Congress Passes Another Round of Federal Stimulus
Updated: December 28, 2020
Original Post: December 23, 2020
Update: On December 27, 2020, the President signed the CAA, 2021 bill into law.
On Monday, December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA). The CAA allocates $1.4 trillion in funding for the federal government’s 2021 fiscal year operations as well as provides $900 billion in pandemic relief for individuals and businesses. The CAA has many provisions in its 5,593 pages. While Congress expected it to be signed by the President, on December 22 the President raised concerns about various aspects of the bill. Until this is resolved and legislation is ultimately signed by the President or Congress overrides a Presidential veto, the provisions discussed here are not effective.
Paycheck Protection Program
The bill includes $284 billion in additional funding for the Paycheck Protection Program (PPP), which previously provided small businesses with $525 billion of forgivable loans aimed principally at keeping workers employed.
In this second round of PPP funding, called “second draw loans”, businesses that are still struggling may qualify for an additional loan. This includes non-profits and self-employed individuals. However, eligibility for these second draw loans has been tightened. Specifically, only companies with 300 or fewer employees will be eligible for another loan, down from a limit of 500 in the program’s first iteration, and publicly traded companies are not eligible. In addition, the maximum loan amount is $2 million instead of the previous limit of $10 million. Lastly, only applicants that experienced a decrease in their quarterly revenues by 25 percent or more from the prior year’s levels are eligible.
The loan amount for many borrowers is determined much like it was the first-time around: 2.5 times the average monthly payroll during either the one-year period before the loan or calendar year 2019; you get to choose which one to use. Seasonal and new employers must use a different calculation to determine the loan amount.
But for businesses in the accommodation and food services sector (identified by the North American Industry Classification System – NAICS – prefix 72), the multiplier for determining the loan amount is 3.5 instead of 2.5. This sector includes hotels, motels, bed and breakfast establishments, RV parks, restaurants, bars, and caterers. This will allow these businesses that were hit particularly hard during the pandemic to obtain larger loans than they were able to secure with the first round of PPP funding.
In addition, the types of expenses that PPP funds can be used for are expanded from those allowed in the original program to include payment for certain operating costs such as software or cloud computing services, employer personal protection equipment and similar costs, essential business goods and supplies purchased before the start of PPP covered period, as well as the cost of property damage incurred due to public disturbances that are not covered by insurance. This expansion of qualifying costs applies to the second draw loans and original loans, so long as forgiveness has not yet been secured.
The bill also simplifies the process for forgiving loans of less than $150,000.
Tax deduction for expenses paid with PPP and Economic Injury Disaster Loans (EIDLs)
As we previously wrote, the IRS concluded in April of this year that, despite PPP forgiveness being tax-exempt under the CARES Act, expenditures paid with forgiven PPP funds would not be deductible. With the passing of the CAA, Congress has overridden the IRS’s conclusion, clearly indicating “no deduction shall be denied” because of the loan being forgiven. This applies to the original and second draw loans.
Also, owners of partnerships and S corporations get an additional benefit: the tax-free forgiveness increases the basis in their ownership interest, resulting in a smaller gain should they sell their interest or potentially allows them to deduct losses incurred by the company.
In addition, the CAA provides that the EIDL advance is excluded from income and no deduction for expenses paid with those funds will be disallowed. Lastly, EIDL advances no longer reduce the amount of PPP loan forgiveness.
Additional 2020 recovery rebates
The CARES Act provided direct payments to certain individual taxpayers, the so-called “economic impact payments” or “stimulus payments.” The COVID-Related Tax Relief Act of 2020, which is part of the CAA, includes a provision for an additional amount to be paid.
The provision provides a refundable tax credit to eligible individuals. Specifically, the credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit is reduced at a rate of $5 per $100 starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly). As with the previous stimulus checks, non-resident aliens and anyone who qualifies as another person’s dependent are not eligible for the credit. As with the previous credit, the Treasury can issue advances on this credit based on an individual’s 2019 tax return.
Various other provisions
The CARES Act created the employee retention credit for employers that suffer economic harm due to COVID but choose to retain employees. The CAA substantially enhances the eligibility and generosity of the credit by increasing the credit from 50% to 70% of qualified wages, expanding the wage base from $10,000 per employee per year to $10,000 per employee per quarter, and extending the availability through the first two quarters of 2021. In addition, the original version of the credit was expanded to allow PPP loan recipients to claim it.
The CAA provides for workers receiving unemployment benefits to get a supplement of $300 per week from Dec. 26 until March 14, 2021. This bill also extends programs that provide unemployment benefits to self-employed, gig workers, and others in nontraditional employment, as well as additional weeks of benefits to individuals who exhaust their regular state benefits.
The Families First Coronavirus Response Act (FFCRA) enacted a requirement for employers to pay employees for their absence due to COVID, whether for their own sickness or quarantine or because they needed to care for someone else affected by the virus. The FFCRA also instated a mechanism to reimburse employers for this paid sick and family leave via payroll tax credits. The CAA extends these credits through March 31, 2021.
COVID leave payments are no longer mandatory after December 31, 2020, but the CAA extends these credits through March 31, 2021 should employers choose to pay employees for this time.
Generally, the deduction for business meals meeting certain criteria is limited to 50%. The CAA temporarily allows the cost of these business meals (food and beverages) “provided by a restaurant” to be fully deducted if paid or incurred after December 31, 2020 and before January 1, 2023. This provision is designed to boost business spending at restaurants.
The CARES Act provided an above-the-line deduction for 2020 cash charitable contributions made by individuals. This deduction is for non-itemizers and is up to $300, ($600 for married filers). For 2020, the CARES Act also suspended the limitation on the amount of cash contributions that individuals could make from the usual limit of 60% of adjusted gross income to 100%; for corporations, the limit increased from 10% to 25% The CAA extends these provisions through 2021.
Extenders
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, also a component of the CAA, extends several tax deductions and credits that were set to expire at the end of 2020, making some of them permanent. These include the following:
- The reduction in the medical expense floor from 10% to 7.5%, which allows additional expenses to offset income.
- The work opportunity tax credit, which is extended through 2025. This credit is designed to benefit employers who hire individuals who are members of certain targeted groups, such as qualified veterans and ex-felons.
- The exclusion of income from the discharge of indebtedness on a principal residence, which is extended to discharges before January 1, 2026.
- The temporary provision allowing employers to include eligible student loan payments as part of a tax-free qualified educational assistance program; this provision is extended through 2025.
- The provision allowing mortgage insurance premiums to be treated as deductible mortgage interest is extended through 2021; it was set to expire on December 31, 2020.
- A variety of energy-related deductions and credits.
There is much more packed into this extensive legislation, and additional Treasury, SBA and IRS guidance will be forthcoming. JPS will provide information and updates as they become available in coming weeks and months.
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