On December 27, 2020 the President signed into law the 5,600 page Consolidated Appropriations Act (CAA), 2021. Within the CAA there are two COVID related bills, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). These bills contain many tax and non-tax related provisions. This update will focus on the some of the business tax provisions.
Taxation of Forgiven PPP Loans and Other CARES Act Financial Assistance
The bill specifically exempts the money received from PPP and EIDL loans as well as certain other repayment assistance from taxation. It also specifically allows for expenses paid for with the above mentioned assistance payments to be deductible. This overrules the earlier IRS ruling that the expenses would not be deductible. This applies for both round one and round two PPP funds.
PPP Round Two
The bill creates a “second draw” of PPP loans. To be eligible for the second draw a business must have less than 300 employees and have a quarter over quarter reduction in revenue of 25% or greater when 2020 is compared to 2019. Said differently, the revenue for any 2020 quarter must be at least 25% lower than the same quarter for 2019. The eligible entity may be any business structure type, partnership, corporation, etc., including 501(c)(3) and 501(c)(6) nonprofit organizations.
The maximum loan amount for round two is 2.5 times 12 months of qualified payroll expenses, with a cap of two million dollars. Restaurants/bars will be able to apply for a maximum loan amount that is 3.5 times 12 months of qualified payroll expenses, with a cap of two million dollars.
As with round one there will be a 24 week period in which the funds must be spent on eligible expenses. However, the group of eligible expenses has been greatly expanded. The eligible expenses from round one – payroll cost, mortgage interest, rent, and utilities – are still eligible for this round. However, operation expenses, property damage costs, supplier costs and worker protection expenses are also now covered expenses. The broad categories of operation expenses and supplier costs cover most of the expenses required to operate a business.
PPP Forgiveness Applications
The new Act provides a simplified process to apply for forgiveness for loans under $150,000. The Small Business Administration (SBA) is working to finalize details on this new process.
Payroll Tax Credits
The employer credit for paid federal emergency sick and family leave and the employee retention payroll credits were both set to expire on December 31, 2020. The new Act extends the federal emergency paid sick and family leave credit until March 31, 2021, however after December 31, 2020 employers are no longer mandated to provide this leave but can voluntarily provide the leave. The employee retention credit is extended through June 30, 2021.
The bill also added an additional tax deduction for business related meals. The cost of business meals provided by a restaurant between 1/1/21 and 12/31/22 will be 100% deductible. This replaces and enhances the current 50% deductibility of the cost.