Christmas came early this year! As part of the Consolidated Appropriations Act of 2021, Congress has passed a stimulus package (“COVID-related Tax Relief Act of 2020”) that has provided a variety of useful provisions and clarifications for individual and business taxpayers alike. While not as comprehensive as the CARES Act passed earlier this year, it provides much-needed aid.

The full text of the bill has not yet been released. The U.S. Treasury, SBA and IRS have also not commented on the changes listed below. Many of the details, forms and processes are still being clarified over the next few weeks.

We will continue to follow this legislation as it becomes law and is implemented, but here is a high-level summary of some of the major items for taxpayers:

Payroll Protection Program (PPP) Updates for Business Taxpayers

PPP-Funded Expenses are now Fully Tax-Deductible

One of the biggest open questions concerning the PPP loans was whether expenses paid using these funds could be deducted for tax purposes. This issue was further complicated when the IRS announced that such expenses would not be tax-deductible, in apparent opposition to the intent of Congress. The new stimulus package settles this question by declaring that qualifying expenses funded with PPP proceeds (wages and salaries, utilities, and certain rent and mortgage interest) are now fully deductible for determining taxable income.

PPP Forgiveness is Tax-Exempt Income

Another open question regarding the PPP was the treatment of a forgiven loan. Under the new legislation, the forgiveness of the loan is considered tax-exempt income, and is treated for tax purposes like any other tax-exempt income (for example, it provides a basis for partners of partnerships and shareholders of S corporations).

EIDL Advances will not factor into PPP forgiveness calculations

If a borrower received both PPP and EIDL Funds previously, the EIDL Advance reduced PPP forgiveness. This provision was repealed.

PPP Second Draw Loans

These Loans are targeted at hard-hit businesses that employ 300 or fewer employees and that have used or will use the full amount of their first PPP Loan. The max loan amount is $2M based on the similar 2.5 months of average payroll expenses used on the PPP1 (3.5 times for restaurants and hotels – NAICS code 72 entities). Businesses must show a 25% decline in revenue in the 1st, 2nd, or 3rd quarter in 2020 as compared to the same quarters in 2019.

Simplified Forgiveness Applications of PPP1 Loans less than $150k

Borrowers with PPP1 loans up to $150k will be able to apply for forgiveness with the completion of either a one-page online form or paper form with minimal calculation detail. The SBA has been advised to release a new form within seven days of the enactment of the bill. We are expecting this around the first week of 2021.

MRPR Pro-Tip: Specifically, regarding the PPP loan updates, we have seen these provisions get changed back and forth all year between flexible and less flexible. Due to a short window of time before year-end and final details not being available, we do not recommend immediate decision changes.

We understand documentation may be streamlined yet will remain extremely important. With that, we advise you to continue forward on where you are at with calculations of Full-Time Employees (FTEs) and payroll costs for your covered period as well as preparing documentation – this is the most time consuming of the process, not the application itself. As always, the time frame for applying for forgiveness is 10 months from the end of your covered period. More clarification will be coming available and it may be prudent to wait and assess before submitting your application. Each situation will differ.

Updates for Business Taxpayers

Business Meals Fully Deductible until 2022

The new stimulus package provides that business-purpose meals purchased from a restaurant are 100% deductible for tax purposes if purchased before January 1, 2023. This provision is not retroactive to the 2020 tax year.

Several Credits Extended or Made Permanent

The new legislation extends or makes permanent a variety of business tax credits and deductions, such as the 179D deduction for energy-efficient commercial buildings. Businesses in many industry lines will benefit from these extensions.

Individual Taxpayers Updates

New Direct Payments to Taxpayers

Americans who file tax returns will soon receive an additional stimulus payment of $600 per taxpayer ($1,200 if married filing jointly), as well as $600 for every qualifying child in the taxpayer’s household (dependents above the age of 17, including college students are not included). The payment will phase out when the taxpayer’s income reaches a certain threshold ($75,000 for single filers, $112,500 for heads of household, and $150,000 if married filing jointly.) Additionally, the qualifying period is retroactive. If you did not qualify for a stimulus payment from the CARES Act but your income has been substantially reduced because of the COVID pandemic, you should consult your tax professional to see if you qualify to get a portion of the prior stimulus as well.

Expanded federal unemployment insurance benefits have been renewed.

The additional $600 per week of unemployment benefits that were in place and expired in July have been renewed, but at a reduced $300 per week for all workers receiving unemployment through March 14th, 2021.

Educator expense deduction expanded.

Teachers and other educators who claim the educator expense deduction can now include personal protective equipment (PPE) in their qualifying expenses. This is useful for teachers returning to in-person instruction.

Emergency financial aid grants not considered taxable income.

For students who receive emergency financial aid grants under certain circumstances, the income from those grants is no longer considered taxable forgiveness-of debt income. As the incoming Biden administration considers extending this type of aid to students encumbered with debt, this provision prevents a surprise to students who have debt forgiven by the emergency grant.

*At the time of publication, there is uncertainty that this Act will be signed. President Trump has vocalized his thoughts on a need for a larger stimulus checks for Individual Tax Payers requesting that the amount be $2,000 per individual vs. $600 per individual. 

We at MRPR will continue to monitor the new legislation and any future COVID stimulus considered by Congress. In the meantime, we hope you have a wonderful Holiday Season and we look forward to connecting in the New Year!