The COVID relief stimulus bill, titled “Consolidated Appropriations Act 2021 (hereafter CAA), was signed into law the evening of Sunday, December 27, 2020. The CAA contains several provisions which will benefit employers during 2021, with the “headliners” being tax deductions for expenses paid from PPP loans and a “second round” of PPP loans for smaller organizations. This legislation is massive in size and complexity, so the purpose of this PayDay is to provide our clients/readers with a summary of the most significant aspects of the CAA as they pertain to employers. Here are the provisions which employers need to know and need to talk with their CPA’s/tax advisors about:
EXPENSES PAID WITH FORGIVEN PPP LOANS—–GREAT NEWS!
The CARES Act signed into law on March 27th of 2020 indicated that PPP loans would be tax-exempt. The IRS rather quickly took the position in rulings/notices that the PPP loans which were forgiven from requiring repayment would continue to be income tax exempt, but the expenses used by forgiven PPP loans would not be tax-deductible. Many advocates of disallowing deductions for payroll, rent and other eligible PPP loan expenses suggested that permitting tax deductions would result in “double dipping”—-in effect, using government money to pay payroll/rent/utilities on a non-taxable basis and then claiming tax deductions for the expenses paid for from tax-exempt government income. The IRS position would have resulted in employers owing income tax on the PPP loans, which many argued violated the original intent of the CARES Act——CONCLUSION—-The CAA specifically states that expenses paid from forgiven PPP loans would be tax-deductible in the same manner as all other business expenses. The CAA law overrides the IRS position, and is great news for PPP loan recipients.
QUESTION TO ASK YOUR CPA/TAX ADVISOR—–The CAA indicates that a shareholder/partner’s “tax basis” in a S corporation or partnership (K-1 schedules) will not be increased UNTIL the PPP loan is legally forgiven by the SBA—-IF an S-corporation or partnership has a net loss in 2020 based on expenses being paid from non-taxable PPP funds and loan forgiveness does not occur until year 2021, the result “could” mean that the deductability of the 2020 loss will not be permitted (technically “suspended”) until year 2021, when the PPP loan is legally forgiven. Check with your bank as to the status of your loan forgiveness application and then ask your CPA how this impacts your 2020/2021 taxes.
MORE PPP FUNDS FOR ELIGIBLE EMPLOYERS—-BOTH FIRST TIME BORROWERS AND A SECOND ROUND FOR HARDEST HIT SMALL EMPLOYERS
The CAA allocates $284 billion dollars to fund another round of non-taxable/potentially forgiveable Paycheck Protection Program loans to “eligible employers.” Employers eligible for this next “round” of PPP loans are those which meet the following qualifications:
- The employer must have 300 or less employees (original PPP loan was up to 500 employees). Of note is that 501(c)(6) non-profit organizations are permitted for this round of PPP loans as long as no more than 15% of their gross receipts and/or 15% of their activities are related to political or lobbying activities. The first round of PPP loans did not permit these Chambers of Commerce, real estate boards, trade associations, etc to apply for PPP funds, but this round does include 501(c)(6) organizations
- If the employer received PPP loan from the CARES Act, it must have already used or plan to use 100% of the PPP funds to apply for a “second round” of PPP loan funding.
- This round of PPP loans requires that the borrower attest that the funds are “necessary to support the ongoing operations” of the organization/business. It is not expected that the SBA will audit this “necessity test” for loans below $2 million, but it is possible that the IRS or “whistleblowers” could result in an audit of the “necessity test” for the loan. Recipients of this round of PPP loans will be made public and thus open to scrutiny by the public—You simply need to be comfortable attesting that the PPP loan is “necessary” for your continued operations.
