General Update regarding the new Stimulus Package Bill for Individuals and Employers
As you may know, on Sunday, December 27, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021), including the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), hereafter “The Bill.” The Bill contains numerous provisions, including a new round of PPP loans and $600 stimulus payments, are designed to help individuals, families, businesses, and others affected by the COVID-19 pandemic.
Enclosed below is a summary of key provisions from the new Bill.
The Bill provides a refundable tax credit in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married taxpayers filing jointly), in addition to $600 per qualifying child.
Deductibility of PPP-Funded Expenses
The Bill clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
In addition to the clarification about the deductibility of expenses paid with PPP funds, the Bill clarifies that gross income does not include forgiveness of certain loans, emergency Economic Injury Disaster Loan grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section and that tax basis and other attributes will not be reduced as a result of the exclusion of those amounts from gross income.
CARES Act Extensions and Pandemic Provisions
Educator expenses for protective equipment: The Bill requires Treasury to issue regulations or other guidance providing that the cost of personal protective equipment and other supplies used for the prevention of the spread of COVID-19 is treated as an eligible expense for purposes of the educator expense deduction.
Money purchase pension plans: The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans. The Bill adds money purchase pension plans to the retirement plans qualifying for these temporary rules. The provision applies retroactively as if included in Section 2202 of the CARES Act.
Payroll tax credits: The Bill extends the refundable payroll tax credits for paid sick and family leave, through the end of March 2021. It also modifies the payroll tax credits so that they apply as if the corresponding employer mandates were extended through March 31, 2021. The Bill also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.
Employee Retention Tax Credit modifications: The Bill extends the CARES Act employee retention tax credit (ERTC) through June 30, 2021. It also expands the ERTC and contains technical corrections. The expansions of the credit include:
- An increase in the credit rate from 50% to 70% of qualified wages;
- An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- A reduction in the required year-over-year gross receipts decline from 50% to 20%;
- A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
- A provision to allow certain governmental employers to claim the credit;
- An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
- Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit.
The Bill also (retroactive to the effective date of the CARES Act):
- Provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds;
- Clarifies the determination of gross receipts for certain tax-exempt organizations; and
- Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.
Deferral of employees’ portion of payroll tax: In August, Trump issued a memorandum allowing employers to defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201 for any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000. It applies to payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. Under the memorandum, employers are required to increase withholding and pay the deferred amounts ratably from wages and compensation paid between Jan. 1, 2021, and April 30, 2021. The Bill extends the repayment period through Dec. 31, 2021.
The new round of PPP, or PPP2 as some are calling it, contains many similarities to the first round of the PPP but also has several important differences. The following is a high-level view of the new PPP provisions.
Who is eligible to apply?
PPP2 loans will be available to first-time qualified borrowers and, for the first time, to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 or fewer employees.
- Have used or will use the full amount of their first PPP loan.
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
PPP2 also makes the forgivable loans available to Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations”, provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.
PPP2 will also permit first-time borrowers from the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.
The Bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
PPP Loan Terms
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating costs such as software and cloud computing services and accounting needs.
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the same parameters PPP1 had when it stopped accepting applications in August.
PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.
Simplified Application and Other Terms of Note
The new COVID-19 relief bill also:
- Creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, 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 SBA must create the simplified application form within 24 days of the Bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
- Repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
- Includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
Miscellaneous Tax Provisions
Temporary allowance of full deduction for business meals: The Bill temporarily allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022.
Certain charitable contributions deductible by nonitemizers: The Bill extends and modifies the $300 charitable deduction for nonitemizers for 2021 and increases the maximum amount that may be deducted to $600 for married couples filing jointly.
Education expenses: The Bill repeals the Sec. 222 deduction for qualified tuition and related expenses but in its place increases the phaseout limits on the lifetime learning credit (so they match the phaseout limits for the American opportunity credit), effective for tax years beginning after Dec. 31, 2020.
