Author: Beth Rizkal

The Biden administration has announced several reforms to the popular Paycheck Protection Program (PPP) to bring greater relief to the smallest and most vulnerable businesses. Among other things, the administration is imposing a two-week moratorium on loans to companies with 20 or more employees and focusing on smaller businesses. It’s also changing several program rules to expand eligibility for the 100% forgivable PPP loans.

The PPP in a nutshell

The CARES Act, passed in the early days of the COVID-19 pandemic, established the PPP to help employers cover their payrolls during the resulting economic downturn. The program is open to almost every U.S. business with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by the pandemic.

Generally, the loans are 100% forgivable if the proceeds are allocated on a 60/40 basis between payroll and eligible nonpayroll costs. While the latter initially were limited to mortgage interest, rent, utilities and interest on any other existing debt, the Consolidated Appropriations Act (CAA), enacted in late December 2020, expanded the qualifying nonpayroll costs. They now include, for example, certain operating expenses and worker COVID-19 protection expenses.

The CAA also provided another $284 billion in funding for forgivable loans for both first-time and so-called “second-draw” borrowers. The second-draw loans are restricted to smaller and harder hit businesses.

In addition, the CAA established a simplified, one-page forgiveness application for loans up to $150,000. It clarified that PPP borrowers aren’t required to include any forgiven amounts in their gross income for tax purposes and that borrowers can deduct otherwise deductible expenses paid with forgiven PPP proceeds.

The impetus for the new changes

According to the Small Business Administration (SBA), the new reforms are intended to ensure equity in the program. The SBA says a “critical goal” of the latest round of PPP funding in the CAA was to reach small and low- and moderate-income (LMI) businesses that hadn’t yet received needed relief.

Under current policies, though, the second round has distributed only $2.4 billion of a $15 billion set-aside for small and LMI “first-draw” borrowers. The SBA says this is, in part, because a disproportionate amount of funding in both wealthy and LMI areas is going to businesses with more than 20 employees. The Biden administration hopes to remedy that disparity with the announced revisions.

The changes

The announcement outlined five reforms:

1. A two-week exclusive application period for smaller businesses. The SBA has established, beginning February 24, 2021, a two-week exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees. The restriction aims to give lenders and community partners more time to work with these applicants, which often struggle to collect the necessary paperwork and secure loans.

Larger PPP-eligible businesses need not worry about missing out. The SBA says that they’ll still have time to apply for and receive support before the program is set to expire on March 31, 2021.

2. A revised loan calculation formula. The current formula is based on net profits. As a result, many of the smallest businesses — sole proprietors, independent contractors and self-employed individuals — were excluded from the PPP.

The administration is revising the formula to focus instead on gross profits. That means solo ventures that don’t show net profits on their federal tax returns nonetheless can receive PPP loans. The administration also will set aside $1 billion for businesses in this category without employees located in LMI areas.

3. The elimination of the non-fraud felony exclusion. The existing rules restrict PPP eligibility based on criminal history. A business is ineligible for PPP funding if it’s at least 20% owned by an individual with either 1) an arrest or conviction for a felony related to financial assistance fraud in the previous five years, or 2) any other felony in the previous year.

To expand access, the administration is adopting some of the proposals in a bipartisan bill in Congress dubbed the Second Chance Act. Specifically, it will eliminate the one-year lookback for any kind of felony unless the applicant or owner is incarcerated at the time of the application.

4. The elimination of the student loan exclusion. Current rules prohibit PPP loans to any business that’s at least 20% owned by an individual who’s delinquent or has defaulted on a federal debt within the previous seven years. Federal student loans fall within the definition of such debt.

The pandemic has only exacerbated the number of Americans who are delinquent on their student loans. The SBA will work with the U.S. Departments of Treasury and Education to remove the student loan delinquency restriction to broaden PPP access.

5. Clarification of noncitizen small business eligibility. The CARES Act is clear that all lawful U.S. residents can apply for PPP loans. Lack of guidance from the SBA, though, has created inconsistent access for lawful U.S. residents who are holders of Individual Taxpayer Identification Numbers (ITIN), such as Green Card holders and those in the United States on a visa.

The SBA will issue new guidance to address this problem. The guidance will state that otherwise eligible applicants can’t be denied access to PPP loans solely because they use ITINs when paying their taxes.

Stay tuned

Congress is currently debating the Biden administration’s proposed $1.9 trillion COVID-19 relief package, known as the American Rescue Plan. That bill doesn’t specifically address the PPP but includes $15 billion in grants to help small businesses, $35 billion in small business financing programs, and unspecified aid to restaurants, bars and other businesses that have suffered disproportionately.

