Highlights of the 2020 Law - Businesses

 As usual, this year brings a new batch of tax laws for business and individual tax returns. This post will outline some of the major changes for businesses. If you are looking for individual tax changes you can go here.

Article Highlights

• Paycheck Protection Program (PPP) and Frequently Asked Questions
• Employee Retention Tax Credit
• Business Meals
• Employer-Provided Educational Assistance 
• Extension o Deferred Payroll Taxes
• Depreciation for Residential Rental Property
• NOL Rules for Farming Losses
• Work Opportunity Tax Credit
• Credit for Alternative Fuel Vehicle Refueling Equipment
• Credit for Fuel Cell Vehicles

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law.  The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). 

The entire text of the Consolidated Appropriations Act of 2021--all 5,593 pages--can be found here.

This post provides an overview of the many tax provisions included in the legislation that will affect businesses. 

Paycheck Protection Program (PPP)

CAA makes available approximately $284.5 billion in new PPP funding and reopens the PPP for first- and second-draw loans on terms that are generally favorable to businesses.  The application period for PPP Round 2 loans will end on March 31, 2021.

Frequently Asked Questions about the PPP

What is the Paycheck Protection Program?

The PPP is a loan program that allows eligible borrowers to obtain loans on favorable terms to cover payroll and other eligible expenses.  Under the original program, loan proceeds could only be used for payroll costs, rent payments, mortgage interest payments, and utility payments.  

Effective December 27, PPP loans (including existing loans) may be used for additional categories of non-payroll expenses including operating expenses, costs to repair property damage, costs for supplies, and expenses for protecting workers.

This loan program is for the specific purpose of helping eligible borrowers affected by the coronavirus pandemic to continue paying employees and to keep their doors open for business.  To the extent the PPP loan is promptly used to pay eligible expenses, the loan never has to be repaid.

Who is eligible for a first- or second-draw PPP loan?

In general, you are eligible for a first-draw PPP loan if you employ fewer than 500 employees (full-time and part-time) who live in the United States, AND you were in operation on February 15, 2020. Businesses, nonprofit organizations, self-employed individuals, sole proprietors, and independent contractors may apply.  

You must certify on the PPP loan application that “current economic uncertainty makes the loan request necessary to support your ongoing operations.”

You are eligible for a second-draw PPP loan if 

1. you have or will have used your first-draw PPP loan by the time you receive the second-draw PPP loan; 
2. you have no more than 300 employees; and 
3. you experienced a decline in “gross receipts” of at least 25% in any quarter of 2020 compared to the same quarter of 2019.  (Special rules apply for businesses that did not operate in 2019.) 

“Gross receipts” include all revenue in whatever form received or accrued from any source.  The amount of a forgiven PPP loan is excluded.  As with first-draw borrowers, second-draw borrowers must certify that the loan is necessary to support ongoing operations.

Do independent contractors count as employees for purposes of PPP calculations?

No.  Independent contractors can apply for a PPP loan on their own; the entities that engage them cannot count them for purposes of a PPP loan application.

I don’t have employees.  Can I still qualify?

Yes.  The rules issued under the CARES Act state: “You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual . . . .”  In that case, you must submit documents such as payroll processor records, payroll tax filings, Forms 1099-MISC, income and expenses from a sole proprietorship, or other documents sufficient to demonstrate the qualifying loan amount.

Can I apply for a PPP loan if I am receiving unemployment assistance?

Yes, but proceed with caution. There is no restriction on receiving both benefits, but you cannot use the PPP loan to cover your own compensation while at the same time receiving unemployment benefits.  If you are receiving unemployment benefits, you can use your PPP loan for other business expenses, such as other employees’ compensation, rent, mortgage interest, utilities, operating costs, property damage costs, and supplier costs.

At least 60% of the forgiven loan amount must be used for payroll costs; if you use all or most of your loan for non-payroll expenses, therefore, the forgivable amount may be low.

How do I apply for a PPP loan?

You will need to complete a PPP Round 2 loan application and submit the application with the supporting documentation to an approved lender.  The SBA has released model first-draw and second-draw PPP loan applications (which individual lenders may modify).

You should contact your existing lender or lending institution where you maintain your bank accounts.  Many participating lenders are accepting applications only from existing customers.  Lenders accept PPP applications through their own online portals.  Unlike applying for an EIDL, you cannot apply for a PPP loan directly with the SBA.  If your existing bank is not participating in the program or is not accepting PPP Round 2 applications, you may wish to apply with a community financial institution that is accepting applications from new customers.  

If you need additional help finding a qualified lender, this SBA search tool will identify lenders near you.

When can I apply?

