The Consolidated Appropriations Act of 2021 (CAA) passed by Congress and signed by the President includes several tax related provisions and assistance to businesses impacted by the COVID-19 pandemic.
Tax Treatment of Paycheck Protection Program (PPP) Loan Forgiveness:
The CAA allows the expenses paid with proceeds from the PPP loan draws to be deducted on the businesses tax return. The U.S. Department of the Treasury originally came out with guidance the expenses covered with the tax-exempt income from the forgiven loans would not be tax deductible. The CAA reverses this guidance, which allows the proceeds to be tax-exempt and the expenses to be deducted for tax purposes.
Second Draw PPP Loans:
The CAA allows for some companies to apply for a second round of PPP funding. To qualify, a company must meet the following requirements:
1. Have 300 or fewer employees
2. Have used or will use all of its first draw of the PPP draw on qualified expenses before the expected funding date of the second draw
3. Experienced a revenue decline of at least 25 percent during any quarter of 2020 versus 2019
Each eligible business can qualify for 2.5 months of the borrower’s average monthly payroll costs (based on calendar year 2019 or 2020) or the maximum eligible loan of $2 million. Businesses in the hospitality industries (restaurants, bars, hotels, etc.) can qualify for 3.5 months of the borrower’s average monthly payroll costs, limited to $2 million.
For loans less than $150,000, the borrower does not need to submit proof of the 25 percent or greater decline in quarter-over-quarter revenue from 2019 to 2020 to their lender, whereas proof of this decline must be provided to the lender for loans in excess of $150,000.
The borrower is required to make the following certifications on the application under penalties of perjury:
1. The applicant had a 25 percent or greater reduction in revenue in the measurement period
2. The applicant received the first draw PPP loan and will have used the full amount of the loan on qualified expenses
3. The current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant
Employee Retention Credit:
The CAA provided an extension of the CARES Act Employee Retention Credit. Under the CARES Act, an eligible employer may receive a refundable credit in the amount equal to 50 percent of qualified wages paid between March 12, 2020, and December 31, 2020. That credit is limited to $10,000 in aggregate per employee, resulting in an overall maximum credit of $5,000 per employee in 2020. The requirements for claiming the credit in 2020 are as follows:
1. Had its trade or business operations partially or fully shut down due to government orders in relation to the Covid-19 pandemic; or
2. Suffered a significant decline of 50 percent or more in gross receipts in any calendar quarter when comparing to the same quarter in 2019.
The CAA updated the 2020 requirements to allow employers that received PPP Loans to also claim the employee retention credit, provided the Employee Retention Credit is not claimed on the same payroll costs that were used in the PPP Loan forgiveness.
The CAA also expands the credit for the following between January 1, 2021 and June 30, 2021:
• The credit is increased from 50 percent of qualified wages to 70 percent of qualified wages in 2021
• The per-employee wage cap is increased from $10,000 for all calendar quarters in 2020 to $10,000 for each quarter in 2021, resulting in a maximum credit of $7,000 per employee each calendar quarter
• The reduction in gross receipts for an employer who experienced a significant decline in gross receipts is reduced from more than 50 percent to more than 20 percent in 2021
There is significant interplay between the PPP second draw loan forgiveness and the Employee Retention Credits. Planning should be done to maximize the amount of the PPP second draw and the availability of Employee Retention Credits. Please contact your Bland & Associates, P.C. (Bland) tax adviser before applying for the PPP second loan draw to make sure the timing will optimize the amount of Employee Retention Credits.
The CAA also includes a number of tax extenders for certain credits and deductions, as well as a liberalization on the deductibility of meals. Contact your Bland tax adviser for additional information.
by: Jamie Brewer, CPA & Michael Seelhoff, CPA