Executive Summary: Extensive bill with far reaching tax and relief consequences is now law
On Sunday, 12/27/20, President Trump signed into law an Omnibus bill to fund normal federal operations, along with a significant Coronavirus Response and Relief Supplemental Appropriations Act. This bill contains many stimulus provisions and several affect 2020 tax liabilities. After studying the 5,500+ page text, we feel the highlights below represent the most consequential provisions to many of our clients. Because this bill may potentially have a meaningful affect on 2020 tax liabilities, please scan the highlights below and reach out to your CPA to discuss how these may affect your unique situation. On January 5th, we will also host a one hour virtual event to recap the bill and its opportunities for 2021 as well. We pray you had a very Merry Christmas, and that your new year is blessed beyond measure after a quite eventful 2020!
Both houses of Congress negotiated and passed an Omnibus spending bill over the December 19th weekend and into Monday. This consisted of 12 appropriations bills comprised of $1.4 trillion in typical government spending for the remaining budget year, and another $900 billion of relief in the Coronavirus Response and Relief Supplemental Appropriations Act. There are several items of note in relief spending that we explore below, and highlights include $166 billion in direct checks, $120 billion in additional unemployment assistance, $284 billion in a Paycheck Protection Program 2.0 (PPP2), and additional funding for specific businesses, health and education affected by the pandemic.
PPP Expenses Deductible for all PPP Loans: Basis increase for tax-free forgiveness income
Treasury Secretary Mnuchin and the IRS had clearly set forth for the last 9 months that expenses paid with PPP monies would not be deductible for income tax purposes, creating a significant tax event for all PPP borrowers. With one week left in the year, this has been reversed by Congressional action, and these expenses will clearly now be deductible as the bill has become law. Also, a step up in basis will be provided for pass through entities from the tax-exempt income applicable to the forgiveness of debt, further ensuring the aforementioned expenses’ deductibility. PPP borrowers literally have received a Christmas surprise, as they will be able to have their cake and eat it too despite all guidance and logic to date. This is a phenomenal benefit for our clients. Also, the list of PPP covered costs eligible for forgiveness has been expanded.
Paycheck Protection Program Second Draw Loans: aka PPP2 – All NFPs eligible, $2m cap, eligibility tied to 25% revenue drop in any quarter vs. the same quarter in 2019, 2.5x avg. monthly payroll, with a special increase to 3.5x for restaurants and hospitality
Eligible borrowers can obtain a second PPP Loan. These Second Draw PPP Loans are limited to the lesser of a) $2.0 million or b) 2-1/2 times the borrower’s average monthly Payroll Costs (3-1/2 times if the borrower is a Food Services or Hospitality business).
Eligible entities include any business concern, nonprofit organization, self-employed individual, and certain other organizations that a) employ 300 or fewer employees, and b) have experienced a 25% revenue reduction in a calendar quarter during 2020 compared to the same quarter in 2019.
FFCRA Extensions: EPSLA and EFMLEA extended to 3/31 within original framework
The Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family Medical Leave Expansion Act (EFMLEA) under the Families First Coronavirus Response Act are both being extended until March 31, 2021. These sick and leave pays have been heralded as one of the most effective strategies to curb COVID spread, as they have allowed millions of contagious individuals to remain home and receive pay. Also, businesses have received a dollar-for-dollar credit for all these wages, so they are truly an incremental benefit to the employees, and if structured correctly, the employer. For many American workers, the reality that lost wages will significantly impact their families might lead them to work while sick. These wages curtailed that stark truth, and their extension is welcomed. Please review our “Post and Promote” strategy and the benefits of EPSLA and EFMLEA here if you are a covered employer eligible for the credits. The new act also provides self-employed individuals an election to utilize 2019 earnings instead of the current year when calculating applicable credits, which is another pro-business provision.
Employee Retention Credit Changes: 1) More than a consolation prize rules for 2020; 2) Prospective: extended to July 1, 2021, increased to 70%, increased to $10,000 max wages per employee per quarter, and reduced year over year gross receipts decline test to 20%
The Employee Retention Credit (ERC) that was established as a “consolation prize” for non-PPP recipients who experienced significant drops in revenue has been liberalized, expanded, and extended. This is now an incredibly significant credit that should be studied closely by all potential taxpayers, even if they did receive PPP monies, as section 206 of the new act strikes the “consolation prize” rules that limited this provision to non-PPP recipients. The original information about the credit is found here. The program’s end date has moved from January 1, 2021, to July 1, 2021, allowing this to extend another six months. More significantly, for the first two quarters of 2021, the credit has been changed from 50% to 70% of the applicable wages. Also, the wage limit has changed from $10,000 for the year in total for 2020 ($5,000 max credit per employee), to $10,000 per applicable quarter in 2021 (allowing for another potential $14,000 of credit on top of what credit might be achieved in 2020). The required quarter vs. prior quarter rolling revenue decline testing for 2021 eligibility has been liberalized from a 50% decline in revenue to only a 20% decline. However, this is still a by quarter analysis with start and end provisions, that can now rely on the prior quarter instead of the current. Of note, in addition to the revenue decline test, businesses may also qualify for the ERC if they have suffered a full or partial suspension of operations during a calendar quarter due to governmental order limiting commerce, travel, or group meetings due to COVID-19. The IRS has provided some Q&A analysis that is rather liberal and many enterprises that have suffered, but not met the revenue tests, could qualify both retroactively and prospectively. Of further note, it is important to integrate PPP1 dollars for eligible ERC enterprises in 2020 forgiveness applications and for historical wages that until now would not have qualified, and to analyze PPP2 dollars and eligibility for the even greater ERC benefits for the first two quarters in 2021. Integrating these liberalized Employee Retention Credits alongside forgiveness of selected covered expenses under the PPP programs is imperative, and a subjective and unique process for every enterprise. For affected taxpayers, the PPP forgiveness application and selected covered expenses are that much more important to integrate into this conceptual framework in order to avoid the ever-present potential pitfall of missed opportunity.
