By Raffi Yousefian | Published 12/22/2020; Updated 01/11/2021 4:56:09 PM

Santa arrived a few days early this year. The long-awaited stimulus 4.0 has arrived, luckily during Christmas this time instead of tax season. Now we can skip out on our only holiday of the year and start preparing for the PPP loan application process. Nonetheless, let the games begin!

This article will summarize the relief and additional programs available for small businesses and nonprofits through The Consolidated Appropriations Act of 2021, the new bill passed by Congress last night (December 21). The bill is on its way to being signed into law by the President. We will update this information daily as more guidance is issued by the SBA and Treasury. 

Paycheck Protection Program (PPP) Loans

The bill provides multiple improvements to the first round of PPP and offers a new round of PPP loans to certain borrowers. 

For all-inclusive updated guidance on PPP 1, please visit EVERYTHING YOU NEED TO KNOW | PPP LOAN AND FORGIVENESS

For all-inclusive updated guidance on PPP 2, please visit EVERYTHING YOU NEED TO KNOW ABOUT PPP 2

Improvements to the PPP

This section explains the improvements to the first and second round of PPP as a result of this bill.

First and foremost, all borrowers – whether or not they have applied for forgiveness – can now deduct the expenses paid for using PPP funds, while not having to recognize the forgiveness of the loan proceeds as taxable income. Basically, they’re allowing you to double-dip, and who doesn’t like double-dipping? The tax-exempt income generated by the PPP loan proceeds will get included in the basis for a partner of a partnership or shareholder of S-corporation generally upon receiving loan forgiveness. More on this here

For first-round PPP borrowers who have not applied for forgiveness, and for second round PPP borrowers, the following will apply:

  • A borrower is no longer required to use an 8-week or 24-week covered period starting from the date they receive loan proceeds. Instead, they can choose to use any period lasting between 8 to 24 weeks. 
  • The final forgiveness amount will no longer be reduced by any EIDL grant received
  • Borrowers with loans of up to $150k are now eligible for “automatic” forgiveness. “Automatic” forgiveness means that borrowers can file a simple one-page application to request loan forgiveness and will not have to submit documentation. The simplified application form will be created within 24 days of the bill’s enactment. The SBA may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers will only be subject to audit if they commit fraud or use the proceeds for improper purposes, therefore they’re required to retain relevant records related to employment for four years and other records for three years. The one-page application will ask for:
    • the number of employees the borrower was able to retain because of the loan
    • the estimated total amount of the loan spent on payroll costs
    • the total loan amount
  • For loans between $150,000 and $2 million, borrowers are not required to submit documentation but must complete related certifications, retain relevant employment records for four years, and retain other records and worksheets for three years. As a reminder, lenders and/or the SBA may review and audit all PPP loans.
  • If your loan calculation has increased due to changes in the interim final rules you are allowed to work with lenders to modify your loan value regardless of whether the loan has been fully disbursed.
  • The Act clarifies that “other employer-provided group insurance benefits,” such as life insurance, are included in payroll costs.
  • There are new expenses that qualify for non-payroll costs:
    • Covered operations expenditures: 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.
    • Covered property damage costs: Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
    • Covered supplier cost: An expenditure made by an entity to a supplier of goods that are:
      • Essential to the operations of the entity at the time at which the expenditure is made, or
      • Is made pursuant to a contract, order, or purchase order that was either (1) in effect at any time before the covered period with respect to the loan, or {2) with respect to perishable goods, in effect before or at any time during the period.
    • Covered worker protection: These are operating or capital expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the CDC, or OSHA during the period beginning on March 1, 2020, and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires. Eligible costs are those related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. The term includes:
      • The purchase, maintenance, or renovation of assets that create or expand a drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an indoor, outdoor, or combined commercial real property; an onsite or offsite health screening capability; or other assets relating to the compliance with the requirements of certain protective guidance.
      • The purchase of covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or 0ther kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor.
      • Does not include residential real property or intangible property.
  • Seasonal businesses are more specifically defined and this definition applies to any loan made before, on, or after enactment including the forgiveness of the loan. A seasonal business is now defined as a business that:
    • operates for no more than seven months in a year; or
    • earned no more than 1/3 of its receipts in any six months in the prior calendar 
  • The safe-harbor date for restoring FTEs and wages has been changed from December 31, 2020 to the last day of the borrower’s covered period for all new loans (the deadline remains December 31, 2020 for loans issued on or before August 8, 2020). The other safe harbors (such as forgiveness not being reduced if the employer can document written offers to rehire individuals; an inability to hire similarly qualified employees, or an inability to return to the same level of business activity due to compliance with COVID-related guidance) still stands. 

