Covid Relief Package
When Congress initially responded to the Covid-19 pandemic by passing the CARES Act on March 27th, 2020 — handing down individual stimulus payments, Paycheck Protection Program loans, supplemental unemployment benefits and a bevy of additional tax breaks to struggling businesses — many anticipated that if the virus continued to spread unabated, additional relief would quickly follow. Nearly nine months have passed, however, and while daily deaths have skyrocketed and closures designed to contain the virus have caused untold economic damage, another round of relief has thus far remained elusive.
On late Sunday, however, members of the House and Senate at long last agreed to a second significant stimulus package as part of a broader spending package that, in total, exceeds 5,500 pages in length.
As we’ll soon see, the package — which we’ll simply refer to as “the bill” — doubles down on some earlier Covid tax incentives while also providing as-yet-unseen forms of relief.
Let’s take a look at what made it in to the final bill, and what it means for the tax fortunes of individuals and businesses. We’ll begin our journey in subtitle B of Title II of Division N of the bill – the Covid-related Tax Relief Act of 2020.
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The bill provides another much-needed round of individual stimulus payments, albeit smaller than those available under the CARES Act: up to $600 for individuals and $1,200 for a married couple filing jointly, plus $600 for each dependent child under the age of 17 (no payment is available for an adult dependent). Taxpayers eligible to be claimed as a dependent on another’s return are not eligible to receive a payment.
Once again, the payments phase out once adjusted gross income exceeds $75,000 for a single taxpayer and $150,000 for a married couple.
The checks will be cut in the coming weeks, and will be based on your 2019 filing information. But as was the case with the first round of stimulus checks, the payments represent an ADVANCE against a credit taxpayers will claim on their 2020 tax return. And once again, if the ACTUAL credit a taxpayer is owed on his or her 2020 return exceeds the ADVANCE payment received, they will claim an additional refundable credit for the balance. To the contrary, if the ADVANCE payment exceeds the ACTUAL credit, the taxpayer is not required to “true-up” by making a payment back to the IRS.
Kelly Phillips Erb has all the detail you could need on stimulus checks right here.
The headliner of the CARES Act was the establishing of the Paycheck Protection Program, which made loans of up to $10 million available under Section 7 of the Small Business Act to borrowers who, in general, had fewer than 500 employees. The loans could be used to pay for payroll, rent, mortgage payments and utilities.
The most appealing part of the PPP loans, however, was that any amounts spent during the 24 week period beginning with the disbursement of the loan would be eligible to be forgiven by the SBA, and even better, Congress declared that the forgiveness would not create taxable income, a deviation from the general tax rules.
The subsequent rollout of the PPP, however, was riddled with problems: much of the necessary guidance was nonexistent, and what little was published was either too late to help or inconsistent with the legislative text of the CARES Act.
The biggest problem, of course, was that soon after borrowers began obtaining the loan, the IRS issued Notice 2020-32, which concluded that expenses paid with PPP funds would not be deductible. Thus, while the forgiveness of the funds would not generate taxable income, the denial of a deduction related to the use of the funds would effectively make the loan taxable. And while that may well be the correct result from a tax policy perspective, it came as quite the unwelcome news to thousands of borrowers.
The bill made substantial changes to PPP loans — both existing and new — but let’s not bury the lede here.
Deductibility of Expenses Paid with Forgiven PPP Funds
Ever since the IRS published Notice 2020-32, borrowers and tax professionals alike have put their faith in Congress to overrule the Service and provide a double benefit: tax-free forgiveness of loan proceeds AND deductible expenses paid with PPP funds. Section 276 of Division N of the latest bill does just that, providing 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.”
Importantly, this rule applies to ALL borrowers; even those who have already applied for forgiveness. Thus, expenses paid with PPP funds are now completely deductible.
Changes to the Existing PPP Program
The bill reopens the original Paycheck Protection Program by earmarking $35 billion for those who have not yet borrowed. For those who have already partaken, the bill makes several changes to the existing program; unfortunately, if a taxpayer has already applied for forgiveness, the rules discussed below will NOT apply. If a borrower has not yet applied for forgiveness yet, however, the below changes are all in play.
