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Consolidated Appropriations Act

Overview of the American Rescue Plan Act from IRS (May 13, 2021)

IRS provides overview of key tax provisions in American Rescue Plan Act, including retroactive tax benefits for 2020

Employee Retention Credit Increases for Employers (Feb 16, 2021)

Signed into law in the waning days of 2020, the Consolidated Appropriations Act (CAA) of 2021 provides an employee retention tax credit (ERC) for employers. This article looks at the extended and modified employee retention tax credit (ERC), allowing some employers to now receive tax refunds even if a PPP loan was received. 

The COVID-19 pandemic made it difficult for many employers to keep workers on the books in 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, provided some relief. And the Consolidated Appropriations Act (CAA) extends some provisions (with a few modifications) through June 30, 2021.

Under the CARES Act an employer could claim an employee retention credit (ERC) for 50% of qualified wages paid after March 12, 2020, and before January 1, 2021. Eligible employers were able to benefit immediately from the credit because it reduced the Social Security component of tax deposits. If an employer's current payroll tax deposits were insufficient to cover the credit, the employer could obtain an advance payment from the IRS.

To qualify for the ERC, an employer originally had to meet one of two requirements during any calendar quarter: 1) It was forced to fully or partially suspend operations because government authorities limited commerce, travel or group meetings due to pandemic concerns or 2) It experienced a significant decline in gross receipts. For the CARES Act credit, a "significant decline" occurred when gross receipts were less than 50% of gross receipts in the same calendar quarter of 2019. Only the first $10,000 of wages paid to an employee during the designated time frame qualified for the credit. Therefore, employers could claim a maximum credit of $5,000 per employee.

Below are some of the changes made by the CAA to the original ERC:

  • The gross receipts test to determine eligibility has been reduced from a 50% decline to a 20% decline for 2021.
  • Increased the employer size in determining the amount of eligible wages for 2021.
  • The credit is increased to 70% of the first $10,000 of qualified wages for two quarters, for a maximum credit per worker of $14,000 (70% x $10,000 of qualified wages for two quarters) for 2021.
  • A safe-harbor rule permits employers to determine their eligibility by using gross receipts from the previous quarter.
  • If an employer was operational for only part — or none — of 2019, it's still eligible to claim the credit.
  • An employer that receives PPP loans may still qualify for the ERC for wages that are not paid with forgivable PPP loan proceeds.

Key Takeaways for Expanded ERC

  • Refund opportunities for some businesses that took out a PPP loan in 2020 (as long as the same wages are not used for both).
  • The 20% decline in gross receipts for Q4, 2020 compared to Q4, 2019 could make an employer eligible for Q1, 2021.
  • Timing of the Round 2 PPP loan may be important to maximize both PPP loan and ERC.

Employee Retention Tax Credit Basics 

Tax Relief & Second Draw PPP Financing Opportunities for Businesses (Jan 12, 2021)

The Consolidated Appropriations Act (CAA), signed into law in December 2020, is known for authorizing a second round of direct stimulus payments to individuals and extending enhanced unemployment benefits. But the law also provides tax relief and new financing opportunities for businesses affected by the COVID-19 pandemic. Following are highlights of key provisions: 

New PPP Financing Available

Eligible small businesses that previously received forgivable Paycheck Protection Program (PPP) loans may apply for a “second draw,” provided they’ve used or will use all the proceeds of their original loans by the time a second draw is disbursed. Generally, to qualify for an additional loan, you must have 300 employees or less and demonstrate a 25%-or-more decline in gross receipts in any quarter of 2020 compared to the same quarter in 2019. (Special eligibility rules apply to businesses that didn’t exist during some or all of 2019.)

Like the first round of PPP loans, you may receive up to 2½ times your average monthly payroll costs in 2019 (or in the one-year period preceding the date of the loan), but new loans are capped at $2 million. Businesses that are ineligible for a second draw may be able to increase the amount of their original PPP loans. Also, the CAA permits certain businesses that didn’t previously receive PPP loans to apply for them. But you will have to act quickly: Applications are due by March 31, 2021.

PPP Expenses Deductible

The CARES Act, which established the PPP program, provided that the amount of PPP loan forgiveness isn’t included in a borrower’s gross income for tax purposes. But last year, the IRS essentially erased this tax benefit by ruling that borrowers may not deduct expenses paid with the proceeds of loans that have been (or likely will be) forgiven.

The CAA restores the tax advantages of loan forgiveness by overruling the IRS and providing that otherwise deductible expenses remain deductible regardless of whether a loan is forgiven.

Allowable Loan Uses Expanded

As before, to qualify for forgiveness, applicants must use at least 60% of a PPP loan’s proceeds for payroll. But the CAA expands the allowable nonpayroll uses beyond mortgage, rent and utility expenses, to include:

  • “Covered operations expenditures” for software or cloud computing services that facilitate business operations,
  • “Covered property damage costs” related to vandalism or looting due to public disturbances in 2020 and not covered by insurance or otherwise reimbursed,
  • “Covered supplier costs” for goods that are essential to business operations and meet certain requirements, and
  • “Covered worker protection expenditures” to comply with health guidelines, such as expenses for creating drive-through window facilities or air filtration systems.

The CAA also clarifies that payroll costs, for PPP purposes, include employer-provided group life, dental, vision or disability insurance.

Other PPP Updates of Interest

Modified covered period. The “covered period” is the one during which PPP loan proceeds must be spent on eligible expenses in order to qualify for forgiveness. Originally, the covered period was eight weeks from the time the loan is made. Later, it was extended to 24 weeks, although borrowers that received loans before June 5, 2020, could choose either an eight-week or 24-week period. Now, borrowers can choose a covered period of any length between eight and 24 weeks.

