President Signs $900 Billion Covid Relief Package; Paycheck Protection Program Expanded
Last week, Congress overwhelmingly approved a $900 billion Covid relief package for individuals and businesses. Highlights of the relief package, which passed the Senate by a vote of 92-6 and passed the House by a vote of 359-53, include $600 payments to individual taxpayers with adjusted gross income (AGI) of $75,000 or less (or $112,500 AGI for heads of households), payments of $1,200 to joint filers with AGI of $150,000 or less, and an additional $600 payment for each qualifying child. For businesses, additional time is provided for paying previously deferred payroll taxes, another round of Paycheck Protection Program (PPP) loans is available, and borrowers with PPP loans may take deductions for expenses paid with PPP loan proceeds. The legislation also extends numerous expiring tax provisions for both individuals and businesses. President Trump sharply criticized the package and demanded changes before ultimately signing it into law, as passed, on December 27, 2020.
Highlights of the year-end Covid-related legislation include:
(1) Additional unemployment assistance which provides 11 weeks of $300 per-week emergency unemployment benefits, an extension of expiring pandemic-related unemployment assistance, and protection for individuals who received pandemic-related unemployment benefit overpayments through no fault of their own and are now unable to repay the funds;
(2) A second round of direct cash assistance payments of $600 for each family member, subject to certain family adjusted gross income limitations, with mixed-status families now eligible where only one spouse has a social security number;
(3) The creation of a Paycheck Protection Program (PPP) Second Draw loan program with a maximum loan amount of $2 million made available for businesses that employ 300 or less employees and have used, or will use, the full amount of their first PPP loan;
(4) A new rule establishing that business expenses paid with the proceeds of a forgiven PPP loan are deductible (effectively overriding prior law and IRS guidance issued earlier this year);
(5) Eligibility to use 2019 income to determine the earned income tax credit and the additional child tax credit;
(6) A permanent reduction in the adjusted gross income threshold for medical expense deductions from 10 percent to 7.5 percent;
(7) An expansion of the carryover and grace period policies relating to employees with unused amounts in their health and dependent care flexible spending accounts;
(8) A three-month extension of credits reimbursing employers for paid sick and family leave paid to employees due to Covid-19;
(9) An increase in the income threshold at which the Lifetime Learning Credit phases out;
(10) Additional time for employees and employers to pay back deferred employee payroll tax amounts from the President’s August memorandum;
(11) An extension and expansion of the employee retention tax credit;
(12) Permanent and temporary extensions of expiring tax provisions (“tax extenders”); and
(13) A 100-percent deduction for business meal and beverage expenses, including any carry-out or delivery meals, provided by a restaurant that are paid or incurred in 2021 and 2022.
I. COVID-RELATED TAX RELIEF
Additional 2020 Recovery Rebates for Individuals and Amendments to Earlier Recovery Rebates
Sections 272 and 273 of the Covid-Related Tax Relief Act provide a refundable tax credit in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
The provision also provides for the Department of Treasury to issue advance payments based on the information on 2019 tax returns. Eligible taxpayers treated as providing returns through the nonfiler portal in the first round of Economic Impact Payments, provided under the CARES Act, will also receive payments. The Treasury Department may issue advance payments for Social Security Old-Age, Survivors, and Disability Insurance beneficiaries, Supplemental Security Income recipients, Railroad Retirement Board beneficiaries, and Veterans Administration beneficiaries who did not file 2019 returns based on information provided by the Social Security Administration, the Railroad Retirement Board, and the Veterans Administration.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
In general, taxpayers without an eligible social security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a social security number (SSN) and one spouse does not are eligible for a payment of $600, in addition to $600 per child with an SSN. The provision aligns the eligibility criteria for the new round of Economic Impact Payments and the credit for the Economic Impact Payments provided by the CARES Act.
Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. Additionally, the provision instructs the Treasury Department to make payments to the United States territories that relate to each territory’s cost of providing the credits.