1. New Expenses Eligible for Use/Forgiveness
The bill gives PPP borrowers who have not yet applied for forgiveness the opportunity to spend proceeds on four new types of expenses. Those costs are also eligible for forgiveness, subject to limitation. I say “subject to limitation” because each of the four expenses are non-payroll costs, and the sum of all non-payroll costs cannot exceed 40% of the TOTAL costs eligible for forgiveness. So what are the four new expenses?
- Covered operations expenditures. Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
- Covered property damage costs: Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Covered supplier cost: An expenditure made by an entity to a supplier of goods that are:
- Essential to the operations of the entity at the time at which the expenditure is made, or
- Is made pursuant to a contract, order, or purchase order that was either 1) in effect at any time before the covered period with respect to the loan, or 2) with respect to perishable goods, in effect before or at any time during the period.
- Covered worker protection. These are operating or capital expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the CDC, or OSHA during the period beginning on March 1, 2020 and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires. Eligible costs are those related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to Covid–19. The term includes:
- The purchase, maintenance, or renovation of assets that create or expand a drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an indoor, outdoor, or combined commercial real property; an onsite or offsite health screening capability; or other assets relating to the compliance with the requirements of certain protective guidance.
- The purchase of covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or 0ther kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor.
Not included in the definition of covered worker protection costs, however, are residential real property or intangible property.
2. New Options for Covered Periods
Only those PPP proceeds paid or incurred during the “covered period” are eligible for forgiveness. As of yesterday, there were only two options for a covered period: 8 or 24 weeks. The bill, however, gives a borrower the right to choose ANY covered period beginning on the date a borrower receives the loan and ending on a date selected by the borrower during the period—
- beginning on the date that is 8 weeks after such date of origination; and
- ending on the date that is 24 weeks after such date of origination.
Or stated in a simpler manner, a borrower is no longer locked into an 8 or 24 week period; instead, they can choose any period lasting BETWEEN 8 and 24 weeks as well.
3. Streamlined Forgiveness for Borrowers under $150,000
This one is important: The bill delivers long-rumored streamlined forgiveness for loans of less than $150,000. These borrowers will only be required to submit a one-page online or paper form, and will only be subject to audit if they commit fraud or use the proceeds for improper purposes. It appears a small borrower will not be subjected to the required reductions in forgiveness amounts generally caused by slashing salaries or slashing headcount.
Second Round PPP Loans
In addition to expanding upon the first tranche of PPP loans, the bill creates a SECOND round of loans at Section 7(a)(37) of the Small Business Act (the original PPP loans were at Section 7(a)(36)) for those who have already borrowed and fully extinguished their original PPP proceeds. For these borrowers, the loan is generally determined by multiplying 2.5 by the average monthly payroll for 2019, limited to $2 million. In addition, hard hit businesses in the hospitality industry – think: bars, restaurants and hotels – will be permitted to borrow 3.5 times average monthly payroll, again limited to $2 million. Additional computational rules are provided for seasonal employers.
More importantly, eligibility for a second round of borrowing is more stringent than before. A borrower will have to have fewer than 300 employees (down from 500), and be able to establish, in general, that they experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019. At this point, guidance on determining gross receipts is absent, but the bill does require the SBA to issue regulations within 10(!) days of the passage of the bill.
Eligible entities must be businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Ineligible entities include: entities listed in regulations at 13 C.F.R. 120.110, and except for nonprofits and religious organizations; entities involved in political and lobbying activities, entities affiliated with entities in the People’s Republic of China; registrants under the Foreign Agents Registration Act; and entities that receive a grant under the Shuttered Venue Operator Grant program (we’ll discuss that later).
For eligible new borrowers, the covered period will be a choice of any stretch of time beginning on the date of disbursement and ending between 8 and 24 weeks later. Like the first round of loans, proceeds can be used on payroll costs, rent, utilities, mortgage principal interest, and the four new eligible buckets of expenses discussed above. As we’ll discuss more fully below, because PPP borrowers may now also claim the Employee Retention Credit, any wages for which a credit is computed will not be treated as forgivable payroll costs for purposes of the PPP.
Once again, the amount of forgiveness attributable to non-payroll costs cannot exceed 40% of the total amount forgiven. Under the bill, however, the final forgiveness amount will no longer be reduced by any EIDL grant received.