Ability to Request an Increase in PPP Loan Amount: If you have not been forgiven yet
A PPP borrower may request an increase in its loan amount if the borrower’s PPP Loan has not been forgiven, and either 1) the borrower returned a portion of its PPP Loan or 2) did not receive the full amount for which the borrower was eligible. We noted early in the PPP process that several banks were not processing loans for the correct, full amount, due to disparate interpretations of certain aspects of the CARES Act at the institutional level. Many borrowers simply took the funds as approved given the frothy conditions in the PPP market at the time. This can be a welcome benefit and significant for those few affected clients.
Simplified Forgiveness for PPP Loans of $150,000 or Less: No longer necessary to send support, 4 years document retention, and simpler application and attestation
The SBA is required to issue a simplified one-page forgiveness application for loans under $150,000 within 24 days of final law. To obtain forgiveness, the borrower will only be required to certify i) the number of employees retained, ii) the estimated amount spent on payroll costs, and iii) the total loan. The borrower must also certify that the application is accurate, that the borrower has complied with the requirements pertaining to PPP Loans, and retains employment records for 4 years and other records for 3 years. These new simplified requirements will also be applied to applications for new loans of $150,000 or less.
Repeal of EDIL Advance PPP Loan Integration: No longer reduces PPP Forgiveness
A borrower’s PPP Loan forgiveness will not be reduced by the borrower’s amount of an EIDL Advance. If an EIDL Advance previously reduced the borrower’s PPP Loan forgiveness, the SBA would increase the forgiveness by the EIDL Advance. This information is on hand through the existing loan forgiveness application process, and it is expected that the SBA will simply remit the residual balance, thus reducing the partial loans on the banks’ and borrowers’ books.
PPP Eligibility for 501(c)(6) Organizations: 501(c)(6)’s can go back and file for PPP1
Sec. 501(c)(6) and Destination Marketing organizations are now eligible to obtain a PPP1 Loan. The entity may not employ more than 300 employees and must have limited lobbying activities. Professional sports leagues are excluded. Sec. 501(c )(6) organizations include chambers of commerce, real estate boards, and boards of trade. This is a significant expansion, as many trade and member organizations have suffered heavily though the pandemic.
Grants for Shuttered Venue Operations: 45% of 2019 revenue grant (capped at $10m) for certain theatrical venues
The Act allows for grant payments to certain shuttered venue operators. Eligible persons or entities include live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, and talent representatives. There are requirements that the operator must meet to be eligible for the grant, including having been fully operational as of February 29, 2020, and the venue intends to reopen as of the grant date. The grant amount for an eligible venue is the lesser of 45% of 2019 revenue or $10 million. Grants are made by prioritizing operators most affected in terms of decline in revenue, first to operators with a 90% decline in revenue, and then to operators with a 70% decline in revenue.
Temporary Allowance of Full Deduction for Business Meals: Meals are 100% deductible for 2021 and 2022
For calendar years 2021 and 2022, the Act allows for 100% deductions for business meals. To qualify, the expense must be incurred for food or beverages provided by a restaurant. The rules for qualified business meals still apply, but taxpayers will be able to deduct 100% of the amount instead of the 50% limitation that was in effect for 2020. This is not a retroactive provision, and the lobby around bringing back entertainment expenses did not persevere. This is not a surprise, as the year 2020 was probably not going to be the year that brought back the party. Let’s hold out some hope for 2021!
Extenders: A big list of 1, 2, and 5-year extensions ranging from WOTC to the highly utilized mining emergency rescue provisions
The Act provides for many extenders of current tax provisions. Some of the more significant provisions include the following: medical expense deduction for itemizing taxpayers will remain at the 7.5% floor of adjusted gross income; deductions for energy-efficient commercial buildings (which will be inflation-adjusted); and a transition from qualified tuition deductions to the Lifetime Learning Credit. These extenders are permanent extensions. The following extenders have been extended through 2025: the New Markets tax credit; Work Opportunity Tax Credit (WOTC); employer credit for paid family and medical leave (not to be confused with FFCRA credits); and gross income exclusion for discharge of indebtedness on a principal residence. There are many credit provisions for an energy-efficient property, distilleries, and other industries. Please contact your CPA to determine if a specific credit or expiring provision is still available.