On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021, which is the second-largest federal stimulus package after the $2 trillion CARES Act passed back in March. Within the bill is the Coronavirus Response and Relief Supplemental Appropriations Act (the “Act”). The Act was enacted to help relieve the financial stresses businesses are experiencing during this economic downfall. The Act extended the Paycheck Protection Program (the “PPP”), enhanced the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) relief, and provided additional relief. Below is a summary of changes to the PPP, tax provisions, business meal deduction, and employment benefits.
Expansion of the Paycheck Protection Program
The Act added an additional $284 billion for forgivable PPP loans and extended the program to March 31, 2021. Small businesses categorized as “hard-hit” businesses that received PPP loans in 2020 will be eligible for a second round of funds. The eligibility requirements for the second round of PPP loans are:
- Have 300 or fewer employees;
- Have used or will use the full amount of their first PPP loan; and
- Show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
The additional eligibility requirements stated above do not apply to first-time borrowers. The size of a PPP loan is limited as follows:
- A business may obtain 2.5 times its average monthly payroll; or
- A business in Accommodation and Food Service (NAICS Code 72) may obtain 3.5 times its average monthly payroll.
The second round of PPP loans are capped at $2 million per borrower; whereas, the first-time borrowers remain capped at $10 million.
Enhancements to the PPP
Expanded forgivable expenses, including:
- Operational Expenditures: software and cloud computing service payments used to facilitate, without limitation, business operations, service or product delivery, payroll, processing, billing, accounting, inventory, and human resource functions.
- Supplier Costs: payments to suppliers of goods that are essential to operations at the time made pursuant to an order or contract in effect prior to the covered period.
- Property Damage: costs related to any public disturbances that occurred in 2020, to the extent not covered by insurance or other compensation.
- Worker Protection Costs: costs related to compliance with regulations issues by CDC, HHS, OSHA or any state or local government authority after March 1, 2020 and ending on the date when the national emergency declared by the president related to Covid-19 safety measures expires.
Additional Notable Updates
- Expenses paid with proceeds of PPP loans are deductible for income tax purposes, a change from prior IRS rules. This may be the most significant change for many businesses.
- Borrowers may self-elect a covered period between 8 and 24 weeks from receipt of the PPP loan.
- Repealed the requirement that borrowers must deduct the $10,000 Economic Injury Disaster Loan advance amount from the forgivable amount of the PPP loan.
PPP Loan Proceeds
A business whose PPP loan is forgiven is not required to include the amount forgiven in gross income. Also, tax deductions are permitted for otherwise deductible expenses paid using the proceeds of a forgiven PPP loan, and there is no corresponding reduction in the basis of business assets. Therefore any forgiven PPP loan is effectively tax-exempt income.
- Employers who deferred withholding of the employee payroll taxes under the presidential memorandum dated August 8, 2020 now have until December 31, 2021 to arrange for withholding from employees and repay the deferred amounts.
- Businesses that receive CARES Act loan forgiveness are not required to include amounts forgiven in income and are permitted tax deductions for otherwise deductible expenses paid.
- Employer tax credit for paid family and medical leave extended through 2025.
- Employer may continue to pay up to $5,250 per employee toward an employee’s “eligible student loan repayments” and the payments will be excluded from employee’s income through 2025.
Business Meal Deduction
The Act increased the limit on deducting business meals, including takeout and delivery meals, provided by restaurants to fully deductible. This rule applies to expenses paid or incurred in 2021 and 2022. All other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners, and professional advisors. Thus, to be deductible:
- The food and beverages cannot be lavish or extravagant under the circumstances; and
- You or one of your employees must be present when the food or beverages are served.
If food or beverages are provided at an entertainment activity, either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice, or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.
Impact on Labor & Employment
The Act extended existing pandemic unemployment insurance programs under the CARES Act, the Pandemic Unemployment Assistance program, and the Pandemic Emergency Unemployment Compensation program. The Act provided an additional 13 weeks of benefits to those individuals who have exhausted their regular state benefits in addition to a supplemental federal unemployment benefit of $300 per week for up to 10 weeks to March 14, 2021. Additionally, the Act added program integrity provisions that require documentation of earnings and employment and compelled states to have processes for verifying an applicant’s identity to combat fraud and abuse in the unemployment programs.
Paid Sick Leave
The Act provides a tax credit to support employers that offer paid sick leave to employees. The Families First Coronavirus Response Act is no longer required as of December 31, 2020, but if covered employers voluntarily provide these benefits through March 31, 2021, those employers are eligible to take the tax credit for the leave. Also, the Act extended refundable payroll tax credits and employee eligibility for the paid sick and family leave to March 2021.
When it comes to the Coronavirus Response and Relief Supplemental Appropriations Act, there are a lot of changes for employers and business owners to know. It is important to understand all your options and develop a strategy to maximize your benefits. Epiphany Law attorneys will partner with you to create a plan that will help your business efficiently and effectively achieve your desired results. You can contact us here.