Wealth planning alert: COVID relief
COVID relief bill expands and clarifies paycheck protection program, employee retention tax credit, and other business-related tax provisions
On December 21, 2020, the president signed into law the Consolidated Appropriations Act, 2021 (the “Relief Bill”), a new bill that expands upon and clarifies many of the business-related provisions passed under the CARES Act in March of 2020. Below are some of the highlights of the business-related provisions in the Relief Bill.
Paycheck protection program (“PPP”) loans
The CARES Act authorized an initial $669 billion of funding for low-interest PPP loans in March of 2020. Under that program, businesses with fewer than 500 employees could secure up to $10 million of loans from the Small Business Administration. A portion or all of each loan could be forgiven if the loan proceeds were used for certain eligible expenses, including payroll costs, mortgage interest, rent, and utilities. The Relief Bill renews and expands the original program by authorizing an additional $284 billion of funding for new loans, expanding the list of authorized uses of the loan proceeds, and clarifying and easing forgiveness of the loans. These new funds can be used by businesses seeking a first-time loan or by those seeking a second draw of loan proceeds, though second loans are capped at $2 million. Businesses seeking a first-time loan must use the eligibility requirements set forth under the CARES Act, while businesses seeking a second loan must meet more restrictive eligibility criteria.
The UBS Global Wealth Management Business Owners Client Segment Team has put together a more detailed outline of the new program, including eligibility requirements, authorized use of loan proceeds, and criteria for forgiveness, and we encourage you to look at those here. Some highlights are below:
- Any business, nonprofit organization, eligible self-employed individual, sole proprietor, or independent contractor, among others, who has used or will use their full PPP loan is eligible to receive a second loan if the business employs 300 or fewer employees and shows at least a 25% reduction in gross receipts in one of the first three quarters of 2020 as compared to that same quarter in 2019;
- Several businesses, including publicly traded companies, businesses not in operation by February 15, 2020, businesses engaged in political or lobbying activities and certain businesses having connections to China are expressly prohibited from obtaining a second loan;
- Whether the business is a first- or second-time borrower, the Relief Bill modifies the “covered period” for which loan proceeds must be used in order to qualify for forgiveness to between eight and 24 weeks;
- The Relief Bill expands the list of authorized uses of the loan proceeds that will qualify for forgiveness to include, among other things, group life, disability, vision and dental insurance benefit payments;
- Importantly, the Relief Bill permits employers to deduct expenses paid with forgiven loan proceeds, expressly reversing prior guidance released by the IRS and Treasury; and
- The new application deadline to apply for a PPP loan is March 31, 2021.
Modifications to the employee retention tax credit
The Relief Bill also contains significant enhancements to the employee retention tax credit enacted under the CARES Act, many of which should allow more businesses to avail themselves of the credit. The CARES Act initially provided a 50% tax credit of up to $5,000 per employee for businesses that continue to pay their employees during a period of significant decline in gross receipts.
The Relief Bill expands the availability of the credit through July 1, 2021 for businesses whose gross receipts in the first or second quarter (or both) of 2021 are less than 80% of gross receipts for the same quarter (or both quarters) in 2019. The prior credit required a 50% reduction in gross receipts, so this less stringent requirement should allow many more businesses to take advantage of the credit. Moreover, the original credit was not available for wages actually paid to employees continuing to work if the business employed over 100 employees; this threshold has been raised to 500 employees, so that in the first two quarters of 2021, those businesses who employ 500 or fewer employees can avail themselves of the credit, even if the employees continue to work during the covered period.
The maximum amount of the credit has been sizably increased from $5,000 per employee in 2020 to $14,000 per employee in 2021 ($7,000 per quarter for each of the first two quarters of 2021). Notably, a business that receives a PPP loan is no longer prohibited from claiming the credit as before; instead, a credit cannot be claimed for the portion of wages paid with the proceeds of a forgiven PPP loan. Because this change was made retroactive to the date of the CARES Act, a business that paid qualified wages in excess of the forgiven PPP loan amount may want to consider filing an amended employment tax return to claim the credit.
Voluntary extensions of paid sick and family leave tax credits
Under the Families First Coronavirus Response Act, eligible employers were given refundable payroll tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave due to COVID-19. The Relief Bill extends the availability of the credit through March 31, 2021, though employers are no longer required to provide the leave.
Temporary 100% deduction for business meals
The Tax Cuts and Jobs Act of 2017 limited the deductibility of business meal expenses to 50% of the cost of food and beverages. The Relief Bill temporarily eliminates the limitation, allowing for 100% deductibility of business meal expenses, for tax years 2021 and 2022.
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