The Consolidated Appropriations Act (CAA), that was passed late last year, provides the much-needed stimulus and tax relief for businesses hit hard by the COVID-19 pandemic. Two of the provisions that business owners are most likely interested in are the $284 billion in funding for forgivable loans through the Paycheck Protection Program (PPP), for both first-time and so-called “second-draw” borrowers, and the extension of the Employee Retention Credit.
Deduction for PPP expenses
The CARES Act created the Paycheck Protection Program (PPP), which made forgivable loans available to eligible small businesses that suffered losses as a result of the pandemic. The CAA expands the allowable uses for PPP funds, provides a simplified forgiveness process for smaller loans and clarifies the proper tax treatment of loan proceeds and forgiven amounts.
Related Read: Paycheck Protection Program: Update to Loan Forgiveness Applications
The law clarifies that the forgiven portion of a PPP loan will not be included in a borrower’s gross income for federal income tax purposes. The CARES Act did not address whether expenses paid with the proceeds of forgiven loans would be tax-deductible, and the IRS, in Notice 2020-32, announced that such deductions would be disallowed. However, the CAA overrules Notice 2020-32 retroactively.
It confirms that PPP loan recipients will enjoy two tax benefits:
- Tax-free loan forgiveness; and
- Tax deductions for expenses funded by those loans.
Employee Retention Credit extended
The CARES Act established an employee retention tax credit to encourage businesses to keep employees on their payrolls despite the financial impact of the pandemic. The CAA extends the credit through the middle of 2021 and enhances many of its benefits.
Related Read: Make the Most of the Employee Retention Credit
Under the CARES Act, the fully refundable payroll tax credit was equal to 50% of up to $10,000 per employee in qualified wages paid after March 12, 2020 and before January 1, 2021. The credit was available for wages paid while a company’s operations were fully or partially suspended by a COVID-19 governmental order, or during a period that the business suffered a significant decline in gross receipts. Generally, a “significant decline” meant that gross receipts in a 2020 calendar quarter were less than 50% of gross receipts in the same calendar quarter in 2019. The significant decline was deemed to continue until gross receipts in a quarter reached 80% of gross receipts in the same quarter in 2019.
Although the credit was available to businesses of all sizes, those with 100 or fewer employees had an advantage — they could claim the credit for wages paid to all eligible employees, regardless of whether they continued working. Businesses with more than 100 employees could claim the credit only for wages paid to employees who were not working. The credit was not available to businesses that received PPP loans.
The CAA extends the credit to include qualified wages paid before July 1, 2021. It also provides several enhancements for the first two quarters of 2021:
- The credit increases from 50% to 70% of up to $10,000 in wages per quarter (previously, per year). In other words, the maximum credit in the first portion of 2021 is $7,000 per quarter (compared to $5,000 per year) for each eligible employee;
- The threshold for a “significant decline” in gross receipts decreases from 50% to 20%; and
- The number-of-employees threshold increases from 100 to 500. Thus, businesses with 500 or fewer employees may claim the credit for wages paid to all eligible employees, regardless of whether they continue working.
The CAA also makes several changes to the credit that applies retroactively to March 13, 2020. For example, PPP loan recipients may now claim the credit for qualified wages paid after March 12, 2020, so long as the credit is not claimed for wages paid with the proceeds of a forgiven PPP loan. In other words, a business may claim the credit if it pays qualified wages in excess of forgiven PPP loan proceeds used for payroll.
Review your situation
All businesses should review their tax situations carefully to be sure they are receiving the full tax benefits available to them. Because up to 40% of PPP loan proceeds can be used to pay rent, utilities and other non-payroll costs during the covered period, businesses who are also eligible for the Employee Retention Credit should maximize these non-payroll costs when applying for forgiveness, leaving more wages available for the credit. Businesses that wish to apply for PPP loan forgiveness, the Employee Retention Credit, or both, should also ensure that they have the necessary records to document wages and other expenses and the source of funds used to pay them.
Sidebar: Other business tax benefits
The CAA’s significant changes involve PPP loans and the Employee Retention Credit, but it also makes several other important changes that benefit businesses. For example, the Act:
- Allows businesses to deduct the full cost of otherwise deductible restaurant business meals in 2021 and 2022. Previously, business meals were only 50% deductible.
- Makes the Section 179D “Commercial Buildings Energy-Efficiency Tax Deduction” permanent.
- Extends the time for repaying employee payroll taxes for the period September 1, 2020, through December 31, 2020, which was deferred according to the president’s executive order. Previously, to avoid penalties and interest, these taxes had to be repaid by April 30, 2021. The CAA extends the repayment period through December 31, 2021, allowing businesses to withhold and remit those taxes ratably over the course of the year.
- Extends the Work Opportunity Tax Credit and empowerment zone credits through 2025.
Congress declined to extend mandatory paid sick and family leave under the Families First Coronavirus Response Act, which expired December 31, 2020. But, the CAA makes tax credits available to businesses with fewer than 500 employees if they voluntarily offer paid leave according to the Families First Coronavirus Response Act framework through March 31, 2021.
Related Read: What You Need to Know About the Families First Coronavirus Response Act
For more information, contact Joel Herman at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.