Letter to Business Clients
January 13, 2021
Dear Clients and Friends,
As a year end holiday gift, Congress overwhelmingly approved a $900 billion Covid relief package for individuals and businesses. The President signed the bill into law on December 27, 2020. For businesses, additional time is provided for paying previously deferred payroll taxes, another round of Paycheck Protection Program (PPP) loans is available, and borrowers with PPP loans may take deductions for expenses paid with PPP loan proceeds. The legislation also extends numerous expiring tax provisions for businesses.
The provisions of greatest interest to individuals and businesses fall in the following categories spanning the three bills that were passed into law; (i) Covid-related tax relief, (ii) Paycheck Protection Program extension and enhancement, (iii) tax extenders, (iv) miscellaneous tax provisions, and (v) disaster tax relief.
There is a lot of information in the new law to digest. We were scrambling to change our tax planning projections the last couple days of the year when the PPP loan expenses became deductible. Give us a call to discuss these provisions if you have any questions at this time. We will be communicating with you as more information becomes available from the IRS and SBA that applies to your situation. We look forward to working with you to maximize the benefits available and minimize the tax that you pay. We have also enclosed our most recent Tax Update newsletter for your review which includes more information regarding tax changes for 2021
You will notice a new voice answering the phone if you call the office. Please take a minute to introduce yourself to our new administrative assistant, Rebecca Watkins. She and her family live here in Milford. If you’re wondering about Mary, don’t worry she hasn’t gone far. She has joined the accounting staff to head up our new book keeping division and moved her desk to the back office. We are excited for both of them and wish them success in their new positions as we move forward into the new year.
If you know of someone who would benefit from this information please let us know and we will send it to them right away. It is also available on our website. We look forward to hearing from you soon and assisting you with your tax and financial needs. As always, contact us if you have any questions.
Starkey & Company, P.A.
$900 BILLION COVID RELIEF PACKAGE – BUSINESS
Highlights of the year-end Covid-related legislation include:
- The creation of a Paycheck Protection Program (PPP) Second Draw loan program with a maximum loan amount of $2 million made available for businesses that employ 300 or less employees and have used, or will use, the full amount of their first PPP loan
- A new rule establishing that business expenses paid with the proceeds of a forgiven PPP loan are deductible (effectively overriding prior law and IRS guidance issued earlier this year)
- A three month extension of credits reimbursing employers for paid sick and family leave paid to employees due to Covid-19
- Additional time for employees and employers to pay back deferred employee payroll tax amounts from the President’s August memorandum
- An extension and expansion of the employee retention tax credit
- Permanent and temporary extensions of expiring tax provisions (“tax extenders”)
- A 100-percent deduction for business meal and beverage expenses, including any carry-out or delivery meals, provided by a restaurant that are paid or incurred in 2021 and 2022.
Tax Treatment of PPP Loans
Section 276 of the Covid-Related Tax Relief Act provides that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also (1) overrides current law (and IRS guidance) preventing the deduction of expenses paid with tax-exempt income by allowing businesses to deduct business expenses paid with the proceeds of a PPP loan that is forgiven, and (2) provides that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act (3/27/2020).
Employee Retention Tax Credit Modifications
Sections 206 and 207 of the Disaster Tax Relief Act extend and expand the CARES Act employee retention tax credit (ERTC) and makes technical corrections. Beginning on January 1, 2021 and through June 30, 2021, the provision:
- Increases the credit rate from 50 percent to 70 percent of qualified wages
- Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50 percent to 20 percent and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility
- Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter
- Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees
- Allows certain public instrumentalities to claim the credit
- Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers
- Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year
- Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit
- Retroactive to March 13, 2020, the provision: (1) clarifies the determination of gross receipts for certain tax-exempt organizations; (2) clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance; and (3) provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds.
Extension of Credits for Paid Sick and Family Leave
Section 286 of the Covid-Related Tax Relief Act extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act (Families First Act), through the end of March 2021. It also modifies the tax credits so that they apply as if the corresponding employer mandates were extended through the end of March 2021. This provision is effective as if included in Families First Act.
Extension of Certain Deferred Payroll Taxes
On August 8, 2020, the President issued a Presidential Payroll Tax Memorandum allowing employers to defer withholding employees’ share of social security taxes or the railroad retirement tax equivalent from September 1, 2020, through December 31, 2020, and requiring employers to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January 1, 2021, and April 31, 2021.
Under the Payroll Tax Memorandum, the deferral is only available with respect to any employee with wages or compensation, as applicable, payable during any bi-weekly pay period of less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. This equates to wages of $104,000 per year. The Payroll Tax Memorandum provides that the amounts deferred are not subject to any penalties, interest, additional amounts, or additions to the tax. The Payroll Tax Memorandum also authorizes the Treasury Secretary to issue guidance to implement these orders and directs the Treasury Secretary to explore avenues, including legislation, to eliminate the obligation to repay the deferred taxes. Under the Payroll Tax Memorandum, penalties and interest on deferred unpaid tax liability would begin to accrue on May 1, 2021.
Section 274 of the Covid-Related Tax Relief Act extends the repayment period through December 31, 2021. Additionally, penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.
Clarification of Tax Treatment of Certain Loan Forgiveness and Other Business Financial Assistance Under the Coronavirus Relief Legislation
Section 278 of the Covid-Related Tax Relief Act clarifies that gross income does not include forgiveness of certain loans, emergency EIDL grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. The provision is effective for tax years ending after March 27, 2020.
