In the waning hours of the legislative year, the House and Senate passed a $900 billion pandemic relief package, which was tacked on a $1.4 trillion catch-all spending bill and other end-of-session business in a massive bundle of bipartisan legislation. The legislation, the 2021 Consolidated Appropriations Act, a 5593-page bill, is the longest piece of legislation in American history. After a veto threat, the bill was ultimately signed by the President on December 27, 2020.
Some highlights of the Corona virus relief efforts are
- a temporary $300 per week supplemental jobless benefit from Dec. 26, 2020 until March 14, 2020
- the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed, gig workers, and others in nontraditional employment and workers who have a mix of traditional and freelance employment income
- the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally funded unemployment benefits to individuals who exhaust their regular state benefits
- an extension of the employee retention tax credit and several expiring tax provisions
- a $600 direct stimulus payment to individuals making up to $75,000 per year and $1,200 to couples making up to $150,000, with payments phased out for higher incomes, with an additional $600 payment per dependent child
- $284 billion to revive the Paycheck Protection Program, which would cover a second round of PPP grants to especially hard-hit businesses
- $20 billion to provide Economic Injury Disaster Loan (EIDL) Grants to businesses in low-income communities
- $25 billion in emergency rental aid
- an extension of the national eviction moratorium through Jan. 31, 2021
- $15 billion for theaters and other live venues
- $82 billion for local schools, colleges and universities
- $10 billion for childcare
- $22 billion for health-related expenses incurred by state, local, Tribal, and territorial governments
- $13 billion for emergency food assistance, including a 15% increase for six months in Supplemental Nutrition Assistance Program benefits
- $7 billion for broadband expansion
Tax Breaks for Christmas
The relief bill clarified that business owners who received loans in the program can claim deductions for expenses they paid for with loan proceeds. This supersedes IRS guidance that such expenses could not be deducted and brings the policy in line with what many have argued was Congress’s intent when it created the original PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The CARES Act specifically demanded that the forgiven loans were not taxable.
While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).
In November, the IRS then expanded on this position by issuing Rev. Rul. 2020-27, which held that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period.
The new COVID-19 relief bill clarifies 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” by Section 1106 of the CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to loans under both the original PPP and subsequent PPP loans.
In addition to PPP tax clarification, the bill also raised business meal deductions to 100% during 2021 and 2022 as long as the expense is for food or beverages provided by a restaurant. Companies were previously allowed to deduct only 50% of those costs.
The bill also makes permanent the lower tax rates in place on alcoholic beverages since 2018 as part of the Craft Beverage Modernization and Tax Reform Act (CBMTRA) and provides significant tax relief for wineries, breweries, and distilleries for years to come. These excise tax provisions were set to expire at the end of this year had Congress not acted.
PPP2-Return of the Loan
Contained in the Relief Bill is re-start of the PPP Loans from last year. There are several key changes to the new program.
Previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 or fewer employees
- Have used or will use the full amount of their first PPP loan
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019
The legislation makes Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” (as defined in the act), provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.
PPP2 will also permit first-time borrowers from the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Not-for-profits, including churches
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location
The bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
Public traded companies are excluded, as are those entities with more than 300 employees per location.
Hotels and food-service businesses are eligible for larger loans, up to 3.5 times their average monthly payroll. Other borrowers would again be limited to 2.5 times their payroll. The maximum amount of the loans are also capped at $2 million.
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations
- Covered operating costs such as software and cloud computing services and accounting needs
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the final rules governing PP1.
The new program creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
The new program includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
The bill also allocates $50 million to the Small Business Administration for audits and other efforts to address fraud in the program.
New York Times reports that “Bank of America, JPMorgan Chase, Cross River Bank and Wells Fargo — the four most active lenders, which collectively made more than one million of the program’s loans — said they intended to participate again.”
Fixing the EIDL-PPP Problems
The bill clears up issues for Paycheck Protection Program borrowers who took relief from a second Small Business Administration program, the Economic Injury Disaster Loan system. That program gave borrowers long-term, low-interest loans directly from the government to help them rebuild.
The CARES Act designated up to $10,000 of each EIDL loan as an advance that lawmakers said would not have to be repaid. But the law required the advance to be docked from the amount that would be forgiven on a business’s PPP loan. Certain borrowers soon learned that they still owed $10,000 on their forgiven PPP loan and faced unexpected $500 per month payments.
The relief bill includes a $15 million grant program to help closed theaters, museums, zoos and live event venues.
The bill stipulates that any eligible venue must have seen their revenue decline by at least 25 percent this year, and there are a number of disqualifiers that will limit what movie theater operators or live venues are eligible for the grants. Among them: The owner of the venue cannot be publicly traded, operate in more than one country, or in more than 10 U.S. states, and they cannot have more than 500 full-time employees, or have received at least 10 percent of their revenue from government sources.
The language of the bill was based on the Save Our Stages Act, which was introduced by Sen. John Cornyn (R-Texas) and in the House by Rep. Peter Welch (D-Vermont) in July.
The bill includes a wide range of provisions that go beyond Covid-19 relief and government appropriation. It includes a new law that will make it a felony to operate an illegal streaming service, and another that establishes a small claims panel to adjudicate copyright claims.
So how will the $15 billion grant program for live venues work?
- About $2 billion will be set aside for organizations that employ 50 or fewer people. After 60 days, any amount remaining from this pool that goes unused will be available to larger operators.
- During the first 14 days of the program, the SBA will only award grants to eligible entities that have faced 90% or greater losses in revenue. In the next 14 days following the initial 14 days, grants will only be made to entities that suffered a 70% revenue loss or greater. After the first 28 days, grants will be awarded to other eligible entities that have suffered at least a 25% reduction in revenue.
- The SBA can make a grant of up to $10 million and a subsequent grant equal to 50% of the initial grant.
- The grants can be used for payroll costs, rent, utilities and personal protective equipment.
- The SBA will conduct increased oversight of all people and entities that receive the grants and will have to submit a report within 45 days after the legislation's passage outlining an oversight and audit plan for the grant program and will have to provide monthly updates.
- Businesses and organizations that receive this grant will be ineligible to receive a PPP loan.
For More: James W. Kilbourne, Jr.
Updated: December 28, 2020