By Anthony Montanaro, CPA, ABV, CFE, Richard Stephenson, CPA, and Kevin Wilkes, JD
On Dec. 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. In addition to important federal government budget appropriations, the act contains new tax provisions and Paycheck Protection Program (PPP) loan updates.
Clarification on Tax Treatment of PPP Loans – For federal income tax purposes, no amount of a forgiven PPP loan is to be included in a borrower’s gross income. Also, related expenses are deductible and no basis increase shall be denied by reason of the income exclusion. Previously, the IRS indicated expenses related to forgiven PPP loans were not tax deductible. This favorable tax treatment also applies to Economic Industry Disaster Loan (“EIDL”) Advance Payments and Shuttered Venue Operator Grants.
Credits for Paid Sick and Family Leave Extended – The Families First Coronavirus Response Act (FFCRA) provided qualified employees the right to certain paid leave for reasons related to COVID-19 and allowed employers a corresponding tax credit to partially offset wages paid under the FFCRA. The credit would have expired Dec. 31, 2020, but the appropriations act extends the credit through March 31, 2021. It also includes technical corrections and clarifications that self-employed individuals are to use when calculating “average daily self-employment income” to determine the amount of allowed payroll tax credits for any FFCRA sick leave.
Employee Retention Credit Extended – The tax credit available for qualified compensation paid to covered employees was extended through June 30, 2021. Originally part of the Coronavirus Aid and Economic Security Act (CARES Act), the credit was set to expire for compensation paid after Dec. 31, 2020. The Consolidated Appropriations Act also expands eligibility and provides an opportunity for certain taxpayers who received a PPP loan to benefit from this credit. Taxpayers should consult their tax advisers to determine eligibility.
Deferred Payroll Taxes – Employers who deferred employees’ share of payroll taxes from the period beginning Sept. 1, 2020, and ending Dec. 31, 2020, may extend the payback period from April 31, 2020, through Dec. 31, 2021.
Business Meals – The Consolidated Appropriations Act makes certain business meals 100% deductible, provided the food and beverages are supplied by a restaurant and the expenses are paid or incurred between Jan. 1, 2021, and Dec. 31, 2022. This change should increase business tax deductions for the next two years and support the restaurant industry, which was battered by the COVID-19 pandemic.
Direct Stimulus Payments – To stimulate the economy, direct payments amounting to $600 per individual (including child dependents) are being sent out. Structured as a credit against 2020 income taxes, the payments begin to phase out for single taxpayers with 2019 adjusted gross income exceeding $75,000 ($150,000 for joint filers).
Earned Income Tax and Child Tax Credits – Lower-income taxpayers can use 2019 in lieu of 2020 taxable income to compute the earned income and child tax credits, if advantageous.
Teacher Expenses – The U.S. Treasury shall issue regulations providing that qualified personal protective equipment and supplies purchased by teachers to prevent the spread of COVID-19 qualify for the above-the-line educator expense deduction.
Charitable Contributions – Favorable provisions applicable to qualified charitable contributions set forth in the CARES Act have been extended to 2021. Individual taxpayers who itemize their tax deductions may deduct charitable contributions up to 100% of adjusted gross income. Individual taxpayers making charitable contributions may also claim a $300 above-the-line deduction in 2021. Corporations may deduct up to 25% of taxable income for donations of cash or food inventory from any trade or business.
Other Tax Changes – The Consolidated Appropriations Act provides certain disaster tax relief and extends or makes permanent numerous other tax law changes. Taxpayers should carefully review the law with their tax adviser. Extended favorable tax provisions include the Work Opportunity Tax Credit, New Markets Tax Credit, the gross income exclusion of qualified principal residence debt, the deduction for mortgage insurance premiums (through 2021), and several energy credits (through 2021). The 7.5% of adjusted gross income floor for medical expenses is permanent.
PPP Loan Modifications
The Consolidated Appropriations Act makes critical PPP changes, such as simplifying loan forgiveness rules, expanding eligible expenses, and creating a second round of funding for qualifying borrowers. The Treasury will issue official regulations on these provisions in January. The following descriptions of provisions are based on the text of the legislation, and may differ from final Treasury regulations.
Second Draw Loan Eligibility Requirements – The act appropriates $284.45 billion in funding for a second round of PPP loans for existing borrowers. To qualify, borrowers must meet more restrictive guidelines. Generally, they must not have more than 300 employees and must experience a 25% gross receipts reduction (or more) during a quarter in 2020 as compared to that same quarter in 2019 (special rules apply to entities not in operation during all of 2019). In addition, borrowers must not be a company organized in China, hold a 20% or more ownership interest in a Chinese company, or have a board member who is a resident of China. Lastly, PPP loan recipients cannot also receive a Shuttered Venue Operator Grant (see below).