Minimum low-income housing tax credit rate: The Bill establishes a 4% rate floor for calculating credits related to acquisitions and housing bond-financed developments for purposes of the Sec. 42 low-income housing tax credit, effective in 2021.
Depreciation of certain residential rental property over 30-year period: The Bill provides that the recovery period applicable to residential rental property place in service before Jan. 1, 2018 and held by an electing real property trade or business is 30 years.
Waste energy recovery property eligible for energy credit: The Bill makes waste energy recovery property eligible for the Sec. 48 energy investment tax credit, effective for 2021 through 2023. Waste energy recovery property generates electricity from the heat from buildings or equipment.
Extension of energy credit for offshore wind facilities: The Bill extends the Sec. 48 investment tax credit for electing offshore wind facilities that begin construction through 2025.
Minimum rate of interest for certain determinations related to life insurance contracts: The Bill updates the Sec. 7702 fixed interest rate for life insurance contracts and ties the rate going forward to benchmark interest rates that are periodically updated.
Minimum age for distributions during working retirement: The Bill modifies Sec. 401(a) to allow certain qualified pensions to make distributions to workers who are 59½ or older and who are still working. For certain construction and building trades workers, the age is lowered to 55.
Temporary rule preventing partial plan termination: The Bill provides that qualified plans will not be treated as having a partial termination under Sec. 411(d)(3) during any plan year that includes the period March 13, 2020, through March 31, 2021, as long as the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number covered on March 13, 2020.
Temporary special rule for determination of earned income: The Bill allows taxpayers to refer to earned income from the immediately preceding tax year for purposes of determining the Sec. 32 earned income tax credit and the Sec. 24(d) additional child tax credit for tax year 2020.
Modification of limitations on charitable contributions: This Bill extends for one year (through 2021) the increased limit from the CARES Act on deductible charitable contributions for corporations and taxpayers who itemize.
Temporary special rules for health and dependent care flexible spending arrangements: The Bill allows taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. This provision also permits employers to allow employees to make a 2021 midyear prospective change in contribution amounts.
Disaster Tax Relief
The Bill provides disaster tax relief for individuals and businesses in presidentially declared disaster areas for major disasters (other than COVID-19) declared after Dec. 31, 2019, through 60 days after the date of enactment.
Use of retirement funds for disaster mitigation: The Bill allows residents of qualified disaster areas (as defined in the Bill) to take a qualified distribution of up to $100,000 from a retirement plan or individual retirement account (IRA) without penalty. Amounts withdrawn are included in income over three years or may be recontributed to the plan.
Employee retention credit for disaster zones: The Bill allows a tax credit of 40% of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone (as defined in the Bill). The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.
Qualified disaster relief contributions: The Bill modifies the CARES Act’s modification of the charitable contribution limits for 2020 to allow corporations to make qualified disaster relief contributions of up to 100% of their taxable income.
Qualified disaster-related personal casualty losses: The Bill permits individuals who have a net disaster loss (as modified by the Bill) to increase their standard deduction amount by the amount of the net disaster loss. The Bill reduces various excise rates for small brewers and distillers.
Please note that the above summary is DRAFT and PRELIMINARY and subject to change without notice as more details become available. Our goal this year continues to make the tax return preparation for all our clients as smooth and stress free as possible for everyone. We will continue to share any new updates/developments with you to ensure you and your clients are well informed with the latest tax news on the federal and state levels. Should you have any questions, please do not hesitate to contact our team member or myself.
We thank you in advance for your cooperation and happy new year.
- RIA Tax Watch – President signs year-end appropriations and COVID-19 relief bill (12/28/2020)
- Jeff Drew, 2020, COVID-19 relief bill addresses key PPP issues (Updated: December 27, 2020)
- Alistair M. Nevius, J.D., 2020, Many tax provisions appear in year-end coronavirus relief bill (Updated: December 27, 2020)
- Alan Gassman, 2020, Forbes, New PPP And EIDL Rules – What Trump Signed (10/21/2020)