With the passing of the federal government’s latest stimulus bill, families, small businesses and tax preparers across America can breathe a sigh of relief and begin to digest what kind of impact these changes will have.
In order to help you understand how you will be affected by the latest economic relief measures and tax adjustments implemented by the Emergency Coronavirus Relief Act of 2020, we have highlighted the changes that we feel will impact the majority. We encourage you to take the time to read through and bookmark any items that you think may apply to you or your business. As discussions begin regarding 2020 tax preparation, it will be important to bring these up with your tax accountant.
Please note that the Small Business Administration (SBA) will be required to come out with guidance within 10 days of the new bill passing. However, it is reasonable to anticipate that complete guidance may take a bit longer. We will look to provide you with any further clarification as necessary.
Impact on Individuals/Families
2nd Round of Stimulus Checks
Taxpayers will each receive a $600 non-taxable stimulus check as well as a $600 check per dependent child. The bill excludes nonresident aliens, adult dependents and estates/trusts. Phaseouts begin at modified adjusted gross income (MAGI) of $75,000 single, $112,500 head of household and $150,000 married filing jointly based on the 2019 federal tax return.
Pandemic Unemployment Assistance (PUA)
PUA has been extended for an 11-week period providing an extra $300 per week to those on unemployment. The extension will run through March 14, 2021.
Charitable Donation Deduction
The ability for non-itemizing taxpayers to take up to a $300 ($600 for MFJ) above-the line deduction for cash contributions to qualified charitable organizations has been extended through 2021.
For taxpayers who do itemize, they may take an itemized deduction of up to 100% adjusted gross income (AGI) in 2020 and 2021 (previously limited to 60% of AGI).
Medical Expenses Deduction
The medical expense itemized deduction floor has been permanently set at 7.5% of adjusted gross income (previously 10%).
Child Tax Credit and Earned Income Credit
In order to prevent reduced tax credits caused by job loss, taxpayers will be permitted to use their 2019 income to determine eligibility and computation of these credits on their 2020 return (typically current year income is used).
Temporary Rules for Health Flexible Spending Arrangements
Health and dependent care FSA plans may now permit unused benefits to be carried over to the next tax year through 2021 plan years.
Impact on Small Businesses
Paycheck Protection Program (PPP) 2.0
Qualified businesses who can prove economic hardship will be eligible for a second PPP loan. As with the first program, funds are primarily intended to help cover payroll costs (must make up 60% or more of eligible costs for full forgiveness), however the new bill has expanded upon the definition of eligible costs.
Eligible costs have been expanded to include:
-Operations expenditures (ie. business software or cloud computing service used to support daily business functions)
-Property damage costs from 2020 riots that was not covered by insurance
-Worker protection expenditures (ie. costs incurred to adapt or comply with COVID-19 guidance set forth by DOH, CDC or OSHA from March 1, 2020 through current date)
In order to qualify for a second loan, a business must have been in business prior to February 15, 2020, have 300 or fewer employees and be able to prove a decline in gross receipts of 25% for any quarter of 2020 versus the same quarter of 2019. The amount of the loan will be based on 2 ½ months of average monthly payroll for most businesses or Schedule C line 31 divided by 12 and multiplied by 2 ½ months for sole proprietors (same as previous). A new addition to the guidelines is the calculation for certain businesses within the accommodation and food service industries, allowing for 3 ½ months of average monthly payroll. Also, Non-profits (501(c)(6)) organizations that are not lobbying organizations and have fewer than 150 employees are now eligible.
Additionally, if you did not request enough funding when you applied for your first PPP loan, you will now have the opportunity to request an increase in your original loan amount for what it should have been. Reasons for a request include but are not limited to if you requested for your employees but not yourself, if you requested for the original 8-week period before the 24-week period was approved or to include group insurance costs (ie. life, disability, vision and dental) in your average monthly payroll calculation.
Applications will become available as early as January 2021 and the deadline for application submission is currently set for March 31, 2021. Stay tuned to your bank to see when they begin accepting applications.
The new bill sets forth changes regarding PPP forgiveness that ultimately give loan recipients a better chance at full forgiveness.
Under the new legislation, the Economic Injury Disaster Loan (EIDL) advance will no longer reduce your PPP forgiveness amount. Meaning your entire PPP loan will be forgiven assuming you meet all of the eligibility requirements. This should be retroactive as well for those who already received forgiveness.
Originally, loan recipients marked the end of their covered period at either 8-weeks or 24-weeks after loan funds were received. The new bill amends the end of a covered period to be any time between 8-weeks and 24-weeks after loan funds were received, as chosen by the recipient. This is an important change because the date chosen may affect the full-time equivalent (FTE) calculation and could mean the difference between partial or full forgiveness.
