By: Jessica A. Distel, CPA, MBA - Director of Tax and Business Services
As of this afternoon, the Coronavirus Response and Relief Supplemental Appropriations Act had been passed by both the House and the Senate, but not yet signed by President Trump. Though President Trump is calling for some changes to the Act before he will sign, we wanted to address a summary of this bill that is over 5,500 pages and to highlight the areas that will impact a large percentage of our clients.
As we stand alongside our small business clients, we anticipate additional funding through the Paycheck Protection Program (PPP) to help them through these difficult times. Perhaps the most significant piece of the legislation is that businesses who received a PPP loan earlier this year and anticipate forgiveness will not have to report the forgiven loan as income, and the law explicitly states that the expenses used by the loan proceeds are still deductible. This counteracts an IRS ruling released in November 2020 and it is a much-welcomed benefit for small businesses.
The law also enacts a second round of PPP loans which is being referred to as the PPP second draw. Some eligibility rules for small businesses to qualify for the PPP second draw include that the business may have no more than 300 employees and revenues in 2020 must be at least 25% less than the same quarter in 2019. There are specific provisions for businesses that started operations during 2019 or in early 2020, but prior to February 15, 2020. Our interpretation is that PPP loans from earlier in year will have to be completely used, but not forgiven before applying for the second draw. There is also a total cap on the second draw of $2 million. A specific list of what documentation will be needed to apply for the second draw has not yet been released, but we anticipate this may be available by mid-January 2021. Finally, there has been a simplification for loan forgiveness for the second draw when the amount of the loan is $150,000 or less.
With a few exceptions, the calculation for the PPP second draw is expected to be similar to the calculation for the first round. Generally speaking, eligible small businesses can apply for 2.5 times their average total monthly payroll. However, food and beverage establishments that have a NAICS code that begins with 72 may be able to apply for 3.5 times their average total monthly payroll costs and the loan amount for certain farmers and ranchers is now based on gross income not net profit from their 2019 Schedule F. For all calculations, the maximum annual salary per employee and/or owner is still capped at $100,000.
To further assist the food service and restaurant industry, the business meals deduction that is currently limited to 50%, will now be 100% deductible (effective for the years 2021 and 2022). On December 22, 2020, this was an area challenged by President Trump, so we shall see if the time period will be extended or not.
Some modifications to the employee retention tax credit are also included in the bill. As of January 1, 2021 through June 30, 2021, the credit rate would increase from 50 percent to 70 percent of qualified wages and the per-employee limit would increase from $10,000 per year to $10,000 per quarter. We expect to see more small businesses being eligible for this credit in 2021.
Some significant impacts on individuals include a new stimulus payment of $600 per person for those eligible (single taxpayers with a gross income of $75,000 or less and phasing out up to $100,000; married taxpayers with a gross income of $150,000 or less and phasing out up to $200,000). This payment is only half of the payment received earlier in the year and eligibility would be based on 2019 tax returns. President Trump voiced concern about the amount of this stimulus payment and is asking Congress to amend the bill to reflect a payment of $2,000 per taxpayer. This would be a 2020 credit, so if the taxpayer’s income was too high in 2019, but under the threshold in 2020, the taxpayer would be able to claim the payment on his/her 2020 tax return.
To further assist those who are unemployed, the bill extends the extra federal unemployment payment in the amount of $300 per week to March 14, 2021. This would be in addition to state unemployment payments and the bill ensures this additional federal benefit for ten weeks only.
There are several other areas of the bill that would impact individual taxpayers. For instance, the student loan payment deferral has not been extended; therefore, payments would be due after January 31, 2021, and the itemized deduction for medical expenses would permanently be deductible for those unreimbursed expenses that exceed 7.5% of Adjusted Gross Income (AGI), as opposed to the previous 10% of AGI.
Jessica A. Distel, CPA, MBA
Director of Tax and Business Services