COVID Related Tax Relief Act of 2020 – Consolidated Appropriations Act

By Michael Mazza, CPA, MST, Shareholder

The Consolidated Appropriations Act (CAA), 2021 was signed into law on December 27,2020.  The CAA made changes to multiple tax areas, below are the highlights of the changes made to the Payroll Protection Program (PPP) as well as the Employer Retention Tax Credit (ERTC).  If you have any questions on the below items please contact Detweiler, Hershey and we will be happy to assist you.

Payroll Protection Program (PPP) Updates

  • Deductibility of expenses paid with PPP loans – The Act provides that expenses paid from the proceeds of PPP loans are deductible.  Previously the IRS had determined that these expenses would not be deductible, however the Act reverses this and makes the expenses deductible.
  • PPP Second Draw – PPP loans will be available to first time qualified borrowers and to businesses that previously received a PPP loan.

The Act provides first time borrowers to apply for a PPP loan by following the original rules put in place for PPP loans.

The Act permits businesses who received a previous PPP loan and experience a 25% reduction in gross receipts to take a PPP Second Draw Loan of up to $2 million.  In order to qualify taxpayers...

  • Must have taken out an Original PPP Loan
  • Employ no more than 300 employees per physical location
  • Have used or will use the full amount of their first PPP loan
  • Demonstrate at least a 25% reduction in gross receipts in the first, second, third or fourth quarter of 2020 relative to the same 2019 quarter or a 25% or greater reduction in annual gross receipts 

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors and small agricultural cooperatives.

Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or in calendar 2019.

Borrowers in the hospitality or food service industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs.

Taxpayers requesting loans of $150,000 or less will have a simplified application to complete.  Additionally, taxpayers who borrow PPP Second Draw Loans of no more than $150,000 may submit certification, on or before the date the loan forgiveness application is submitted, not when applying, attesting that the eligible entity meets the applicable revenue loss requirement.

Like Original PPP loans, PPP Second Draw Loans may be forgiven for payroll costs up to 60% and non-payroll costs such as rent, mortgage interest and utilities of 40%. Additionally, the Act added qualified non-payroll costs such as COVID worker protection and facility modifications as well as other COVID-related expenses.

Forgiveness of the loans is not included in income as cancellation of indebtedness income.  Additionally, the expense paid with the loan proceeds are deductible.

Employer Retention Tax Credit (ERTC)

The Act made changes and modifications to the Employer Retention Credit that was put in place by the CARES Act.  The original ERTC provided a payroll tax credit of up to $5,000 annual cap per employee for qualifying businesses.  A business was not able to claim the credit if they also received a PPP loan.

Under the CAA, modifications were made to the original credit as well as extending it in 2021.

Beginning January 1, 2021, the credit is available to business with operations that are either fully or partially suspended by COVID-19 governmental order or a business can qualify if their gross receipts are less than 80% for the same quarter in 2019.  If a business was not in existence in 2019, they may use a comparison to 2020 for purposes of the credit.

Beginning January 1, 2021, the credit is 70% of qualified wages, plus the cost to continue providing health benefits to the employee.  This is up from 50% in the CARES Act.  Additionally, the maximum credit cap is $7,000 per employee for each of the first two quarters of 2021.  Previously the credit was capped at $5,000 annually per employee.

The credit is available to employers employing less than 500 employees; this is up from 100 employees originally.

As stated above, the original credit was not allowed if a business had also received a PPP loan. This has been repealed in the CAA.  Additionally, this repeal is retroactive to the original credit and makes businesses eligible to claim the credit for 2020 even if they received a PPP loan.  To apply for the credit in 2020 the business must meet the original rules which are different from the rules starting January 1, 2021.

The credit cannot be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.  However, a company that received a PPP loan in 2020 and paid qualified wages in excess of the PPP loan amount forgiven, and is otherwise eligible to claim the credit, can claim the credit retroactively.

Filed in: Client News