We’ll keep you updated on any additional relevant changes to the PPP, as well as developments regarding the next round of pandemic relief.

© 2021

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19. But analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling another business, it’s important to understand the tax implications.

Two ways to arrange a deal

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier.

Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Preferences of buyers

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Preferences of sellers

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Obtain professional advice

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed. 

© 2021

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

© 2021

A number of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2021. Some stayed the same due to low inflation. And the deduction for business meals has doubled for this year after a new law was enacted at the end of 2020. Here’s a rundown of those that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2021 at $142,800 (up from $137,700 for 2020).

Deductions

• Section 179 expensing:
• Limit: $1.05 million (up from $1.04 million for 2020)
• Phaseout: $2.62 million (up from $2.59 million)

• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
• Married filing jointly: $329,800 (up from $326,600)
• Married filing separately: $164,925 (up from $163,300)
• Other filers: $164,900 (up from $163,300)

Business meals

Deduction for eligible business-related food and beverage expenses provided by a restaurant: 100% (up from 50%)

Retirement plans

• Employee contributions to 401(k) plans: $19,500 (unchanged from 2020)
• Catch-up contributions to 401(k) plans: $6,500 (unchanged)
• Employee contributions to SIMPLEs: $13,500 (unchanged)
• Catch-up contributions to SIMPLEs: $3,000 (unchanged)
• Combined employer/employee contributions to defined contribution plans: $58,000 (up from $57,000)
• Maximum compensation used to determine contributions: $290,000 (up from $285,000)
• Annual benefit for defined benefit plans: $230,000 (up from $225,000)
• Compensation defining a highly compensated employee: $130,000 (unchanged)
• Compensation defining a “key” employee: $185,000 (unchanged)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $270 per month (unchanged)
• Health Savings Account contributions:
• Individual coverage: $3,600 (up from $3,550)
• Family coverage: $7,200 (up from $7,100)
• Catch-up contribution: $1,000 (unchanged)

• Flexible Spending Account contributions:
• Health care: $2,750 (unchanged)
• Dependent care: $5,000 (unchanged)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

© 2021

To help you make sure you don’t miss any important 2021 deadlines, we’ve provided this summary of when various tax-related forms, payments and other actions are due. Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

Date Deadline for February 1 Individuals: Filing a 2020 income tax return (Form 1040 or Form 1040-SR) and paying tax due, to avoid penalties for underpaying the January 15 installment of estimated taxes.

Businesses: Providing Form 1098, Form 1099-MISC (except for those that have a February 16 deadline), Form 1099-NEC and Form W-2G to recipients.

Employers: Providing 2020 Form W-2 to employees. Reporting income tax withholding and FICA taxes for fourth quarter 2020 (Form 941). Filing an annual return of federal unemployment taxes (Form 940) and paying any tax due.

Employers: Filing 2020 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration.

February 10 Individuals: Reporting January tip income of $20 or more to employers (Form 4070).

Employers:Reporting income tax withholding and FICA taxes for fourth quarter 2020 (Form 941) and filing a 2020 return for federal unemployment taxes (Form 940), if you deposited on time and in full all of the associated taxes due.

February 16 Businesses: Providing Form 1099-B, 1099-S and certain Forms 1099-MISC (those in which payments in Box 8 or Box 10 are being reported) to recipients.

Individuals: Filing a new Form W-4 to continue exemption for another year, if you claimed exemption from federal income tax withholding in 2020.

March 1 Businesses: Filing Form 1098, Form 1099 (other than those with a February 1 or February 16 deadline) and Form W-2G and transmittal Form 1096 for interest, dividends and miscellaneous payments made during 2020. (Electronic filers can defer filing to March 31.) March 10 Individuals: Reporting February tip income of $20 or more to employers (Form 4070). March 15 Calendar-year S corporations: Filing a 2020 income tax return (Form 1120S) or filing for an automatic six-month extension (Form 7004), and paying any tax due.

Calendar-year partnerships: Filing a 2020 income tax return (Form 1065 or Form 1065-B) or requesting an automatic six-month extension (Form 7004).

March 31 Employers: Electronically filing 2020 Form 1097, Form 1098, Form 1099 (other than those with an earlier deadline) and Form W-2G. April 12 Individuals: Reporting March tip income of $20 or more to employers (Form 4070). April 15 Individuals: Filing a 2020 income tax return (Form 1040 or Form 1040-SR) or filing for an automatic six-month extension (Form 4868), and paying any tax due. (See June 15 for an exception for certain taxpayers.)