PPP Round 2 applications will be accepted through March 31, 2021, or until the funds for the program are exhausted, whichever is sooner.  APPLY AS SOON AS YOU CAN.

What is the maximum amount I can borrow?

It’s a formula amount: for businesses other than NAICS sector 72 entities (e.g., and restaurants and hotels) it is 2.5 times your average monthly payroll expenses for any of the following time periods: 

(1) the 12 months before you apply for the loan, 

(2) calendar year 2019, or 

(3) calendar year 2020.  

Choose the time period that reflects the largest payroll costs if you want to maximize your loan amount.  Under the PPP Round 2, restaurants and hotels are allowed to borrow 3.5 times their average monthly payroll expenses.

The Treasury Department has released guidance to help general partnerships, sole proprietors, and independent contractors calculate payroll.  See Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type, for complete instructions.

If you are a seasonal business, under PPP Round 2 you can borrow 2.5 times your average total payments for payroll costs incurred or paid in any 12-week period between February 15, 2019 and February 15, 2020.

If you are a startup business that did not exist during the one-year period before February 15, 2020, under PPP Round 2 you can borrow 2.5 times your average total monthly payroll costs paid or incurred as of the date you apply for the PPP loan.

Salary and wages above $100,000 per employee are excluded from the calculation of average monthly payroll, but all benefits the business pays on behalf of such employees (e.g., health insurance, retirement benefits, group life insurance, and disability, vision, and dental insurance benefits) are counted in the payroll calculation. 

Finally, there’s an absolute cap of $10 million on every first-draw PPP loan.  Second-draw PPP loans are capped at $2 million.

What information should I gather in order to apply for a PPP loan?

You should have evidence of paying payroll or self-employment taxes.  Your lender may require any or all of the following information for the relevant period; check before applying:

• organizational documents for your business;
• 2019 and 2020 profit and loss statements to show revenue loss during 2020;
• 2019 and 2020 business tax returns:
• for partnerships, include IRS Form 1065 and Schedule K-1
• for sole proprietors and independent contractors, include IRS Form 1040 Schedule C and Form 1099-MISC
• 2019 and 2020 IRS quarterly 940, 941, or 944 payroll tax reports;
• documentation for the following:

• gross wages for each employee
• paid time off for each employee
• vacation pay for each employee
• family medical leave pay for each employee
• state and local taxes assessed on the employee’s compensation for each employee
• documentation to support the total health, dental, vision, life and disability insurance expenses and retirement expenses incurred as a part of payroll expenses

What can I use the loan proceeds for?

The Economic Aid Act expanded what loan proceeds can be used for.  Permissible uses for existing and new PPP loans now include:

• payroll costs (including employer expenses related to providing health, dental, vision, disability and life insurance benefits and retirement benefits);
• costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• payments of interest on any mortgage obligation (but not to pay principal or prepay a mortgage);
• rent (including rent under a lease agreement);
• utilities (including electricity, water, gas, sewage, telephone, cell phone, Internet, and transportation costs);
• interest on any other debt obligations that were incurred before the covered period (though such expense is not eligible for PPP loan forgiveness);
• operating expenses, including payments for any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records and expenses;
• costs related to property damage and vandalism or looting resulting from public disturbances that occurred in 2020 and that were not covered by insurance or other compensation;
• worker protection expenses including any operating or capital expenditures to adapt business activities to comply with government-issued COVID-19 safety guidelines (g., air pressure ventilation or filtration systems, physical barriers to ensure social distancing, a drive-through window, an expansion of indoor or outdoor business space, onsite or offsite health-screening, or the purchase of personal protective equipment); and
• the costs of supplies that are essential to your operations at the time of purchase, made pursuant to a contract in effect prior to your covered loan period, or with respect to perishable goods, in effect before or at any time during your covered loan period.

When will I have to repay the loan?

You will not have to start making payments on the loan until after you submit your forgiveness application and the SBA pays the forgiveness amount to the lender.  You have 10 months from the end of your covered loan period to submit your forgiveness application.  If you do not submit your application by such time, you will need to begin making payments on the loan to your PPP lender.

For PPP loans made before June 5, 2020, the full amount will be due within 2 years of when you received the money.  If you received your PPP loan on or after June 5, you will have 5 years to repay the loan.  Pre-June 5^th loans can be extended up to 5 years if the lender and borrower mutually agree.  If you want to pay earlier, there are no penalties for pre-payment.

Are there any other PPP loan terms I should know about?

• Interest rate will be 1%.
• No collateral will be required.
• No personal guarantees will be required.

Will all or a portion of my PPP loan be forgiven?

