On December 27, 2020, the Consolidated Appropriations Act, 2021 for COVID-19 relief was signed into law by the president. Two items of particular importance for businesses are the expansion of the Employee Retention Credit (ERC) and additional Paycheck Protection Program loans (PPP2).
Expansion of the Employee Retention Credit (ERC)
The CARES Act introduced the ERC with the aim of providing eligible employers with a refundable tax credit. A qualifying business is one whose:
1. operations were fully or partially suspended due to orders from a government authority limiting commerce, travel or group meetings due to COVID-19.
2. gross receipts for any quarter in 2020 were less than 50% of its gross receipts for the corresponding quarter in 2019. Businesses can continue to take the credit each quarter until gross receipts are 80% of the gross receipts in the same quarter of 2019.
Fifty percent of up to $10,000 in qualified wages (a total of $5,000 per employee) paid by qualifying businesses were eligible for the tax credit. These rules apply to wages paid during any quarter between March 12, 2020 and December 31, 2020.
As a result of the Consolidated Appropriations Act, 2021, the following modifications have been made to the ERC and will apply from January 1, 2021 to June 30, 2021.
- The maximum tax credit per employee increased from 50% to 70% of qualified wages.
- The limit on per-employee wages increased from $10,000 for the year to $10,000 per quarter (maximum credit of $7,000 per quarter).
- If the employer has over 100 employees, then the credit is only available if employees stay at home and do not provide ANY services with respect to wages paid prior to December 31 ,2020. This threshold has been increased to 500 employees from January 1, 2021 to June 30, 2021.
- The required gross receipts decline has been updated to 20% (previously a 50% decline was required) for the same calendar quarter in 2019; employers have been provided a safe harbor that allows them to use prior quarter gross receipts to determine eligibility.
- Employers that were not in business during any quarter in 2019 or with seasonal employees may claim the ERC for the corresponding quarter in 2020.
- Expenses related to group health plans may be considered as qualified wages even when employees do not receive wages.
- The ERC will now be allowed in coordination with a PPP loan but can only be claimed on wages not paid with PPP loan funds.
- Businesses with fewer than 500 full-time equivalents may elect in any calendar quarter to receive an advance payment of the ERC for that quarter, as long as the amount does not exceed 70% of the average quarterly wages paid in 2019. If the advance payment ends up exceeding the actual credit due, payroll tax for that calendar quarter will be increased by the amount of the excess.
- Wages are no longer capped at what the employee was paid in the 30‐day period immediately before the eligible quarter in 2020. This means that employers can now claim the ERC for bonuses paid to essential workers.
Paycheck Protection Program – Release of Second Round of Funding (PPP2) and Clarifications on PPP1
Under PPP2, $284 billion has been set aside for a second round of forgivable loans for small businesses. Loans will be capped at $2 million per borrower, down from the $10 million limit in the first PPP.
Businesses may receive a loan amount of up to 2.5 times their average monthly payroll costs in 2019 or in the 12 months before they submit a loan application (3.5 times for those in the accommodation and food services sector – for businesses with NAICS codes starting with 72). The Small Business Administration (SBA) will issue guidance on calculating the revenue reduction.
Among the important changes under PPP2:
- Expanded eligibility for loans
- Reverses IRS guidance and allows tax deductions for expenses paid with PPP loans
- Repeals the CARES Act provision that required PPP borrowers to deduct an Economic Injury Disaster Loan Program Advance from the PPP loan forgiveness amount
Businesses are eligible for PPP2 if they received a first round of PPP funds and have spent or will spend the full amount of their first loan. If businesses have not applied for the first round of PPP funds, they are still eligible to do so. To qualify for PPP2:
- Businesses must employ no more than 300 employees.
- If a business has more than 300 employees, it must have met established SBA qualifying criteria for small businesses.
- A business must have had gross receipts during the first, second, third or, only with respect to an application submitted on or after January 1, 2021, fourth quarter in 2020 that demonstrate a 25% or more reduction from the gross receipts of the entity during the same quarter in 2019.
- Businesses still need to meet necessity requirement for loans (we are awaiting SBA guidance for a definition of necessity).
- The $100,000 salary/wage limitation now applies on an annualized basis.
- Borrowers in bankruptcy can apply for PPP loans with court approval.
- You can now receive PPP loans and the Employee Retention Credit together (but on separate wages). If you believe that you qualify for the ERC, do not file your PPP forgiveness application. Talk to a trusted advisor first.
Additional businesses that may apply for a PPP loan:
- 501(c) (6) organizations
- The organization cannot receive more than 15% of its receipts from lobbying activities and lobbying activities cannot comprise more than 15% of the total activities of the organization. Further, lobbying activities cannot exceed more than $1 million during the prior tax year (ending before February 15, 2020)
- The organization cannot use loan proceeds on lobbying
- “Destination marketing organizations” that employ no more than 300 employees
- Housing cooperatives that employ no more than 300 employees
- FCC broadcast station license holders and newspapers with more than one physical location, as long as the business has no more than 500 employees per physical location or the applicable SBA size standard; and eligible nonprofit or tax-exempt private and public colleges and universities that have a public broadcasting station if the organization certifies that the loan will support locally focused or emergency information
Increase in PPP1 loan amount
- The bill allows recipients of an original PPP loan to amend their loan applications and request an increased amount in PPP funds due to changes in legislation. Changes that could increase original loan amounts include:
- Improper calculations
- Seasonal employer and partnership rule updates issued on May 19, 2020 (including changes for partner compensation)
- Expenses for group insurance costs – life, dental, vision and disability
- Tips paid by customers to employees
- The bill also requires the SBA to issue guidance within 17 days so that borrowers who returned all or part of the PPP loans are provided with a process that allows them to reapply for the maximum allowable amount
Loan forgiveness/Eligible expenses
Four types of non-payroll expenses have been added to the list of expenses eligible for loan forgiveness:
- Covered operations expenditure, which means 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
- Covered property damage cost, which 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, which means an expenditure made by an entity to a supplier of goods for the supply of goods that are essential to the operations of the entity at the time at which the expenditure is made; and is made pursuant to a contract, order, or purchase order in effect at any time before the covered period with respect to the applicable covered loan; or with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan
- Covered worker protection equipment, which means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established by local or state government as well as federal bodies like the CDC, OSHA or DHHS, beginning March 1, 2020 and ending when the national emergency declaration expires
Up to 40% of the loan can be used for these non-payroll-related expenses.
The covered period of the loan begins on the loan origination date, but all loan recipients are allowed to choose the ending date, which can be between eight and 24 weeks after funding. At least 60% of PPP funds must be used for payroll-related expenses during the covered period in order to qualify for full forgiveness.
A simplified loan forgiveness process has been created for loans under $150,000, as long as all loan requirements are met.
This article was authored by Nicole Davis and Scott Whalen of Smith and Howard’s tax group, drawing on information contained in the Consolidated Appropriations Act, 2021. For more information or help, please contact your tax advisor, call us at 404-874-6244 or fill out our contact form.