Individuals: Paying the first installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

Individuals: Making 2020 contributions to a traditional IRA or Roth IRA (even if a 2020 income tax return extension is filed).

Individuals: Making 2020 contributions to a SEP or certain other retirement plans (unless a 2020 income tax return extension is filed).

Individuals: Filing a 2020 gift tax return (Form 709) or filing for an automatic six-month extension (Form 8892), and paying any gift tax due. Filing for an automatic six-month extension (Form 4868) to extend both Form 1040 and, if no gift tax is due, Form 709.

Household employers: Filing Schedule H, if wages paid equal $2,200 or more in 2020 and Form 1040 isn’t required to be filed. For those filing Form 1040, Schedule H is to be submitted with the return and is thus extended to the due date of the return.

Trusts and estates: Filing an income tax return for the 2020 calendar year (Form 1041) or filing for an automatic five-and-a-half month extension to October 1 (Form 7004), and paying any income tax due.

Calendar-year corporations: Filing a 2020 income tax return (Form 1120) or filing for an automatic six-month extension (Form 7004), and paying any tax due.

Calendar-year corporations: Paying the first installment of 2021 estimated income taxes.

April 30 Employers: Reporting income tax withholding and FICA taxes for first quarter 2021 (Form 941), and paying any tax due. May 10 Individuals: Reporting April tip income, $20 or more, to employers (Form 4070).

Employers: Reporting income tax withholding and FICA taxes for first quarter 2021 (Form 941), if you deposited on time and in full all of the associated taxes due.

May 17 Exempt organizations: Filing a 2020 calendar-year information return (Form 990, Form 990-EZ or Form 990-PF) or filing for an automatic six-month extension (Form 8868) and paying any tax due.

Small exempt organizations (with gross receipts normally of $50,000 or less): Filing a 2020 e-Postcard (Form 990-N), if not filing Form 990 or Form 990-EZ.

June 10 Individuals: Reporting May tip income, $20 or more, to employers (Form 4070). June 15 Individuals: Filing a 2020 individual income tax return (Form 1040 or Form 1040-SR) or filing for a four-month extension (Form 4868), and paying any tax and interest due, if you live outside the United States.

Individuals: Paying the second installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

Calendar-year corporations: Paying the second installment of 2021 estimated income taxes.

July 12 Individuals: Reporting June tip income, $20 or more, to employers (Form 4070). August 2 Employers: Reporting income tax withholding and FICA taxes for second quarter 2021 (Form 941), and paying any tax due.

Employers: Filing a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or requesting an extension.

August 10 Individuals: Reporting July tip income, $20 or more, to employers (Form 4070).

Employers: Reporting income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 10 Individuals: Reporting August tip income, $20 or more, to employers (Form 4070). September 15 Individuals: Paying the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

Calendar-year corporations: Paying the third installment of 2021 estimated income taxes.

Calendar-year S corporations: Filing a 2020 income tax return (Form 1120S) and paying any tax, interest and penalties due, if an automatic six-month extension was filed.

Calendar-year S corporations: Making contributions for 2020 to certain employer-sponsored retirement plans, if an automatic six-month extension was filed.

Calendar-year partnerships: Filing a 2020 income tax return (Form 1065 or Form 1065-B), if an automatic six-month extension was filed.

October 1 Trusts and estates: Filing an income tax return for the 2020 calendar year (Form 1041) and paying any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

Employers: Establishing a SIMPLE or a Safe-Harbor 401(k) plan for 2020, except in certain circumstances.

October 12 Individuals: Reporting September tip income, $20 or more, to employers (Form 4070). October 15

 

Individuals: Filing a 2020 income tax return (Form 1040 or Form 1040-SR) and paying any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).

Individuals: Making contributions for 2020 to certain existing retirement plans or establishing and contributing to a SEP for 2020, if an automatic six-month extension was filed.

Individuals: Filing a 2020 gift tax return (Form 709) and paying any tax, interest and penalties due, if an automatic six-month extension was filed.

Calendar-year C corporations: Filing a 2020 income tax return (Form 1120) and paying any tax, interest and penalties due, if an automatic six-month extension was filed.

Calendar-year C corporations: Making contributions for 2020 to certain employer-sponsored retirement plans, if an automatic six-month extension was filed.

November 1 Employers: Reporting income tax withholding and FICA taxes for third quarter 2021 (Form 941) and paying any tax due. November 10 Individuals: Reporting October tip income, $20 or more, to employers (Form 4070).

Employers: Reporting income tax withholding and FICA taxes for third quarter 2021 (Form 941), if you deposited on time and in full all of the associated taxes due.

