COVID Tax Breaks – Consolidated Appropriations Act, 2021 (CAA)
January 2021
Two days after last Christmas, President Trump signed into law the Consolidated Appropriations Act, 2021 (CAA) which was passed by both the House and Senate. The CAA is wide-ranging in its extended financial relief breaks for both individuals and businesses.
In this article we’ll focus on three significant provisions as it relates to both classes of taxpayers.
1. Continuation of Unemployment Benefits
2. Round 2 of Economic Impact Payments (EIP)
3. Paycheck Protection Program (PPP) … taxability of Rounds 1 & 2 PPP loans; New PPP Provisions
Continuation of Unemployment Benefits
Federal supplemental unemployment benefits in the amount of $300 has been extended for an 11-week period beginning December 26, 2020, through March 14, 2021.
Round 2 of Economic Impact Payments (EIP)
Similar to payments many taxpayers received in 2020 based on information on 2019 tax returns, the CAA provides a refundable tax credit on 2020 tax returns. The credit is $600 per taxpayer ($1,200 for married filing jointly) and $600 per qualifying child under age 17. The credit gradually is phased out starting at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married taxpayers filing jointly.
Paycheck Protection Program (PPP) … Taxability of Rounds 1 & 2 Loans; New PPP Provisions
Taxability of PPP Loans: In a reversal of previous rules, the IRS has issued guidance regarding allowable deductions for recipients of PPP loans. Previously, the IRS stated businesses that have had their PPP loans forgiven were not permitted to claim deductions for wages, rent, utilities and other expenses to which the borrowed funds were applied. The revised guidance overrides the previous rules and clarifies that business owners may now enjoy those tax breaks retroactive to the initial PPP loan grants.
Let’s put this in perspective. In simple terms, under the “old” rules, a small business owner received a $100,000 PPP loan which qualified for forgiveness. That means the $100,000 was not included in the company’s gross revenue for tax purposes. However, if that same $100,000 was used to pay expenses not permitted as deductions … for all intents and purposes, the taxpayer received no benefit from the forgiven loan proceeds. Said another way, $100,000 of tax-free money was received … and $100,000 of deductions were lost.
In contrast, the same business owner under the new rule will enjoy loan forgiveness, i.e. a non-declarable infusion of revenue, plus tax deductions for the now-allowable expenses to which the PPP loan funds are applied. Net result … tax-free money used to generate additional cash flow.
To qualify for first and second-round PPP loans forgiveness, borrowers must demonstrate the funds are applied to the following eligible costs: payroll, rent, covered mortgage interest, and utilities, covered worker protection and facility modification expenditures, covered property damage costs, covered payments to suppliers and payments for business software or cloud computing services that facilitate business operations, product or service delivery, and a number of back-office functions, including accounting. No less than 60 percent of the funds must be used for payroll over a period of borrowers’ choice spanning eight and twenty-four weeks.
New PPP Provisions – Round 2: With $284 billion in fresh funding, a new round of PPP money became available to select lenders and borrowers on Monday, January 11, 2021. This additional funding for PPP loans is designed to limit a wave of small-business failures that could cripple the economy.
First in line are entities seeking their first PPP loans with a priority placed on minority and women-owned businesses. Next will be the acceptance of second-round loans for small businesses and nonprofits that spent their first loan from last year.
Allocation of the new financial relief infusion will include $60 billion for businesses that are first-time PPP loan applicants and those with 10 or fewer employees. Additionally, $30 billion will be made available to provide loan funds for underserved area lenders. Compared to the first round of PPP loans, proceeds can be used to cover more expenses, including operations expenditures, property-damage costs, supplier costs and personal protective equipment for employees.
Repeat PPP borrowers must employ no more than 300 workers and loan approval is capped at $2 million. One additional requirement … to be eligible for a second round of PPP loans, applicants must prove a decline in revenue of at least 25 percent during one quarter of 2020 compared to the same quarter in 2019.
Note: To streamline the process, applicants for a loan of $150,000 or less may certify that they meet the loss of revenue provision and provide documentation of the loss at a later date.
“This updated guidance enhances the PPP’s targeted relief to small businesses most impacted by COVID-19,” Treasury Secretary Steven T. Mnuchin said. “We are committed to implementing this round of PPP quickly to continue supporting American small businesses and their workers.”
The US Small Business Administration and Treasury released new borrower loan application forms for the revamped PPP.
• Form 2483 – Paycheck Protection Program Borrower Application Form
• Form 2483-SD – PPP Second Draw Borrower Application Form.
For those seeking a “deep-dive”, the SBA and Treasury also published top-line summaries of the first-draw and second-draw PPP loans and a pair of procedural notices.
• Top-Line Overview of First Draw PPP Loans
• Top-Line Overview of Second Draw PPP Loans
• Procedural Notice – Modifications to SBA Forms 3506, 3507 and 750 CA (PPP only)
• Procedural Notice - SBA Procedural Notice on Repeal of EIDL Advance Deduction Requirement
Of course, there is much more detail, but the above summarizes the most pressing concerns expressed by both individual and business taxpayers.
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