Tax Treatment of PPP Loans
Section 276 of the Covid-Related Tax Relief Act provides that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also (1) overrides current law (and IRS guidance) preventing the deduction of expenses paid with tax-exempt income by allowing businesses to deduct business expenses paid with the proceeds of a PPP loan that is forgiven, and (2) provides that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act (3/27/2020).
Employee Retention Tax Credit Modifications
Sections 206 and 207 of the Disaster Tax Relief Act extend and expand the CARES Act employee retention tax credit (ERTC) and makes technical corrections. Beginning on January 1, 2021 and through June 30, 2021, the provision:
(1) Increases the credit rate from 50 percent to 70 percent of qualified wages;
(2) Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50 percent to 20 percent and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
(3) Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
(4) Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
(5) Allows certain public instrumentalities to claim the credit;
(6) Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
(7) Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year;
(8) Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit; and
(9) Retroactive to March 13, 2020, the provision: (1) clarifies the determination of gross receipts for certain tax-exempt organizations; (2) clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance; and (3) provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds.
Extension of Credits for Paid Sick and Family Leave
Section 286 of the Covid-Related Tax Relief Act extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act (Families First Act), through the end of March 2021. It also modifies the tax credits so that they apply as if the corresponding employer mandates were extended through the end of March 2021. This provision is effective as if included in Families First Act.
Election to Use Prior Year Net Earnings from Self-Employment in Determining Average Daily Self-Employment Income for Purposes of Credits for Paid Sick and Family Leave
Section 287 of the Covid-Related Tax Relief Act provides an election for an individual who elects the credit for paid sick or family leave to use prior year net earnings from self-employment income, rather than current year earnings, in calculating the income tax credit available.
Extension of Certain Deferred Payroll Taxes
On August 8, 2020, the President Trump issued a Presidential Payroll Tax Memorandum allowing employers to defer withholding employees’ share of social security taxes or the railroad retirement tax equivalent from September 1, 2020, through December 31, 2020, and requiring employers to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January 1, 2021, and April 31, 2021.
Under the Payroll Tax Memorandum, the deferral is only available with respect to any employee with wages or compensation, as applicable, payable during any bi-weekly pay period of less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. This equates to wages of $104,000 per year. The Payroll Tax Memorandum provides that the amounts deferred are not subject to any penalties, interest, additional amounts, or additions to the tax. The Payroll Tax Memorandum also authorizes the Treasury Secretary to issue guidance to implement these orders and directs the Treasury Secretary to explore avenues, including legislation, to eliminate the obligation to repay the deferred taxes. Under the Payroll Tax Memorandum, penalties and interest on deferred unpaid tax liability would begin to accrue on May 1, 2021.
Section 274 of the Covid-Related Tax Relief Act extends the repayment period through December 31, 2021. Additionally, penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.
Clarification of Educator Expense Deduction for PPE
Section 275 of the Covid-Related Tax Relief Act requires the IRS to issue guidance or regulations providing that personal protective equipment (PPE) and other supplies used for the prevention of the spread of Covid-19 are treated as eligible expenses for purposes of the educator expense deduction. Such regulations or guidance will be retroactive to March 12, 2020.
Emergency Financial Aid Grants
Section 277 of the Covid-Related Tax Relief Act provides that certain emergency financial aid grants under the CARES Act are excluded from the gross income of college and university students. The provision also holds students harmless for purposes of determining eligibility for the American Opportunity and Lifetime Learning tax credits. The provision is effective as of March 27, 2020, the date of enactment of the CARES Act.
Clarification of Tax Treatment of Certain Loan Forgiveness and Other Business Financial Assistance Under the Coronavirus Relief Legislation
Section 278 of the Covid-Related Tax Relief Act clarifies that gross income does not include forgiveness of certain loans, emergency EIDL grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. The provision is effective for tax years ending after March 27, 2020..