There’s one interesting twist: in general, a borrower’s amount eligible for forgiveness is reduced if they either slash salaries of certain employees or cut headcount during the covered period. There are a few bailouts provided, however, if the borrower can restore the salary or headcount prior to the earlier of 1) the date the borrower files the application for forgiveness, or 2) December 31, 2020. An earlier version of this bill moved the safe harbor date back to September 30, 2021, which makes sense given the second round of PPP borrowing. But I don’t see where it’s made it into the final bill, which may mean that a technical correction is in order.
Other Loan Forgiveness Issues
The bill provides taxpayers to double dip in a number of scenario: for example, receipt of an Economic Injury Disaster Loan advance will no longer be taxable, and any expenses paid with the advance will remain deductible. The same holds true for borrowers of traditional Section 7 SBA loans who had six months of their principal and interest paid pursuant to the CARES Act.
Additional SBA Debt Programs
Grants for Shuttered Venue Operators
The bill authorizes $15 billion for the SBA to make grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues quarter-over-quarter comparing 2020 to 2019. The taxpayer had to be fully operational as of February 29, 2020.
The SBA will make an initial grant of 45% of gross revenue earned in 2019, up to $10 million. A second grant of up to 50% of the first grant can also be made, but the total of both grants cannot exceed $10 million.
The grants must be used to pay the following expenses:
- Payroll costs,
- Rent, utilities or mortgage interest and principal,
- Interest on other debt outstanding prior to February 15, 2020,
- Covered worker protection expenses (as defined above in the PPP section),
- Up to $100,000 in payments to an independent contractor,
- Other ordinary and necessary expenses including maintenance, administrative costs, state and local taxes, insurance premiums, advertising, and more. The grant CANNOT be used to purchase real estate, pay interest or principal on debts taken out after February 15, 2020, or lobbying expenses.
Pursuant to the bill, the grants will not be included in taxable income.
Other Debt Relief Programs
The CARES Act authorized the SBA to pay six months’ worth of a borrower’s principal and interest on an existing Section 7 loan (not a PPP loan). The bill would compel the SBA to pay an additional three months of principal and interest beginning in February 2021.
Employee Payroll Tax Deferral
Over the summer, President Trump used an executive order to allow certain employees to defer the 6.2% share of Social Security tax on wages paid from September 1, 2020 through the end of the year until the first four months of 2021. The bill extends the due date for that deferral to be repaid from April 30, 2021 until December 31, 2021.
The Families First Coronavirus Response Act required certain small employers to pay up to 10 weeks of qualified family leave when an adult couldn’t work because a child was without school or care, and up to 2 weeks of sick leave for a variety of Covid-related reasons. In turn, the employer would receive a fully refundable dollar-for-dollar payroll tax credit equal to the wages paid.
The bill extends the credit provisions from December 31, 2020 through March 31, 2021.
The bill provides an additional $300 per week for all workers receiving unemployment benefits, through March 14, 2021. This bill also extends the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed, gig workers, and others in nontraditional employment, and the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally-funded unemployment benefits to individuals who exhaust their regular state benefits. Additionally, the bill increases the maximum number of weeks an individual may claim benefits through regular state unemployment plus the PEUC program, or through the PUA program, to 50 weeks. The bill also provides an extra benefit of $100 per week for certain workers who have both wage and self-employment income but whose base UI benefit calculation doesn’t take their self-employment into account.
Alright. Next, let’s head into Division EE, the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
Extension of the Employee Retention Tax Credit
The CARES Act gave rise to the Employee Retention Credit (ERC), a mutually exclusive option to a PPP loan. The credit was only available for 2020, and offset a taxpayer’s payroll tax liability. The credit was equal to 50% of the first $10,000 of qualified wages paid to an employee during an “eligible quarter;” generally, either a quarter in which 1) the business had its operations fully or partially suspended by an appropriate government order, or 2) the business had a precipitous drop in gross receipts quarter-over-quarter when comparing 2020 to 2019. The credit was computed differently if the business had more than 100 employees – above that threshold, the employer could only claim the credit on wages paid to employees NOT to work.
