The Consolidated Appropriations Act, 2021, is now law.  This was a rather large bill and not surprisingly so given the fact that it is an Appropriations bill and not just a COVID relief bill.  I am sure you have heard a lot about items in this bill, mainly the foreign aid portions and the $600 stimulus payments but I wanted to bring your attention to some items that are of importance to your business and you as an individual tax payer.  By no means is this a complete rundown of the Act.  This is meant to highlight just some of the items that we believe you may benefit from.

The New PPP2 program:

The SBA will announce when the program is open for applications.

Eligibility for the PPP2 Loans:

  • First time qualified borrowers
  • Borrowers who previously received PPP funding provided:
    • Have 300 or fewer employees
    • Have used or will use the full amount of the first PPP loan
    • Have experienced a 25% gross revenue decline in any 2020 quarter as compared to the same quarter in 2019
  • If you returned all or part of the previous PPP funding, you may reapply under the PPP2 funding

The funds can be used for the following expenses over a 24-week covered period:

  • 60% approved payroll costs as in the initial PPP program
  • 40% approved non-payroll costs such as rent, mortgage interest and utilities. In addition, you can use the funds for:
    • Employee protection and work place modifications to protect the employees including the purchase of PPE in order to comply with COVID-19 federal health and safety guidelines
    • Expenses paid to suppliers for items that are essential at the time of purchase to the business’s current operations
    • Operating costs such as software and cloud computing services and accounting needs

The maximum loan amount is the same as previously, 2.5 times the average monthly payroll costs for the year prior to application of the loan to a maximum of $2,000,000.  If your business NAICS code starts with 72 (hotels & restaurants) you can get up to 3.5 times the average payroll.

Changes to the PPP forgiveness application process

  • The new bill has created a simplified and more streamlined forgiveness process for loans of $150,000 or less. Under the new law you will need to do the following if your PPP loan falls in this range:
    • Submit to the funding lender a certification that is no more than one page long with:
      • A description of the number of employees retained because of the loan
      • The estimated total amount of loan funds spent on payroll costs
      • The total amount of the loan
    • The SBA within 24 days of the enactment of the bill will create a new application form to address this new procedure. Keep in touch with your bank if you have not already filed for forgiveness.
    • If you received the EIDL advance, it is no longer required to be deducted from the eligible forgiveness amount, making the full amount of the PPP eligible for forgiveness.

The relief bill clarifies that despite receiving full forgiveness of the PPP loan proceeds the expenses used to qualify for this forgiveness remains fully deductible and includible in any tax or basis calculations.  This specifically overrides the IRS and the latest revenue ruling issued by them in November stating that expenses paid with the PPP proceeds were not eligible for deduction.

Other provisions in the bill

  • In addition to the ability to deduct expenses paid with forgiven PPP funds, the bill also clarified that Emergency Economic Insurance Disaster Loan (EIDL) grants, and certain loan repayment assistance, as provided by the CARES Act are not taxable and expenses paid with the funds received are fully deductible.
  • The bill extends the employee retention tax credit through July 1, 2021, and bumps the maximum refundable payroll credit to $14,000 from $5,000. The bill clarifies that businesses will now be able to take advantage of the employee retention tax credit even if the participated in the Payroll Protection Program.  The bill also changed the test to claim the credit from a 50% decline to a 20% decline in gross receipts from the previous year.
  • Business meals are 100 percent deductible for tax years 2021 and 2022.
  • The credits for paid family and sick leave has been extended to March 31, 2021. The Act also allows self-employed individuals to use SE income from 2019 instead of from 2020 when computing the credits.

The Act also contains benefits aimed in assisting individuals.  Some of these include:

  • Direct payments for a refundable tax credit of $600 for a single tax payer, $1,200 for joint taxpayers and $600 per dependent child. This credit does phase out though when income exceeds $75,000 for a single taxpayer, $112,500 for head-of-household and $150,000 for joint taxpayers.  For each $100 over this amount $5 of the credit is lost.
  • The Act extended the additional deduction of $300 in donations for taxpayers who claim the standard deduction and have made donations of at least this amount during the tax year through 2021.
  • The Act provides for $300 in weekly federal unemployment insurance payments on top of the state benefits paid. This would continue through March 14, 2021.  The Act also extended the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed and the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally funded unemployment benefits to individuals who exhaust their regular state benefits.  The Act provides an extra benefit of $100 per week for individuals who have both wage and self-employment income but whose base unemployment insurance benefit calculation doesn’t take their self-employment into account.
  • The limitation on out-of-pocket medical expenses was permanently set to 7.5% instead of the 10% limit.

Like I said above there is a lot to this bill.  We have been and are continuing to research various portions and will bring you further information when available.  In the meantime, please do not hesitate to reach out to our office if you would like to set up a counseling session to review how this bill impacts you and your business.