As you are all aware, the recently enacted federal legislation commonly referred to as the "Stimulus Bill" contained numerous provisions applicable to employers and business owners. This Client Alert focuses on some of its key provisions that may affect your business as well as your employees.
There are numerous provisions continuing and modifying the Paycheck Protection Program ("PPP") and Prior SBA Guidance on COVID-19 Relief Options:
PPP- covered expenses incurred and paid from PPP loan proceeds are now entirely deductible, preserving the full tax benefit of loan forgiveness being excludible from taxable income. States, like Pennsylvania, may not all follow the federal exclusion.
Emergency EIDL advance grants of up to $10,000 are not taxable and expenses paid with them are fully deductible. Moreover, an EIDL advance grant is no longer offset against allowable PPP loan forgiveness.
Initially, the SBA provided that the covered period (the time in which a borrower must use the funds to qualify for forgiveness), would be an 8-week period beginning on the date the borrower received the loan proceeds. Later amendments expanded the covered period to 24 weeks, if desired. Now, borrowers can determine the length of their covered period, so long as it is at least 8, and is not longer than, 24 weeks.
New PPP loan options - Prior Borrowers
- Prior borrowers can increase their loans based on guidance issued after the 1st draw of loans, which guidance, if in effect at the date of the 1st draw, would have allowed additional items to be includable in payroll costs.
- Prior borrowers who returned all or part of original loans can reapply for the difference or receive the full amount of the originally approved amount in the event they took less than the maximum allowable under new rules.
- SBA had 17 days from passage of the new law to issue guidance. See SBA Procedural Notice, Control No. 5000-20076, effective January 13, 2021.
- This should help borrowers that are partnerships and sole proprietors who believed they could not include self-employment or partner compensation as income before later guidance was issued that allowed those amounts to be included in payroll under certain conditions and treated as if they were employee wages.
Second draw PPP loans for those who received a first draw loan:
- Eligible business must have:
- 300 or less employees, subject to certain size or industry exceptions, with the same affiliation rules. First draw limit was 500.
- Have experienced a 25% gross receipts decline in any quarter of 2020 compared to the same quarter in 2019.
Local newspapers and TV and radio broadcasters are now eligible for PPP loans.
2nd draw loans cannot exceed $2 million and cannot exceed $10 million when combined with the 1st draw:
- Loan cap is 2-1/2 x average monthly payroll for the 12-month period through the date of application or 2019 average monthly payroll. Note, this 2019 average will likely work to the benefit of all businesses which have had a reduction in payroll, which average was used in the 1st draw PPP application, and, therefore, the same average monthly payroll number could be used for a 2nd draw.
- Hotels and restaurants (and those food service and accommodation entities with an NAICS code of 72) have a special loan maximum of 3-1/2 times monthly payroll with the total not in excess of $2 million.
- 2nd draw is open until 3/31/2021.
- Certain non-profit entities known as 501(c)(6) organizations (business leagues, chambers of commerce, etc.) are now eligible for PPP loans under certain conditions.
- More qualified uses for PPP loan proceeds are permitted:
- Business facilitating software or cloud computing services;
- Property damage due to public disturbances not covered by insurance;
- Cost of essential supplies for operating a business under a purchase order before the disbursement date of the loan proceeds; and
- COVID 19 employee protection expenditures necessary to comply with requirements or guidance issued by the CDC, HHS, OSHA or any state or local government during the period beginning March 1, 2020 and ending on the date that the national emergency declared expires incurred in connection with sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. Such expenses could include PPE, physical barriers, expansion of indoor/outdoor areas, or installation of ventilation or filtration systems and drive-through windows.
- Group life, disability, vision, and dental insurance premiums can now count as payroll costs for PPP loan purposes.
- NOTE: 60% of 2nd draw PPP loan proceeds must be spent on payroll and associated costs as was the case previously with the 1st draw.
PPP Loan Forgiveness:
PPP loan forgiveness is now subject to simplified rules for both 1st and 2nd draws.
- Loans less than $150,000 will be forgiven with limited information disclosure.
- EIDL grants no longer reduce PPP forgiveness.
- SBA is to report to Congress on and of policies, procedures and metrics with 45 days of the law's enactment.
- Agent fees now can be payable by the borrower and not necessarily by the lending bank.
- New borrowers can apply for PPP loans under the terms of the original version of the program under the CARES Act (including the 500-employee cap on eligibility) until September 30, 2021.Proceeds may be used for any of the additional qualified expenses included in the new legislation.
- PPP's prior waiver of affiliation rules for certain businesses in the food services and accommodation industries, certain franchises, and entities receiving funds from licensed small business investment company lenders also apply to these 2nd draw loans.
- Employers in Chapter 11 bankruptcy can receive PPP loans if allowed by the SBA, but it appears the SBA will not allow it.
- The latest in government guidance for the PPP loans can be found at here.
Additional Stimulus Bill Changes for Employers:
Employee Retention Tax Credit ("ERTC") has been enhanced. The ERTC has been expanded and is extended through July 1, 2021 (first 2 quarters of 2021) and the new law increases the fully refundable portion of qualified wages from 50% to 70% of qualified wages (including the cost of providing continued health benefits) up to $10,000 per employee per quarter, and increased the maximum credit per employee to $14,000, all for 2021 only.
