Key Takeaways of the New $900B Stimulus Bill

On December 21, 2020, Congress passed significant legislation (over 5,000 pages) to not only avert a government shutdown but to also provide relief for individuals and businesses suffering from the negative economic effects of the coronavirus. We have summarized below some of the key takeaways from the new $900 billion Stimulus Bill.  To jump to a particular section, click on the links below:

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1. Stimulus Payment

One of the most talked about provision of the legislation is the individual stimulus payment. To provide another round of immediate cash assistance to Americans and their families, the legislation would provide stimulus payments to many U.S. taxpayers. 

How Much?

  • $600 if single or $1,200 if married filing jointly

  • Increased by $600 for each child under the age of 17

Important Note: AGI is determined based on your 2019 tax return.

The stimulus payment begins to phase out once your adjusted gross income (AGI) exceeds:

  • Single: $75,000

  • Head of Household: $112,500

  • Married Filing Jointly (or surviving spouse): $150,000

 
  • Beginning on the date that is 8 weeks after such date of origination; and

  • Ending on the date that is 24 weeks after such date of origination

2. Paycheck Protection Program (PPP) Updates

There are a number of welcome provisions to the PPP program, including:

The legislation provides a major relief for taxpayers who received a PPP loan. Previously, borrowers who used their PPP funds for qualified expenditures and had a reasonable expectation that the PPP loan would be forgiven were not able to receive a tax deduction for those qualified expenditures. Under the new legislation, borrowers are now allowed a tax deduction for qualified expenditures paid with the proceeds of a PPP loan that is reasonably expected to be forgiven. This provision is effective as of March 27, 2020, the date of the enactment of the CARES Act, therefore it applies even if you have already applied for forgiveness.

  • Covered Operations Expenditures – means a payment for any business software or cloud computing service that facilitates business operations, product, or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

The legislation provides some much-needed clarification on unclear provisions with regards on the PPP program. It clarifies that other employer-provided group insurance benefits are included in payroll costs. Examples of this would include group life, disability, vision, or dental insurance. It also clarifies that a business organization that were not in operation on February 15, 2020 shall not be eligible for the initial PPP loan as well as a second draw PPP Loan.

Expansion of Simplified Application

Before the passing of this legislation, borrowers who received PPP loans under $50,000 were eligible for a simplified loan forgiveness process. The legislation expanded the simplification process from borrowers who received PPP loans under $50,000 to those who received PPP loans under $150,000. The new simplified form is supposed to be available 24 days from the enactment of this legislation and applies to PPP loans made before, on, or after the date of enactment.

PPP Clarification

Deductibility of Qualified Expenditures

Additional Eligible Expenses

The legislation further expands eligible non-payroll uses of PPP Funds. The additional non-payroll expenditures include:

  • Covered Property Damage Costs – means a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.

  • Covered Supplier Costs – means expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.

  • Covered Worker Protection Expenditures – means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established, or guidance issued by a State or local government.

All PPP Loans made before, on, or after the enactment of the legislation are eligible to utilize the above expenditures as qualifying expenditures eligible for loan forgiveness.

Covered Period Changes

Before the passing of this legislation a borrower needed to choose either an 8 week or 24 week covered period. The legislation changes the covered period to give the borrower the right to choose their covered period. The date in which a borrower can choose begins on the date of the origination of a covered loan and ends on a date selected by the eligible recipient of the covered loan that occurs during the following period:

3. Paycheck Protection Program (PPP) Second Draw Loans

The legislation creates a second round of PPP for some of the businesses that have been severely impacted by the pandemic. The second round is being called a “PPP second draw” loan. Below are the details:

  • Eligible entities include, but are not limited to, Partnerships, S Corporations, C Corporations, certain non-profit organizations, self-employed individuals, sole-proprietors, independent contractors;

  • Entity must not have more than 300 employees (exceptions apply to businesses with multiple locations);

  • Entity must have used, or will use, the full amount of their original PPP loan; and

  • Demonstrate at least a 25% reduction in gross receipts in the 1st, 2nd or 3rd quarter of 2020 relative to the same 2019 quarter. PPP Second draw applications that are received after January 1, 2021 are also eligible to test the 4th quarter.

 

Eligibility Requirements

Loan Terms

  • Borrowers may receive a loan amount of up to 2.5X the average monthly payroll costs paid by the eligible entity during

    • The 1-year period before the date on which the loan is made; or

    • Calendar year 2019;

  • Entities in industries assigned to NAICS CODE 72 (Accommodation and Food Services) may received loans of up to 3.5X the average monthly payroll costs;

  • The maximum loan amount for the PPP Second Draw Loans is $2 million;

  • Simplified process to receive PPP Second Draw Loans of $150,000 or less.

Loan Forgiveness

  • In order to obtain full loan forgiveness 60% of the PPP second draw loan needs to be spent on eligible payroll costs and 40% on eligible non-payroll costs.

  • The safe harbors that were put in place during the first round of PPP loan funding, with regards to restoring full-time equivalents and restoring salaries and wages, are the same for the PPP second draw loans but the bill does not seem to provide information as to a specific date these factors need to be restored.

4.  Economic Injury Disaster Loans (EIDL) Changes

Although not as attractive as the PPP Loan, another option available to taxpayers for aid during the pandemic is the EIDL program and the emergency grant available. The legislation provides the following changes to the EIDL Emergency Grant program:

  • Additional funds have been made available for the EIDL Emergency Grant

    • EIDL Emergency Grant does not need to be repaid and eligible recipients can receive up to $1,000 per employee limited to $10,000 in total

    • EIDL Emergency Grant no longer has an impact on PPP loan forgiveness.

