As many of you have heard by now, last week Congress approved The Consolidated Appropriations Act, 2021 which provides emergency assistance and health care response for individuals, families and businesses as a result of the Coronavirus (COVID-19) pandemic. The Act expands the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, that provides loans (covered loan) to assist small businesses with certain expenses incurred during the economic challenges due to the COVID-19 emergency. The Consolidated Appropriations Act, 2021 also clarifies the deductibility of certain expenses paid for with funds from a loan under PPP and the tax impact on income for the forgiveness of the related debt.
The Consolidated Appropriations Act, 2021 clarifies that:
- no amount is included in the gross income of the eligible recipient due to the debt forgiveness,
- no deduction is denied, no tax attribute is reduced, and no basis increase is denied because of the exclusion from gross income, and
- in the case of an eligible recipient that is a partnership or S corporation:
- any amount excluded from income is treated as tax exempt income, and in general, any increase in the adjusted basis of a partner’s interest in a partnership with respect to any amount excluded from income is equal to the partner’s distributive share of deductions resulting from costs giving rise to the forgiveness.
This clarification also applies to any subsequent Payroll Protection Loans for tax years ending after the date of enactment of the Consolidated Appropriations Act, 2021.
Under the Consolidated Appropriations Act, 2021 a recipient of a loan may use the proceeds to pay the following expanded list of eligible expenses:
- payroll costs,
- certain healthcare benefits,
- interest on mortgage obligations,
- interest on any other debt obligations,
- operations expenses,
- property damage,
- supplier costs, and
- worker protection expenses.
The Act also provides a simplified process for recipients of a covered loan of not more than $150,000 to apply for loan forgiveness.
Paycheck Protection Program Second Draw Loans
Congress has also provided for an additional subsidy for Small Businesses whereby they can receive another round of PPP funding of up to $2 million as follows:
Eligible entities. Prior PPP borrowers must meet the following conditions to be eligible for the PPP Second Draw Loans:
- Employ no more than 300 employees per physical location;
- Have used or will use the full amount of their first PPP loan; and
- Demonstrate at least a 25% reduction in quarterly gross receipts in 2020 relative to the same quarter in 2019.
Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.
Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Loan forgiveness. Like the first PPP loan, the PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income.
Application of exemption based on employee availability. The CAA, 2021 extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.
Other Stimulus Package Initiatives
In addition to the PPP subsidies referred to above, the following benefits and tax savings initiatives were passed as part of the law.
Stimulus checks of $600 will be mailed to individuals with an adjusted gross income of $75,000 or less and to filers of joint returns of $150,000 or less will receive $1200 and up to $600 for each qualifying child.
Business meals incurred in 2021 will be 100% deductible.
The above the line deduction for charitable contributions was increased to $600 for those taxpayers that don’t itemize.
The Employee Retention Credit was expanded for eligible companies whose revenue decreased by more than 20% in 2021.
This was previously available only to Companies that incurred a reduction of revenue of 50% or more.
We expect to receive further guidance from the SBA as well as Federal and State Tax Agencies as it relates to Forms, definitions of the new categories of qualified expenses as well as adherence to Federal tax regulations in the coming weeks and will advise you accordingly.
In the meantime, please feel free to contact our offices with any questions.