November 15 Exempt organizations: Filing a 2020 calendar-year information return (Form 990, Form 990-EZ or Form 990-PF) and paying any tax, interest and penalties due, if a six-month extension was previously filed. December 10 Individuals: Reporting November tip income, $20 or more, to employers (Form 4070). December 15 Calendar-year corporations: Paying the fourth installment of 2021 estimated income taxes. December 31 Employers: Establishing a retirement plan for 2021 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

© 2021

COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

Background on the credit

The CARES Act, enacted in March of 2020, created the ERTC. The credit:

• • Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
  • Was subject to an overall wage cap of $10,000 per eligible employee, and
  • Was available to eligible large and small employers.

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.

In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven.

What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax saving opportunity.

© 2021

The Consolidated Appropriations Act of 2021 (CAA) was signed into law in late December. The sprawling legislation contains billions of dollars in additional stimulus funding in response to the COVID-19 pandemic, as well as numerous unrelated provisions. Let’s take a closer look at the provisions that are most likely to affect your company’s bottom line.

Paycheck Protection Program

The CAA includes another $284 billion in funding for forgivable loans through the Paycheck Protection Program (PPP), for both first-time and so called “second draw” borrowers. New loans can be made through March 31, 2021, or until the funding is exhausted. The new law expands the allowable uses for PPP funds, provides a simplified forgiveness process for smaller loans, and clarifies the proper tax treatment of loan proceeds and forgiven amounts.

The second draw loans are intended for smaller and harder hit businesses. Eligible borrowers include businesses, certain nonprofits, self-employed individuals, sole proprietors and independent contractors.

To qualify for a second draw, a borrower must have no more than 300 employees and have used (or will use) all of the proceeds of its first PPP loan. Borrowers generally also must demonstrate at least a 25% reduction in gross receipts in one quarter of 2020 compared with the same quarter in 2019. For loans of $150,000 or less, a borrower can submit a certification attesting that it meets the revenue loss requirements on or before the date it submits its loan forgiveness application.

Loans are limited to 2.5 times average monthly payroll costs in the year prior to the loan or the calendar year, up to $2 million. Accommodation and food service businesses may receive loans for up to 3.5 times their average monthly payroll. Businesses can obtain only a single second draw loan, and businesses with multiple locations that are eligible under the initial PPP requirements can have no more than 300 employees per physical location.

The CARES Act, which created the PPP, limited the funds to payroll, mortgage, rent and utility payments. The CAA allows businesses to also apply the funds to:

• Covered operating expenses, including software or cloud computing services that facilitate business operations, product and service delivery, payroll processing, human resources, sales and billing, accounting or tracking supplies, inventory, records, and expenses,
• Uninsured costs related to property damage, vandalism or looting during 2020 public disturbances,
• Supplier costs according to a contract, purchase order or order for goods, in effect before taking out the loan, that are essential to the borrower’s operations, and
• Worker protection expenses incurred to comply with federal or state health and safety guidelines related to COVID-19 (for example, personal protective equipment, ventilation systems and drive-through windows).

As with the first round of PPP loans, full forgiveness requires a 60/40 cost allocation between payroll and nonpayroll costs. In other words, you must spend at least 60% of the funds on payroll over your covered period, which may range from eight to 24 weeks.

The CAA creates a simplified forgiveness application for loans up to $150,000. Such loans will be forgiven if the borrower signs and submits to the lender a one-page certification form from the Small Business Administration (SBA). The certification requires a description of the number of employees retained due to the loan, the estimated total amount of funds spent on payroll and the total loan amount. Borrowers must retain relevant records regarding employment for four years and other records for three years.

The CAA also eliminates the previous requirement that borrowers deduct the amount of any SBA Economic Injury Disaster Loan (EIDL) advances from their PPP forgiveness amount.

Additionally, the CAA addresses some of the confusion that had arisen regarding PPP tax issues. It specifies that a borrower need not include any forgiven amounts in its gross income. And — contrary to the position taken earlier by the IRS — it states that borrowers can deduct otherwise deductible expenses paid with forgiven PPP proceeds. The CAA also provides that tax basis and other attributes aren’t reduced by loan forgiveness (special rules apply to partnerships and S corporations). These tax provisions apply to second draw loans, too.

Other financial assistance

The CAA provides $20 billion for new EIDL grants for businesses in low-income communities and $15 billion for live venues, independent movie theaters and cultural institutions.

