On December 21, 2020, Congress released the Consolidated Appropriations Act, 2021 (the “Act”), which funds the government for 2021 and contains many tax-related provisions. If signed into law, the Act will be one of the largest spending measures ever passed by Congress (ahead of the CARES Act earlier this year).
Note, the purpose of this Tax Alert is to address the Act’s long-awaited COVID-related relief provisions. Stay tuned in the coming weeks for Part 2, which summarizes the Act’s other tax-related provisions, including extensions of temporary provisions.
PPP Loan Expenses Deductible
The Act provides a highly anticipated “correction” to the tax deductibility of PPP loan expenses. Under the CARES Act, PPP loan amounts that are forgiven are excludible from gross income. However, the IRS surprised borrowers in Notice 2020-32 by stating that expenses paid with PPP funds would not be deductible, citing the tax benefit rule.
In overruling the IRS, the Act provides 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.” Thus, expenses paid with PPP funds are now fully deductible, even if a borrower already applied for loan forgiveness.
PPP Loan Expansions and Modifications
In addition to providing more PPP loan funding for those that have not borrowed yet, the Act relaxes certain rules for existing PPP loans.
First, the Act creates four new types of expenses that qualify as non-payroll costs:
- Covered operations expenditures – payments for any business software, cloud computing service, and other human resources and accounting needs.
- Covered property damage costs – costs related to property damage due to public disturbances that occurred during 2020 that was not covered by insurance.
- Covered supplier cost – expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the borrower’s operations at the time the expenditure is made. Supplier costs of perishable goods can be made before or during the life of the loan.
- Covered worker protection – personal protective equipment and adaptive investments (i.e., physical barriers, air filtration systems, drive-through windows, etc.) to help a borrower comply with government health and safety guidelines related to COVID-19.
Note, these expenses are subject to the same 40% limitation. Thus, at least 60% of the PPP loan amount must still be used for payroll. Moreover, these new categories do not apply to borrowers that have already had their loans forgiven.
Second, in addition to expanding the definition of non-payroll costs, borrowers are not locked in to choosing an 8-week or 24-week covered period; rather, they can choose any covered period lasting between 8 and 24 weeks.
Third, all borrowers with PPP loans of less than $150,000 are afforded a simpler, more efficient process of applying for forgiveness. These borrowers must submit a one-page form with bare information and a certification. They do not need to submit supporting documentation at the time of submission but must retain “relevant records” for the next four years in case of SBA audit.
Finally, the Act creates a second round of PPP loans for smaller and harder-hit businesses that already borrowed in the first round and expended those funds. Except as noted below, the characteristics of the second round are similar to the first round:
- The total PPP loan amount is limited to $2 million per borrower;
- A borrower must have fewer than 300 employees;
- A borrower must have a 25% drop in gross receipts when comparing any quarter in 2020 to the same quarter in 2019; and
- Borrowers in the restaurant industry may receive loans of up to 3.5 times the average monthly payroll costs in 2019.
For all PPP loans, the Act clarifies the definition of a seasonal employer to mean a borrower that either operates for no more than seven months in a year, or earned no more than 1/3rd of its receipts in any six months in the prior calendar year.
Other SBA Debt Programs
Like the PPP loans, the Act clarifies that EIDL advances are not taxable and any expenses paid with the advance are tax deductible. Moreover, forgiven PPP loan amounts will no longer be reduced by any EIDL received.
In addition to PPP and EIDL, there will be new SBA loan programs available under the Act. These include grants to live venues, theatres, museums, movie theatres, and talent representatives, with the following characteristics:
- Eligible recipients must be fully operational as of February 29, 2020;
- During the first 14 days of the program, grants are only offered to recipients that have a 90% or greater revenue loss, and in the next 14 days, only to those that have a 70% or greater revenue loss;
- After that 28-day period, eligible recipients must have a 25% reduction in revenues when comparing each quarter in 2020 to the same quarter in 2019; and
- The amount of the initial grant is 45% of gross revenue earned in 2019, with a second grant of up to 50% of the first grant; but the total amount of both grants cannot exceed $10 million per borrower.
Extension of the Employee Retention Credit
The Act extends the employee retention credit (“ERC”) from December 31, 2020 through July 1, 2021 and provides that PPP borrowers may also claim the ERC. However, forgivable payroll costs for PPP do not include qualified wages upon which the ERC is computed.
In addition, the Act modifies several aspects of the credit. First, the credit percentage is increased from 50% to 70% of qualified wages. Second, the amount of qualified wages that are considered per employee is increased from $10,000 to $10,000 per quarter. Third, the rules that applied to employers with more than 100 employees now does not kick in until the employer has more than 500 employees. Finally, to be eligible for the credit under the second test, an employer need only see a 20% drop in gross receipts rather than 50%.
Stimulus Checks and Other Relief
The Act provides a second round of stimulus checks in the amount of $600 per individual (or $1,200 for married couples), plus $600 for each dependent under the age of 17. Like the first round, eligibility phases out once AGI exceeds $75,000 per taxpayer (or $150,000 for married couples) at a rate of $5 per $100 of additional income.
Other COVID-19-related relief includes the following:
- Families First Coronavirus Response Act (“FFCRA”) credit extended from December 31, 2020 to March 31, 2021;
- Due date to pay deferred employee payroll taxes extended from April 30, 2021 to December 31, 2021;
- An additional $300 per week unemployment benefit, through March 14, 2021 and other benefit extensions; and
- To assist struggling restaurants, 100% deduction for business meal expenses for 2021 and 2022.
Please expect a further discussion on the Act in the coming weeks. For any tax-related questions specific to this Tax Alert, please contact any of the following individuals:
Name: Meghan Andersson, JD, LLM, CM&AA
Office: Irvine, CA
Phone: (949) 623-0542
Name: Jason Borkes, CPA, CM&AA
Office: Irvine, CA
Phone: (949) 623-0516
Name: Mark Cook, MBA, CPA, CGMA
Office: Irvine, CA
Phone: (949) 623-0478