December 22, 2020
Late last night the both the House and the Senate approved a $900 billion pandemic aid bill. President Trump is expected to sign the bill into law soon.
The relief bill was part of a $2.3 trillion catchall package that included $1.4 trillion to fund the government through the end of the fiscal year on September 30, 2021.
Democrats and Republicans agreed on the provisions of this relief bill on Sunday night after tense negotiations. Americans will benefit from the billions of dollars in aid for individuals and small businesses. Treasury Secretary Steven Mnuchin said that direct payments to households could begin reaching individual Americans as early as next week.
Although the complete details of the legislation have yet to be released, from what we understand it provides for:
- Another round of Payroll Protection Program (PPP) loans.
- Another round of direct payment stimulus to households.
- Extended unemployment benefits.
- The extension of certain tax provisions.
- An increased tax deduction for corporate meals.
- Numerous other provisions related to the COVID-19 pandemic.
- Energy related provisions.
- Funding for programs that are not related to the pandemic.
PPP Program
The legislation includes $284 billion to fund another round of PPP loans and allows businesses to receive a second loan.
The bill clarifies that business owners can deduct expenses paid for with forgiven PPP loans. They do not have to include loan forgiveness in income. This will give small businesses a tax break that could amount to more than $100 billion.
The new bill overrides an IRS decision that says businesses cannot claim deductions on certain costs, such as rent and wages, paid for with tax-free PPP money. It is not certain how this will affect PPP borrowers who have already received final forgiveness before the bill is signed into law. The bill places no limits on the ability of any business to deduct expenses associated with forgiven PPP loans.
“The deductibility of the expenses paid from PPP funds is a welcome news to taxpayers,” said Chris Abell, CPA, and a manager with McCarthy & Company. “Our clients are certainly relieved this bill clarified the legislative intent of the PPP bill passed in the spring.”
The tax deductibility of expenses paid with PPP loans applies to independent contractors, sole proprietors, and farmers (individuals who show their business income on a Schedule C or Schedule F of their personal income tax returns). All expenses that are tax deductible for such individuals will be tax deductible in the normal fashion.
Individuals can receive forgiveness of any loan amount not attributable to wages paid to individuals other than the owner. Individuals cannot deduct the PPP forgiveness amount. They can however receive the standard tax deductions for paying business expenses. An independent contractor, sole proprietor, or farmer who received a PPP loan and spent it on personal expenses will not be able to deduct those expenses. But they do not have to include the loan forgiveness amount in income.
A provision of the legislation provides that any income tax basis increase that occurs because of receiving the PPP loan will not be lost upon forgiveness of that loan.
According to the Philadelphia Business Journal, House Republicans on the Small Business Committee unveiled details on who might qualify for the new PPP loans and details on what expenses could be forgiven before Congress passed the legislation. It is possible that some of the details could have been changed in the final text of the legislation. The new PPP loan provisions provide for:
- A second loan for small businesses with less than 300 employees with a revenue reduction of at least 25% in the first, second or third quarter of 2020 relative to the same quarter in 2019.
- A maximum second loan amount of $2 million for most businesses at 2.5 times their average monthly payroll costs, although some food service, hospitality, and accommodations businesses could see more, as their maximum equals 3.5 times their monthly payroll costs.
- Creation of a simplified loan forgiveness application form consisting of a one-page certification that requires the small business to list the loan amount, the number of employees retained, and the estimated total spent on payroll costs for loans under $150,000.
- Forgiveness for small businesses if they spend at least 60% of their PPP second draw loan on payroll costs during the covered period.
- Expansion of covered expenses to include software, cloud computing resources and human resources and accounting needs, as well as property damage costs due to public disturbances that were not covered by insurance, supplier costs and the purchase of personal protective equipment.
- Expansion of eligibility to include 501(c)(6) nonprofits, such as local chambers of commerce, as well as destination marketing organizations, housing cooperatives, newspapers, broadcasters, and radio stations.
- Repeal of a previous CARES Act provision that required small businesses to deduct any Economic Injury Disaster Loans from PPP loan forgiveness.
- Prohibition on publicly traded companies accessing the PPP. Entities affiliated with the Chinese government are also ineligible.
- The creation of a farmer and rancher calculation for PPP loans, as well as codifying rules for faith-based organizations and churches to maintain their eligibility in the program.
- PPP loan borrowers to choose two covered periods, an eight-week covered period, or a 24-week covered period, in which to spend the loan proceeds.
- Voluntary release of demographic information for loans. However, the SBA is mandated to include a demographic questionnaire in the loan origination application.
- Clarification that group insurance payments count as payroll costs, including group life, disability, vision, and detail insurance.
- Ineligibility for businesses that receive a grant under a separate, $15 billion program for venues.
- A reapplication option for the PPP maximum for any business that returned all or part of their PPP loan so long as they have not received forgiveness yet. And any borrower that would have gotten a larger loan under the new legislation can reapply for the difference.