Simplified forgiveness application procedures. The CAA allows businesses that borrow less than $150,000 to simply certify that they meet the 25% revenue loss requirement. However, they must substantiate compliance with this requirement when (or before) they submit a forgiveness application. Finally, the CAA simplifies the forgiveness application for PPP loans under $150,000.

Year-End Stimulus Bill: Christmas Eve Update (Dec. 24, 2020)

To provide the most recent update on the COVID-19 stimulus bill and clarify our previous release, President Trump has pushed the bill back to Congress to increase the individual economic stimulus payments from $600 per individual to $2,000. The House GOP rejected the President’s request, and talks will continue. The President may ultimately fight the bill up through the January 3rd deadline, or Congress may have enough votes to override any veto measure.

Year-End COVID-19 Stimulus Bill Passes (Dec. 24, 2020)

As 2020 concludes, there has been hope that the Federal government could implement a stimulus program designed to provide additional aid to individuals and small businesses during the COVID-19 pandemic. While this bill has not yet been signed by the President, it has passed both the House and the Senate, and the final details have started to become clear this week.

Individual Stimulus Payments

The bill contains a second round of individual stimulus payments at $600 for an individual and $1,200 for a married filing jointly couple. There will also be $600 provided for each dependent under the age of 17. The second round of stimulus payments will have the same basic structure as the first round of payments in terms of income phaseouts and how the ultimate credit will be calculated on the taxpayer’s 2020 tax return. The stimulus payment begins to phase out at $75,000 AGI for an individual and $150,000 for a married filing jointly couple. At the time of this article, President Trump has requested Congress increase the individual stimulus payments to a higher amount before signing the bill into law.

PPP Tax Impact

An unexpected technicality has led many businesses to learn that their uses of PPP funds would not be deductible, essentially creating a “taxable forgiveness” scenario. This result was determined from an IRS interpretation, and was not Congress’s intent with the Paycheck Protection Program. The new law amends the original version and specifically allows a deduction for the use of forgivable PPP loan expenses, which will mean the IRS’ interpretation will no longer be applied to the PPP loans. The amendment will truly allow for the PPP loans to be forgiven ‘tax-free.’ This amendment applies to all PPP loans, even those that have already been forgiven.

Eligible PPP Expenses Added

We will keep this section more high-level, but additional business expenses will now qualify towards PPP loan forgiveness. This includes eligible software and cloud computing expenses, costs relating to property destruction from vandalism in 2020 not covered by insurance, certain costs relating to supplier orders, and certain expenses designed to provide employee protection from COVID-19. Borrowers will still need to use 60% of their PPP funds for payroll expenses to receive full forgiveness.

Additional PPP Funding

The new law creates a second round of PPP funding for eligible small businesses, nonprofit organizations, and self-employed individuals. To be eligible for the second round of funding, an applicant must have 300 or fewer employees and have experienced a 25% reduction in gross receipts for any quarter in 2020 compared to that same quarter in 2019.

The same calculation will be used to determine PPP funding amounts (2.5x average monthly payroll in 2019) except for the hospitality industry, which will be able to take out additional PPP loans equal to 3.5x their average 2019 monthly payroll.

EIDL Advance Changes

The new law also appears to remove the taxability of the EIDL advance and remove the requirement that the EIDL advance be deducted from the PPP forgiveness calculations. Additionally, there will be funding available for business entities and self-employed individuals who did not participate in the first round of PPP funding.

Simplified Forgiveness for Smaller PPP Loans

A one-page forgiveness application form will now automatically be provided for PPP loans under $150,000, and they will not be subject to the FTE or employee pay rate forgiveness reductions put in place for other PPP loans.

Grants for Event and Venue Operators

Additional SBA grants designed to replace a significant amount of revenue will be available for identified entertainment industries. Live venue operators, promoters, theatrical producers, performing art organizations, museum operators, movie theatre operators and talent representatives appear to fall under this category. Qualifying businesses will need to show a 25% revenue reduction for any quarter in 2020 compared to that same quarter in 2019.

Additional Business and Tax Provisions Included in Bill

  • The bill extends the date that any employee payroll tax deferral must be paid. The payroll taxes now must be repaid by December 31, 2021 as opposed to April 30, 2021.
  • FFCRA payroll credits have been extended from December 31, 2020 to March 31, 2021.
  • The bill authorized the SBA to pay an additional three months of principal and interest for eligible Section 7 loans beginning in February 2021.
  • The Employee Retention Credit has been extended to July 1, 2021. Additional flexibilities were also provided regarding the calculation of the credit. For the first two quarters of 2021, the applicable credit percentage was increased from 50% to 70%, and the employee qualified wage threshold has been increased to $10,000 per quarter as opposed to $10,000 on an annual basis. A business now also needs to have a 20% drop in quarter over quarter gross receipts as opposed to 50%.
  • It also appears that a business may qualify for both the Employee Retention Credit and PPP loan forgiveness under the current bill beginning in 2021.
  • Business meals will be 100% deductible in 2021 and 2022 so long as they are considered “restaurant” meals.
  • The 100% AGI limitation for charitable contributions has been extended into 2021. Additionally, for individuals who do not itemize their deductions, a Married Filing Jointly return with eligible charitable contributions can now qualify for a $600 “above the line” deduction as opposed to $300.
  • Permanent extension of the 7.5% AGI limitation for individual medical expense deductions, as opposed to 10%.
  • The bill also includes other miscellaneous business and individual credit extensions, as well as phaseout increases.

We will continue to monitor the progress of the bill and try to timely update our clients as the final bill becomes law. Additional commentary provided by The Journal of Accountancy has been linked here.

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If you have questions about this new bill, feel free to reach out to your point of contact at Baden Gage & Schroeder or email us at or call 1-800-830-2551.

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