The maximum loan size for the second draws may be no greater than $2 million. Borrowers now have the option to use either actual payroll costs during the one-year period prior to the application date or 2019 payroll costs to calculate the loan size.
Additional Eligible Expenses – Below are covered expenditures by category as added by the Consolidated Appropriations Act:
- Operations expenditures: Business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tacking of supplies, inventory, records, and expenses.
- Property damage: Costs related to property damage, vandalism, or looting due to public disturbances during 2020 that were not covered by insurance or other compensation.
- Supplier costs: Expenditures made by an entity to procure goods from a supplier that are essential to the operations of the entity at the time the expenditure and pursuant to a contract or purchase order …
-In effect at any time before the covered period with respect to the applicable covered loan; or
-With respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
- Worker-protection expenditures: – Operating or capital expenditures that facilitate the adaption of an entity’s business activities to comply with requirements established or guidance issued by the Department of Health and Human Services, the CDC, OSHA, or any equivalent requirements established or guidance issued by state or local government, during the period beginning March 1, 2020, and ending on the date the national emergency declared by the president ends. These expenditures may include the purchase, maintenance, or renovation of assets that create or expand …
-A drive-through window
-An indoor, outdoor, or combined air or air pressure ventilation or filtration system
-A physical barrier such as a sneeze guard
-An expansion of additional indoor, outdoor, or combined business space
-An onsite or offsite health screening capability
-Other assets relating to the compliance with any regulatory compliance such as personal protection equipment and respirators
Expenditures made under this category do not include any payments relating to residential real property or intangible property
These additional expense categories are effective retroactively and apply to all PPP loans (except those already forgiven). Also, the act confirms that employee group life, disability, vision, and dental insurance payments qualify as payroll costs for loan forgiveness.
Here are some other changes to the Paycheck Protection Program:
Elimination of Loan Forgiveness Reduction for EIDL Advances – The act repeals the reduction in loan forgiveness resulting from a borrower obtaining an EIDL advance payment. This repeal is retroactive and is applicable to borrowers who have already completed the loan forgiveness process.
Covered Period – The act defines the covered period as either an 8-week or 24-week period.
Simplified Loan Forgiveness Application – Borrowers with loans not more than $150,000 are eligible to use a simplified loan forgiveness application. This form will be one page and only requires a description of the number of employees retained because of the loan, the estimated amount of the loan spent on payroll costs, the total loan value, and borrower certifications. No supporting documentation is required with this form. The Treasury must issue this form within the next 24 days.
Increased Loan Size for Hotels and Restaurants – Entities classified under NAICS code 72 (Accommodation and Foods Services) may obtain a PPP loan equal to 3.5 times the average monthly payroll. These loans remain subject to the $2 million maximum loan size.
Limited Ability for PPP Borrowers to Request a Loan Increase – To the extent borrowers received an initial PPP loan less than the amount they would have qualified for due to changes in regulations, such borrowers may request an additional disbursement. The loan must not have been forgiven to qualify.
New Loan Calculation Methodology for Farmers and Ranchers – Farmers and ranchers operating as sole proprietors, independent contractors, or self-employed individuals may use average monthly gross income as reported on their 2019 1040 Schedule F to calculate the maximum loan amount. Farmers and ranchers with employees may add the average monthly gross income amount to the 2019 average monthly payroll to calculate the loan amount. The maximum loan size of $2 million for second draw loans still applies; however, borrowers may request an increase in the size of their initial loans based on this new methodology, provided the loans have not been forgiven.
New Grants and Additional Funding
Shuttered Venue Operator Grants is a newly established relief program targeted for live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, or talent representatives that meet certain requirements.
EIDL Advance Payments are an appropriation of an additional $20 billion in funding for EIDL. Eligible borrowers can receive up to $10,000 in advance payments ($1,000 per employee). These grants do not have to be repaid and will no longer reduce PPP loan forgiveness.
Anthony Montanaro, CPA, ABV, CFE, is senior manager, consulting, for Louis Plung & Company LLP in Pittsburgh. He can be reached at firstname.lastname@example.org.
Richard Stephenson, CPA, is senior tax accountant for Louis Plung & Company in Bethel Park. He can be reached at email@example.com.
Kevin Wilkes, JD, is associate principal for Louis Plung & Company in Wexford. He can be reached at firstname.lastname@example.org.
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