For those of you who have been following along as we navigated the rollercoaster that has been the Paycheck Protection Program (PPP) through 2020, buckle up, because we’re not done yet! Congress has passed a second major stimulus to help the economy survive COVID, and there are major PPP and non-PPP ramifications to be aware of. Note, however, that President Trump has indicated that he will not sign the bill, but Congress seems to have a veto-proof majority. A few highlights:
PPP-Related Items in the Bill
1. PPP forgiveness is now truly tax-free (and I like to think we helped make that happen, every little bit helps). Congress had originally intended that this be tax-free income, but the IRS stepped in, citing existing tax law, and said that the tax-free nature of the PPP forgiveness means that the related deductions (e.g. the wages you paid to your employees using PPP funds) must therefore be non-deductible. This effectively made the PPP taxable, but Congress has now provided further legislation to specifically state that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph”. However, note that will not have the increased basis until the forgiveness is approved, so be wary of potential distributions in excess of basis or non-deductible losses (limited by basis) in 2020.
2. Another round of PPP lending is on its way. The new bill allows both new and previous borrowers to receive another PPP if they meet the requirements to be considered an “eligible entity”. What makes an entity eligible? The entity must meet the following criteria:
- The entity must be a Schedule C (self-employed individual), LLC, or other entity that is taxed as a S-Corp or partnership
- There must have been a 25% decrease to revenue from one quarter in 2020 as compared to the same quarter in 2019. (If you were not in business in Q1, Q2, or Q3 of 2019 but were in business in Q4 2019, you can compare Q1, Q2, or Q3 or 2020 to Q4 of 2019. If you were not in business in 2019 at all but were in business by February 15, 2020, you can compare your revenue during Q2 or Q3 of 2020 to Q1 of 2020.)
- The entity must employ no more than 300 employees (or meet an alternative size standard)
3. Borrowers with loans under $150,000 can use a simplified application. The simplified application is one page, however, all of the same rules apply here as did with the longer form.
4. Borrowers with loans between $150,000 and $2,000,000 are not required to submit supporting documentation. Note that you must still retain the documentation for your records.
5. The covered period can be between 8 and 24 weeks, but the exact end-date is up to you. This is important if you are maintaining a certain headcount but expect reductions following the end of your covered period.
6. Additional expense types qualify for forgiveness, including certain operating expenses (e.g. computer software, SaaS), property damage costs, supplier costs, and worker protection expenditures
7. EIDL Grant no longer reduces PPP Forgiveness. If you’ve already filed, speak to your lender as this was enacted retroactively and includes previously filed forgiveness applications.
Non-PPP Items of Note in the Bill
There are also many non-PPP-related implications of this bill. Here are a few highlights:
1. More stimulus checks! The checks will be for $600 per individual (including minor dependents). The qualifications that determine who receives a stimulus check are the same as the original round that was part of the CARES Act. The phase-out begins at $75,000 for a single taxpayer and $150,000 for a joint tax return.
2. Federal unemployment benefits have been renewed at $300/week and is available through March 14, 2021. Self employed individuals are eligible for an additional $100/week.
3. Loan payments made by the SBA are not taxable income to the borrower. Like the PPP, the IRS originally noted that these payments were taxable income to the borrower. This bill overrides the IRS on this matter.
4. Extension of SBA loan payment program for an additional three months, beginning on February 1, 2021, with certain borrowers eligible for an additional eight months. These eligible entities include certain retail establishments, hotels, restaurants, personal care service providers, transportation, and news organizations.
5. Employee Retention Tax Credit. The major change here is that this is now allowed to be taken by employers who received a PPP, a shift from the prior rules. Note, however, that the same wages cannot be used for this credit and to qualify for PPP forgiveness (i.e. no double-dipping). Additionally, the new rules allow group health insurance to be considered part of gross wages, and the credit is now extended through July 1, 2021.
What is the credit? For 2021, the credit is 70% of wages paid (up from 50%), limited to wages of $10,000 per employee per calendar quarter (up from $10,000 annually under prior rules). In order to qualify for the credit, the business must have seen a 20% or more decrease in gross receipts in the current quarter as compared to the same quarter in 2019 (other comparisons are available in certain situations).
What about the 2020 credit? You can go back and amend your 2020 941s to claim this credit retroactively, noting that the old limitations and rules apply other than the fact that you can now receive this credit and a PPP loan.
6. Business meals will be 100% deductible from January 1, 2020 to December 31, 2022. Under current law, these meals were only 50% deductible. In order to qualify, the meal must have been purchased from a restaurant (dine-in and take-out both qualify).
7. Charitable contributions will be deductible, even if you don’t itemize your expenses. The CARES Act made this happen for 2020 for up to $300 per tax return (regardless of whether you file single, joint, etc.). This bill sets this deduction up to continue for 2021, and for 2021 the deduction will be $300 for single taxpayers and $600 for taxpayers filing a joint return.
There’s a lot here, both on the PPP front and the non-PPP front, and many of these provisions can and will have real-life, real-money impacts on many of you. If you’re not sure how anything here affects you or you want to discuss your own situation, don’t hesitate to reach out! If you’ve already done your 2020 tax projections based on taxable PPP forgiveness, don’t forget to revise them. You may be able to reduce estimated payments or even take advantage of losses (e.g. by rolling a traditional IRA to a Roth IRA), but you’ll have to act quickly!
This is a dynamic, complicated piece of legislation and it is subject to further change. Before acting, you should always discuss your own situation with your tax advisor.