According to the Senate Historical Office, the Consolidated Appropriations Act of 2021 may be the largest single item of legislation in American history. It has been passed by Congress but is waiting on the President to sign it before it is final law. “The Act” is actually a collection of several Acts, a few of which have tax provisions. These include the COVID-related Tax Relief Act of 2020, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
How does this affect your business?
Are additional PPP loans available?
The CARES Act, passed in March 2020, created the precedent of a federally guaranteed loan based on payroll, and the loans would be forgiven to the extent that the company kept employees on the payroll. The Paycheck Protection Program was a novel approach to an economic problem during a pandemic – how to avoid a total economic collapse by keeping people employed even as business economic activity began to slow down. A complete discussion of the history of PPP loans is beyond the scope of this article.
The Act provides a second round of PPP loans, a so-called “second draw.” Like the first loan in 2020, the loan is based on 2.5 months of payroll under the same rules as before. The maximum loan is $2 million. However, for businesses whose NAICS code begins with “72,” the loan can be up to 3.5 months of payroll. These businesses are hotels, beds and breakfasts, campgrounds, restaurants, caterers, and bars. Other qualifying requirements –
- The taxpayer business must have under 300 employees.
- The taxpayer must have used or will have used all of their original PPP loan on qualifying uses.
- The taxpayer must confirm under penalty of perjury that they need the PPP loan to support ongoing operations in businesses. Note that this is a tighter requirement than in the first PPP loans. As the list of loan recipients is public information, applicants should be prepared to defend this statement to employees and competitors, as well as regulators.
- The taxpayer must have a 25% decrease in gross receipts in quarters 1, 2, or 3 of 2020, as compared to the same quarter in 2019. For loan applications submitted after 12/31/2020, the applicant can use the same test for quarter 4. Special rules are available for those taxpayers who were not in business in 2019, but the business must have been in operation on 2/15/2020.
As in the original PPP loan regime, the money must be used for certain categories of expenses. In the Act, the list of qualifying uses has expanded, but most taxpayers will find the funds used almost exclusively on payroll.
The funds must be spent on qualifying uses in a so-called “covered period.” This period begins with the date of loan funding and ends anytime in the following 8 to 24-weeks.
Are there other incentives for retaining employees, other than the PPP “second draw”?
The CARES Act also created an “Employee Retention Credit” through 12/31/2020. Fifty percent of the first $10,000 paid per employee beginning 3/12/2020 was allowed as a payroll tax credit if the employer qualified. Eligible employers are those –
- With a 50% reduction in year-over-year quarterly receipts, OR
- Whose operations have been fully or partially suspended because of a government order limiting commerce, travel, or meetings, due to COVID-19.
Few clients applied for this credit since a taxpayer could not receive this credit and a PPP loan both, and most found the PPP route more beneficial.
Under the Act, several key changes are made that will increase the interest in this credit. The credit is extended through June 30, 2021.
- Previously the company must have a 50% reduction in year-over-year revenue for the same quarter. Now the reduction needs only be 20% (revenue of 80% or less than the same quarter in the prior year).
- No longer must a taxpayer choose between the PPP and the employee retention credit. However, salaries used for this credit cannot also be used for the PPP forgiveness computation.
- The credit rate is increased from 50% to 70% of compensation.
- The $10,000 maximum compensation per employee is applied per calendar quarter, instead of per year. So the previous maximum credit of $5,000 per employee in 2020 ($10,000 annual maximum compensation x 50% credit rate) is now $14,000 per employee for the first half of 2021 ($10,000 quarterly compensation x 2 quarters x 70% credit rate). Of course, you must pay an employee $10,000 per quarter to reach this maximum.
Again, this is a payroll tax credit, so contact your payroll service provider for further details about claiming this credit.
What are the income tax ramifications of the PPP loan forgiveness?
These PPP loans, as well as the original ones, are tax-free when forgiven. The Act also clarifies that, even though the loan forgiveness is tax-free, the taxpayer can still deduct the expenses paid with the loans. Further, the forgiveness is treated as tax-exempt income, which increases the basis to the owners of businesses taxed as partnerships or S-corporations.
However, business owners should be prepared that state tax treatment may differ. In NC, for example, House Bill 1080 stipulates that NC will follow the federal example of tax-free forgiveness. However, NC does not allow a deduction for expenses paid with forgiven PPP funds. Therefore, businesses should expect that their taxable income for NC purposes will be notably higher than for US purposes. It will be very possible under these facts to have a loss for US tax rules but owe tax for NC.
What new do we know about the forgiveness process?
The Act requires the Small Business Administration to design a 1-page forgiveness application for borrowers up to $150,000. Experts have advised that the borrowers should still have a draft of the full application in their files, as all of those questions will still apply upon examination.
For those businesses that have previously filed for forgiveness, if the taxpayer also received an emergency EIDL (economic injury disaster loan) advance of up to $10,000, the forgiveness granted was reduced by the $10,000 EIDL advance. The law changed this requirement of reduction of forgiveness. These taxpayers are advised that they should re-submit their forgiveness application to receive forgiveness credit for the EIDL.
Are there incentives for paying extended sick or family leave for those employees affected by COVID-19?
The Families First Coronavirus Response Act enacted on March 18, 2020, required employers to provide certain extended sick and family leave for employees that were negatively impacted by COVID-19. To help pay this cost, certain credits were available against payroll tax. These credits were previously scheduled to end on 12/31/2020.
Under this Act, these credits are extended through 3/31/2021.
Ask us or your payroll tax provider how this works.
What other business provisions are in the Act?
- The deduction for business meals from a restaurant is increased from 50% in 2020 to 100% in 2021 and 2022 only. It is not entirely clear what “… from a restaurant” might mean or not mean at this point. What about catering? Hotel dining?
- The Work Opportunity Tax Credit and the New Markets Tax Credit are extended through 2025.
- The tax deduction for building or buying an energy-efficient commercial building under Code Section 179D is extended permanently.
- Employers who have medical or dependent care flexible spending accounts normally have to operate under a “use it or lose it” rule. The Act creates an exception that allows for rolling over excess funds from 2020 to 2021, and from 2021 to 2022.
Contact us today with any further questions or clarifications needed about this law.