- The CAA intends that this round of PPP loan funds be geared to the “hardest hit” employers, and therefore inserts a qualifying condition to be eligible for this PPP loan round—-An employer must be able to prove that at least one calendar quarter of 2020 resulted in gross receipts which were 25% or more less than the identical calendar quarter of 2019 (for many, the likely quarter of maximum reduced gross receipts will be Q2 of 2020 vs Q2 of 2019)
NOTE—EMPLOYERS SHOULD REVIEW THEIR RECORDS TO DETERMINE IF AT LEAST ONE QUARTER’S 2020 GROSS RECEIPTS WERE REDUCED BY AT LEAST 25% AS COMPARED TO THE IDENTICAL QUARTER IN 2019—-BE PREPARED TO DOCUMENT THE DECREASE IN GROSS RECEIPTS TO YOUR SBA LENDER AS A CONDITION OF THE PPP LOAN. THIS ELIGIBILITY REQUIREMENT APPLIES TO BOTH FIRST TIME AND SECOND TIME PPP LOAN BORROWERS.
SOME REVISED RULES PERTAINING TO THIS ROUND OF PPP LOANS FOR ELIGIBLE EMPLOYERS
The CAA provides some new rules to this round of PPP loans and changes some rules of the first round of PPP loans. All of this round’s PPP loan rules pertain to both first-time and “second round” PPP borrowers:
- The maximum PPP loan for this round is $2 million (the original CARES Act loans capped out at $10 million)
- This round of PPP loans must be spent for the same types of expenses as the original PPP loans (payroll/rent/mortgage interest/utilities) AND adds some additional spending categories such as “covered supplier costs,” PPE for employees, repair/improvement of property due to Covid, etc.
- At least 60% of the PPP loan proceeds must be used for “payroll costs” to be “forgiven” from repayment—-same rule as with previous PPP loans——-NOTABLE EXCEPTION—- Payroll costs now include an employer’s costs for group dental, vision, disability and life insurance, in addition to group health and employer-paid retirement. BORROWERS OF PREVIOUS PPP LOANS SHOULD TALK WITH THEIR SBA LENDER ABOUT REVISING ITS ORIGINAL APPLICATION TO INCLUDE THESE ADDED GROUP INSURANCE COSTS IN CALCULATON OF THEIR ORIGINAL PPP LOAN AMOUNT–—–time will tell how bankers deal with this potential for an increased amount of previous PPP loan funds!!
- The calculation of the PPP loan amount is very similar to the original CARES Act PPP loans—–2 1/2X average “payroll costs” for 2019 (or for a one year period immediately preceding the date of the loan—–most employers will use year 2019 when their payroll costs were likely higher than 2020)
- RESTAURANTS, HOTELS, CATERERS, B&B INNS—-Employers whose NAICS code begins with a “72” as engaged in “food/beverage services” calculate this PPP loan at 3 1/2X their average monthly payroll costs, which is 40% more than other PPP loan borrowers; and
- The “covered period” for this round of PPP loan funds is any period of time as selected by the employer-borrower which begins on the date of the PPP loan funding and ends at any time between 8 weeks and 24 weeks after the date of loan origination. Employers who spend this round of PPP funds can apply for forgiveness at any point in time between 8 and 24 weeks——This provision also applies to previous PPP loan recipients from the CARES Act
OF SPECIAL NOTE TO PREVIOUS PPP LOAN RECIPIENTS—-The inclusion of group insurance costs for dental, vision, life and disability premiums for employees can be added to your previous PPP loan amount calculation on a revised original CARES Act PPP loan application—-the result is an increased amount of original PPP funds for those previous PPP loan borrowers who did not include these group insurance costs in “payroll costs” in their original PPP loan—-CHECK INTO THIS WITH YOUR BANKER!!
MISCELLANEOUS CAA PROVISIONS WHICH IMPACT PPP LOAN RECIPIENTS, BOTH OLD AND NEW
The CAA provides that “advanced funds” (often $10,000) of EIDL loans are not taxable and more importantly do not reduce the PPP loan forgiveness as the previous law and SBA loan forgiveness forms indicated. FOR PREVIOUS PPP LOAN BORROWERS WHO ALSO HAVE AN EIDL LOAN—–talk with your banker about getting a refund of your EIDL advances which the CAA indicates do not reduce PPP loan forgiveness.
The Families First Coronavirus Relief Act signed into law mid March of 2020 was originally set to expire at the end of 2020. The CAA extends the deadline for FFCRA sick pay/family leave wages and corresponding tax credits to March 31, 2021. Employers should continue claiming the FFCRA tax credits during Q1 of 2021, in the same manner as 2020. (See our earlier post regarding FFCRA.)
Simplified PPP loan forgiveness forms will be drafted by the SBA to be used by recipients of PPP loans whose loan amount was less than $150,000. It is expected that the new SBA “simplified” loan for below 150K loans will be similar to the current SBA 3508-S forms previously only applicable to PPP loans below $50K—-the CAA requires the SBA to release the new form quickly and the form, by law, can not be any longer than a single page. This simplified verion of loan forgiveness applies to both previous PPP loan recipients as well as new PPP loans originated per the CAA law.
DYNAMIC IMPROVEMENT IN EMPLOYEE RETENTION TAX CREDITS—–NOW CAN BE USED BY EMPLOYERS WHO ALSO GOT/WILL GET PPP LOANS
The CARES Act passed in late March of 2020 provided that an employer could claim “employee retention credits” (ERC) on “qualified wages” of employees IF their business operations were fully or partially “shut down” by government order (think closure of indoor dining, churches restricted as to the number of congregants, gyms, retailers in general) OR the operations were not shut down BUT the business/non-profit experienced a drop in gross receipts of greater than 50% in any quarter in 2020 as compared to the identical quarter in 2019. Most employers did not consider the ERC payroll tax credit SINCE THE ORIGINAL CARES ACT DID NOT PERMIT PPP LOAN BORROWERS TO ALSO CLAIM ANY EMPLOYEE RETENTION TAX CREDIT——-AccuPay did help some churches and 501c6 orgs claim the ERC tax credits IF they did not receive an original PPP loan.
SO WHAT HAS CHANGED TO MAKE ERC TAX CREDITS A POTENTIAL BIG DEAL? The CAA law permits PPP loan recipients to ALSO claim employee retention tax credits, to include the original 2020 PPP loan recipients as well as new 2021 PPP loan recipients.
The CARES Act did not permit ERC tax credits IF an employer received a PPP loan—–and for most employers, the forgivable PPP loan was the “better deal” than the ERC tax credits. For employers who met one of the 2 conditions for ERC tax credit eligibility (disrupted operations due to shut-down govt order OR a 50% or greater reduction in gross receipts during a quarter (Q2 of 2020 most likely, and perhaps Q3), they should review their 2020 payroll records to determine IF they can receive the ERC tax credits even though they also received one of the original PPP loans. CAVEAT—–the PPP loan forgives the 60%+ of “payroll costs” from being repaid—–the ERC provides tax credits for “qualified wages” paid to employees for employers who qualify for ERC tax credits—-the new CAA law indicates that an employer can not use the same wages for both PPP loan forgiveness AND for ERC tax credits——BUT WHAT ABOUT EMPLOYERS WHO SPENT FAR MORE IN PAYROLL COSTS DURING 2020 IN THEIR 24 WEEK COVERED PERIOD THAN THEIR PPP LOAN AMOUNT?——Can those employers retroactively claim the ERC tax credits on “qualified wages” paid to employees during 2020 and reduce their payroll costs for PPP loan forgiveness purposes by the wages used for ERC tax credit purposes? (and remember, the employer had more payroll costs than needed for complete PPP loan forgiveness since the employer could count 24 weeks worth of payroll costs when the PPP loan amount was actually calculated based on 2 1/2 months of payroll costs.)
