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Congress is set to pass, and the President is set to sign, a COVID-19 Relief Act (C19 Relief Act) tacked on to a general federal government funding bill today (collectively HR 133). This bill is massive, totaling over 5,000 pages, making it quite possibly the largest piece of legislation ever passed. However, there are certain items our clients may find especially interesting, much more beyond omnibus and other random junk that is included in the overall legislation.
We do not know all the details yet, and the Treasury, along with the SBA, are sure to issue additional guidance as there are certain to be further clarifications or interpretations to come once all the legal language is digested. The information below is our best attempt to provide guidance, based on our understanding of the package right now, knowing this information may change at any time.
PPP Round 2
The CARES Act established the Paycheck Protection Program (PPP) loans with a forgivable portion. The C19 Relief Act provides for a second round of PPP loans, again with a forgivable feature. The difference in PPP V1 and V2 are few but important.
It is designed to benefit harder hit and smaller businesses. PPP V2 is more targeted by limiting the eligibility to those with less than 300 employees and those who have suffered a decrease in revenue. Additionally, PPP V2 is limiting loans to $2M. The decrease in revenue qualification appears to be a 25% drop in quarterly revenue as measured by comparing 2020 quarterly revenue to the same quarter in 2019. Eligible expenses for forgiveness also appear to include expenses associated with responding to making the workplace safer, such as supplies and other personal protection equipment instead of just payroll, rent, utilities, etc.
Additionally, for those businesses in NAICS 72, which is broadly the restaurant/catering/bar and hotel/accommodation industries, the V2 loan amount appears to be based upon 3.5X average monthly payroll instead of 2.5X as in V1.
The SBA is expected to issue guidance and applications in about 10-days, so hold on for additional information from your bank on how to apply for PPP V2. However, it may be wise to figure out now if you have a quarter with a 25% drop in year over year revenue in anticipation of such guidance. For everyone remembering all the changes with PPP V1, I am sure you know there will be more and more information coming out in the next days, weeks, and even months, so our advice, as always, is to remain flexible.
PPP Tax Impact (The BIG One)
The CARES Act included specific language indicating that the PPP loan forgiveness was not income. However, Treasury then went out on their own to interpret the law to indicate that although it is not income, the deductions that the PPP money was used for would not be deductible. This, in effect, had the same result in increasing taxable income. Many legislators went on the record saying that Treasury was going against Congressional intent.
The C19 Relief Act appears to correct this interpretation, allowing a deduction for PPP funds’ expenditures. This is perhaps the biggest tax item included in this bill and is especially important for our clients as many were not looking forward to paying tax on what was believed to be non-taxable forgiveness.
Additionally, since the increase in tax revenue was not contemplated in the CARES Act when figuring out the cost of the PPP, the clarification in the C19 Relief Act does not increase the cost of this item.
In addition to the PPP forgiveness clarification, the Act also appears to be excluding from income any Section 1112 SBA loan payments received under the CARES Act, as well as the Economic Injury Disaster Loan (EIDL) Advance payments. Certain SBA 7a borrowers received 6 months of payment relief, and others received up to $10K of EIDL Advances–the Act appears to align these benefits with the PPP forgiveness tax rules. This is good news all around.
PPP Small Loan Forgiveness Process
For loans under $150K, the forgiveness process is now a bit easier under the C19 Relief Act, whereby the forgiveness application appears to be a much simpler attestation instead of a full application for forgiveness, much like the current process for loans under $50K. For loans over $150K, documentation is still required to be submitted to lenders despite a rumor that it would be significantly reduced for loans below $2M.
The Economic Injury Disaster Loan (EIDL) program appears to be restarting. EIDL provides loans and grants to small businesses. Further, it appears they may be allowing businesses that did not receive the full $10K EIDL Advance a process for qualifying for the maximum Advance.
Originally, for businesses that received an Advance, such an Advance would reduce the PPP loan eligible for forgiveness. However, the C19 Relief Act appears to remove that reduction, allowing the full PPP loan to be forgiven.
Recovery Rebate Checks
Included in the C19 Relief Act are $600 Tax Recovery Rebates for qualified individual taxpayers and their qualifying children. It appears the qualification will be similar to those with Round 1 Stimulus Checks (phaseouts start at $150K AGI for joint filers, $75K for single filers). Obviously, we are going from a $1,200 check down to a $600 check, but Treasury is pushing to get this money out quickly through direct deposits for those that qualify and then paper checks for those that don’t.
Deductions for business meals are currently limited to 50%. In order to spur spending at restaurants, the C19 Relief Act appears to allow a full 100% deduction for business meals incurred in years 2021 and 2022 (although not for 2020). Unfortunately, there does not appear to be a change for business entertainment, though, as it remains non-deductible.
The CARES Act allowed for a $300 above the line deduction for qualified charitable contributions (excluding in-kind donations). The C19 Relief Act expands that deduction to $300 for single filers and $600 for joint filers for 2021 also. This deduction is allowed even if someone does not itemize their deductions.
State & Local Tax and Unreimbursed Employee Expense Deductions
Unfortunately, there does not appear to be any changes in the current $10K limit on State and Local Taxes (SALT) or eliminating Unreimbursed Employee Expenses. It was my hope that due to the number of employees working at home and the realization that there is a SALT “marriage penalty” that Congress would take this opportunity to correct this issue, but it does not seem to be the case here.
The good news is that the C19 Relief Act includes $300 per week of enhanced unemployment benefits; unfortunately, these unemployment benefits will continue to be taxable. I believe this may be a big “gotcha” for many taxpayers come tax time. Please be aware that unemployment benefits are taxable for federal purposes. This will be especially painful for married couples where one spouse continues to earn income or for someone who earned a fair amount of income prior to being unemployed.
There appears to be an expansion of the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) to help taxpayers that have seen a drop in income for 2020 and may not have received the same assistance as they did in 2019. In essence, there appears to be an ability to utilize 2019 income qualifications for calculating the 2020 CTC and EITC. This may provide additional financial support for those whose financial circumstances have changed in 2020 compared to 2019.
We’re Here to Help
If you have questions or need assistance with a new application or interpreting the stimulus bill, reach out to your JLK Rosenberger team member. You can also reach Tim Johnson at 949-860-9892 or click here to contact us. We look forward to speaking with you soon.
Disclaimer: This information is ever evolving. Changes are expected. No decisions should be made on the above. Congress still needs to pass this Act and the President needs to sign it. The reader should have no expectation that JLKR/Tim Johnson will update this based on changes made. Items above are generic and general in nature and may not apply to your specific circumstances.