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On Monday, December 21st, Congress passed a stimulus package providing $900B of COVID-19 relief provisions. While the massive bill includes a host of provisions and tax extenders, below is a summary of some of the more relevant provisions to closely-held businesses including long awaited clarification on the deductibility of Paycheck Protection Program (PPP) related expenses.
Original PPP Program
Provides the following changes and clarifications to the original PPP program:
• Clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness
• Expands the allowable uses of PPP proceeds to include:
o Operations expenditures – software, cloud computing, other HR/accounting
o Property damage costs – costs related to 2020 public disturbances not covered by insurance or other compensation
o Supplier costs – expenditures to a supplier that are essential to the recipient’s current operations
o Worker protection expenditures – PPE and costs to comply with COVID-19 federal health and safety guidelines
• Allows the borrower to elect a covered period ending at any point between 8 and 24 weeks after origination
• Creates a simplified application process for loans under $150,000 – sign and submit a 1-page form
• Expands borrower eligibility to include 501(c)(6) organizations (certain exceptions apply)
• Removes requirement that borrowers deduct the amount of their EIDL advance (i.e. $10,000 grant) from their PPP forgiveness amount
“PPP Second Draw” Loan Program
Allows small and harder-hit businesses to take out a 2nd PPP loan. Borrowers may receive 2.5x the average monthly payroll costs in the one year prior to the loan or the calendar year, up to a maximum of $2 million. Businesses in the Accommodations and Food Services Industries may receive loans up to 3.5x average monthly payroll costs. Eligible entities must:
• Employ not more than 300 employees
• Have used or will use the full amount of their first PPP; and
• Demonstrate at least a 25% reduction in gross receipts in the 1st, 2nd or 3rd quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the 4th quarter of 2020.
Employee Retention Credit
Provides the following modifications to the Employee Retention Credit (ERC):
• Extends the credit until June 30, 2021
• Increases the refundable payroll tax credit to 70% for up to $10,000 in qualified wages per quarter
• Decreases the necessary reduction in gross receipts to qualify from 50% to 20% for the same quarter in calendar year 2019
• Definition of “large employer” changes from 100 employees to 500 employees
• Effective for quarters beginning after December 31, 2020, businesses will be able to take the ERC and participate in the PPP as long as the same wages are not paid for with forgiven PPP proceeds
Extension of the Debt Relief Program
Resumes the payment of principal and interest on small business loans guaranteed by the SBA under the 7(a), 504 and microloan programs, established under the CARES Act. All borrowers with qualifying loans will receive an additional 3 months of P&I starting in February 2021, capped at $9,000 per borrower per month. An additional 5 month period is available for businesses in certain industries (i.e. arts/entertainment, food/accommodation, clothing stores, air transportation). Relief is not taxable income and expenses are deductible.
Extension of Credits for Paid Sick and Family Leave
Extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, through the end of March 2021.
Extension of Certain Deferred Payroll Taxes
If employers deferred withholding employees’ share of social security taxes from September 1, 2020 through December 31, 2020, the repayment period for the deferred amount is now extended through December 31, 2021. Penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.
Extension of Participation in 8(a) Program
Requires SBA to allow businesses in the 8(a) program to seek an enrollment extension of 1 year.
100% Deductible Business Meals for 2021 and 2022
Expenses for food or beverages provided by a restaurant and paid or incurred before January 1, 2023 are fully deductible.
Additional Recovery Rebates for Individuals
Provides 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.
Above the Line Charitable Contributions Extended to 2021
Taxpayers who do not elect to itemize deductions will be able to take a deduction for charitable contributions up to $300 or $600 if married filing jointly in 2021.
Update: On Sunday, December 27, the President signed this bill.
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As always, Lanigan, Ryan, Malcolm & Doyle will continue to monitor the evolving business landscape and add updates to our COVID-19 resource center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan, Ryan team members are always available for questions.