Understanding the Consolidated Appropriations ActJan 08, 2021
As stated in our previous article, “Revenue Ruling 2020-27 and Impacts on 2020 Taxes”, legislation surrounding COVID-19 relief for Americans and small businesses is ever-evolving. On December 24th, 2020, President Donald Trump signed into law the Consolidated Appropriations Act, which was approved by both the House and Senate earlier that week. It includes provisions such as a second round of economic impact payments and Paycheck Protection Loans (PPP2), revises Paycheck Protection Program and Economic Injury Disaster Loan (EIDL) treatment, and provides several billion dollars of additional funding to businesses and organizations in our country affected by the current pandemic.
- $284 billion for PPP2 loans to the Small Business Administration (SBA), and $20 billion to EIDL Grants to low-income communities.
- $15 billion to shuttered live venues, such as independent movie theaters and cultural institutions, and $12 billion to help businesses in low-income and minority communities.
- $166 billion for a second round of stimulus payments: $600 to individuals, $1,200 to married couples, and $600 for each additional independent, depending on income constraints.
- $120 billion to provide $300 in supplemental unemployment assistance and extends the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation program to March 14th, 2021.
- $25 billion in rent aid and an extension of the national eviction moratorium through January 31st, 2021.
- $13 billion for emergency food assistance and an increase for six months of SNAP benefits.
- Up to $156 billion to transportation funding, colleges and schools, health-related expenses, and broadband expansion.
- Simplifies the PPP Loan forgiveness process for loans under $150,000.
- Repeal of EIDL advance deduction from PPP loan forgiveness.
- Extension of subsidy by SBA of other 7(a) loans.
- Restores tax deductibility of eligible PPP-covered business expenses for the 2020 tax year.
- Temporarily allows 100% business expense deduction for business meals (rather than 50%) for tax years 2021 and 2022.
- Extends employer tax credits for paid sick leave and expanded family and medical leave voluntarily provided to employees until March 31, 2021
Paycheck Protection Program Changes
When the IRS released Revenue Ruling 2020-27 in May 2020, many PPP recipients were shocked to hear that they were not planning to allow businesses to deduct any expenses covered by the loan. In the first round of legislation, Congress left this area a bit grey, and the IRS issued its interpretation of the tax deductibility of these expenses. They decided that recipients of PPP funds who received forgiveness or had a reasonable expectation of forgiveness were not to deduct the payroll, rent, mortgage interest, and utility expenses they incurred during the covered period of the loan on their 2020 tax returns. The American Institute of Certified Public Accountants (AICPA) and many business owners pressured Congress to specify their stance and conveyed that disallowing tax deductibility is contrary to their initial intent with the implementation of the CARES Act. In the Consolidated Appropriations Act, Congress made the following revisions to the treatment of PPP loans:
For first-time borrowers-
- Have 500 or fewer employees
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Not-for-profits, including churches
- Accommodation and food service businesses with less than 300 employees per physical location
For second-time borrowers-
- Have 300 or fewer employees
- Have used or will use with the full amount of the first PPP loan
- Can show a 25% gross revenue decline in any 2020 quarter when compared with the same 2019 quarter
- Makes PPP2 loans available to Sec. 501(c)(6) businesses
- Allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them
- Allows tax-deductibility of both PP1 and PP2 loan-covered expenses
PPP2 Loan Terms
Many of the terms of the PPP2 loans are similar to those of the first round of funding. Costs eligible for loan forgiveness include payroll, rent, mortgage interest, and utilities. However, PPP2 loan forgiveness also considers covered worker protection and facility modification expenses (including PPE), expenses to suppliers that are essential at the time of purchase to the business’s current operations, and covered operating costs such as software, cloud computing, and accounting services as eligible expenses. The maximum loan amount has also been decreased from $10 million to $2 million with the second round of funding. Businesses can apply for a loan up to 2.5x their average monthly payroll costs (3.5x for businesses beginning with NACIS Code 72- hotels and restaurants) and can use 2019 or 2020 payroll figures to compute this amount. The covered periods can be elected as 8 or 24-week periods and have been extended for all loans issued until March 31st, 2021.
Businesses are ineligible for applying for PPP funds if they are:
- Not in operation on February 15th, 2020, or earlier
- Receiving Shuttered Venue Operator Grants
- Publicly traded
- Lobbying organizations
- Affiliated with entities in the People’s Republic of China
- Registered under the Foreign Agents Registration Act
- President, Vice President, head of an Executive Department, Member of Congress, or their spouse
- Entities listed in 13 C.F.R 120.110, unless otherwise made eligible
In 2020, many business owners and the associates assisting them with forgiveness were confused by the different forms available and the lack of clarity on which one they should use. For this reason, Congress included a simplified loan forgiveness process stipulation for PPP loans issued that are $150,000 or less. The SBA has 24 days to prepare a form for the simplified process, which:
- It cannot be longer than one-page
- Report loan amount, # of employees retained, and estimate of loan amount spent on payroll
Borrowers are encouraged to retain records for up to four years, and the SBA may perform an audit if incompleteness or fraud is suspected.
Businesses will have until March 31, 2021, to apply or until funds run out, whichever is first. While the banks are not accepting applications at this time, you must review the requirements above to determine if your business will be eligible. The banks are awaiting guidance from the SBA based on the changes; then they will open their portals to accept new applications.