January 5, 2021
The latest COVID-19 relief package signed into law on December 27, is comprehensive and includes a range of items, including enhanced unemployment insurance, rental assistance, transportation aid, and a moratorium on evictions through the end of January 2021. As we’ll focus on in this article, the package also notably includes a reboot of the Paycheck Protection Program and numerous federal tax changes.
Paycheck Protection Program
The latest COVID-19 package allocates $284 billion to reboot the Paycheck Protection Program (PPP). The PPP, which provided substantial assistance to small and mid-size businesses in the form of forgivable loans, closed in August of 2020 but is now reopening to provide “second draw” loans to eligible borrowers. A few of the key changes in the rebooted PPP are as follows:
1. Eligibility: Businesses, certain nonprofit organizations, self-employed workers, and independent contractors are eligible for the PPP so long as they have less than 300 employees and can demonstrate that they experienced a 25% reduction in gross receipts during a quarter in 2020 compared with the same quarter in 2019.
2. How Will the Amount of the Loan Be Determined: As with the first round of the PPP, eligible borrowers will be entitled to borrow an amount of 2 ½ times their average monthly payroll costs. However, businesses in the foodservice industry and accommodation industry will be able to borrower up to 3 ½ times their average monthly payroll costs. The maximum amount that any business will be eligible to borrow is $2 million.
3. Forgiveness Requirements: The formula to calculate forgiveness of a PPP loan is the same as the first round of loans. Borrowers are required to spend at least 60% of the loan amount on payroll-related costs. The other 40% may be used on other forgivable costs, such as mortgage expenses, rent, and utility payments. Under the COVID-19 relief package, however, the definition of other forgivable costs has been expanded to include expenditures such as costs for personal protective equipment and gear to protect employees, software-related expenses, and property damage costs due to public disturbances that occurred in 2020.
4. Access to “Second Draw” PPP Loans: PPP loans will continue to be issued by financial institutions, such as banks, credit unions, and community lenders. The Small Business Administration (SBA) fully guarantees all PPP loans.
5. Timing of Issuance of “Second Draw” Loans: Pursuant to the COVID-19 Relief Package, the SBA is required to establish regulations no later than ten days after the Bill was signed into law, however, it is unclear when loans will begin to be issued.
6. Simplified Forgiveness Process for Qualifying Loans: PPP loans under $150,000 are eligible for a simplified forgiveness process. Borrowers will need to complete a one-page certification attesting that they have complied with program requirements, along with providing other information.
Federal Tax Provisions
The latest COVID-19 package includes the following key federal tax changes:
1. $600 Refundable Tax Credits to Individuals. This change has generated perhaps the most publicity of any part of the COVID-19 relief package. The package provides a refundable tax credit of $600 per individual taxpayer ($1,200 for married taxpayers filing jointly), in addition to $600 per qualifying child. The IRS is paying out this credit in advance of filing a 2020 tax return, and those payments have already started. Suppose the credit determined on the taxpayer’s 2020 tax return exceeds the IRS’s advance payment. In that case, taxpayers will receive the difference as a refundable tax credit on their return.
The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
2. Tax Treatment of PPP Loan Forgiveness. The IRS had previously taken the position that taxpayers could not deduct expenses that were paid using a PPP loan that was forgiven by the government. This position’s result was that the forgiven PPP loans were effectively treated as taxable income to the recipients.
The COVID-19 package changes this result, by specifying that taxpayers whose PPP loans are forgiven are allowed to deduct the expenses paid with PPP loan proceeds. In addition, the package specifies that the tax basis and other attributes of a PPP borrower’s assets will not be reduced as a result of the loan forgiveness.
3. Tax Treatment of EIDL Loan Forgiveness. The prior COVID-19 relief package (passed earlier in 2020) expanded access to Economic Injury Disaster Loans (EIDL). It established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of CARES Act loans.
The current COVID-19 relief package confirms that the forgiveness of EIDL loans and emergency EIDL grants does not constitute taxable gross income. In addition, the package specifies that: a) deductions are allowed for expenses paid with the amounts not included in income, and b) an entity’s tax basis will not be reduced as a result of the EIDL amounts being excluded from gross income.
4. $250 Educator Expense Deduction Can Be Claimed For PPE Purchases. Eligible educators (including kindergarten through grade 12 teachers) have been allowed a $250 above-the-line deduction for certain trade or business expenses paid by them. Under the package, educators are now allowed to claim the purchase of personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 as an eligible expense.
5. Farmers’ NOL Changes. The prior COVID-19 package had extended the NOL carryback provisions for farmers to five years from two years. As some farmers did not wish to use the five-year carryback, the current COVID-19 package allows farmers who elected a two-year net operating loss carryback prior to the passage of the prior package to elect to retain that two-year carryback. The current package also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver.
6. 50% Limit on Business Meal Deduction Is Suspended. Companies may generally deduct the food and beverage expenses (assuming those expenses meet the ordinary and necessary test) associated with operating a trade or business. This includes food and beverage consumed by traveling employees. The deduction is generally limited to 50% of the actual expense.
Under the COVID-19 relief package, this 50% limit will not apply for food and beverage expenses provided by a restaurant that are paid or incurred during 2021 and 2022.
While this latest COVID-19 relief was signed on December 27, multiple Congress members have been working to make changes to the package. You can watch our COVID-19 resource center for information on any updates to the package.
If you have any questions about these provisions, do not hesitate to contact Lauren Goodman, Matt Ottemann or any member of McGrath North’s COVID-19 Response Team to discuss further.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.