Authority to Waive Certain Information Reporting Requirements
Section 279 of the Covid-Related Tax Relief Act gives the Treasury Department authority to waive information filing requirements for any amount excluded from income by reason of the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
Application of Special Rules to Money Purchase Pension Plans
The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans. Section 280 of the Covid-Related Tax Relief Act clarifies that money purchase pension plans are included in the retirement plans qualifying for these temporary rules. The provision applies retroactively as if included in Section 2202 of the CARES Act.
Election to Waive Application of Certain Modifications to Farming Losses
Section 281 of the Covid-Related Tax Relief Act allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. This provision also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver. These clarifications are aimed at eliminating unnecessary compliance burdens for farmers. The provision applies retroactively as if included in the CARES Act.
II. PAYCHECK PROTECTION PROGRAM EXTENSION AND ENHANCEMENT
Section 311 of the Economic Aid Act creates a second loan from the Paycheck Protection Program (PPP), called a “PPP Second Draw” loan for smaller and harder-hit businesses, with a maximum loan amount of $2 million. In order to receive a PPP Second Draw loan, eligible entities must: employ not more than 300 employees, have used or will use the full amount of their first PPP; and must demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter (although applicable timelines for businesses that were not in operation in Q1, Q2, and Q3, and Q4 of 2019 are provided). Applications submitted on or after January 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.
In addition to the creation of the PPP Second Draw, Section 304 of the Economic Aid Act expands the list of eligible expenses for which a PPP loan may be used. Additional eligible expenses include (1) covered operations expenditures; (2) covered property damage costs; (3) covered supplier costs; and (4) covered worker protection expenditures.
Eligible and Noneligible Entities
Entities eligible for the PPP Second Draw include businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Entities ineligible include entities listed in 13 C.F.R. 120.110 and subsequent regulations (except for entities from that regulation which have otherwise been made eligible by statute or guidance, and except for nonprofits and religious organizations); entities involved in political and lobbying activities including engaging in advocacy in areas such as public policy or political strategy or an entity that otherwise describes itself as a think tank in any public document, entities affiliated with entities in the People’s Republic of China; and registrants under the Foreign Agents Registration Act.
In general, borrowers may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020. New entities may receive loans of up to 2.5 times the sum of average monthly payroll costs. Entities in industries assigned to NAICS Code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times average monthly payroll costs. Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location. Waiver of affiliation rules that applied during initial PPP loans apply to a second loan. An eligible entity may only receive one PPP second draw loan. Fees are waived for both borrowers and lenders to encourage participation. For loans of not more than $150,000, the entity may submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits its loan forgiveness application and non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.
Borrowers of a PPP Second Draw loan are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the covered period. The 60/40 cost allocation between payroll and non-payroll costs in order to receive full forgiveness will continue to apply.
Churches and Religious Organizations
Churches and religious organizations are eligible for PPP Second Draw loans.
Safe Harbor on Restoring Full-time Employees and Salaries and Wages Applies
The rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25 percent applies.
Maximum Loan Amount for Farmers and Ranchers
A specific loan calculation for the first round of PPP loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, who report income and expenses on a Schedule F, and were in business as of February 15, 2020, is established. These entities may utilize their gross income in 2019 as reported on a Schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. This provision applies to PPP loans before, on, or after the date of enactment (i.e., December 27, 2020), except for loans that have already been forgiven.
A seasonal employer is defined as an eligible recipient which: (1) operates for no more than seven months in a year, or (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.
Eligibility of News Organizations for Loans
Eligible FCC license holders and newspapers with more than one physical location are eligible for a PPP Second Draw loan, as long as the business has no more than 500 employees per physical location or the applicable Small Business Administration size standard; and includes eligible Code Sec. 511 public colleges and universities that have a public broadcasting station if the organization certifies that the loan will support locally focused or emergency information.
Prohibition on Use of Loan Proceeds for Lobbying Activities
An eligible entity is prohibited from using proceeds of the covered loan for lobbying activities, lobbying expenditures related to state or local campaigns, and expenditures to influence the enactment of legislation, appropriations, or regulations.
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