New COVID-19 Relief Bill is Passed by Congress: What’s in It for You?
On Monday, December 21, 2020, the House and Senate both voted to pass a bill (Consolidated Appropriations Act, 2021) that contains nearly $900 billion in stimulus relief, and is expected to be signed into law by President Trump in the next few days.
The following summary breaks down some major components of the relief bill:
Paycheck Protection Program (PPP) – Deductibility of PPP Expenses & EIDL Advance
Small businesses have been awaiting the reversal of the IRS position that expenses paid with PPP loans would not be deductible to the extent the loan was forgiven. As intended in the CARES Act, the bill provides relief to PPP recipients by providing both forgiveness of the PPP loans and a tax deduction for expenses paid with the PPP loans. It is possible that states may “decouple” from this provision and disallow the expenses paid with PPP loans for state tax purposes, and we will continue to monitor any state rulings.
Under the CARES Act, a recipient’s PPP loan forgiveness was required to be reduced by the Economic Injury Disaster Loan (EIDL) advance received (up to $10,000). The relief bill repeals the provision reducing PPP forgiveness by an EIDL advance.
Paycheck Protection Program (PPP) – Second Round of PPP Loans
The relief bill will provide an additional round of Paycheck Protection Program (PPP) forgivable loans to eligible recipients. Eligible recipients include businesses and self-employed individuals that generally:
- Have fewer than 300 employees; and
- Demonstrate that the business has had a 25 percent (or greater) reduction in gross receipts during the first, second, third or fourth quarter in 2020, compared to the same quarter in 2019.
For the second round of PPP loans, businesses will calculate the maximum loan amount using the same method as the first PPP loan (2.5 times average monthly payroll costs). The average payroll costs will use the calendar year 2019 payroll, or the payroll for the 1-year period before the date the new loan is made. However, for the second round of PPP loans there will be a $2 million maximum loan amount. The hotel and restaurant industry (covered under NAICS Code 72) will calculate the loan amount using 3.5 times the monthly average payroll costs but will still be subject to the $2 million maximum loan amount.
The relief bill allows a PPP loan recipient to select the “covered period,” to better align with payroll and full-time equivalent (FTE) counts. The covered period must be at least 8 weeks and cannot exceed 24 weeks. This provision will apply to both first and second round PPP loans. The bill also provides for additional “eligible” expenses to include “covered supplier costs” and “covered worker protection expenditures,” among others.
Stimulus Payments to Individuals
A second round of direct payments to eligible individuals. The direct payments will be similar to the first round of payments made to individuals under the CARES Act in March 2020. Second round payments will be up to $600 per eligible individual and $600 per child.
The direct payments to individuals are limited based on adjusted gross income (“AGI”). Taxpayers with an AGI of up to $75,000 per year ($150,000 if married filing a joint return) will be eligible for the full direct payments. Individual payments will be reduced for individuals earning over $75,000 and less than $87,000 ($150,000 to less than $174,000 if married). Taxpayers with an AGI of $87,000 or more ($174,000 if married) would not be eligible for a second direct payment. The income requirements will be based upon 2019 income tax return filings.
The bill will provide an additional $300 per week Federal unemployment benefit to recipients. The additional $300 Federal benefit will be in addition to state unemployment benefits and will apply to self-employed individuals and gig workers. The extra $300 benefit will begin after December 26, 2020 (or the date signed into law, if later) and expire on March 14, 2021.
Full Deduction for Business Meals in 2021 and 2022
The bill provides for a two-year full deduction for business meals, where a tax deduction was previously limited to 50 percent of the amount spent. The 100 percent deduction for business meals applies to the 2021 and 2022 tax years (not retroactively to 2020). The food and beverages must be provided by a restaurant to qualify for the full deduction.
Expansion of the Employer Retention Credit (ERC)
The bill extends and expands the Employer Retention Credit to eligible businesses for calendar quarters through July 1, 2021. The ERC refundable tax credit was increased from 50 percent to 70 percent, resulting in a maximum credit of $7,000 per employee per quarter.
Eligible employers must demonstrate that gross receipts for the calendar quarter are less than 80 percent of the gross receipts of the employer for the same calendar quarter in 2019. An employer may elect to determine the gross receipts test based upon the prior quarter. Eligible employers also include businesses that experienced a full or partial suspension of operations due to a governmental order.
An employer that receives a PPP loan can still qualify for the ERC, however the same wages may not be used for both the ERC and PPP forgiveness.
Contributing author: Brian J. Potter, CPA, CDA, is a tax partner at Dannible & McKee, LLP. Brian has over 14 years of experience providing tax and consulting services to a wide range of clients. He has extensive experience in individual and corporate tax planning, financial planning, multi-state taxation, research and development, New York State income tax credits and ownership transition issues.