Late on December 20, 2020, Congress agreed upon a new COVID-19 relief package to aid businesses and individuals that are suffering financial hardship due to the ongoing pandemic. President Trump signed the Consolidated Appropriations Act, 2021 into law on December 27. The package is part of the massive year-end appropriations bill passed by Congress and follows the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed earlier in the year. The new act extends and modifies many of the earlier COVID-19 tax incentives as well as provides much needed clarity on the tax treatment of the Paycheck Protection Program (PPP) loans.

PPP Loans

One of the most talked-about issues among business owners and tax professionals as year-end tax planning wraps up is the deductibility of the expenses paid with PPP loan funds. In November, the IRS issued guidance amplifying its position that expenses paid with PPP funds are not deductible. Since then, several organizations representing businesses and tax professionals have urged Congress to pass legislation reversing this position. The act accomplishes this by stating that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided.” This clarifies that the expenses paid with the PPP loans, even if forgiven, are deductible. This also clarifies that PPP forgiveness will increase basis in pass-through entities (S Corporations and LLCs/Partnerships). However, additional guidance may be necessary to determine the timing of the basis increase. Owners of pass-through entities that received PPP loans with basis limitation concerns should contact their tax advisors immediately to determine if action should be taken before the new year.

The act also creates a second round of PPP loans for small businesses up to $2 million. For businesses that already received a PPP loan, some of the new qualifications to receive a second loan include: (1) have 300 or fewer employees, (2) have used or will use the full amount of the first PPP loan, (3) can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019. Additional expenses that qualify for loan forgiveness include: (1) covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines, (2) expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations, (3) covered operating costs such as software and cloud computing services and accounting needs, and (4) covered property damage costs.

Payroll Credits

The employer credit for paid sick and family leave, originally part of the Families First Coronavirus Response Act, is extended to March 31, 2021 (originally December 31, 2020), and the employee retention tax credit will now apply to compensation paid to a covered employee through June 30, 2021 (originally set to expire with respect to compensation paid after December 31, 2020).

Stimulus Checks

The stimulus checks from earlier this year provided many households with $1,200 for each individual and $500 for each qualifying child; the act provides an additional $600 for each individual and each qualifying child. The direct payments begin to phase out for individuals with adjusted gross income in excess of $75,000 ($150,000 for joint filers) based on 2019 income only. Distribution of the payments is set to begin as early as this week.

Individual Financial Assistance

The act also extends federal unemployment benefits and provides a $300-a-week federal unemployment subsidy through March 14, 2021. Additionally, $25 billion of funds will be applied towards the assistance of tenants who are behind on their rent and an extension of the national eviction moratorium through January 31, 2021.

Other Tax Provisions

The act extends several expiring tax provisions. In addition, it temporarily (for 2021 and 2022) allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant.

This is a brief overview of some of the tax-related provisions within this massive relief package. Please look for future communication as we continue to digest its contents. In the meantime, contact your BMSS professional at (833) CPA-BMSS with any questions you may have.

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