Important COVID-19 Tax-Related Provisions for 2021
On December 27, 2020, President Trump signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, & Venues Act (the PPP2 Act), and The Consolidated Appropriations Act. The Act provides extensive relief in response to the COVID-19 pandemic which includes $284 billion for the Payroll Protection Program (PPP) and another round of “recovery rebate” payments to individuals.
Here is a brief overview of some of the tax-related provisions that may affect individuals and business:
- Permanent reduction of adjusted gross income (AGI) floor to 7.5% for medical expense deductions
- Extended non-itemizer deduction for up to $300 of cash donations ($600 for married couples filing jointly) to qualified charities through 2021
- Extended 100% of AGI deduction limit for cash donations to qualified charities through 2021
- Extended exclusion for certain employer payments of student loans through 2025
Businesses and other employers
- Clarification of tax treatment for PPP loans, certain loan forgiveness and other financial assistance under COVID-19 legislation
- Extended payroll tax credits for paid leave required under the Families First Coronavirus Response Act (FFCRA) through March 2021
- Extended and expanded tax credits for retaining employees under the Coronavirus Aid, Relief and Economic Security (CARES) Act through June 2021
- 100% business meals deduction for food and beverages provided by restaurants in 2021 and 2022
- Extended Work Opportunity credit through 2025
- Extended New Markets credit through 2025
- Extended family medical leave credit through 2025
While many of the original provisions of the PPP that were part of the CARES Act passed in March 2020 remain intact, there are some important differences. For businesses that did not participate in the first round of the PPP, and are considering taking an initial loan, most of the provisions of the original PPP apply, namely:
- Must have 500 employees or less.
- Borrowing is capped at 2 ½ times average monthly payroll, up to $10 million.
- The loan may be forgiven if used for eligible expenses and must be used in any time frame between 8-24 weeks from loan disbursement.
- At least 60% must be used to cover payroll. The rest can be used for business mortgage interest, rent, or utilities. Additional expenses are also now eligible (see below).
For businesses that did borrow during the first round of the PPP, they may be eligible for a second PPP loan. For businesses taking a second PPP loan, there are a few notable differences:
- Must have 300 employees or less.
- Borrowing is still capped at 2 ½ times average monthly payroll, but the maximum is reduced to $2 million.
- The business must have already used their first PPP loan, or will fully utilize it in the future.
- The business must have had a 25% reduction in gross receipts during any quarter in 2020 when compared to the same quarter in 2019.
The PPP2 Act and The Appropriations Act also contain other important provisions, as follows:
- Businesses in the accommodation & food services industry may borrow up to 3 ½ times average monthly payroll vs. the standard 2 ½ times for other businesses.
- Loans under $150,000 qualify for a simplified forgiveness process via a one-page application.
- The Appropriations Act overrides IRS Notice 2020-32 by allowing businesses to deduct expenses that would ordinarily be deductible, even if they are paid with the proceeds of a forgiven PPP loan.
- Expands the allowable PPP expenses to include the following additional expenses: covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures (personal protection equipment). Loans that have already been forgiven are excluded.
- The requirement for borrowers to deduct any EIDL advance received from their PPP forgiveness amount has been repealed.
- Expands the eligibility of the employee retention tax credit created by the CARES Act to now include businesses that receive a PPP loan. However, wages paid with PPP loan proceeds are still not eligible for the credit.
While this is not an exhaustive list of the 5500 plus-page legislation, it does provide a brief look at some of the most significant tax-related provisions. Before making any decisions as they relate to the PPP, business owners should consult with their lending, legal, and/or tax professionals. Additional guidance may become available in the coming weeks and months, so it may be prudent to remain in contact with these professionals to receive the latest information.