After much anticipation, on December 27, 2020, President Donald Trump signed COVID relief legislation. The provisions included in this bill extend numerous provisions enacted by the CARES Act in March of 2020 and extended many other tax provisions . After signing, President Trump sent a redlined version of the bill back to the House to vote on today which will increase the amount of stimulus checks to $2,000 per adult and $600 per child. We will report more on this provision once it is finalized. For now, we believe the provisions regarding PPP funding and other guidance detailed below will be unchanged.
Payroll Protection Plan Draw Two
This legislation provides for additional funding to the Payroll Protection Program that was heavily utilized earlier this year. PPP loans will be available to entities that received PPP funds earlier in the year and to borrowers that did not receive PPP funds previously. There are separate eligibility requirements for each.
Entities who previously received a PPP loan must:
- Employ no more than 300 people.
- Have experienced a decrease in gross receipts of at least 25% for any quarter in 2020 compared to the same quarter in 2019. If the business was not in business in 2019 the business can compare the gross receipts in any quarter in 2020 to the first quarter of 2020 to determine the reduction in gross receipts. Additional guidance is needed from the SBA regarding the definition of gross receipts, but we do not anticipate PPP funds and possibly EIDL grants to be included in the calculation of gross receipts
For entities that did not receive funding in the initial round of PPP loans, the eligibility requirements are:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loan.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations (NAICS codes starting with 72) with fewer than 300 employees per physical location.
Borrowers will be able to receive 2.5 months of average payroll expenses. Average payroll can be calculated based on either 2019 payroll costs or payroll costs for the twelve months prior to applying for the PPP loan. For borrowers that received PPP loans earlier this year, the same reports provided to lenders for the initial round of funding can be used to apply for this round of PPP loans.
Borrowers who have yet to apply for forgiveness are not required to apply for forgiveness nor are they required to have their PPP loans approved for forgiveness by the SBA prior to applying for additional PPP funds. Borrowers should, however, either already used or be capable of fully using all their initial PPP funds before applying for additional PPP funding.
Congress has expanded eligibility for PPP loans to include certain 501(c) (6) non-profit organizations, such as trade associations and local chambers of commerce. There are limitations on the amount of lobbying activities these organizations may participate in to be eligible for the PPP program. If your entity falls into this category, please reach out to a Mitchell Wiggins team member regarding eligibility to apply for a PPP loan.
There are funds set aside in this round of PPP loans for businesses that were unable to receive a PPP loan in the first round of funding, employers with fewer than 10 employees and community lenders. We anticipate that these funds will be depleted very quickly. Entities that believe they may be eligible should begin gathering data and speaking to their bankers now to ensure they have necessary documentation together to apply for this round of PPP loans.
Clarification of Tax Impacts of PPP Loan Forgiveness and EIDL Grants
The CARES Act legislation passed in March explicitly stated that the PPP loan proceeds would not be included in income. The IRS subsequently issued guidance stating that the loan proceeds were tax-exempt income and therefore the related expenses used for forgiveness would not be tax deductible, per the Internal Revenue Code. Congress indicated that was not the intent of the original legislation and has rectified this in the new legislation. The legislation explicitly states that “no deduction shall be denied, no tax attribute shall be reduced and no basis increase shall be denied” for recipients of PPP loans, EIDL grants, live venue grants and other business financial assistance.
Businesses that received PPP funds and used those funds to keep employees on payroll, even in times with no work or production, will not be penalized with a tax on their PPP funds. This applies to both initial and subsequent PPP funds received.
Simplification of PPP Forgiveness
Congress has simplified the forgiveness process for those businesses receiving PPP loans of less than $150,000. This applies to both initial PPP loans received in early 2020 and those PPP loans that will likely be funded in early 2021. Borrowers with loans under this threshold may file a simple application for forgiveness that includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
The legislation also repeals the requirement that borrowers reduce their EIDL grant from PPP forgiveness. This will likely cause issues for loan that have already been forgiven and repaid the portion of their PPP loan unforgiven due to an EIDL grant. We anticipate that the SBA will provide guidance on these situations in the coming weeks.
Additional Location or Industry Specific Grants and Funding
The legislation provides additional funding for Emergency Injury Disaster Loan (EIDL) grants to businesses located in low income communities. Live venues, such as museums, independent movie theaters and music venues and businesses located in low income or minority communities will have set aside funding. We anticipate the SBA will be providing information in the coming weeks on how to apply for these funds.
Extension of FFCRA Employer Mandated Sick Leave for Employees and Tax Credits
In previous communication, we’ve outlined the mandated sick leave that certain employers are required to provide to their employees. This legislation extends those mandates to March 31, 2021. These costs can be offset by related payroll tax credits that can be claimed on an Employer’s quarterly Form 941.
Self-employed individuals are also eligible for the tax credit related to COVID sick leave. The legislation clarifies that self-employed individuals can use the prior year net earnings from self-employment to calculate the credit. If you are self-employed and were out of work due to a COVID-19 quarantine or diagnosis, be sure to communicate this to your tax preparer in 2021.
Extension of Employer Tax Credits and Deferrals
The bill extended the optional deferral of payroll tax by employees from to December 31, 2021. It also extended and expanded the Employee retention credit (ERC) and rehiring tax credit. These tax credits were generally not available to entities receiving PPP funds. We anticipate that the IRS will provide additional guidance on these deferrals and payroll tax credits in the coming weeks.
Expanded Deduction for Business Meals Expenses
In an effort to drive business to struggling restaurants, Congress has expanded the deductibility of business meal expenses from 50% deductible to fully deductible from December 31, 2020 through January 1, 2023. The expenses must be incurred from a restaurant to be eligible.
Guidance on Qualifying Educator Expense Tax Deductions
Educators are allowed to deduct up to $250 annually for expenses paid personally related to supplies purchased for their classroom. The legislation expands the definition of these eligible costs to include personal protective equipment (PPE) and cleaning supplies for the classroom.
This is a brief summary of selected items included in this expansive legislation. As additional guidance and clarification is issued, we will provide updates. If you have any questions regarding these provisions, please reach out to a Mitchell Wiggins team member.
Please be advised that our offices will be closed on December 24th, December 25th and January 1st for our staff to spend time with their families and recharge before our busiest time of year. We know that you have experienced difficulties and uncertainties unlike any other year. We appreciate the trust you’ve put in our team to be your advisor during this difficult time and we’re looking forward to helping you with this legislation and future challenges that may come.