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Latest Tax Changes Included in the Consolidated Appropriations Act 2021

On Dec. 27, President Donald Trump signed the Consolidated Appropriations Act 2021, the second largest stimulus package passed last year following the $2 trillion Coronavirus Aid, Relief, and Economic Security Act approved in early 2020. This latest spending bill authorizes additional COVID-19 relief legislation and funds the federal government through Sept. 30, 2021, making important changes to the Paycheck Protection Program. In addition to revitalizing the PPP loans, Congress included several tax provisions which are generally beneficial to taxpayers.

Deduction for Expenses Paid with PPP Loans. The bill nullifies IRS Notice 2020-32, reversing the IRS’s position that expenses paid from the proceeds of a PPP loan that is subsequently forgiven are not deductible for tax purposes. The bill allows the taxpayer to take a deduction for expenses paid by a forgiven PPP loan. California has made it clear that it does not follow this treatment, so expenses paid with a forgivable PPP loan will generally be nondeductible for California tax purposes.

With respect to PPP forgiveness, it provides that no amount will be included in the gross income of the borrower by reason of forgiveness, no deduction will be denied or tax attribute reduced and no basis increase shall be denied by reason of the exclusion. With respect to pass through entities, any amount due to PPP loan forgiveness is excluded from taxable income and is treated as tax exempt income. Finally, any increase in the adjusted tax basis of a partnership due to PPP loan forgiveness is excluded from taxable income of the partnership and is treated as part of the partner’s distributive share of deductions resulting from the expenditure of the PPP loan proceeds.

Business Meals Deduction. In an effort to help the restaurant industry, the bill allows businesses to deduct 100% of the costs of food and beverage purchased from a restaurant for business meals until Jan. 1, 2023. Previously tax law only allowed a deduction for 50% deduction of business meals.

PPP Part Two

Changes to the Borrower’s Eligibility Requirement. Borrowers who would now include certain non-profit organizations covered under 501(c)(6) of the Internal Revenue Code and (i) community associations and chambers of commerce; (ii) hospitality marketing, non-profit or governmental entities; (iii) newspaper and broadcast companies (including non-profit organizations with the NAICS codes beginning with 5151); and (iv) housing cooperatives with less than 300 employees.

For those businesses that have previously obtained a PPP loan, they now can obtain a second round of loan amounts. To receive a second round of PPP loans the borrower must be eligible for the initial round of PPP loans and must have used the full amount of the initial PPP loan, has less than 300 employees and demonstrate a year-to-year decline of 25% or more of gross receipts for any quarter in 2020 (as compared to the same quarter in 2019).

Extension of the PPP Loan Program. The PPP program is now extended through March 31, 2021. As a result, the covered period of eligibility and time allowed to use PPP loan funds has been extended from Dec. 31, 2020, to March 31, 2021.

Additional Eligible Expenses. In addition to qualifying payroll costs, mortgage, rent and utility payments, borrowers are allowed to spend PPP loan proceeds on the following types of expenses, which can subsequently be forgiven:

• Covered operation expenditures meaning payments made for any business software or cloud computing services that facilitates business operations, products or delivery service, processing, payment or tracking of payroll expenses, human resources, and sales and marketing functions or accounting or tracking of supplies, inventory, records and expenses.

• Covered property damage costs meaning any costs related to property damage or vandalism or looting due to public disturbances that occurred in 2020 that are not covered by insurance.

• Covered supplier costs meaning expenditures by the borrower to a supplier of goods with a supply of goods that are (i) essential to the operation of the business at the time of the expenditure and (ii) are purchased pursuant to contracts that were in effect during the covered period.

• Covered worker protection expenditures, meaning any operating or capital expenditure that facilitates the adaptation of the borrower’s business activities to comply with HHS, CDC or OSHA requirements (or the equivalent state or local guidance) related to COVID-19 during the period from March 1, 2020, to the end of the national emergency declaration. This excludes any cost of any residential property or intangible property.

Additional types of qualifying payroll costs include group insurance premiums for group life, disability, vision or dental insurance in addition to group health insurance policies.

Ability to Increase Loan Amount. Borrowers who obtain a PPP loan, including those who have repaid or returned the loan proceeds, are eligible to modify their loan amounts based on changes in regulations, which will result in the larger loan amount for the borrower. The Small Business Administration must release guidance within 17 days of enactment regarding procedures for additional loan amounts. Borrowers who have received forgiveness for the existing PPP loan are not eligible to request a larger loan amount. Publicly traded companies are also excluded.

Second Round PPP Loan Amounts. The new loan amounts are capped at $2 million. The loan amount is generally calculated by multiplying the average total monthly payroll for the one-year period prior to the date the loan is made or calendar year 2019, (at the election of the borrower) by 2.5. Borrowers within accommodation and food service industries (NAICS Code 72) are eligible to use a 3.5 multiplier instead of a 2.5 multiplier. Seasonal employees may use any 12-week period between Feb. 15, 2019, and Feb. 15, 2020, to calculate average monthly payroll costs.

As discussed earlier, borrowers are eligible for forgiveness for loan proceeds used to pay payroll costs, covered mortgage, rent, utility payments, covered operation expenses, covered property damage costs, covered supplier costs and covered worker protection expenditures. To be eligible for full forgiveness, at least 60% of the loan must be spent on qualifying payroll costs.

Administrative Rules. The bill also has changes to the audit and forgiveness procedures. For loans up to $150,000, forgiveness will require completion of a one page online or a paper form with limited borrower certifications. Loans between $150,000 and $200,000 will have simplified forgiveness requirements. Finally, the SBA must also establish specific policies and procedures for conducting audits and reviews of PPP loans within 45 days of enactment.

Conclusion

Phil Jelsma is CGS3’s partner and chair of the firm’s tax practice.

The full article can also be found in the Daily Journal here and in the Daily Transcript here (subscription required).