JANUARY 13, 2021 – FIRST DRAW PPP LOAN INCREASES

This procedural notice lays out instances where a First Draw PPP Loan that was approved on or before August 8, 2020 is eligible for a loan increase on that First Draw loan. None of the borrowers listed below are eligible for an increase if the SBA has remitted a forgiveness payment to the lender. The borrower may still be eligible for a Second Draw loan. The borrower must provide documentation to the lender.

Partnerships

If the partnership excluded amounts for partner compensation, then the loan may be increased.

Seasonal Employers

Seasonal employers are allowed to use “the average total monthly payments for any 12-weeek period selected by the employer beginning February 15, 2019 and ending February 15, 2020”. Previously, seasonal employers had to use an average between May 1, 2019 and September 15, 2019, as an alternate method to using 2019.

Farmers and Ranchers

Farmers and ranchers are now allowed to use gross receipts as opposed to net profit to calculate their maximum loan.

Other Eligible Borrowers

There is also increase relief for the following categories of borrowers:

• Borrowers that fully repaid the loan
• Borrowers that partially repaid the loan
• Borrowers that did not accept the full amount of the loan.

JANUARY 15, 2021 – PPP EXCESS LOAN AMOUNT ERRORS

This procedural notice states “An excess loan amount error is a borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act. An excess loan amount error does not include a knowing misstatement. Knowing misstatements may result in additional action, such as charges for fraud.”

A borrower cannot receive forgiveness on any amount above their maximum whether the error was a borrower or lender error.

JANUARY 15, 2021 – PPP RESUBMISSIONOF LOAN FORGIVENESS USING FORM 3508S

Form 3508S is a simplified 1-page forgiveness form for borrowers with original loan balances of $150,000 or less. Form 3508S requires virtually no documentation to be submitted with the application. Borrowers must retain payroll records for 4 years and other expense records for 3 years in case the SBA decides to audit the forgiveness application. Eligible borrowers that applied for forgiveness using the more complicated Forms 3508EZ or 3508 may resubmit using the simplified form if the SBA has not notified the lender of a final loan decision or remitted payment to the lender.

January 17, 2021 – MAX FIRST DRAW LOANS AND DOCUMENTATION REQUIRED

This guidance reiterates the maximum loan calculations and documentation required by the following borrowers:

• Self-employed individuals with no employees
• Self-employed individuals with employees
• Farmers and Ranchers
• Partnerships
• S corporations
• C corporations

Documentation Required

• You must provide proof of payroll by furnishing Forms 941 (or other tax forms containing similar information), state unemployment insurance forms along with evidence of any retirement and health insurance contributions. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided as evidence that you were in business as of February 15, 2020.
• Self-employed individuals must provide Form Schedule C for either 2019 or 2020 as well as a 2020 invoice or bank statement to establish you were in business as of February 15, 2020. Self-employed individuals will also have to provide Forms 941, state unemployment insurance forms and evidence of retirement or health insurance contributions if they have any employees.
• Farmers and ranchers furnish the same information as self-employed individuals except they use Schedule F instead of Schedule C. Keep in mind they can use the gross receipts, not the net profit (self-employed individuals must use net profit) plus the same expenses for employees as listed above. If farmers and ranchers have employees, they must provide the same information as mentioned above.
• Partnerships would provide the same information as above for employees (Forms 941, state unemployment insurance forms and retirement and health insurance contributions). Additionally, they add the net earnings from self-employment reduced by section 179 expenses claimed, unreimbursed partnerships expenses claimed and depletion on oil and gas properties multiplied by 92.35%, up to a maximum of $100,000 per partner. Partnerships must provide Form 1065 (including K-1s) in addition to the required documents for employees.
• Keep in mind more than 2% shareholders of S corporations have their health insurance added to their payroll and the maximum allowed is $100,000. Any other employee is allowed a $100,000 maximum payroll amount plus health and retirement benefits. Self-employed individuals, farmers and ranchers and partners in partnerships or LLCs are not allowed an additional amount for health benefits or retirement plan contributions.

JANUARY 19, 2021 – CALCULATING REVENUE REDUCTION FOR SECOND DRAW LOANS

This guidance is to assist businesses in calculating their revenue reduction and payroll costs (and the relevant documentation required) for determining eligibility of Second Draw Loans.

Gross receipts are defined as:

For-Profit Business

“Gross receipts generally are all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.

Gross receipts do not include the following:

• taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the concern or its employees).
• proceeds from transactions between a concern and its domestic or foreign affiliates; and
• amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.” In other words, cost of goods sold does not reduce gross receipts.

Not-for-Profit Businesses

“Gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986, which is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes, but is not limited to:

• the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts,
• the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts,
• gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T),
• the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and
• the gross amount received as investment income, such as interest, dividends, rents, and royalties.

Gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.”

PPP Loan Proceeds Forgiven and EIDL Advances

Neither of these items is included in gross receipts for purposes of the 25% revenue reduction calculation.

Periods Allowed for 25% Revenue Reduction

Borrower may use any 2020 quarter where they can show at least a 25% drop in revenue compared to the same quarter in 2019. The borrower may also compare annual gross receipts of 2020 to 2019 if they were in business in 2019.

There are additional rules outlined for businesses that opened subsequent to January 1, 2019 and for those that opened subsequent to January 1, 2020 but prior to February 15, 2020.