- Eligibility for ERTC has been expanded to employers who previously received PPP loans, provided the same wages are not utilized for both. Thus, while awaiting more guidance from IRS, the employer may need to amend 2020 Forms 941 to obtain the benefit for 2020.
- An employer can qualify for the ERTC in a 2021 calendar quarter if their gross receipts for the calendar quarter are less than 80% of their gross receipts for the same calendar quarter in 2019 (as opposed to the 50% decline that applied for 2020). If the employer was not in existence on the first day of a calendar quarter in 2019, the comparison is to the gross receipts for the same calendar quarter in 2020.
- An employer also can qualify for the ERTC in a 2021 calendar quarter if their gross receipts for the immediately preceding calendar quarter are less than 80% of the gross receipts of such employer for the corresponding calendar quarter in 2019.The ERTC has been expanded for 2021 to apply to the following governmental entities: colleges and universities, a governmental entity whose principal purpose or function is providing medical or hospital care, and, and governmental entities that are also tax exempt under Code Section 501(c)(1).
- Eligible employers with an average number of full-time employees in 2021 of no more than 500 (up from the 100 threshold that applied in 2020, and taking into account affiliated employers, "Small Employers"), are eligible to receive an ERTC with respect to, wages paid to both furloughed and non-furloughed employees. (For 2020, an employer with 100 or fewer employees was eligible for the ERTC even if the employees were working, but an employer with more than 100 employees could not take the ERTC for wages paid to an employee performing services). These Small Employers eligible for the ERTC also may elect to receive their ERTC in advance, based upon average quarterly wages paid in 2019, with a true up or down at the end of the applicable quarter.)
- The employee share of payroll taxes deferred for certain employees for 2020 can now be withheld from wages and deposited ratably over all of 2021 instead of by April 1, 2021.
- NOTE: With respect to the deferral of the employer Social Security portion of FICA and SECA tax (that applies to 50% of the SECA tax for the self-employed and partners) permitted under the CARES Act, there has been no change-50% of that amount is due December 31, 2021 and 50% balance is due on December 31, 2022.
- SBA had 10 days from enactment to provide regulations implementing these changes and has issued a first round of guidance.
Business meals at restaurants (the "three martini lunch") are again 100% deductible for 2021 and 2022 as opposed to 50% limit under the TCJA.
FFRCA-Type Credit Extension:
The new law extends employer tax credits for providing both paid emergency sick leave and paid special family and medical leave under the same terms and conditions as applied with respect to the Families First Coronavirus Response Act (FFCRA) through March 31, 2021.
Flexible Spending Account (FSA) Changes:
- Employers may elect to allow for unlimited unused account balance rollovers in 2021 and 2022 for health and dependent care assistance FSAs.
- Alternatively, employers may elect to adopt a 12-month grace period after the end of the year for reimbursement claims for plan years ending in 2020 and 2021.
- The age limit for dependent care assistance FSA eligible reimbursements has been raised to 14 for the 2020 plan year and for unused FSA amounts rolled into 2021.
- Mid-2021 FSA election changes are permitted without a change in status.
- Post-termination health FSA reimbursements are permitted for the 2020 and 2021 plan years (including grace periods).
- Conforming plan amendments are required by 12/31/21 for 2020 FSA changes and 12/31/2022 for 2021 FSA changes.
Household Relief for Lower Income Employees
- The federal government will make payments of $600 per adult and dependent based on 2019 income.
- Phased out at AGI of $75,000 and $150,000 for married couples
- If income was too high in 2019, or if dependents were added, additional amounts can be requested on 2020 tax returns filed in 2021.
- Non-citizens are eligible based on the number of individuals in the household.
Unemployment Supplemental Aid
- There is a new $300/wk. federal subsidy for 11 weeks.
- 50 weeks has now become the maximum time period for collecting jobless benefits.
- There is also now a $100/wk. subsidy for individuals who also have self-employment income.
Rental assistance is available for which landlords and building owners can apply for low-income tenants with households where one person has lost a job making them at risk of losing their residence.
Entertainment venues such as movie theaters and live entertainment sites may apply for financial aid due to COVID 19 ("the Shuttered Venue Program"), once the SBA opens the program.
The medical expense deductibility floor for those itemizing deductions on Form 1040 has decreased to 7.5% of AGI from 10% of AGI.
Special rules apply for tax-qualified defined contribution retirement distributions and plan participant loans for non-COVID-19 related disasters occurring during the period beginning no earlier than December. 28, 2019 and ending no later than December 27, 2020 provided that a federal disaster is declared by February 21, 2021. They are essentially similar to those for COVID-19 related distributions under the CARES Act and allow for emergency distributions repayable over time, which would make such amounts tax-free and increase borrowing capacity for plan participant loans.
The charitable deduction limit for corporations increase to 25% of gross income from 10% of gross income and to 25% from 15% for contributions of food inventory has been extended through 2021.
For Further Information:
The Dilworth Paxson PPP team is ready to help your business with the process of applying for a PPP loan or for forgiveness. For more information about the new round of PPP loans, you may contact Victoria Reider, Stephanie S. Vogel or John W. Schmehl.
You can also contact John W. Schmehl, Stephanie S. Vogel, or Matthew I. Whitehorn with questions about the tax and employee benefits issues raised in the new legislation.