COVID-19 Relief Bill to Provide Additional Pandemic Aid
Late on the night of December 21, both chambers of Congress overwhelmingly passed the Consolidated Appropriations Act of 2021 (CAA), a $900 billion COVID-19 relief bill that among other things provides $600 stimulus payments to individuals, adds $300 to extended weekly unemployment benefits, and provides more aid for small businesses. The President initially refused to sign the bill, even though his administration helped negotiate it, however, Sunday night he did so making it law.
The CAA also codifies tax deductibility for business expenses paid with forgiven Paycheck Protection Program (PPP) loans, an issue that previously put apparent Congressional intent at odds with the Treasury Department's interpretation of the tax law.
Additionally, CAA provides new PPP funding, makes certain not-for-profit organizations eligible for PPP loans for the first time, and offers businesses that have experienced severe revenue reduction the opportunity to apply for a second loan.
While we are still evaluating this 5,600 or so page behemoth, some early key takeaways include:
- Relief for small businesses suffering pandemic-related economic hardships includes more than $284 billion to the U.S. Small Business Association (SBA) for first and second PPP forgivable small business loans and allocates $20 billion to provide Economic Injury Disaster Loan (EIDL) Grants to businesses in low-income communities. In addition, there is targeted relief for closed live venues, independent movie theaters, and cultural institutions to the tune of $15 billion, while $12 billion will be set aside to help business in low-income and minority communities.
- A new round of economic impact payments of $600 for individuals making up to $75,000 per year and $1,200 for married couples making up to $150,000 per year, as well as a $600 payment for each child dependent.
- Workers receiving unemployment benefits will get a $300 per week supplement from December 26 until March 14, 2021. CAA also extends the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed, gig workers, and others in nontraditional employment, and the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally funded unemployment benefits to individuals who exhaust their regular state benefits.
- Emergency rental aid and an extension of the national eviction moratorium through January 31, 2021 is included.
- The bill also extends the employee retention tax credit and several expiring tax provisions and temporarily allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant. This provision is effective for expenses incurred after December 31, 2020, and expires at the end of 2022.
- The earlier CARES Act included temporary changes to the limitation on charitable contributions in order to encourage taxpayers to support charities. For individuals, the limitation on charitable contributions was increased from 60 percent of the contribution base to 100 percent for 2020. Also, individual taxpayers can claim a $300 above-the-line charitable contribution on 2020 tax returns. Meanwhile, the CARES Act increased the percentage limitation on charitable contribution deductions for corporations from 10 percent to 25 percent for qualified cash contributions made in 2020. All of these provisions are extended to 2021 under CAA.
A New Round of PPP Loans (PPP2)
Many suffering small businesses have been clamoring for a new round of PPP forgivable loans, as well as, a more simplified forgiveness process. CAA delivers some of these things, and contains many things that are similar to the first round of the PPP with a few important differences.
Who is Eligible for PPP2?
PPP2 loans will be available to first-time qualified borrowers as well as businesses that previously received a PPP loan, provided they meet new, somewhat more restrictive criteria.
Specifically, previous PPP recipients may apply for another loan of up to $2 million if they:
- Have 300 or fewer employees.
- Have used or will use the full amount of their first PPP loan.
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
PPP2 also makes the forgivable loans available to an expanded group of nonprofit organizations, specifically IRC section 501(c)(6) business leagues, such as chambers of commerce, visitors' bureaus, etc., and so-called "destination marketing organizations" (as defined in the law). These organizations must have 300 or fewer employees and receive no more than 15% of their receipts from lobbying, the lobbying activities must comprise no more than 15% of the organization's total activities and have cost no more than $1 million during the most recent tax year that ended prior to February 15, 2020.
PPP2 also allows first-time borrowers from the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations with fewer than 300 employees per physical location.
The bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
Loan Terms for PPP2
As with the original PPP, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Expenditures to suppliers that are essential at the time of purchase to the recipient's current operations.
- Covered operating costs such as software and cloud computing services and accounting needs.
To be eligible for full loan forgiveness, at least 60% of the funds must be spent on payroll over a covered period of either 8 or 24 weeks, the same as for PPP1. Borrowers may apply for loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, but the maximum loan amount has been cut from $10 million in the first round to a new $2 million maximum, with the exception that hotels and restaurants can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.
Simplified Forgiveness Application and Other Issues
Several other CAA provisions related to PPP include:
- It creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, the law calls for the submission of a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA has 24 days from the bill's enactment to create the simplified form. Borrowers will be required to retain relevant records related to employment for four years and other records for three years, so the SBA can review and audit these loans to check for fraud as needed.
- CAA repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
- The law includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
Tax Deduction for PPP expenses
As mentioned earlier, the bill also makes it law that business expenses paid with forgiven PPP loans are tax-deductible. This supersedes previous IRS guidance that such expenses could not be deducted. Many, including members of Congress, had argued that this was Congress's original intent when it created the original PPP as part of CARES Act, since CARES specifically stated forgiven PPP loans would not be taxable. The IRS had argued otherwise, since the CARES Act did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible. This disagreement is resolved by CAA, certainly good news for affected businesses.
There is much yet to be learned about CAA and certainly much guidance will be needed from the SBA, IRS, etc. Stay tuned as we continue to unpack the finer points of the new law.