Another important change regarding forgiveness is that the application process would be greatly simplified for those who received a loan of $150,000 or less (previously $50,000 or less).
It is important to note that the forgiveness application deadline has not changed. Per the PPP Flexibility Act of 2020, loan recipients have up to 10 months from the last day of the covered period to apply. If you have received any communications from your bank requesting payment, you can refer them to this.
2nd Round EIDL Advance
An additional $20 billion in EIDL grant funds has been approved, specifically targeting businesses in low-income communities. This could prove to be beneficial for businesses that were eligible and did not receive the full $10,000 amount in the first round. In order to qualify for the advance, the business must be in a low-income community and have suffered an economic loss of 30% or more during an 8-week period between March 2, 2020 and December 31, 2021 versus the same 8-week period in the prior year. It is believed that the SBA will contact eligible recipients.
PPP and EIDL
The new bill provides revised clarification on the tax implications of CARES Act funding, which overturns the previously released guidance in IRS Rev. Rul. 2020-27.
There is NO tax effect for:
PPP and EIDL advance funds are still not considered income and any eligible business expenses paid with those funds will be deductible.
Also, although the EIDL loan does not have any tax effect (as it is reported on the balance sheet), it is worth noting that any interest paid on an EIDL loan will be deductible.
Employee Retention Credit
One of the biggest potential tax saving opportunities under the new legislation is that qualifying employers will be eligible for the Employee Retention Credit regardless of if they received a PPP loan. Previously, you had to choose between one or the other.
Justifiably, any wages that are used to calculate the credit may not be included in the calculation of payroll costs for PPP forgiveness. Essentially, if you are eligible and choose to take advantage of both relief measures, payroll costs will first need to be allocated to calculate the credit, and any remaining payroll costs may be used towards calculating forgiveness.
Because of this "denial of double benefit" rule, it is strongly recommended that you hold off on applying for forgiveness until you have assessed your business's specific circumstances with a professional. Additionally, this change is intended to be retroactive for 2020. If you (like many other business owners) initially chose to forego pursuing the credit because you applied for and received a loan, you are encouraged to reach out to your accounting professional who can review 2020 operations and confirm if payroll costs are sizeable enough to take advantage of both programs or, if they are not, what program should take priority.
The improved availability of this credit is so important because it provides for a substantial tax credit of up to 50% of wages paid to employees after March 12, 2020 through December, 31, 2020 for the 2020 tax year. In order to be eligible, an employer must meet one of the following requirements:
1. The Operation of the business if fully or partially suspended due to orders from a government authority limiting commerce, travel or group meetings due to COVID-19.
2. Gross receipts are less than 50% of the gross receipts for the same quarter in the previous year until gross receipts are 80% of the gross receipts in the same quarter for the previous year.
Wages used to calculate the 2020 credit are limited to $10,000 per employee per year.
The bill extends the availability of the credit for wages paid from January 1, 2021 through June 30, 2021 and increases the credit ceiling amount up to 70%. The second requirement noted above is also amended to be more inclusive as follows:
(2) Gross receipts are less than 80% of gross receipts for the same quarter in 2019 (or for the prior quarter)
For example, for Q2 2021 you could compare to either Q2 2019 or Q1 2021 to determine eligibility.
Wages used to calculate the 2021 credit are limited to $10,000 per employee per quarter. It is also permissible for wages to be higher than the previous year (ie. you can increase wages in order to qualify for the credit).
Payroll Tax Credits for Paid Sick Leave and FMLA
In order to help protect employees from loss of income during COVID-19 related absences, the Families First Coronavirus Response Act (FFCRA) passed back in April required employers with less than 500 employees to provide up to 2 weeks of paid sick leave through December 31, 2020. In turn, employers are eligible for a tax credit to help offset the expense. The new legislation provides that eligible employers who continue to provide this sick leave beyond December 31, 2020 out of good faith will continue to receive the associated payroll tax credit through March 31, 2021.
Additionally, the general business credit available to employers for family and medical leave expenses has also been extended through March 31, 2021.
Deferral of Employee Social Security Tax Payments
Payment on employee Social Security taxes withheld for the period of September 1, 2020 through December 31,2020 may now be deferred through December 31, 2021 (previously April 30, 2021). Additionally, penalties or interest on amounts owed will not accrue until January 1, 2020.
Business Meals Allowance
Business related meals will be 100% deductible in 2021 and 2022. This is meant to help encourage spending in the restaurant industry which has been especially hard hit during the pandemic.