Grants for Shuttered Event Venue Operators

Finally, there is some support for the nightlife and performing arts industries, if it’s not already too late. This program is available for a live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative. The SBA will make an initial grant of 45% of gross revenue earned in 2019, up to $10 million, followed by a second grant of up to 50% of the first grant, but the total of both grants cannot exceed $10 million. The grantee must be able to demonstrate a 25% loss in revenue. The grant proceeds must be used for the following:

  • Payroll costs
  • Rent, utilities or mortgage interest and principal,
  • Interest on other debt outstanding prior to February 15, 2020,
  • Covered worker protection expenses (as defined above in the PPP section),
  • Up to $100,000 in payments to an independent contractor,
  • Other ordinary and necessary expenses including maintenance, administrative costs, state and local taxes, insurance premiums, advertising, and more.
  • The grant CANNOT be used to purchase real estate, pay interest or principal on debts taken out after February 15, 2020, or lobbying expenses.

To qualify, the grantee must:

  • have been fully operational as of 2/29/2020, and
  • experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019

The grants will not be considered taxable income. In the initial 14-day period of implementation of the program, grants shall only be awarded to eligible entities that have faced 90 percent or greater revenue loss. In the 14-day period following the initial 14- day period, grants shall only be awarded to eligible entities that have faced 70 percent or greater revenue loss. After these two periods, grants shall be awarded to all other eligible entities. 

Be aware that recipients of this grant will be ineligible for the PPP. 

More information about this grant will be available on the SBA’s website soon. 

Employee Retention Credit

Perhaps the [hidden] treasure in this entire package is the “reimagined” Employee Retention Credit (ERC) that was introduced in the CARES Act. The ERC is now available even if you receive a PPP loan! Better yet, you can claim the ERC retroactively for 2020 even if you received a PPP loan in the first round. For 2020, the maximum credit remains $5,000 per employee (i.e., 50% of wages up to $10,000), for employers that were affected by government shutdown orders or had revenue declines of 50 percent or more. More info about the 2020 ERC can be found in our CARES Act post

For 2021, the ERC has been extended through July 1, 2021, benefits have been expanded, and there are new requirements. The 2021 version is so beneficial that we’re going to break it out piece by piece with the new details. It’s important to understand that I’ve bolded every detail that has been changed/improved since the 2020 version of the ERC. 

Who is eligible? 

If a business (or nonprofit organization described under 501(c) of IRC and exempt from tax under 501(A)) is:

  • fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
  • the employer’s gross receipts are below 80% (20% decline in sales) of the comparable quarter* in 2019 (once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter);

*There’s a safe harbor that allows employers to use prior quarter gross receipts to determine eligibility. For example, if in Q1 2021 you don’t qualify, you can elect to compare Q4 2020 sales to Q4 2019 sales. 

*If a business did not exist at the beginning of the same quarter of 2019, the same quarter in 2020 is substituted.

and continues to pay its workers, then the business can receive a credit against the payroll taxes it pays on wages equal to 70% of qualified wages paid to each employee for that quarter. The amount of qualified wages for each employee across per quarter cannot exceed $10k. So basically, you can receive up to $7k back from the Federal government for each employee during each quarter mentioned above.  The maximum credit allowed per employee in 2021 is $14,000.

Employers can immediately see the benefit of this by receiving an advance of the credit. You heard that right. In the 2020 version of the ERC, employers saw the benefit of the credit by reducing their required payroll tax deposits that were withheld from employees’ wages and receiving a refund for the excess of the credit over payroll tax withholdings. Now, the employer will receive an advance of the credit then make up any difference when filing their quarterly payroll tax returns. Employers will need to ask their payroll processor how they’re going to administer this process. 

What are qualified wages?

The business’s qualified wages depend on whether it has less than or more than 100 employees.

  • If < 500 employees, then the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit. 
  • If > 500 employees, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

*health care costs are included in wages even if no wages are paid to the employee

Limitation

Finally, no double-dipping is allowed. If you take advantage of this credit, then you can’t use those wages to claim the sick and paid leave credit under the Families First Coronavirus Response Act, and vice versa. Payroll costs (as defined for PPP purposes) which include wages used to claim an ERC are NOT eligible to be forgiven as part of the PPP process. Therefore, a taxpayer may claim both the ERC and borrow a PPP loan, but they cannot do it on the SAME wages or health care costs. 

If a PPP loan borrower includes wages for PPP forgiveness rather than the ERC credit, and the PPP payroll costs are not forgiven, then these wages can be claimed for the ERC. 

The issue here is that by default wages are considered qualified for ERC, therefore a taxpayer has to elect out of counting these wages towards the ERC and choose to use them for PPP loan forgiveness instead. We’re still unsure how this election process is going to happen, especially since many PPP borrowers have already applied for forgiveness.  

Application

In order to claim the employee retention tax credit, eligible employers report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second quarter. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures. Eligible employers can also request an advance of the employee retention credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19 for an advance credit.

Strategy

PPP borrowers should determine whether they had any qualified wages for purposes of the ERC so they can determine whether those wages are better utilized as part of claiming an ERC or forgiven as part of the PPP. On the other hand, if payroll costs exceeded their PPP loan amounts, then this excess could be used towards claiming the ERC retroactively. 