Authority to Waive Certain Information Reporting Requirements
Section 279 of the Covid-Related Tax Relief Act gives the Treasury Department authority to waive information filing requirements for any amount excluded from income by reason of the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
Election to Waive Application of Certain Modifications to Farming Losses
Section 281 of the Covid-Related Tax Relief Act allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. This provision also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver. These clarifications are aimed at eliminating unnecessary compliance burdens for farmers. The provision applies retroactively as if included in the CARES Act.
PAYCHECK PROTECTION PROGRAM EXTENSION AND ENHANCEMENT
Section 311 of the Economic Aid Act creates a second loan from the Paycheck Protection Program (PPP), called a “PPP Second Draw” loan for smaller and harder-hit businesses, with a maximum loan amount of $2 million. In order to receive a PPP Second Draw loan, eligible entities must: employ not more than 300 employees, have used or will use the full amount of their first PPP; and must demonstrate at least a 25 percent reduction in gross receipts in the first, second, third, or fourth quarter of 2020 relative to the same 2019 quarter.
In addition to the creation of the PPP Second Draw, Section 304 of the Economic Aid Act expands the list of eligible expenses for which a PPP loan may be used. Additional eligible expenses include (1) covered operations expenditures; (2) covered property damage costs; (3) covered supplier costs; and (4) covered worker protection expenditures.
Eligible and Noneligible Entities
Entities eligible for the PPP Second Draw include businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Entities ineligible include entities listed in 13 C.F.R. 120.110 and subsequent regulations (except for entities from that regulation which have otherwise been made eligible by statute or guidance, and except for nonprofits and religious organizations); entities involved in political and lobbying activities including engaging in advocacy in areas such as public policy or political strategy or an entity that otherwise describes itself as a think tank in any public document, entities affiliated with entities in the People’s Republic of China; and registrants under the Foreign Agents Registration Act.
In general, borrowers may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020. New entities may receive loans of up to 2.5 times the sum of average monthly payroll costs. Entities in industries assigned to NAICS Code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times average monthly payroll costs. Businesses with multiple locations that are eligible entities under the initial PPP requirements may employ not more than 300 employees per physical location. Waiver of affiliation rules that applied during initial PPP loans apply to a second loan. An eligible entity may only receive one PPP second draw loan. Fees are waived for both borrowers and lenders to encourage participation. For loans of not more than $150,000, the entity may submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits its loan forgiveness application and non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.
Borrowers of a PPP Second Draw loan are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the covered period. The 60/40 cost allocation between payroll and non-payroll costs in order to receive full forgiveness will continue to apply.
Churches and Religious Organizations
Churches and religious organizations are eligible for PPP Second Draw loans.
Safe Harbor on Restoring Full-time Employees and Salaries and Wages Applies
The rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25 percent applies.
Maximum Loan Amount for Farmers and Ranchers
A specific loan calculation for the first round of PPP loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, who report income and expenses on a Schedule F, and were in business as of February 15, 2020, is established. These entities may utilize their gross income in 2019 as reported on a schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. This provision applies to PPP loans before, on, or after the date of enactment (i.e, December 27, 2020), except for loans that have already been forgiven.
A seasonal employer is defined as an eligible recipient which: (1) operates for no more than seven months in a year, or (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.
Prohibition on Use of Loan Proceeds for Lobbying Activities
An eligible entity is prohibited from using proceeds of the covered loan for lobbying activities, lobbying expenditures related to state or local campaigns, and expenditures to influence the enactment of legislation, appropriations, or regulations.
TAX EXTENDERS (PARTIAL LIST)
The Disaster Tax Relief Act permanently extends the following tax provisions:
(1) Energy efficient commercial buildings deduction
The Disaster Tax Relief Act extends the following tax provisions through December 31, 2025:
(1) New markets tax credit
(2) Work opportunity credit
(3) Seven-year recovery period for motorsports entertainment complex
(4) Empowerment zone tax incentives
(5) Employer credit for paid family and medical leave
(6) Exclusion from income for certain employer payments of student loans
The Disaster Tax Relief Act extends the following tax provisions through December 31, 2021:
(1) Second generation biofuel producer credit
(2) Alternative fuel refueling property credit
(3) Two-wheeled plug-in electric vehicle credit
(4) Extension of excise tax credits relating to alternative fuels
Temporary Rule Preventing Partial Plan Termination
Section 209 of the Disaster Tax Relief Act provides that a qualified retirement plan will not be treated as having a partial termination under Code Sec. 411(d)(3) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.
Temporary Allowance of Full Deduction for Business Meals
Effective for amounts paid or incurred after December 31, 2020, Section 210 of the Disaster Tax Relief Act amends Code Sec. 274(n)(2) to provide that the 50 percent limitation on the deduction for food or beverage expenses does not apply to expenses for food or beverages provided by a restaurant and paid or incurred before January 1, 2023.
DISASTER TAX RELIEF
Disaster Tax Relief in General
Section 301 of the Disaster Tax Relief Act provides relief for individuals and businesses in Presidentially declared disaster areas for major disasters declared on or after January 1, 2020, through February 25, 2021. The relief generally applies to incident periods beginning on or after December 28, 2019. It does not apply to areas for which a major disaster has been so declared only by reason of Covid-19.
Employee Retention Credit for Employers Affected by Qualified Disasters
Section 303 of the Disaster Tax Relief Act provides a tax credit for 40 percent of wages (up to $6,000 per employee) paid by a disaster-affected employer to a qualified employee. The credit applies to wages paid without regard to whether services associated with those wages were performed. Certain tax-exempt entities are provided the option to claim the credit against payroll taxes.