SEEK TAX ADVICE ON HOW TO OPTIMIZE THE ERC TAX CREDITS FOR BOTH 2020 AND THE FIRST HALF OF 2021 AS INTEGRATED WITH PPP LOAN FORGIVENESS. Here are links to Part 1 and Part 2 of an article about the employee retention tax credit as authored by a tax attorney, Tony Nitti, who is also a contributor to Forbes on tax information. The ERC tax credits are very complex and employers who can meet one of the two tests to be eligible for the ERC tax credits should absolutely contact their CPA/tax advisor about possible application of the CAA new law ERC tax credits to their fact pattern for both 2020 and the first half of 2021 (ERC credits expire as of June 30, 2021).
ACTION STEPS EMPLOYERS SHOULD TAKE NOW PERTAINING TO THE NEW CAA LEGISLATION
- Employers who have already received the original PPP loan in 2020 should talk to their CPA/tax advisor regarding how it impacts their 2020 and 2021 taxes—-can the PPP funded tax deductions be used to deduct 2020 losses or must they be carried over to 2021 based on “tax basis” restrictions in 2020. All expenses will be tax-deductible either in 2020 or 2021—-which will impact your income tax obligations in one or both years.
- Employers should review their financial records for 2020 to determine if they had a quarter of gross receipts in 2020 which declined by 25% or greater as compared to the identical quarter in 2019—–this will determine eligibility for a “second round” of PPP loan funding, along with the “necessity test” attestation.
- Employers who received PPP loans of $150K or less during 2020 should monitor the release of the new simplified version of the SBA loan forgiveness form.
- Employers who did not include group insurance costs for dental, vision, life or disability costs as payroll costs in determining their 2020 PPP loan amount should talk with their banker about a possible revision of their 2020 PPP loan amount and a possible increase in the original PPP loan amount to include 2 1/2X these average monthly costs from year 2019———Employers who had their PPP loan forgiveness amount reduced by EIDL loan “advances” should talk with their bank about obtaining a refund of their EIDL advance which reduced their PPP loan forgiveness as originally required by the CARES Act.
- Employers whose operations have been shut down by government order OR whose gross receipts in a quarter declined significantly should seek advice from their CPA/tax advisor about how to optimize the benefits of the employee retention tax credit as integrated with PPP loan forgiveness—-Read the articles we linked in this PayDay and forward those articles to your CPA/tax advisor—this provision will save affected employers substantial money! (And the provisions are complex)!
- First time PPP loan borrowers should calculate their average monthly payroll costs from 2019 payroll records and provide them to their chosen SBA bank/lender. Talk to your current business bank about their readiness for new PPP loan funding, since they already know you as a bank customer. If your existing bank is not “ready” or seems uncertain, you may wish to ask a few local community banks about their plans for PPP loan funding, as well as some of the online “Fintech” SBA lenders—-a PPP lender which is already accepting “pre-applications” is Biz2Credit, which works closely with many CPA firms as to PPP loan calculators, resources and actual lending/funding of PPP loans. Here is a link to Biz2Credit’s website which is also an excellent resource for PPP loan rules.
- Second time PPP loan borrowers should give priority to their original SBA lender since they will already have documentation and calculations of your monthly average payroll costs from calendar year 2019 (make sure to also include group dental, vision, life and disability costs in your payroll costs calculations). If your experience with your PPP round 1 lender was not efficient/helpful, you can apply for a “second round” PPP loan from any SBA lender, just like first time PPP borrowers referenced above.
The new CAA rules for PPP loans, simplified forgiveness, tax deductions for expenses but with “tax basis” restrictions, dramatically new rules/computations for employee retention tax credits and related matters suggests that for most employers, guidance from your CPA/tax advisor is more critical than ever—-as well as discussions with your selected SBA lender. AccuPay is happy to provide our clients with payroll information needed for these new loans (for second round PPP borrowers, the same information from 2019 as used for your original PPP loan can be used—-along with any added costs for group dental, vision, life and disability insurance spent during 2019.)
AccuPay will continue to write PayDay’s pertaining to this new law, so make sure you are signed up for our PayDay email list—-you can sign up at our website or via this link
The entire CAA law is great news for smaller employers—–an excellent start to a great 2021 business year!!
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.