      • Additional rules to be provided to ensure borrowers are made whole if they received forgiveness and their EIDL was deducted from that amount

  • A new targeted EIDL advance program is available to assist business that have been severely impacted by the coronavirus

 

5. Employee Retention Credit (ERC)

The CARES Act provided for a refundable credit, applicable for only one-year, against the employer’s share of the 6.2% social security tax. In order to be eligible for the credit, one of the following tests must be satisfied. In either test, the employer needed to continue to pay their employees.

  • Business operations were fully or partially suspended by order of an applicable government authority, or

  • The business continued operations but there was a decline in gross receipts by more than 50% compared to the same quarter in the prior year.

 

Each quarter the business will receive a credit, equal to 50% of the qualified wages paid to each employee for that quarter, against its 6.2% share of social security taxes. The credit is based on qualified wages paid to employees and provided for the first $10,000 of compensation paid to an eligible employee, including health insurance.   The amount of the credit may be limited if a business has more than 100 employees.

Note: The CARES Act prohibited any business from claiming the ERC if it received a Paycheck Protection Loan.

The new legislation provides not only an extension of the ERC but also some beneficial changes:

  • ERC has extended the wage period through July 1, 2021;

  • The credit a business receives increased from 50% of qualified wages to 70% of qualified wages;

  • Qualified wages changed from an overall cap of $10,000 of compensation paid to an eligible employee to a $10,000 limit per quarter per employee;

  • A business is no longer prohibited from claiming the ERC if it received a PPP Loan; and

  • The decline in gross receipts changed from 50% to 20% making more businesses eligible for the credit.

6. Unemployment Benefits

The legislation provided several relief provisions related to unemployment:

  • Restores the Federal Pandemic Unemployment Compensation (PFUC) supplement at $300 per week, starting after December 26, 2020 and ending March 14, 2021.

    • Increased the number of weeks of benefits an individual may claim from 13 to 24

  • Extends Pandemic Unemployment Assistance (PUA) to March 14, 2021

    • PUA expands jobless benefits to gig workers, independent contractors, self-employed, etc.

    • Increased the number of weeks of benefits an individual may claim from 39 to 50

  • Extends Pandemic Emergency Unemployment Compensation (PEUC) to March 14, 2021

    • PEUC applies to individuals who have exhausted their regular state benefits

    • Increased the number of weeks of benefits an individual may claim from 13 to 24

 

7. Educator Expenses

The legislation expands eligible expenses for the educator expense deduction. Personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 are eligible expenses for purposes of the educator expense deduction. This applies to expenses paid or incurred after March 12, 2020.

 

8. Extension of Credits for Paid Sick and Family Leave

The act extends refundable payroll tax credits to employers for paid sick and family leave that were originally enacted in the Families First Coronavirus Response Act. Originally the refundable payroll tax credits for paid sick and family leave were set to expire on December 31, 2020 but the legislation has extended the applicable period through March 31, 2021.

 

9. Charitable Contributions

The CARES Act offered an “above-the-line” deduction for charitable contributions up to a maximum of $300 for 2020. Therefore, taxpayers do not need to itemize their deductions to qualify.  The charitable contribution needs to be paid in cash and paid to certain qualifying charitable organizations.

Taxpayers who itemized their deductions already receive a benefit for their charitable contributions, but the CARES Act also increases the adjusted gross income (AGI) limitation applicable to certain charitable contributions. Previously, a taxpayer’s charitable contributions were generally limited to 60% of their AGI. For 2020 only, this limitation has increased to 100% of their AGI.   

 

The legislation expands the CARES Act charitable deduction provisions into 2021 while also increasing the $300 to $600 for a married couple filing jointly. 

 

10. Full Deduction on Business Meals

In an effort to assist the severely hit restaurant industry, the legislation has increased the deductibility for business meals from 50% to 100%. This is only applicable for 2021 and 2022. Additional requirements need to be met to classify the meal as a business meal.

 

11. Tax Credit Changes

  • For 2020 only, taxpayers can use their 2019 earned income to determine their earned income tax credit and the refundable portion of the child tax credit.

  • The following tax credits were extended until December 31, 2025 (Therefore, they sunsets at the same time as many provisions in the Tax Cuts and Jobs Act)

    • Work Opportunity Tax Credit

    • New Markets Tax Credit

    • Indian Employment Credit

  • The following energy credits have been extended through the end of 2021

    • Nonbusiness energy property

    • Energy Efficient Homes

    • Qualified Full Cell Motor Vehicles

 

12. Other Provisions

  • Section 179D which provides a deduction for energy efficient commercial building improvements is now permanent in the law

  • The exclusion from gross income of discharged qualified principal residence indebtedness has been extended until December 31, 2025. The limit of the amount that can be excluded from gross income has been reduced from $2 million to $750,000 for married couple filing jointly.

  • Taxpayers with residential rental property that elected to be treated as real property trade or business under 163J were required to change their depreciation based on the alternative depreciation system (ADS). If the residential rental property was placed in service before 2018, then the taxpayer needed to change the depreciable life from 27.5 years to 40 years. The new legislation allows taxpayers to change the depreciable life from 27.5 years to 30 years.

 

These are only some of the key takeaways from the legislation. We expect administrative guidance in the days and weeks to come and are watching developments closely. As more details become available, we will be sure to provide you with the latest updates.  

If you have any questions please do not hesitate to contact one of our tax specialists at Restivo Monacelli LLP. We are here to assist you during this time of great uncertainty.