December 30, 2020
RE: Consolidated Appropriations Act, 2021
Dear Clients and Friends,
On Sunday, December 27, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021). The act provides relief through numerous individual, business, payroll, disaster, and energy-related tax provisions, as well as expands many of the provisions already put into place under the CARES Act.
The key provisions in the Act that we want to immediately address in this letter are related to the Paycheck Protection Program and the New Recovery Rebates.
Paycheck Protection Program (PPP) Loans
The Act provides more than $284 billion to the U.S. Small Business Association (SBA) for first and second PPP forgivable small business loans, and reauthorizes the program through March 31, 2021.
The new round of PPP, or PPP2 as some are calling it, contains many similarities to the first round of the PPP but also has several important differences. The following is a high-level view of the PPP2 provisions.
Eligibility: PPP2 loans will be available to first-time qualified borrowers and, for the first time, to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:
• Have 300 or fewer employees.
• Have used or will use the full amount of their first PPP loan.
• Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
PPP2 Loan Terms- As with the first PPP, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable: Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guideline; expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations; Covered operating costs such as software and cloud computing services and accounting needs.
To be eligible for full loan forgiveness, PPP2 borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the same parameters with the first PPP. Borrowers generally may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. Accommodations and food services companies (NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs.
Clarification of tax treatment of covered loan forgiveness
Taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This supersedes IRS guidance that such expenses could not be deducted.
Clarification of tax treatment of certain loan forgiveness and other business financial assistance under the CARES Act
Gross income does not include forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income.
Simplified application and other terms of note
The Act also creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
New Recovery Rebates/Direct Stimulus Payments
Just as with the CARES Act in March, the Act includes a direct payment to taxpayers in an effort to stimulate the economy (referred to as “additional 2020 recovery rebates”). Unlike the Economic Impact Payments provided in the CARES Act, these payments are only $600 per individual. Families can claim the full $600 amount for child dependents. The payments are a credit against 2020 taxes, and begins to phase out for individuals with adjusted gross income in 2019 in excess of $75,000 ($150,000 for joint filers). The IRS distributes the advanced refunds of the credits based on 2019 tax returns or information about recipients of government benefits.
If the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, the taxpayer will receive the difference as a refundable tax credit. Taxpayers who receive an advance payment that exceeds the credit do not need to repay the amount.
This seemed to be the provision that had drawn the annoyance of President Trump more than any other, as he spent the week after the bill passed demanding that the payments be $2,000 rather than $600. A White House statement issued in conjunction with the signing stated that much more money is coming. However, as of today, leaders have not indicated a vote to increase the stimulus amount.
We are closely monitoring the progress of the Act, as well as IRS and Treasury guidance. Please contact your Duffy Kruspodin advisor if you have any questions on how these changes may affect your specific tax situation.
DUFFY KRUSPODIN, LLP