Tax Law Changes and Other Congress Updates – As of December 21, 2020
On Monday, Congress approved the second longest piece of legislation ever written. This is our hot-of-the-presses summary but bear in mind that it might be two or three weeks before we really understand all of the implications.
As of this writing, President Trump has asked for more in COVID relief to individuals, and he has asked to reduce “pork” in the bill. It is either a very long Christmas in Washington for Congress, or some of the following may no longer apply. While we try to be accurate here, we are not authoritative so take all this with a bit of skepticism. If you are going to actually act on something, call us or your other advisors to confirm the wisdom of your action.
Second-draw PPP loans
The PPP has been given new life, meaning certain business can apply for a second loan, though the terms have changed.
To be eligible, a business must:
- Have no more than 300 employees with not less than 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 compared to same quarter in 2019. Applications that are submitted after January 1, 2021 may qualify with a 25 percent reduction in gross receipts in the fourth quarter of 2020 compared to the fourth quarter in 2019.
- Have received and used the full amount of the first PPP loan.
The following businesses are ineligible:
- Public companies
- Rental real estate,
- Life insurance
- Sex companies
- Lobby company
- SBA loan packagers
- Business with certain Chinese connections
- Shuttered venue grantees (for more info on shuttered venue relief, keep reading)
- A business not in operation on February 15, 2020.
Eligible businesses can apply for a loan that equals 2.5 times their average monthly payroll for the entire year. That said:
- This might be a different number than previously used which was for a shorter average monthly period. Since businesses may use the average monthly billing for the whole year of 2019, the 2.5 times average monthly payroll may be more than asked for in a previous application. This should be an easy calculation to determine if that is the case for most businesses.
- Accommodations and food service companies can use 3.5 times their average monthly payroll. This could give restaurants and other hospitality businesses one more month of payroll or other costs to keep them going. Alas, this is not the relief most restaurants are looking for.
- The maximum available loan is now $2 million.
- Forgiveness amounts will be either the lessor of the covered expenses or the payroll costs divided by .6.
- All the guidance from the SBA for first round of PPP loans will apply to these second-draw loans.
What about added additional eligible expenses? Here are some of our notes:
- May be treated retroactively so you could ask for more money.
- Are not available if your loan has already been forgiven.
- Include operation expenses for software or cloud computer services.
- Include property damage costs due to damage or vandalism from protests/disturbances during 2020 not covered by insurance.
- Supplier costs are covered if they are made to a supplier of goods that are essential and are made pursuant to a contract before the covered period.
- Worker protection expenditures are covered, including acquisition of PPE, and operating or capital expenditures to adapt the business to requirements established by guidelines from Fed, State, or local governments. This does not include residential real property.
In what is massive tax relief legislation, deduction of expenses is assured.
- Congress gave the IRS no room on this. It is definite and will apply to any PPP loan.
- This also applies to subsequent PPP, EIDL Grants and targeted advances, existing loan payment relief and grants for shuttered venue operators.
- In an effort to be sure the IRS does no further end-runs, the bill makes clear that there will be no adjustments to partnership and S-Corp basis, other than increasing tax basis or AAA accounts for the forgiven income. Those taxpayers that own S-Corp or partnership interests should be happy with this.
- We are unsure about the state conformance and will keep you posted.
Forgiveness applications have been simplified to include a one-page application for loans up to $150,000 and a three-year record-keeping requirement. Payroll costs include everything we thought, but the legislation clarified that group insurance costs are included.
And what about existing PPP loans in excess of $2 million. The necessity doctrine did not disappear for loans of more than $2 million. Be sure to have your attorney review that form before it goes in.
The legislation includes new calculations for farmers and ranchers. Farmers and ranchers can apply for a loan that equals the farm gross income divided by 12 times 2.5 (if there are no employees). Schedule F folks may add 2.5 times their employees average monthly payroll.
The covered period is now any period between 8 weeks and 24 weeks (instead of 8 weeks or 24 weeks). Congress left it vague and had not told us if we had to wait.
Be sure you come up with enough expenses to get total forgiveness.
Direct stimulus checks
Direct stimulus checks of $600 per person and child dependents will begin being mailed the week before the new year. The same $75,000 and $150,000 phase outs apply as under the first round of stimulus checks.
Other tax changes
Payroll tax payments have been deferred to April 30, 2021. Keep in mind that this is not a forgiveness so people will have to pay this.
- New payroll credits for paid sick and family leave have been extended out to March 31, 2021.
- Educator expense deduction may now include disinfectant, PPE, and the like.
- Many provisions have been made permanent and some extended through 2025. For instance, the medical deduction floor is 7.5 percent.
- There is full deduction of business meals for 2021 and 2022 per Section 210.
- Above-the-line charitable deductions clarifies that $300 is per individual, so a married couple can deduct $600.
- The 100 percent AGI for cash deduction is extended through 2021. This applies only to individuals.
Odds and ends
- Federal supplement to unemployment insurance is going to be $300 (instead of previously $600) until March 14, 2021.
- With respect to EIDL programs, entities that applied for EIDL before bill enactment will be covered if they are located in a low-income community with less than 300 employees with a revenue decrease of 30 percent.
- Amy Klobuchar backed a provision that provided shuttered venue operators relief. This provision includes 29 pages of rules, so if it applies to you, be sure to reach out to us or an advisor. Thanks Senator.
- The bill includes non-SBA loan modifications.
- The legislation includes extension of employee retention, tax credit and paid sick leave, going through March 14, 2021. We are unclear on why this date was chosen and expect further clarification (or perhaps further confusion).
- Legislation included rental assistance and a moratorium on evictions.
As for disaster relief, the legislation:
- Expands, clarifies and makes permanent the penalty-free distribution from employee benefit plans allowed for in the CARES Act.
- Retains the three-year income recognition option and three-year repayment option.
- Specifies that the principal residence must be in a qualified disaster area (the entire country is declared a disaster area).
- Eliminates the requirement that distributions must take place in 2020.
- As for participant loans from pensions, it extends permissible loans to $100,000 from $50,000 from enactment of the original act.
President-elect Biden said that this is a down payment on a larger bill, so we don’t expect this is the last of discussions around relief packages. We will send updates as new information becomes available. Until then, please feel free to call us if you want additional guidance.