The U.S. Senate and House of Representatives passed a $900 billion COVID-19 relief bill Monday night. The Coronavirus Response and Relief Supplemental Appropriations Act of 2021, as it has been named, still needs to be signed by the President and is not law at this time.

A summary of the key terms of the proposed bill is as follows:

Business Provisions

• Paycheck Protection Program (PPP)
  • It clarifies that businesses can deduct expenses paid with forgiven PPP loans. This applies to the original round of PPP loans and now this new round of PPP loans.
  • The bill provides an additional $284 billion in funding for round two of PPP loans.
  • Who is eligible for round two?
    • First-time qualified borrowers with 500 or fewer employees
    • Businesses that previously received a PPP loan in round one who specifically have 300 or fewer employees; have used or will use the full amount of their first PPP loan; and can show a 25% gross revenue decline in certain 2020 quarters compared with the same quarter in 2019
  • The bill expands eligibility for certain nonprofits (for example, Chamber of Commerce and Churches) and includes set-asides for very small businesses and community-based lenders.
  • Maximum loan size for round two PPP loans is $2 million.
  • The bill makes additional expenses eligible for loan forgiveness besides payroll, rent, mortgage interest and utilities. The bill changed the requirement to spend no less than 60% of the funds on payroll over the covered period. It also includes:
    • Covered worker protection and facility modification expenditures, including PPE to comply with COVID-19 federal health and safety guidelines
    • Expenditures to suppliers that are essential at the time of purchase
    • Covered operating costs such as software and cloud computing services and accounting needs
  • The bill creates a simplified forgiveness application process for loans of $150,000 or less. The U.S. Small Business Administration (SBA) must create the application within 24 days of the bill’s enactment.
  • Repeals the requirement that PPP borrowers deduct the amount of any Economic Injury Disaster Loan Program (EIDL) advance from their PPP forgiveness amount.
• Provides new Economic Injury Disaster Loan Program (EIDL) grants for business in low-income communities.
• Extends and expands the Employee Retention Tax Credit through July 1, 2021.
• Expands the deduction for business meals to 100% for 2021 and 2022.
• Extends the Families First Coronavirus Response Act (FFCRA) paid leave 100% tax credits through March 31, 2021. This does not extend the requirement, but it allows an employer to keep offering such leave.

Individual Provisions:

• Economic impact payments of $600 for individuals making up to $75,000 per year and $1,200 for married couples making $150,000 per year, as well as a $600 payment for each dependent child.
• Extended unemployment benefits $300 per week supplement from December 26 until March 14, 2021, an extra 11 weeks. It also extends the Pandemic Unemployment Assistance (PUA) program with expanded coverage to the self-employed, gig workers, and others in nontraditional employment.
• Adjustments to how the Child Tax Credit and Earned Income Tax Credit are calculated for 2020. The calculation may be able to use 2019 income to determine an individual’s credit eligibility for the 2020 tax year.
• The new above-the-line charitable contribution is extended through 2021 at $600 married filing jointly and $300 for all other filers.
• Flexible Savings Accounts (FSA) balances can be rolled from the 2020 tax year into 2021. This could be helpful for any unused childcare expenses unable to be used in 2020.
• Payroll tax deferral repayment by employees as been extended from April 2021 to December 31, 2021.

Our team is closely monitoring this situation as updates are released. Please reach out to your trusted Scheffel Boyle team member with questions. We are here to help!

 

 

The IRS yesterday released Revenue Ruling 2020-27 to clarify the timing on the deductibility of expenses paid with PPP loan funds.

The ruling asks the question, “may a taxpayer that received a loan guaranteed under the Paycheck Protection Program (PPP), and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses?”

 

BACKGROUND:

Back in May 2020, the IRS issued Notice 2020-32 that informed taxpayers that “no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of the covered loan.”  That meant that even though the forgiveness of the covered loan was exempt from income, the nondeductibility of the expenses has indirectly caused the loan to be taxable.  Over the last few months, Congress has proposed legislation that would make the expenses deductible, but nothing has been passed through congress to date.  In addition, as we are approaching the end of the year, taxpayers who haven’t applied for forgiveness have been left wondering the timing of the deduction of the expenses depending on if forgiveness is obtained in a subsequent year.  This brings us to Revenue Ruling 2020-27.

 

THE NEW REVENUE RULING OFFERS TWO SITUATIONS:

• Situation 1: During the period beginning on February 15, 2020, and ending on December 31, 2020 (covered period), Taxpayer paid expenses that are described in section 161 of the Internal Revenue Code and section 1106(a) of the CARES Act (eligible expenses).  These expenses include payroll costs that qualify under section 1106(a)(8) of the CARES Act, interest on a mortgage that qualifies as interest on a covered mortgage obligation under section 1106(a)(2) of the CARES Act, utility payments that qualify as covered utility payment under section 1106(a)(5) of the Cares Act, and rent that qualifies as payment on a covered rent obligation under section 1106(a)(4) of the CARES Act.  In November 2020, taxpayer applied to the lender for forgiveness of the covered loan on the basis of the eligible expenses it paid during the covered period.  At that time, and based on taxpayer’s payment of the eligible expenses, taxpayer satisfied all requirements under section 1106 of the CARES Act for forgiveness of the covered loan.  The lender does no inform taxpayer whether the loan will be forgiven before the end of 2020.
• Situation 2: During the covered period, Taxpayer paid the same types of eligible expenses that were paid in Situation 1.  Taxpayer did not apply for forgiveness of the covered loan before the end of 2020, although, taking into account the Taxpayer’s payment of the eligible expenses during the covered period, satisfied all other requirements under section 1106 of the CARES Act for forgiveness of the covered loan.  Taxpayer expects to apply to the lender for forgiveness of the covered loan in 2021.

 

ANALYSIS PROVIDED BY THE REVENUE RULING:

In both situations, the Taxpayer had a reasonable expectation of the reimbursement.  At the end of 2020, the reimbursement of the Taxpayers eligible expenses, in the form of covered loan forgiveness, is reasonably expected to occur rather than being unforeseeable, such that the deduction is inappropriate.  Taxpayer’s eligible expenses are not deducible because there is a reasonable expectation of reimbursement.

A Taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses may not deduct those eligible expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

In summary, no matter when the application is filed or when it is approved for forgiveness, if reasonably expected to obtain forgiveness, the expenses will be nondeductible in 2020.

What was not provided in the Revenue Ruling was how to handle business owners with no employee payroll (for example, Schedule C filers with no employees).  These business owners don’t have the qualified expenses that qualifies them for forgiveness.

 

HOW CAN WE HELP

Our team is available to assist you during the process of applying for PPP loan forgiveness. We anticipate there may still be some modifications to the Paycheck Protection Program in the coming weeks and our team is closely monitoring the situation.  We will update you as any such changes or new laws are released.  Please contact your trusted Scheffel Boyle team member with questions. We are always here to help.