Consolidated Appropriations Act of 2021 provides economic aid to hard hit businesses.
There’s much we know (and even more we don’t know) about this massive, 5,600 page bill, signed into law by the president on Sunday, December 27th. This bill resolves a number of issues surrounding the treatment of PPP loans, forgiveness, treatment of related expenses, and how to calculate the impact on the basis of business owners. While all ambiguities aren’t resolved resolved, the net changes are astonishing.
Among the critical provisions are allowing the deduction of business expenses paid for with Paycheck Protection Program loans. EIDL expenses are also now deductible.
CovidTRA or Covid Related Tax Relief Act under the Omnibus CAA provides updates to Payroll Protection Plan loan forgiveness and the treatment of Covered Loan Forgiveness.
The law allows a PPP Second Draw for small businesses with significant declines in revenue. To qualify, you must be able to show a minimum 25% reduction in gross receipts and you can use any quarter in 2020 and compare to 2019 to calculate this. Up to 2.5 x average monthly payroll costs are includable in the “draw”; restaurants get 3 ½ months.
PPP recipients can also claim the Employer Retention Credit. Previously, you had to make a choice of PPP or ERC under the CARES Act ERC, but these changes are retroactive to CARES Act date in March 2019. ERC can now be taken with the PPP. 941s for 2019 can be amended for taxpayers who had PPP. The initial time window for ERC to expire was December 31, 2019. ERC will go to June 30, 2021.
For 2020, maximum ERC was 10 K annually; for 2021 it is 10 K per quarter. In 2020, the credit was 50% of wages; for 2021, it is 70%. Worth noting here, for the two quarters of 2021, the ERC could be worth up to 14 k in refundable credits. For 2020, gross receipts test was 50%; for 2021, it is 80% (using the same quarter in 2019 for the calculation/ basis). The ERC calculation cannot include a “covered period” under previous PPP, where “covered period” refers to the time you had to spend your first PPP loan (either 8 or 24 weeks).
Many small businesses did not seek PPP funds in the first “draw” and even more never got the chance because funds ran out so quickly. Once CAA is law and there is the allocation of additional funding for small business, such businesses may make two “draws.”
Additional 2020 Recovery Rebates, pending in amount from $600 to $2,000 per eligible family member are coming. These will be refundable on the 2020 return, not the 2021 return. IRS will not levy the Recovery rebate – the only offset is child support, but if the 2020 return has a refund and you owe back taxes, IRS will seize the refund.
Under new CAA law, Economic Disaster Loans to small business are excluded from income. New law will not reduce PPP loan proceeds moving forward as was true under old CARES law. EIDLs are forgivable under CAA, but only new EIDLs. There will not be a second draw of EIDL, but there will be new money for businesses that did not get EIDL money in the first round.
CAA says no basis increase is denied; tax exempt income increases basis. Basis is important because you cannot deduct losses without basis. Many S Corps and partnerships have low basis, there could be a timing problem as they spend their PPP or EIDL funds in one year and get forgiveness in the next year.
To read the full text of the bill, go to: