments are based on a filed 2019 tax return, unless one is not required to file a return.
- The payments begin to reduce by $5 for every $100 of income earned above the thresholds.
- A $600 check will be given for every child, under 17, claimed as a dependent on the 2019 tax return.
- The funds are considered an advanced credit of 2020 taxes. This means that and individual showing less income in 2020 than 2019 will receive an additional refund to true up the payment. Taxpayers with higher income in 2020 will not be required to pay back the excess.
- As requested by the President, a bill proposed to increase the payments was introduced and passed by the House and is currently being considered by the Senate.
- Extension of payroll tax credits provided for paid sick leave payments and an increase in the employee retention credit from 50% to 70% of qualifying wages.
- Expanded unemployment benefits
- Five-year extension on various tax issues including the Work Opportunity Credit, New Markets Tax Credit, and employer credit for paid family and medical leave.
- Temporary provision allowing 100% deduction for business meals provided by restaurants
- $600 charitable contribution deduction for married filers who do not itemize deductions on their income tax return.
More information and details of the bill will continue to roll out into the new year as the SBA and Treasury put together the processes needed to implement certain provisions. For now, taxpayers can begin to plan and gather information necessary to take advantage of this relief package. Strothman and Company will be able to provide support in applying for the PPP2 as well provide assistance in filing for PPP loan forgiveness. If you need additional information please contact your Strothman and Company representative or Neil Zinser, Tax Partner.