We LOVE this article from Tony Nitti that demonstrates how the calculation for the 2021 ERC would work compared to the 2020 ERC. 

Unemployment Benefits for Employees

The CARES act offered two additional types of unemployment – Pandemic Unemployment Assistance (PUA), and Federal Pandemic Unemployment Compensation (FPUC). The PUA guaranteed $600 to those who were not eligible to receive state unemployment benefits for up to 39 weeks. The FPUC provided an additional $600 a week in addition to state benefits for up to 13 weeks. The new package replaces the $600 with $300 and extends benefits through March 14, 2021. The new care package increases the maximum number of weeks an individual may claim benefits through regular state unemployment plus the PEUC program, or through the PUA program, to 50 weeks. The bill also provides an extra benefit of $100 per week for certain workers who have both wage and self-employment income but whose base UI benefit calculation doesn’t take their self-employment into account.

Recovery Rebate for Individuals

The bill provides relief for all individuals in the form of a rebate check to taxpayers. The rebate amount will be based on adjusted gross income (AGI) reported on your 2019 tax returns as follows:

  • If your AGI is less than $75k for single filers or $150k for joint filers, then you will receive $600 if single ($1200 if married filing jointly) plus $600 for each child under age 17. 
  • If your AGI is between $75k and $99k for single filers or $150k and $198k for joint filers, then your rebate will be reduced by $5 for every $100 of income over the threshold.
  • If your AGI is greater than $99k for single filers or $198k for joint filers, then you will receive no rebate. 

The 2019 returns are used to determine how much you will receive; however, the amount you are actually entitled to will depend on your 2020 AGI. So when you file your 2020 returns, you will determine how much you should have received. If the amount you received is less than what you’re supposed to receive based on your 2020 income then you will receive a dollar for a dollar tax credit for the excess on your 2020 tax return. On the contrary, if you received more than you were supposed to receive based on your 2020 income, you will NOT have to pay back the excess.

Also, nonresident alien spouses of US persons will now be eligible to receive these payments retroactively. 

The direct deposits could go out as soon as next week, according to Treasury Secretary Steven Mnuchin.

Economic Injury Disaster Loan (EIDL)

An additional $20B has been allocated to this program. The $1k/employee grant advances are still available as well. However, you don’t need to deduct these advances from your PPP forgiveness amount. 

Existing SBA Loans

Small Business Debt Relief Program

Under the CARES act, the SBA was supposed to cover all loan payments including principal, interest, and fees for 6 months on existing non-disaster and non-PPP SBA loans. This included all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020. Borrowers do not need to apply for this assistance. It will be automatically provided.

The new package adds an additional 3 months to this beginning in February 2021. Hard-hit industries (such as foodservice and accommodation, arts, entertainment and recreation, education; and laundry and personal care services) will receive an additional 5 months for a total of 8 months extension of principal and interest payments.

If you apply for a new SBA Section 7(a) or 504 Microloan and get approved before September 20, 2021 then your first six months of principal and interest (up to $9,000 per month) is also forgiven. You don’t have to show that you’ve been impacted by COVID-19.

These payments are capped at $9,000 per month. More info about the original program can be found here

Payroll and Self-Employment Tax Deferral

Under the CARES act, employers can defer payments of social security tax on wages paid between March 27, 2020 through December 31,2020, for about two years. Of the total Social Security tax deferred, 50% needs to be paid by December 31, 2021, and the remaining 50% by December 31, 2022. This also applies to self-employment taxes that would be due between March 27 and December 31, 2020. These dates have been extended to April 31, 2021, and May 1, 2021. 

Employee Payroll Tax Deferral

I have yet to meet anyone who participated in this program. Nonetheless, the bill extends the repayment date for deferred employee Social Security taxes from April 30, 2021, to December 31, 2021. However, the Act does not authorize further deferrals after 2020.

Other Tax Law Incentives and Benefits

  • 100% Deduction for Meals
    • You can now deduct 100% of meal expenses incurred in 2021 and 2022 provided that they’re ordinary and necessary business expenses and provided by a restaurant. 
  • Charitable Contributions Expansion
    • Beginning in the tax year 2020 through 2021, including those receiving charitable contributions from a pass-through entity via K-1:
      • An individual will be able to take a charitable deduction up to $300 for single filers and $600 for MFJ towards AGI, even if they don’t itemize.
      • If the individual does itemize, then charitable contributions can be deducted up to 100% of AGI. That means they’re no longer limited to 60% of AGI.
      • For corporations, the limit increases from 10% of AGI to 25% of AGI.

FFCRA Credits

The bill extends the credit provisions from December 31, 2020, through March 31, 2021, for the beefed-up FFCRA program passed as part of stimulus 2.0. The Act does not reset these amounts for 2021; i.e., if such amounts were exhausted for an employee in 2020, any leave payments to that employee in 2021 would not qualify for the tax credit.