The latest COVID-19 stimulus bill is one of the largest pieces of legislation to be passed by Congress and signed into law by the President. The $900 billion bill will provide additional aid to those who have experienced economic hardships as a result of the pandemic. Additional funding for unemployment, individual households, vaccine distribution, and small businesses are all included. Our focus includes the items most likely to have an immediate impact on individual taxpayers and small business owners. In this post, we’ll cover the important provisions in the COVID relief bill for small businesses. A separate post includes the items relevant to individual taxpayers.
Changes to the Paycheck Protection Program (PPP)
Additional PPP funds are available
An additional $284 billion has been added to the Paycheck Protection Program (PPP), providing forgivable loans to small business owners whose revenue is down for the year. The bill specifically targets businesses that have experienced an outsized impact, including restaurants, live venues, and non-profits. Churches and faith-based organizations are included under the aid intended for non-profit organizations. Second-time loans are limited to businesses with fewer than 300 employees and at least a 25% drop in gross receipts in one 2020 quarter compared to that same quarter in 2019. This round of PPP loans is capped at $2 million per business.
The rules for using funds from the second PPP loan remain similar to the first round, but there are a few changes. In order to have your loan forgiven, 60% must still go to wages. The other eligible expenses that the remaining 40% can go toward has expanded to include cloud computing, personal protective equipment (PPE), and a variety of other expenditures required to allow the business to operate under COVID-19 restrictions (e.g. restaurants switching to outdoor dining, plastic barriers in retail establishments, etc.). The PPP is expanding eligibility to include non-profits, very small businesses, and community-based lenders.
PPP borrowers can now utilize the Employee Retention Tax Credit (ERTC)
Under the CARES Act, which was the first major stimulus package that passed earlier in 2020, businesses that received PPP loans weren’t eligible for other tax credits. The newest bill changes the rules for the Employee Retention Tax Credit, allowing PPP borrowers to take advantage of this valuable credit against quarterly payroll taxes.
One caveat: you cannot use the ERTC against the same wages covered by PPP. We strongly recommend that PPP recipients meet with their strategic advisors prior to applying for PPP forgiveness, in order to maximize the benefits of both programs. PPP holders can claim the ERTC retroactively, provided they do so with their 2020 payroll tax filings. See more about the ERTC below.
Allowing PPP expenses to be deducted
The way business expenses paid with PPP funds will be handled on the 2020 tax return has been a point of contention. Up to this point, those expenses were not permitted to be taken as deductions—a significant tax impact for many small businesses. In the new bill, businesses are now permitted to deduct expenses covered by forgiven PPP loans, regardless of whether the loan was taken out under the old or new rules. Based on our recent experiences with year-end tax planning, we expect many businesses that received PPP loans to see a positive impact on their 2020 tax bills.
Simplified PPP forgiveness for loans under $150,000
Businesses with these smaller loans will be able to submit a one-page forgiveness application with a self-certification of how the funds were used. The SBA has 24 days from the date of the bill’s enactment (12/27/2020) to create the simplified application and distribute it to lenders. Despite the stripped-down documentation requirements, borrowers are still required to retain relevant records for up to four years. The SBA reserves the right to audit PPP loans for fraud.
As of May 27, 2021, the SBA has forgiven two-thirds of 2020 PPP loans, meaning roughly 69.5% of the 2020 loans have been forgiven in whole or in part. 81% of forgiven loans were for less than $100,000. The current system is expediting loans under $150,000, showcasing the difficulty some larger borrowers are facing in the forgiveness process. The SBA is working with lenders to figure out a simplified process to help all loans, regardless of size.
Looking for the latest PPP information? Click here to visit our Paycheck Protection Program resource center.
Other Economic and Tax Changes for Small Businesses
EIDL grants for businesses operating in low-income communities
$20 billion has been provided for new economic injury disaster loan (EIDL) grants specifically for businesses operating in economically disadvantaged areas. To qualify for the grant, the business must be located in a low-income community, have fewer than 300 employees, and have suffered an economic loss of more than 30%. The grants will not be taxable, nor will they prevent the business from taking a tax deduction for qualified expenses paid with the grant funds.
Extension of Employee Retention Tax Credit (ERTC)
The ERTC has been extended through July 1, 2021, and the refundable payroll tax credit has increased to 70% of wages per employee, per quarter, up to $10,000. Most employers will claim the credit on Form 941. Eligibility for the credit requires either a “full or partial suspension” of business operations due to COVID-19, or “a significant decline in gross receipts.”
Extended repayment period for deferred payroll taxes
For those businesses that opted to allow their employees to defer payroll taxes, the repayment deadline has been extended in the new bill. Businesses will now have until December 31, 2021, to collect and remit those payroll taxes (extended from April 2021).
Business meal deductions allowed at 100% in 2021 and 2022
The next change won’t impact your 2020 tax return, but it will offer savings in the coming two years. The deduction for business meals will be expanded in 2021 and 2022, allowing 100% of costs to be deducted (rather than the standard 50%). The intention of the business meal deduction is to help stimulate the restaurant industry.
What’s not in the COVID Relief bill?
There are two key items that have been part of the national conversation and aren’t included in this bill:
- Liability protection for businesses from COVID-19 lawsuits
- State and local aid funding
Both of these items are in other pieces of legislation that are still pending in Congress.
Looking for more information about how the COVID Relief bill will impact you, your business, and your 2020 tax return?
View the recording of our January 14, 2021, webinar on the Consolidated Appropriations Act of 2021.