Direct Payments
Direct payments will be made to qualified individuals in the amount of $600 for each adult tax filer and $600 per child. High-income households will be ineligible for checks. Singles taxpayers making more than $75,000 and married joint filers making more than $150,000 are not eligible for direct stimulus payments.
While the bill provides $600 for each adult tax filer and for each dependent child, nothing is provided for each dependent adult.
Unemployment Insurance
Federal unemployment insurance benefits will be extended. The legislation extends jobless benefits through for up to 11 additional weeks. The bill provides a weekly supplement of $300.
The bill also provides an additional $100 a week to some “mixed earners.” These are people who earn money both as employees and as freelancers or contractors. This addresses the stimulus law in the CARES Act that barred people who qualified for regular unemployment benefits from the program targeting freelancers and gig workers.
The bill could make it more difficult for some people to receive benefits under the Pandemic Unemployment Assistance. Many people have been able to qualify for the program by certifying that they lost employment or earnings without needing to provide proof. The new bill requires people to provide documentation to receive benefits.
Instead of forcing a hard end to the unemployment programs, lawmakers also agreed to allow the benefits to slowly taper off through early April.
Tax Breaks and Extensions
The bill includes numerous tax provisions that will make a big difference for some individuals and businesses. The bill, passed yesterday, addresses the fate of 40 expiring tax provisions:
- 10 provisions are made permanent.
- 11 provisions are extended until the end of 2025.
- 19 provisions are extended for a single year, until the end of 2021.
The legislation:
- Expands the business meals deduction from 50% to 100% of the cost of food and beverages for tax years 2021 and 2022.
- Renews of the employee retention tax credit for businesses.
- Changes the earned income tax credit and the child tax credit.
- Expands the low-income housing tax credit.
- Makes permanent an excise tax break for beer brewers, wine makers and distillers.
- Expands expiring tax credits, including some for mortgage interest premiums and tax credits to help businesses in low-income communities.
The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are two federal income support programs for low- and middle-income households. Both credits are only available to households with “earned income” in the current tax year.
Many households have seen their income drop significantly this year due to the pandemic. As a result, these households would not be able to receive the EITC and CTC credits that they would normally be able to claim. The bill would allow households claiming the EITC and/or CTC on their 2020 tax return to choose whether to use their 2020 earned income or their 2019 earned income.
Before the pandemic, the charitable deduction was only available to households that itemized their deductions. Under the CARES Act, households that claim the standard deduction could declare up to $300 in charitable contributions. Now, married households that file jointly and claim the standard deduction will be allowed to deduct up to $600 in charitable giving.
Other Provisions
Other key provisions provided in the bill include:
- $82 billion for education with about $54 billion going to the nation’s K-12 schools and $22.7 billion going to colleges and universities. It includes funds for HVAC system repairs and replacement to help reduce coronavirus transmission.
- $69 billion for the distribution of a coronavirus vaccine and more than $22 billion for states to conduct testing, tracing, and coronavirus mitigation programs.
- $45 billion for transportation ($15 billion to reinstate payroll reimbursements to airlines, $1 billion for airline contractors, $4 billion for airports, $15 billion for transit, $8 billion for motor coaches, $1 billion for Amtrak and an unspecified amount for state highways).
- $25 billion for emergency rental assistance.
- $10 billion to support childcare providers.
- $15 billion for entertainment venues, independent movie theaters, museums, zoos, and other cultural institutions devastated by the restrictions imposed to stop the spread of the virus.
- $13 billion for nutrition assistance.
- An extension of the CARES Act’s eviction moratorium.
- Funds for the U.S. Postal Service.
In addition, governors would receive $4.1 billion in a separate pot of relief funding, $2.75 billion of which would be reserved to support private and parochial schools. The bill also includes requirements and restrictions for how private schools that have received funding under the Paycheck Protection Program are eligible to receive state funds.
Energy and the Environment
The bill calls for the U.S. to join other nations in phasing out hydrofluorocarbons used in air conditioning and refrigeration systems. It also includes the Water Resources Development Act that deals with water-related infrastructure and extends the production tax credit for renewable energy projects. The bill provides $9.9 billion in federal funds for 46 U.S. Army Corps of Engineers water projects.
Federal Reserve Emergency Loan Programs
The Federal Reserve’s emergency loan programs, which Congress backed up with a $454 billion appropriation this year, were a major sticking point in the negotiations. Senator Patrick J. Toomey, of Pennsylvania, had initially wanted to ban the Fed from creating emergency loan programs “similar to” the ones it had set up to funnel money to companies, states, and municipal borrowers during the pandemic downturn. This was to prevent the re-establishment of copycat programs next year to get money out to the states. The text now simply prohibits the Fed and the Treasury Department from re-establishing the “same” programs.
We will let you know when President Trump signs the legislation into law and will continue to keep you updated. Please visit our COVID-19 Resource Page for more alerts.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at Richard.Higgins@MCC-CPAs.com. I can be reached at Marty.McCarthy@MCC-CPAs.com. As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Source: Philadelphia KYW Newsradio
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
