In these challenging times, we hope you and your loved ones are safe and in good health. In the past year, businesses faced numerous unexpected challenges due to the COVID-19 crisis. Congress addressed the crisis by passing the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” in March 2020 and the Consolidated Appropriations Act, 2021 or “CAA, 2021” in December 2020. While these bills may provide you with some much needed relief, they may also present a few challenges. Either way, these bills may impact your future business and tax planning. Highlighted below are some of the more significant changes made by this legislation:
Paycheck Protection Program expenses are now deductible— Due to an oversight, the CARES Act was silent on whether expenses paid by the proceeds of a PPP loans could be deducted. The IRS took the position that these expenses were nondeductible. Thankfully, CAA, 2021 corrected this oversight and any business expense paid by PPP loan proceeds are deductible.
A second round of PPP Loans are now available — The CAA, 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a “PPP Second Draw Loan” of up to $2 million. In order to qualify, a business must meet the following conditions:
a. Obtained an original PPP loan and either has used or will use the full amount of the first PPP loan
b. Demonstrate a 25% reduction in the gross receipts of the entity during the same quarter in 2019 as compared to the same quarter in 2020
c. Employ no more than 300 employees
Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or in calendar year 2019. However, borrowers in the hospitality or food services industries (NAICS code 72)may receive a loan of up to 3.5 times average monthly payroll costs.
Similar to original PPP loans, PPP Second Draw Loans may be forgiven if used for eligible payroll costs of up to 60% (with some exceptions) and eligible nonpayroll costs of 40%.
Originally, eligible nonpayroll costs included only items such as rent, mortgage interest and utilities. CAA, 2021 expanded the definition to include “covered operations expenditures”. This includes both payments to suppliers that are essential to the current operations and other costs needed to continue operations, such as software and cloud computing services, accounting services, and costs related to personal protection equipment required to comply with health and safety guidelines.
The forgiveness of the loan is not considered taxable income, and, as mentioned above, any expenses paid by the loan proceeds are deductible.
Simplified loan forgiveness applications for PPP loans Under $150,000 — CAA, 2021 simplified the application process for forgiveness of PPP loans under $150,000. The loan is to be forgiven as long as the borrower signs and submits a certification to the lender. The SBA should be issuing a simplified application soon that includes:
a. Description of the number of employees the borrower was able to retain because of the loan;
b. The estimated total amount of the loan spent on payroll costs;
c. The total loan amount
Economic Injury Disaster Loan (EIDL) Advance Update — CAA, 2021 repeals the requirement that PPP borrowers must deduct the amount the amount of the EIDL advance from their forgiveness amount. The maximum $10,000 EIDL advance is treated as a grant, is not subject to repayment, and does not reduce the forgivable portion of the PPP. The EIDL advance is taxable .
Employee Retention Credit (ERC) — Under the CARES Act, the Employee Retention Credit or “ERC” is a refundable tax credit against certain employment taxes available to eligible employers who paid qualified wages to employees. The credit was equal to 50% of the first $10,000 of qualified wages paid to an employee after March 12, 2020 and before January 1, 2021. Qualified wages, for those with fewer than 100 employees, included those wages paid to employees during the period operations were suspended or the period of the decline in gross receipts. Eligible business included business that experienced a year-over-year gross receipts decline of 50% or a suspension of operations due to a government ordered shut-down. PPP Loan recipients were not eligible.
CAA, 2021 extended and expanded the ERC. Beginning on January 1, 2021 and through June 30, 2021, the ERC is equal to 70% of up to $10,000 in qualified wages paid to an employee per quarter. Eligible business now includes business with year-over-year gross receipts decline of 20%, rather than 50%, and PPP loan recipients are now eligible effective March 31, 2020. Thus, PPP loan recipients may amend their 2020 payroll tax returns to claim the credits for any eligible wages and obtain a refund. An employer, however, may not claim the ERC wages funded by PPP loan proceeds and may only claim the ERC based on other qualified wages.
If you are eligible, we suggest contacting your payroll provider as soon as possible to file the amended payroll returns.
Additional bonus depreciation for QIP –. You may recall that due to a drafting error with the Tax Cuts and Jobs Act (‘‘TCJA’’), any Qualified Improvement Property or “QIP” placed in service 2017 was ineligible for 100% bonus depreciation and was instead deducted over 39 years. The CARES Act corrected this error and most businesses may claim 100% bonus depreciation for QIP, provided certain requirements are met.
100% of business meals from restaurants are deductible – Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel. The deduction is generally limited to 50% of the cost. Effective January 1, 2021 through December 31, 2022, CAA, 2021 removed this limit for food or beverages provided by a restaurants. In other words, business may now deduct 100% of business meals and beverages purchased from restaurants.