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Small business and the COVID-19 Pandemic

Consolidated Appropriations Act (CAA) Provides Relief to Individuals and Businesses

On Sunday, December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA 2021) was signed into law by President Trump after controversy. A $900 billion emergency relief package is included as part of this omnibus spending bill. It assists individuals and businesses during the ongoing coronavirus pandemic and economic crisis.  Major relief provisions are summarized here, as well as some additional tax provisions.

Unemployment provisions

The legislation provides an extension to expanded unemployment benefit assistance (although at a lower amount):

  • An additional $300 weekly benefit to those collecting unemployment benefits, through March 14, 2021
  • An additional 11-week extension of federally funded unemployment benefits for individuals who exhaust their state unemployment benefits
  • Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits (allowing individuals to receive a maximum 50 weeks of benefits)
  • Unemployment benefits through March 14, 2021, for many who would not otherwise qualify, including independent contractors and part-time workers

Recovery rebates (stimulus payments)

Many individuals will receive another direct payment from the federal government. Technically a 2020 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed and sent automatically via check or direct deposit to qualifying individuals. To qualify for a payment, individuals generally must have a Social Security number and must not qualify as the dependent of another individual.

The amount of the recovery rebate is $600 ($1,200 if married filing a joint return) plus $600 for each qualifying child under age 17. Recovery rebates are phased out for those with an adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). For those with AGIs exceeding the threshold amount, the allowable rebate is reduced by $5 for every $100 in income over the threshold.

Business relief (see more details later)

  • The employee retention tax credit has been extended through June 30, 2021. It is available to employers that were significantly impacted by the crisis and is applied to offset Social Security payroll taxes. As extended, the credit is increased to 70% of qualified wages, up to a certain maximum per quarter.
  • Paycheck protection program (PPP) loans have been extended and the allowable uses (eligible expenses) of the loan expanded. A PPP loan amount can be forgiven for paying certain expenses, and such amount is not included in income. It is clarified that no deduction will be denied, no tax attribute reduced, and no basis increase denied by reason of the exclusion from gross income.
  • Repayment of employee payroll taxes deferred in 2020 was originally scheduled for the period January 1, 2021, through April 30, 2021. The period for repayment has been expanded to January 1, 2021, through December 31, 2021.
  • The employer tax credit for providing emergency sick and family leave has been extended through March 31, 2021.
  • A full deduction is now allowed for business meals provided by a restaurant for expenses paid or incurred in 2021 and 2022.

Rent relief

  • The legislation allocates funds to state and local governments to provide emergency rental assistance through December 31, 2021.
  • The legislation extends an eviction moratorium originally issued by the Centers for Disease Control and Prevention, but only through January 31, 2021.

Charitable giving

Changes to the normal charitable gifts deduction rules in 2020 have been extended through 2021.

  • For those who itemize deductions, the limit on the charitable gift deduction has been increased to 100% of AGI for direct cash gifts to public charities.
  • For nonitemizers, a $300 (increased to $600 in 2021 for joint returns) charitable deduction for direct cash gifts to public charities is available (in addition to the standard deduction).

Other tax provisions

The floor for deducting medical expenses has been permanently lowered to 7.5% of AGI (it was scheduled to increase to 10% in 2021).

Starting in 2021, the deduction for qualified tuition and related expenses has been repealed. To make up for it, the modified adjusted gross income (MAGI) phaseout range for the Lifetime Learning Credit has been increased to be the same as the phaseout range for the American Opportunity Tax Credit.

