Welcome to 2021…and More New Legislation to Digest
While I hope most of you could enjoy some downtime during the holidays, the same can’t be said for Congress. While the administration and members of Congress argued back and forth, we finally got another COVID-19 relief bill along with an omnibus spending package. This new tax legislation is the topic of today’s blog post.
For those of you who would like to review the actual bill, it is referred to as the Consolidated Appropriations Act, 2021, or HR 113 (CAA).
In today’s installment, I would like to concentrate on some of the new tax legislation’s business provisions and address some of your lingering questions from 2020.
Let’s get into some of the highlights of CAA:
- Congress allows expenses paid with tax-free PPP funds to be tax-deductible (Sec. 304 of the Act). This part of the new law, in essence, replaces Rev. Rul. 2020-27 which IRS issued in November and told us expenses paid with tax-free money would not be deductible. Hopefully, this simplification alleviates some of the angst we all faced for the last eight weeks or so. Remember that Congress makes the laws while the job of the IRS is to enforce those laws.
- The simplified loan forgiveness amount is increased from $50K to $150K (Sec. 307 of the Act). Many of you might recall the October 9, 2020 release of the SBA Form 3508S, made available for PPP borrowing of up to $50K. While the SBA form is just a series of questions, we pointed out that the form required the borrower to certify that whatever documentation the lender specified to confirm the proper use of the PPP funds had been provided. So once again, this is not an automatic forgiveness arrangement but rather a simplified process. The new law increases the applicability of the Form 3508S to borrowing of up to $150K. SBA is given 24 days after the date of enactment to develop the changes to the form. The law also mentions that borrowers should retain the proof of proper use of the PPP funds for four years.
- Taxpayers who utilized Employee Retention Credits (ERC) are no longer prohibited from also having PPP loan forgiveness (Sec. 206 of the Act). This change puts the ERC in the same light as the sick leave credit provisions. The point to remember is that both PPP loan forgiveness and the ERC (as well as sick leave credits) may not be used for the same payroll/payroll period.
- Sick leave credits are extended through March 31, 2021 (Sec. 286 of the Act). Under the FFCRA, employees (or their families) impacted by the coronavirus could receive sick leave benefits. The employer received a refund for the sick leave provided by reducing subject payroll and payroll taxes. The credit was originally for payroll from April 1, 2020, through December 31, 2020. Applicable payroll is now extended through March 31, 2021. While not explicitly stated, it would stand to reason that impacted employees will be on a rolling 12-month period instead of starting over on January 1, 2021. In other words, in my opinion, lacking any future guidance, a COVID-19 impacted employee who received the maximum sick leave of 14 days back in June of 2020 would not be entitled to benefits during the first quarter of 2021 unless the circumstances occurred under a different provision of the law. An example would be when an employee was initially diagnosed with COVID-19 and is now impacted because while not being diagnosed, the employee has to care for a diagnosed family member, schools or daycare centers are shut down, etc. The law also provides for self-employed persons to use their income from 2019 rather than 2020 to calculate their credit.
- Employees who deferred their payroll taxes have longer to repay the deferral (Sec. 274 of the Act). In August of 2020, President Trump issued an executive order permitting employees to defer their portion of social security taxes for the balance of 2020. Initially, as outlined in IRS Notice 2020-65, employees were required to repay the deferral during the period January 1 through April 30, 2021, or be subject to penalty. The repayment period is now extended through December 31, 2021.
- The new law introduces another round of PPP borrowing (Sec. 301 of the Act). The new program is being referred to as “second draw PPP.” According to the Act’s guidance, this provision will be available beginning on or about January 6 (assuming SBA and lenders are ready to go) and run through March 31, 2021. There are some changes from the previous PPP eligibility requirements:
- An employer with 300 or fewer employees (was 500 employees previously)
- The employer used up their first PPP draw (or never had a PPP loan previously)
- The employer can show at least a 25% reduction in gross revenue for any quarter in 2020 as compared with the same quarter in 2019
- Sole proprietors and independent contractors are eligible, as well as nonprofit organizations
- Interest rates, qualified uses of the borrowed funds and timing for forgiveness are essentially the same as the “first draw” PPP rules.
There are many other provisions in the new law (it’s over 6,500 pages!), such as the $600 recovery rebate checks and tax extenders. As mentioned earlier, we will cover more of these issues during our January 26 webinar.
The purpose of today’s installment was to hit the “high points” as I see them from a tax professional perspective.
Stay tuned and buckle up!
by Tom O’Saben, EA