Issue No. 1 | January 2021
Congress Provides Small Businesses Relief in New Stimulus
On December 29th, 2020, the Consolidated Appropriations Act of 2021, or CAA, was signed into law by President Trump. The law provided roughly $900 billion dollars in new stimulus money, the majority of which meant to assist small businesses during the lingering COVID-19 Pandemic.
CAA provides business owners 3 primary means of obtaining relief. Much of the new relief deals with modifications or additions to programs created under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which was the original stimulus bill that was signed into law in March of 2020.
Deductibility of Business Expenses Paid with Payroll Protection Program, PPP, Funds
In a decision long anticipated by business owners across the country, the CAA modified the CARES Act to allow PPP borrowers to deduct business expenses the paid with PPP funds. This allows borrowers to exclude forgiven PPP funds from their gross income, and thus avoid handing business owners a massive tax bill for spending money that was intended as stimulus. This change codifies what Congress and the Treasury Department initially intended with regard to the deductibility of PPP funds used for business expenses.
However, there are still tax issues that this new rule creates for PPP borrowers. One such issue is that the deduction for expenses paid or incurred from PPP proceeds may be limited due to inadequate tax basis or amounts at risk. If the PPP loan is not forgiven or deemed forgiven in the same year, unexpected results may occur due to timing differences between 2020 and 2021.
More guidance will likely come from the IRS that will provide more clarity on how borrowers and their agents should approach this issue. In the meantime, borrowers should seek outside counsel from an attorney or accountant before finalizing their attempt to take advantage of this deduction.
PPP Second Draw
The CAA also created a new round of PPP funding for businesses to apply for. Generally, entities that were eligible to participate in the first round of the PPP, received a PPP loan, and have fully used the funds from their first round of PPP, are eligible to apply for a second draw loan.
Eligibility is generally limited to entities which employ 300 or fewer and have experienced a revenue reduction of 25% or more in 2020 in relation to the comparable 2019 quarter. However, restaurants, hospitality businesses, and news broadcast businesses with multiple locations may be eligible to apply the employee limit for each physical location, which will expand those businesses access to the new PPP funds. Borrowers must have been an operating business on February 15, 2020 and must not be a publicly traded company.
For eligible borrowers, loan size will be determined by the average monthly payroll for either 2019 or 2020, multiplied by 2.5, with a maximum loan size of $2 million.
Extension and Expansion of the Employee Retention Tax Credit
The CAA extends and expands the Employee Retention Tax Credit, or ERC, that was created under the CARES act. The timeframe in which eligible wages can be paid has been extended to run from March 27, 2020 to July 1, 2021.
Eligible employers are now determined on a quarterly basis to include those that are either: (1) partially or fully shut down due to government orders, or (2) suffered a decline of 20% or more in gross receipts when comparing the 2020 quarter to the same quarter in 2019. The CAA expands eligibility for the credit by reducing the required decrease in gross receipts from 50% to 20% and providing a safe harbor allowing employers to use the prior quarter’s gross receipts instead of the current quarter’s gross receipts to determine eligibility.
In CAA also increased the credit rate from 50% to 70% of qualified wages. The limit of creditable wages per employee is increased from $10,000 per year to $10,000 per quarter and the applicable number of employees for the ERC have been increased from 100 to 500 employees. This will permit employers who had 500 or fewer full-time employees in 2019 to take the credit for wages paid to employees who continue to perform services, provided they meet the other requirements.
A limitation, created by the CARES Act, that employers can only count wages up to the amount that an employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship has been removed, allowing employers to claim the credit, for example, for bonus pay to essential workers. With certain limitations, businesses with 500 or fewer employees in 2019 are permitted to take an advance of the credit. Significantly, employers who receive or received a PPP loan will qualify for the credit with respect to wages that are not paid for with forgiven PPP loan proceeds. This is a change from the CARES act, which initially prohibited PPP borrowers from utilizing the ERC.
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