Paycheck Protection Program Loans
Aid to hard-hit businesses.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which is incorporated into the CAA, makes two changes to the Paycheck Protection Program (PPP). The CAA includes $284 billion for new PPP loans, which can be forgiven tax free. The definition of expenses eligible for forgiveness has been expanded to include covered operational expenses (e.g., software, cloud computing, human resource and accounting needs), covered property damage costs related to riots in 2020 not covered by insurance, covered supplier costs (e.g., expenditures pursuant to a contract, purchase order or order in effect prior to taking out the loan for goods that were essential to the recipient’s operations at the time the expenditure was made), and covered worker expenditures including personal protective equipment (PPE). The covered period in which expenses are taken into account for forgiveness can end at the borrower’s choice of between 8 and 24 weeks after the origination of the loan.
Second draw loans.
The CAA provides for “second draw loans,” which are a new round of PPP loans for smaller and harder-hit businesses. The maximum loan amount is $2 million and the maximum number of employees is 300. The business needs to demonstrate a 25% reduction in gross receipts compared with the same quarter in 2019 and that original PPP funds have or will be used in full. Business closed in the first, second, or third quarter of 2019 can use the fourth quarter for purposes of the revenue test. If the business was closed in 2019, but active by February 15, 2020, then the first quarter of 2020 can be compared to second or third quarter of 2020 for this test. Special borrowing limits apply to seasonal businesses. Businesses that received a loan under the first PPP under $150,000 can use a simplified application for a second draw loan. There are also changes to loan forgiveness rules, with an easing of required documentation with the filing of IRS Form 3508-EZ.
Loan forgiveness and expense deductions.
The CAA makes it clear that businesses can deduct expenses as usual even if they obtain PPP loan forgiveness. Specifically, the law says that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” of this loan forgiveness. This counters rulings by the IRS that had said payroll, rent, and other costs covered by PPP loans that were forgiven would not be deductible.
Other Financial Assistance Programs
Changes to SBA EIDL loan rules.
The CAA provided $20 billion for the Economic Injury and Disaster Loan (EIDL) program for businesses located in low-income communities. It also repeals the requirement that PPP borrowers deduct the U.S. Small Business Administration (SBA) EIDL advance from the loan forgiveness amount. EIDL grants can be made through December 31, 2021. The EIDL $10,000 advance payment has the nature of a grant; the CAA confirms that this is tax-free. This treatment is retroactive to grants made after March 26, 2020.
The CAA included some direct aid to live entertainment venues, independent movie theaters, talent representatives, and museums (section 324). These are grants through the SBA to “shuttered venue operators” forced to close due to government shutdowns. The grants can be used for payroll costs, rents, utilities, and PPE. These grants are tax-free income, whereas expenses paid with the funds are deductible to the extent otherwise allowed.
The CAA increases the deduction limit under IRC section 274(m) for business meals to 100% of costs (the limit that had applied prior to the Tax Reform Act of 1986), rather than the usual 50% limit. This change is effective for expenses incurred in 2021 and 2022, but applies only to meals provided at restaurants (not defined in the law). The CAA did not change the deductibility of entertainment costs, which are still not deductible.
Farming businesses with net operating losses (NOL) have some flexibility in handling these deductions. If they elected the two-year carryback for NOLs under the Tax Cuts and Jobs Act of 2017 (TCJA), they can keep this carryback in place despite the creation by the Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES) of a five-year carryback; if they waived the two-year carryback, they can revoke it.
The breaks for charitable contributions created by the CARES Act have been extended. C corporations can deduct cash contributions up to 25% of taxable income. The deduction for donations of food inventory is 25% instead of 15%. Both breaks have a one-year extension.
Energy-efficient commercial buildings.
The deduction for energy-efficient commercial buildings up to $1.80 per square foot has been made permanent (IRC section 179D). The $1.80 per square foot amount will be adjusted for inflation after 2020.
Employee retention credit.
The new law extends and expands the employee retention credit for companies that keep workers on their payroll; the extension runs through June 30, 2021. The credit is now 70% rather than 50%. The credit applies to qualified wages per employee up to $10,000 per quarter, instead of $10,000 per year. The reduction in the required year-over-year gross receipts decline is only 20%, instead of 50%. Most significantly, the credit can be claimed even for those who obtain PPP loans for wages. Wages that are part of PPP loan forgiveness, however, are not also eligible for the employee retention credit. The credit can be claimed by employers who were not in existence for all of 2019.
Sick leave and family leave credits.
The CAA extended the paid sick leave and paid family leave credits for companies with up to 500 employees that are required to offer these benefits, but only through March 31, 2021. The payments are funded by employment tax credits.
Tax credits for the self-employed.
Self-employed individuals can claim income tax credits equivalent to the payroll tax credits for employers. Self-employed individuals can elect to use prior year net earnings in determining average daily self-employment income for purposes of the credits for paid sick and paid family leave. This prior-year rule is effective as if it had originally been included in the Families First Coronavirus Response Act of 2020 (FFCRA), so that it can be used for 2020 returns.
The CAA extends the work opportunity credit under IRC section 51 for hiring workers from certain targeted groups for five years. The paid family and medical leave credit under IRC section 45S (an income tax credit for employer not required to provide paid leave but do so) is also extended through 2025, as well as the new markets credit under IRC section 45D.
The breaks for charitable contributions created by the CARES Act have been extended.
The Indian employment credit under IRC section 45A and the credit for building energy-efficient homes under IRC section 45L are only extended for one year.
Low-income housing credit.
The low-income housing credit under IRC section 42 has been expanded. Starting in 2021, there is a 4% rate floor for figuring credits related to acquisitions and housing bond-financed developments.
Some energy-related tax credits have also been extended, such as the alternative fuel vehicle refueling credit and the credit for building energy-efficient homes.
Employee Benefit Plans
Medical and dependent care FSAs.
The CAA allows medical flexible spending accounts (FSA) and dependent care FSAs to permit employees to roll over all unused amounts; this includes rollovers from 2020 to 2021, as well as from 2021 to 2022. Employees will be able to make a mid-year change in elections for FSAs in 2021, just like in 2020.
Student loan repayments.
There is a five-year extension on employers repaying student loans under an education assistance plan (IRC section 127). As a result, payments up to $5,250 in 2021 through 2025 under such plans are tax free to employees while deductible by employers.
Usually, when qualified retirement plans have a reduction in the number of covered employees, there is a partial termination that triggers certain consequences (e.g., full vesting of benefits). The CAA provides that a partial termination under IRC section 411(d)(3) does not result if the number of active participants in the plan on March 31, 2021, is at least 80% of the number covered on March 13, 2020.
More to Come
These business-related changes mean that the IRS will need to revise some instructions for 2020 returns as well as provide further guidance. In addition, the new Congress may create other tax breaks, or add restrictions to existing ones, in the coming year.