The loan amounts will be forgiven so long as:

• the loan is used to cover payroll costs and other eligible expenses over the 8- to 24-week period after the loan is made; and
• for loans greater than $50,000, employee and compensation levels are maintained.
• Note: An October  2020 an Interim Final Rule exempts PPP loans of $50,000 or less from loan forgiveness reductions based on workforce and wage reductions.

Earlier in the program, to qualify for full forgiveness borrowers had to spend the funds over the 8-week period after the loan was made.  The law was amended to give borrowers the option to spend the funds over a longer 24-week period.  The Economic Aid Act clarifies that a borrower may choose a covered period between 8 weeks and 24 weeks and submit the forgiveness application before the end of the 24-week period if they use their PPP funds early.

PPP borrowers are eligible for full loan forgiveness so long as they use at least 60% of loan proceeds for payroll expenses, with no more than 40% of loan proceeds going to eligible non-payroll expenses.

Reductions to Forgiveness:  For loans greater than $50,000, forgiveness is reduced based on workforce reductions and wage reductions.  

For borrowers of loans over $50,000, some reductions in workforce will not count against you for the purpose of loan forgiveness.  Loan forgiveness will not be impacted if:

• you laid off workers between February 15, 2020 and April 26, 2020 and then rehired them by December 31, 2020 (for loans made before the enactment of the Economic Aid Act on December 27, 2020) or by the last day of your covered loan period (for loans made on or after December 27, 2020).
• you fire an employee for cause; an employee voluntarily resigns; or an employee voluntarily requests and receives a reduction in hours.
• you have laid off employees, and then:

• made a good faith, written offer to rehire,
• documented the employee’s rejection of that offer,
• informed the state unemployment insurance office within 30 days of the employee’s rejection of the offer (employees who reject offers of reemployment may forfeit eligibility for continued unemployment compensation), and
• documented your inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (for loans made before the enactment of the Economic Aid Act on December 27, 2020) or by the last day of your covered loan period (for loans made on or after December 27, 2020).

• you can document in good faith that your business is unable to return to the same level of activity it was operating at before February 15, 2020, due to compliance with operating restrictions related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Is loan forgiveness automatic?

No.  You will need to submit an application for forgiveness directly to the lender that provided your PPP loan. 

Borrowers of loans up to $150,000 will submit a streamlined 1-page PPP loan forgiveness application, known as the PPPLoan Forgiveness Form 3508S.  As required by the Economic Aid Act, the form only requires you to describe the number of employees you were able to keep on payroll as a result of the loan, estimated total payroll costs, the total amount of your PPP loan, and the requested forgiveness amount.  You must also attest that you accurately completed the forgiveness application and complied with the PPP loan requirements. 

Borrowers of loans exceeding $150,000 will submit either the PPP Loan Forgiveness Form 3508 (long form) or the Form3508EZ.  The “EZ” loan forgiveness application may be submitted by borrowers who can satisfy any of the following requirements:

• the borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the most recent quarter before the covered loan period, and did not reduce the number or hours of employees between January 1, 2020, and the end of the covered loan period (ignoring reductions related to employees who refused offers of rehire and whose positions could not be filled with similarly qualified workers).
• the borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the most recent full quarter before the covered loan period, and was unable to return to the same level of business activity it was operating at before February 15, 2020, due to compliance with official requirements related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Is my PPP loan forgiveness amount reduced by the EIDL advance I received?

No.  The Economic Aid Act amends the CARES Act to remove the requirement that borrowers subtract the amount of any EIDL advance (i.e., the $1,000 to $10,000 EIDL grant received from the SBA) from the PPP loan forgiveness to which the borrower is otherwise entitled.  You are now eligible for full forgiveness of your PPP loan even if you also received an EIDL advance.  This rule applies to both prior and new PPP loans.  The SBA will issue rules to extend this benefit to borrowers whose loans have already been forgiven and whose EIDL advance was deducted from the forgiven amount.

Is the amount forgiven taxable?

Maybe.  The amount of any loan forgiveness will not be considered gross income under the federal Internal Revenue Code, although state and local tax authorities may or may not tax the forgiven amount.

May I claim tax deductions for expenses paid with my PPP loan?

Yes.  The Economic Aid Act clarifies that otherwise deductible business expenses paid for with PPP loan proceeds are eligible for federal tax deduction.  This rule applies even if business expenses are paid for with the proceeds of a PPP loan that is fully forgiven.  State and local authorities may take a different approach, so double check state and local requirements when you are preparing your business tax filings.

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts.  If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.  If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Can I apply for more than one PPP loan?