On the tax front, it states that a borrower’s gross income doesn’t include forgiveness of certain loans, emergency EIDL grants and certain loan repayment assistance provided by the CARES Act. As with PPP loans, you can deduct your otherwise deductible expenses paid with such forgiven amounts, and forgiveness won’t reduce your tax basis and other attributes (special rules apply to partnerships and S corporations). Similar treatment applies to targeted EIDL advances and Grants for Shuttered Venues.

Employee Retention Credit

To encourage businesses to maintain their workforces, the CARES Act created the Employee Retention Credit, a refundable credit against payroll tax for employers whose:

• Operations were fully or partially suspended due to a COVID-19-related governmental shutdown order, or
• Gross receipts dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).

Employers with more than 100 employees could receive the credit if they closed due to COVID-19. Those with 100 or fewer employees received the credit regardless of whether they were open for business.

The credit equaled 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through December 31, 2020. The CAA extends the credit for eligible employers that continue to pay wages during COVID-19 closures or reduced revenue through June 30, 2021.

Notably, as of January 1, 2021, the CAA hikes the credit from 50% of qualified wages to 70%. It also expands eligibility by reducing the requisite year-over-year gross receipt reduction from 50% to only 20% and raises the limit on per-employee creditable wages from $10,000 for the year to $10,000 per quarter.

In addition, the threshold for a business to be deemed a “large employer” — and thus subject to a tighter standard when determining the qualified wage base — is lifted from 100 to 500 employees.

The CAA includes some retroactive clarifications and technical improvements regarding the original credit, as well. For example, it provides that employers that receive PPP loans still qualify for the credit for wages not paid with forgiven PPP funds.

Deferred payroll taxes

Businesses were given the option to withhold their employees’ share of Social Security taxes from September 1, 2020, through December 31, 2020. Those that did were originally directed to increase the withholding and pay the deferred amounts on a prorated basis from wages and compensation paid between January 1, 2021, and April 30, 2021.

Under the CAA, such employers now have all of 2021 to withhold and pay the deferred taxes.

Non-COVID-19 disaster relief

The CAA also acknowledges the recent disasters not related to the pandemic (for example, wildfires). Among other things, it provides a tax credit of up to $2,400 (40% of up to $6,000 of wages) per employee, to employers in qualified disaster zones.

The credit applies to wages paid, regardless of whether services were actually performed in exchange for those wages. The CAA also modifies the CARES Act to allow corporations to make qualified disaster relief contributions of up to 100% of their 2020 taxable income.

Business meals deduction

For 2021 and 2022, you can deduct 100% (up from 50%) for food and beverages as long as they’re “provided by a restaurant.” The IRS will likely issue guidance on the deduction, particularly the meaning of the term “provided by a restaurant.”

Retirement plans

The tax code allows “qualified future transfers” of up to 10 years of retiree health and life costs from a company’s pension plan to a retiree’s health benefits or life insurance account within the plan. These transfers must meet certain requirements (for example, the plan must be 120% funded) that pandemic-related market volatility has made too difficult to meet in some cases.

In response, the CAA allows employers to make a one-time election on or before December 31, 2021, to end any existing transfer period for any taxable year beginning after the election in certain circumstances.

The law also includes a partial termination safe harbor for retirement plans in light of 2020’s pandemic-related workforce fluctuations. Plans won’t be treated as having a partial termination (which would trigger 100% vesting for affected participants) if the number of active participants on March 31, 2021, is at least 80% of the number covered by the plan on March 13, 2020. The safe harbor applies to plan years that include the period beginning on March 13, 2020, and ending on March 31, 2021.

Charitable deductions

The CAA extends, through 2021, the CARES Act provision that increases the limitation on corporations’ cash charitable contributions from 10% of taxable income to 25%. Any excess corporate cash contributions will be carried forward to subsequent tax years. The limitation on deductions for donations of food inventory, which the CARES Act increased to 25% for 2020, is similarly extended through 2021.

Tax extenders

The CAA incorporates several “extenders” of tax breaks. For example, it extends both the New Markets Tax Credit and the Work Opportunity Tax Credit through 2025. The employer credit for paid family and medical leave is extended through 2025 for wages paid in tax years after 2020.

The law extends through 2025 the period for which an empowerment zone designation is in effect. But the enhanced expensing rules and nonrecognition of gain on rollover of empowerment zone investments are terminated for property placed in service in tax years beginning after December 31, 2020. Empowerment zone tax-exempt bonds and employment credits also weren’t extended beyond December 31, 2020.

A loaded law

At almost 5,600 pages, the CAA contains many more components that could impact your business and personal taxes. Please contact us if you have any questions about these or other provisions.

© 2021