A number of provisions that are periodically extended (often a year at a time) have been extended through 2025, including:

  • The exclusion from gross income of forgiveness of qualified principal residence loans
  • The employer credit for paid family and medical leave
  • The exclusion from income for certain employer payments of student loans

A number of other provisions have been extended (generally through 2021), including:

  • The treatment of mortgage insurance premiums as qualified residence interest for purposes of the interest deduction
  • The energy efficient home credit

CAA Provisions affecting CARES-Act Programs

PPP Loans

  • You will be able to apply for a first-round PPP loan if you had not received one yet and meet the eligibility.
  • Expenses paid with PPP loan will now be deductible for Federal tax purposes even if that loan is forgiven.
  • New expenses are permissible for 40% of forgiveness amount:
    • Covered Operations Expenses which includes : “any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”
    • Covered Property Damage Costs which includes expenses “related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation”
    • Covered Supplier Costs which includes an expense of a business involving payment to a supplier of essential goods that is made pursuant to a contract, order, or purchase order that was in effect at any time before the Covered Period with respect to the applicable Covered Loan (or at any time during the Covered Period with respect to perishable goods).
    • Covered Worker Protection Expenditures which includes  operating or capital expenditures related to complying “with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19”
  • All PPP borrowers can use an 8 or 24 week period for forgiveness (covered period) no matter when the loan was originated.
  • New 1-page forgiveness form for any PPP loan under $150,000. SBA has to develop this form. No substantiating documents will be required for any loan under $150,000.
  • Additional types of insurance including group life, disability, vision, and dental can be used as part of payroll portion (60%) of forgiveness amount.
  • Borrowers who returned original PPP loans can reapply for PPP.

Employee Retention Credit

  • The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. Credit is paid against employer portion of payroll taxes.
  • Extended through first half of 2021.
  • Now you can use this tax credit AND PPP loan, but not on the same payroll.
  • Healthcare expenses are treated like wages retroactive to 2020.
  • EIDL Grants are not subtracted from PPP forgiveness amount.

CAA Provisions with new stimulus and aid for businesses

PPP Round 2

  • You can apply for a second PPP loan assuming you have exhausted the first one.
  • Rules for PPP2 are similar to original PPP loan (as revised), but…
    • Only businesses with less than 300 employees (except for accommodation and food service businesses).
    • Only businesses that had a drop in revenue during any given quarter of 2020 vs. the same quarter in 2019 of 25% or greater are eligible.
    • Loans are capped at $2m.
    • Loans are based on 2.5times average monthly payroll costs except accommodation and food service businesses are based on 3.5 times.

Employee Retention Credit for 2021 only

  • Tax credit is $10,000 per quarter per employee.
  • Tax credit is increased to 70% (from 50%).
  • To be eligible you have to have 20% reduction in revenue for quarter in 2021 (50% for 2020).
  • Employers with up to 500 employees are eligible (up from 100 in 2020).
  • Can compare previous quarter instead of previous year quarter if that is more favorable.

EIDL Grants

  • EIDL Grants will again be available, but only for certain businesses.
    • Business owners who are located in a low-income community, have suffered an economic loss of greater than 30 percent and employ less than 301 employees are considered eligible for up to the full grant of $10,000.

Shuttered Venue Grants

  • To be eligible to receive a SOS Grant, an entity or an individual must be (i) a live venue operator or promoter, theatrical producer or live performing arts organization operator, (ii) a talent representative, (iii) a movie theatre, or (iv) a “relevant” museum.
    • At least 25% revenue reduction for a given quarter in 2020 vs. 2019.
    • Must have restarted operations to receive grant.
    • Must sell tickets, so live performance cannot be incidental use.
    • Initial Grants are for 45% of 2019 revenue capped at $10m.

Unknowns

  1. Tax treatment of expenses paid with PPP loans for NJ (and other) state tax purposes.
  2. Tax treatment of loan forgiveness for NJ state tax purposes.
    1. NJ Senate bill NJ S3234 which is still in committee.
  3. SBA forms have not been written yet.
  4. IRS changes to tax forms and the tax code have not been written yet.

Disclosures

We have compiled this information from sources we believe are reliable. The information is for educational purposes and is not meant as advice for any person or business. The rules interpreting this law have not yet been written and changes are still possible. Please consult your own trusted advisors before making any decisions.

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