Yes.  As discussed above, businesses with up to 300 employees that have used or will soon use their first-draw PPP loan and have experienced a drop in gross receipts of at least 25% during any quarter of 2020, as compared to the same quarter of 2019, may apply for a second-draw PPP loan. 

Will the details of my PPP loan be made public?

Yes.  On November 5, a federal judge ordered the SBA to provide the names, addresses, and precise loan amounts of all individuals and entities that obtained PPP and EIDL loans by November 19, 2020.  Loan data through August 20, 2020 is available on the SBA website. 

Employee Retention Tax Credit

The ERC was first introduced under the CARES Act in March 2020, so it is not new. What is new is that it received some retroactive improvements allowing more employers to qualify for the credit. 

Also, the CAA extends the ERC through June 30, 2020.

Here is a summary of the changes.

Business Meals

Under Sec 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, for 2021 and 2022, taxpayers will be able to deduct 100% of business meal expenses where the food or beverages is provided by a restaurant, provided:

• The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business. 
• The expense is not lavish or extravagant under the circumstances. 
• The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages. 
• The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact. Final regulation 1.274-12(b)(3) defines “business associate” as a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective. 

Employer Provided Educational Assistance

Educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The CARES Act expanded the definition of expenses to include employer payments of the employee’s student loan debt. But this special allowance was only available for payments made between March 27, 2020 through December 31, 2020. The Act extends the exclusion for loan repayments made through 2025.

Extension of Certain Deferred Payroll Taxes

In August, the president issued a memorandum that allowed employers to elect to defer employees' payroll taxes from September 1, 2020 to December 31, 2020. Under IRS Notice 2020-65, employers were required to increase the withholdings on the employee's pay and to pay the deferred amounts between January 1, 2021 and April 30, 2021. If not paid by April 30, 2021, then the employer could be liable for penalties and interest on any remaining deferred tax liability. 

Under the CAA, the repayment period for the deferred taxes has been extended through December 31, 2021.

Depreciation for Residential Rental Property Owned by Electing Real Estate Businesses

For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) imposed new limitations on deductions for business interest expense. However, real property businesses can elect out of the TCJA business interest expense limitations by choosing to depreciate nonresidential real property, qualified improvement property, and residential rental property straight-line over 30 years, under the so-called alternative depreciation system (ADS). When made, the election applies to such property placed in service in 2018 and beyond.

New law: For tax years beginning in 2018 and beyond, the TCDTRA assigns the 30-year depreciation period to residential rental property that was placed in service before 2018, if the property:

• Was already being depreciated under ADS and
• Is held by a real property business that elects out of the TCJA business interest expense limitations.

Before this change, such property had to be depreciated over 40 years under the pre-TCJA ADS rules.

NOL Rules for Farming Losses

Taxpayers with net operating losses (NOLs) from farming are allowed to choose to carry back those NOLs to the two preceding tax years. They are also allowed to waive the carry-back privilege and instead only carry NOLs forward to future tax years. As a tax relief measure, the CARES Act allows NOLs that arise in tax years beginning in 2018-2020 to be carried back for five years

New law: The COVIDTRA allows farming businesses that chose the two-year NOL carry-back option before the CARES Act became law to elect to retain that two-year carry-back rather than follow the five-year carry-back rule set forth in the CARES Act. The new law also allows farmers who previously waived the carry-back privilege to revoke the waiver. These changes apply retroactively as if they were included in the CARES Act.

Work Opportunity Tax Credit

Employers can claim the work opportunity tax credit (WOTC) for hiring members of 10 targeted groups. Before the CAA, the WOTC only applied to first-year wages paid to qualifying employees who were hired before 2021.

New law: The TCDTRA extends the WOTC to cover first-year wages paid to qualifying employees who are hired in 2021-2025.

Credit for Alternative Fuel Vehicle Refueling Equipment

A personal and business federal income tax credit can be claimed for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling equipment.

New law: The TCDTRA extends this break to cover qualifying 2021 expenditures.

Credit for Fuel Cell Vehicles

A federal income tax credit can be claimed for vehicles propelled by chemically combining oxygen with hydrogen to create electricity. The base credit is $4,000 for vehicles weighing 8,500 pounds or less. Heavier vehicles can qualify for bigger credits of up to $40,000. An additional $1,000 to $4,000 credit is available to cars and light trucks to the extent their fuel economy meets federal standards.

New law: The TCDTRA extends this break to cover qualifying 2021 purchases.

If you have any questions about the information discussed here just drop us a line.

For the latest tax updates be sure to follow us on Twitter, Facebook and LinkedIn. You can also visit our website at https://arndtcpas.com or give us a call at (417) 882-9000.f you have questions about how this COVID-19 tax legislation might apply in your situation, please give this office a call.