Updated as of December 23, 2020
5,593 pages of legislative text was wheeled into the Capitol chambers Monday afternoon, December 21st, containing $900B of economic assistance for the American people. In less than 12 hours, both the House and Senate voted “yes” on the second largest recovery legislation package in United States history. Summaries of the bill were quickly drawn up and widely circulated (official House summary), so our commentary will focus on the big ticket items.
Extension of CARES Act Pandemic Unemployment Assistance
The Federal government will provide $300/week supplements to state unemployment benefits through March 14, 2021. Benefits continue to be available to individuals that are self-employed. Applicants were subject to a limit of 39 weeks of benefits, which has been extended to 50 weeks. Retroactive payments will be limited to weeks of unemployment after December 1, 2020.
MKS: With roughly 20 million receiving unemployment assistance across the country, this was an important part of the stimulus bill given the program was set to expire at year-end. We continue to suggest those in need of assistance to visit their state unemployment site to apply, and resources specific to those in Minnesota are available on our website (www.myslajek.com). Please follow application instructions carefully, as you may be entitled to benefits for the month of December retroactively and tax withholding options can be easily overlooked.
Additional Stimulus Checks to Individuals
Another round of stimulus checks, this time amounting to $600 per eligible family member, are ready to be sent to Americans within a week or two, pending the President’s signature on the passed legislation. If you were eligible for the first round, you should expect to receive another payment as the thresholds based on modified adjusted gross income remain the same.
MKS: Many of our clients have stated that they were eligible yet didn’t receive any funds. Additionally, some individuals (most notably college students) were unfortunately left out of the initial round due to technicalities surrounding dependency status. The IRS “Get My Payment” portal has been the only helpful resource to date, allowing those to check on the status of their eligibility.
While frustrating, the benefits will be reconciled on 2020 individual tax returns filed next year. We advise all to monitor physical mailboxes for any communications from the IRS, and to make this an agenda item during your tax planning meetings this upcoming filing season.
Extension of Paid Sick and Family Leave Under the FFCRA
Refundable payroll tax credits for paid sick and family leave under the Families First Coronavirus Response Act have been extended through March 31, 2020.
MKS: We dove deeper into the lucrative FFCRA credits recently, as we felt that the reimbursement benefits for Covid-19 related employee absences were being overlooked. Revisit our blog post from a few weeks ago here.
Tax Treatment of Paycheck Protection Program Loans
Proceeds from a PPP loan have never been considered taxable income to the recipient. The Relief Act has clarified that deductions are also allowed for expenses paid with the proceeds of a forgiven PPP loan, overruling an IRS decision to disallow these deductions.
MKS: PPP loan proceeds and expenses are now tax neutral at the federal level, and forgiven loans will now take the form of a grant. According to reports from Politico, this provision almost didn’t make it into the bill. Our firm believes this is one of the most beneficial items in the Act, avoiding significant tax liabilities for PPP borrowers that used the funds to support employment opportunities during the pandemic. We are hopeful that state and local taxing authorities conform to the federal treatment.
Tax Treatment of Other Financial Assistance Programs
Those that received Economic Injury Disaster Loan (EIDL) advanced grants or six months of SBA Debt Relief Payments on qualified government loans will not have to include the proceeds as taxable income at the federal level.
MKS: Again, we are hopeful that the state and local governments follow suit. Additionally, we are unsure at this time if local grant programs from states, counties and cities will be taxable income. We recommend a conservative approach to these grants, considering them taxable income until determined otherwise.
Continuation of the Paycheck Protection Program Loans
The Act calls upon the SBA to stand up an additional round of PPP loans, even allowing participants in round one to draw a second loan if all the funds from the first loan have been used. While structurally the same, a few noteworthy changes:
- Expansion of eligible expenses
MKS: Operational expenditures (IT, HR, accounting costs), worker protection expenditures (personal protective equipment) and certain supplier costs (perishable goods) are now eligible expenses under program rules for loans that have not been forgiven, and new loans issued under PPP round 2.
- Simplified application process (underwriting and forgiveness stages)
MKS: Congress has directed the SBA to issue a new application process that significantly reduces the administrative burden for PPP loans under $150K. Borrowers under this threshold are still subject to eligibility criteria, but likely reduced documentation requirements. We are awaiting further details on what this entails, but we strongly suggest a hard stop on forgiveness applications (unless already processed by the lender), and our recommendation for those interested in a second PPP loan is to review the eligibility considerations discussed below.
- Eligibility for second draw PPP loans
MKS: Second PPP loans are meant for businesses with fewer than 300 employees that can demonstrate a 25% reduction of gross receipts during any calendar quarter in 2020 as compared to the corresponding quarter in 2019. A forgiveness determination is NOT required to apply for PPP round 2, but the borrower must have used all of the funds from the initial PPP loan. We expect additional guidance from the regulators and an application in early January.
Furthermore, borrowers applying for loans under $150K will not be required to submit their gross receipts reduction support to the lender. Applications for loans between $150K and $2M will likely be subject to higher scrutiny to ensure the borrowing entity is eligible for a second PPP loan.
- Calculating the loan amount
MKS: Borrowers will calculate their loans using 2.5x the average monthly payroll costs in the preceding 12 months or 2019. Our initial research believes this “recent calendar year” could mean 2019 or 2020. The most noteworthy change to the loan calculation relates to entities assigned to the “72” industry code (Accommodation and Food Services) – these applicants may use 3.5x the average monthly payroll.
- Repeal of EIDL advance grant reductions
MKS: Recipients of advanced grants were not thrilled to see their PPP forgiveness amounts reduced by the amount of any SBA advanced grant received from an EIDL loan application. The Act will now allow full forgiveness of PPP loans without considering SBA grant receipts. For those that have already applied or received forgiveness and are faced with an obligation to pay back the grant, please communicate with your lender. Within 15 days, the SBA has been directed by Congress to determine how borrowers will be made whole if they received reduced forgiveness stemming from an EIDL advanced grant.
Due to the breadth of the package and targeted provisions, we highly suggest spending some time reading additional materials from reputable outlets in addition to our firm communications. We will continue to monitor for updates and initial reactions from industry partners to ensure our firm is well positioned to help those who have further questions or need additional guidance. Please check back for updates to this blog post as we glean more important information for our clients and community.