There is a LOT to be covered within the newest COVID relief legislation. Following is a list of many of the key provisions contained in the Bill approved by the House and Senate and sent to the President on December 21, 2020. This bill was signed by the President on December 27. We note that the President has requested that Congress re-visit certain provisions with which he disagrees. While the amount of the recovery rebate payments to individuals may increase in response to such presidential objections, we expect the other matters covered below that will directly affect the citizens and small businesses of the U.S. will not be changed.
RELIEF FOR BUSINESSES
• DEDUCTIBLITY of PPP EXPENSES
Reversing positions previously held by the US Treasury and the IRS, the year-end relief legislation clarifies that expenses eligible for and supporting PPP forgiveness claims will be deductible for income tax purposes in the year in which they are incurred. Amounts forgiven will also remain nontaxable. This finally resolves a major issue impacting year end 2020 tax planning in a big way – and in the taxpayer’s favor!
• INCREASE IN BASIS FOR S-CORPORATION SHAREHOLDERS AND PARTNERS IN A PARTNERSHIP
The forgiveness of a recipient’s PPP loan will increase their basis. What remains unclear is the timing and how that timing will impact basis and taxable income/loss reported by the shareholder.
To explain: PPP funds were received in 2020, and expenses were paid with those funds in 2020. We know that the expenses decrease basis in 2020, but what about the forgiveness? Does the basis increase arise with the granting of forgiveness, which for many will be in 2021? Or does basis increase in 2020 when the PPP funds were received and used with the expectation of forgiveness? The answer to that question matters. Consider an S-Corporation shareholder with low basis coming into 2020. The realization of tax benefits of a 2020 tax loss will be limited by their low basis, making much of the 2020 loss suspended. This means that the tax benefit of the suspended loss will be deferred into 2021. If 2021 proves to be a profitable year, the ultimate tax benefit of the 2020 loss may be reduced by missing out on the opportunity to carryback a loss to years that were subject to higher tax rates.
• PPP 2
A new round of Paycheck Protection Program loans will be available, with a narrower focus designed to get those funds to the small businesses most in need. It is expected that PPP 2 applications will be available in the first half of January.
At this time, our recommendation is to assess if your company will meet the eligibility criteria for a PPP loan, and if so, gather information confirming your eligibility along with the 2019 payroll information that will be needed to support the loan application.
For PPP 2
$284 billion is allocated to a second round of PPP loans for small business (Unspent funds from the first round of PPP loans have been rescinded.) Regulations for this second PPP round must be issued not later than 10 days from enactment.
PPP 2 Eligibility
PPP 2 will benefit two groups of borrowers – with differing eligibility criteria:
1) Existing PPP round 1 borrowers can obtain a second PPP loan only if they meet all of the following criteria:
a) Fewer than 300 employees
b) Experienced a 25% or greater reduction in gross receipts in any quarter of 2020 as compared to the same quarter of 2019. (For this purpose, we understand that EIDL grants and PPP loan proceeds are not included as 2020 gross receipts.)
c) Is not an entity primarily engaged in political or lobbying activities, organized for research or advocacy in public policy, or describes itself as a “think-tank”
d) Is not organized under the laws of the People’s Republic of China or Hong Kong, or does not have significant operations there, or does not retain a resident of the People’s Republic of China on the entity’s board of directors
2) First time borrowers are eligible if they meet these requirements:
a) 500 or fewer employees (for businesses with NAICS codes starting with 72 [accommodation and food services], average less than 500 employees per physical location)
b) Entity was in business as of February 15, 2020
c) Business qualifies for SBA 7(a) loans
d) Includes sole proprietors, independent contractors, eligible self-employed individuals
e) Includes nonprofits, including churches
f) Includes 501(c)(6) and destination marketing organizations that:
a. Have 150 or fewer employees
b. Includes chambers of commerce, economic development and tourism
c. Subject to a maximum lobbying threshold (10% of receipts, 10% of activities)
Overview of PPP 2
Many of the loan terms are comparable to the earlier PPP loans, most notably being 1% interest bearing, forgivable loans. This time around, however, the maximum loan amount is $2 million. Each borrower’s loan amount is again tied to 2.5 x 2019’s average monthly payroll costs.
Eligible costs will be same as in PPP round 1 (payroll, rent, utilities and mortgage interest), PLUS:
- Covered operations expenditures (such as software or cloud computing services)
- Covered property damage (uninsured or unreimbursed damage, vandalism or looting from public disturbances in 2020)
- Covered supplier costs
- Covered worker protection expenditures and facility modification costs
These new categories of eligible expenses are available to all PPP 2 borrowers and to all original PPP borrowers with loans not yet forgiven as of the enactment date of this latest relief legislation. This newest COVID Relief legislation clarifies that eligible payroll costs include group insurance payments for group life, disability, vision and dental coverages. Eligible costs for forgiveness will require a minimum 60/40 allocation between payroll/nonpayroll costs, consistent with PPP round 1 requirements.
• PPP FORGIVENESS CHANGES
Much anticipated relief has finally come to borrowers with PPP loans up to $150,000. Simplified forgiveness will now be available for loans $150,000 or less after completing a one-page form and attesting to compliance regarding the use of the loan proceeds. Previously a similar option was available only to borrowers of $50,000 or less.
Covered periods in which to use PPP loan proceeds (1) begin on the date the loan proceeds are received and (2) end (at the borrower’s option) on any date occurring between 8 weeks and 24 weeks after receipt. Previously Covered Periods were interpreted as ending only at the end of the 8 or 24 week periods.
EIDL grants will no longer result in a PPP loan forgiveness reduction. This appears that it will be retroactively applied to forgiveness already granted. Stay tuned!
• OTHER GRANTS AND LOANS
An additional $20 billion will go to EIDL Grants and Loans to small business, targeted to low-income communities and businesses that have suffered an economic loss of greater than 30%.
$15 billion has been reserved for grants to shuttered live event venues, movie theaters, and cultural institutions.
• EXTENSION OF EXPIRING PROVISIONS
Many items from both the CARES Act and income tax provisions have been extended, including Employee Retention Tax Credits, Employer Credit for Paid Family and Medical Leave, Work Opportunity Credit, and SBA loan payment subsidies
We will expand on this discussion in the near future.
OTHER PROVISIONS AFFECTING INDIVIDUALS AND TARGETED SECTORS OF THE ECONOMY
• $600 per person and per child stimulus payments – checks expected to be issued soon (applicable to those making up to $75,000 per individual/$150,000 per couple per year).
• $300 federal unemployment supplement through March 14, 2021 and temporary extension of expanded pandemic-era unemployment eligibility
• Emergency food assistance (SNAP, and assistance for food banks and food pantries)
• Emergency rental assistance and extension of eviction moratorium through January 31, 2021
• Extension of student loan forbearance through April 1, 2021
• Funding for health-related expenses (Healthcare provider relief fund; funds for testing, tracing, and vaccine development and distribution; funds for substance abuse prevention and treatment and mental health)
• Education funding for K-12, higher education and the “Governor’s Fund”; includes targeted aid for private and parochial schools, minority-serving institutions, territories and the Bureau of Indian Education
• Broadband expansion, including state connectivity and deployment and educational connectivity and distance learning.
• Emergency funding for transportation (airlines, airports, buses, Amtrak, and public transit)
• Noteworthy Income tax changes:
o Temporary 100% deduction for business meals for 2021 and 2022
o $300 individual/ $600 married charitable contribution deductions for non-itemizers in 2021
o Many other changes we will discuss in a follow-up to this information
How DHJJ Can Help
Please contact DHJJ with questions regarding the COVID-19 relief for individuals and businesses.