The bill extends the ERC through July 1, 2021, and greatly expends several aspects of the credit for amounts paid in the first two quarters of 2021. First, the credit percentage is increased from 50% to 70% of qualified wages. Qualified wages, in turn, are increased from $10,000 in TOTAL per employee to $10,000 per quarter per employee, while the change in treatment of qualified wages that once occurred above 100 employees now does not kick in until employees exceed 500. In addition, a mere 20% drop in quarter-over-quarter receipts are now required to make a quarter an “eligible quarter,” rather than the 50% initially required by the CARES Act.
Perhaps most importantly, it appears that a taxpayer may now claim the ERC AND take out a PPP loan; they are no longer mutually exclusive. Any wages upon which an ERC is computed, however, would not be forgivable costs under the PPP program.
Full Business Meals Deduction Permitted in 2021 and 2022
Yup, it’s as simple as that. Section 274(n)(2) has been modified to allow for full expensing of “restaurant” meals purchased in 2021 and 2022 provided the other requirements for deductibility under Reg. Section 1.274-12 are met; i.e., not lavish, the taxpayer is present, as is an employee or business associate, etc…
Changes to Charitable Contributions
The CARES Act permitted taxpayer who do NOT itemize their deductions to claim up to a $300 charitable deduction in arriving at adjusted gross income for 2020 only, provided the contribution were paid in cash to a public charity. The bill extends the provision to 2021, but increases the deduction to $600 for a married couple filing jointly.
The CARES Act also temporarily increased the limitation for deductible cash contributions to a public charity from 60% to 100%. The bill extends this treatment into 2021.
Special “Lookback” for EITC and CTC:
The bill includes a special temporary rule allowing lower-income individuals to use their earned income from tax year 2019 to determine the Earned Income Tax Credit and the refundable portion of the Child Tax Credit (i.e., the Additional Child Tax Credit) in the 2020 tax year. This will help workers who experienced lower wages this year, due to the pandemic, to get a larger refund that is consistent with their earnings from prior filing seasons.
Extension of Certain Expiring Provisions
The bill revives several provisions that were set to expire at the end of 2020, some permanently, some for shorter durations. Here are a few of the provisions that are now permanent fixtures of the Code:
- Unreimbursed medical expenses are deductible to the extent they exceed 7.5% of adjusted taxable income. This floor was slated to increase to 10% in 2021, but the bill makes permanent the 7.5% floor.
- Section 179D, which allows for a limited deduction upon making energy efficient improvements to nonresidential rental, was set to expire at the end of 2020. It is now permanent.
- The deduction in arriving at adjusted gross income for qualified tuition expenses – which was set to expire at the end of 2020 – WILL be allowed to expire, though it will be replaced with increased income phase-out thresholds on the Lifetime Learning Credit under Section 25A.
And then there are a few provisions that were extended for five years, until December 31, 2025. They include:
- The New Markets Tax Credit of Section 45D;
- The Work Opportunity Credit;
- Section 108(a)(1)(E), which allows for up to $2 million of mortgage principle secured by a taxpayer’s principal residence to be forgiven tax-free. The new limit, however is $750,000 for a married couple, $375,000 for a single taxpayer;
- Section 181, which allows for immediate expensing of certain qualified film and television and live theatrical productions;
- Section 127, which had historically allowed an employer to pay up to $5,250 of an employee’s qualified tuition each year tax-free before being amended by the CARES Act to include within that limit – for 2020 only — payments of an employee’s student loan principal and interest, has been amended to allow for student loan payments through the end of 2025.
The bill also extended through the end of 2021 a host of soon-to-expire energy credits, including the credits for nonbusiness energy property, energy efficient homes, and fuel cell motor vehicles.
Changes to Depreciation of Certain Residential Real Property
It appears the bill allows taxpayers who elect out of the interest limitation rules of Section 163(j) – and are thus required to depreciate their nonresidential real property, residential real property, and qualified improvement property over their alternative depreciation system lives of Section 168(g) – may depreciate residential real property placed in service PRIOR TO 2018 over 30 years rather than the 40 years that was previously mandated for that time period.
That should do it. There’s a lot to digest, particularly in the realm of the expanded Employee Retention Credit and the second round of PPP loans. A deeper dive into those two issues awaits, but in the meantime, hopefully this discussion gives you a decent look at what’s new in Congress’s latest stimulus efforts.