Documentation Required to Substantiate 25% Revenue Reduction

• Quarterly financial statements for the entity. If the financial statements are not audited, the Applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.
• Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
• Annual IRS income tax filings of the entity (required if using an annual reference period). If the entity has not yet filed a tax return for 2020, the Applicant must fill out the return forms, compute the relevant gross receipts value, and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax return.

When to Furnish Documentation

For loans greater than $150,000 documentation must be provided with the Second Draw application. Loans of $150,000 or less must provide documentation on or before applying for forgiveness but can provide it with it’s application.

Maximum Loan Amount

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $2 million. (Remember that First Draw PPP loans could be up to $10 million.) The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll or $2,000,000.

The reason for the additional payroll of hotels, motels and restaurants is because these groups of businesses were some of the hardest hit economically by the pandemic.

JANUARY 19, 2021 – ADDITIONAL ITEMS RELEASED

Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act

This is a long (62 pages) Interim Final Rule that does just as the name suggests. It provides a more detailed look at the forgiveness requirements and procedures and is beyond the scope of this writing.

Revised Forgiveness Forms are Released.

Form 3508S – for borrowers with original loan balances of $150,000 or less

Form 3508EZ – for borrowers of more than $150,000 that meet one of the two following conditions:

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. (For purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.).

AND

The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.

• Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the Covered Period).
• Also ignore reductions in an employee’s hours that the Borrower offered to restore, and the employee refused.

OR

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. (For purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000,).

AND

The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the Covered Period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Form 3508 – for borrowers not eligible to file Form 3508S or 3508EZ.

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Jeff Skolnick, CPA, M.S. Taxation

Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act

The Payroll Protection Program (PPP) became law as part of the CARES Act on March 27, 2020. Once it became law the SBA and/or the Treasury published 25 interim final rules providing guidance. The Economic Aid Act became law on December 27, 2020 and on January 6, 2021 the first interim rule was published by the SBA and Treasury. I am stating this history in order to explain why I am sure there will be more on both the First Draw PPP program and the PPP Second Draw program (which I cover later in this article).

This latest interim rule is not intended to make changes but in order to consolidate the many changes that have occurred since the program was first implemented.

General

Congress authorized a total of $806.45 billion for the First Draw PPP and the Second Draw programs.

The new law extends the time to apply for a PPP loan to March 31, 2021.

First Draw PPP

Generally, any business that employs less than 500 employees qualifies. This includes self-employed individuals, nonprofit organizations, veterans organizations, and tribal business concerns. The law specifically includes sole proprietors, independent contractors, and eligible self-employed individuals. You must have been in business as of February 15, 2020.

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $10 million. The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

Stated more simply, an employer calculates their average monthly payroll costs and multiplies that figure by 2.5 and compares that to $10,000,000, and whichever is less will be the maximum amount. Let’s say a company determines their monthly payroll costs to be $40,000. The maximum loan allowed is $40,000 multiplied by 2.5, or $100,000. $100,000 is far less than $10,000,000 and would, therefore, be the maximum. 

Payroll Costs

One of the biggest keys is determining the definition of payroll costs. These are defined in the law as payments of salary, wages, commission, tip or equivalent, payment for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, payment for the provisions of employee benefits consisting of group healthcare or group life, disability, vision, or dental insurance, including insurance premiums, retirement benefits, state or local tax assessed on employee compensation, payments to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment of similar compensation that does not exceed $100,000 in 1 year. Farmers and ranchers are allowed to use gross income of their Schedule F for 2019 or 2020, as opposed to net income.

There are some things that are not allowed as payroll costs, and they include annual salary of an employee in excess of $100,000, which must be prorated. In other words, if we look at a 4-month window, the prorated amount of a maximum $100,000 salary would be $33,333. Also excluded are federal payroll taxes, withholding, and railroad retirement tax as well as payments to individuals whose principal place of residence is outside the United States. Additionally, qualified sick and family leave wages for which a credit was taken under the Families First Coronavirus Response Act.

You must provide proof of payroll by furnishing Forms 941 (or other tax forms containing similar information), state unemployment insurance forms along with evidence of any retirement and health insurance contributions. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided as evidence that you were in business as of February 15, 2020.

Self-employed individuals must provide Form Schedule C for either 2019 or 2020 as well as a 2020 invoice or bank statement to establish you were in business as of February 15, 2020. Self-employed individuals will also have to provide Forms 941, state unemployment insurance forms and evidence of retirement or health insurance contributions if they have any employees.

Farmers and ranchers furnish the same information as self-employed individuals except they use Schedule F instead of Schedule C. Keep in mind they can use the gross receipts, not the net profit (self-employed individuals must use net profit) plus the same expenses for employees as listed above. If farmers and ranchers have employees, they must provide the same information as mentioned above.

Partnerships would provide the same information as above for employees (Forms 941, state unemployment insurance forms and retirement and health insurance contributions). Additionally, they add the net earnings from self-employment reduced by section 179 expenses claimed, unreimbursed partnerships expenses claimed and depletion on oil and gas properties multiplied by 92.35%, up to a maximum of $100,000 per partner. Partnerships must provide Form 1065 (including K-1s) in addition to the required documents for employees.

The loan proceeds are allowed to be used for payroll costs (which we already defined), interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations incurred before the February 15, 2020.

Additional expenses allowed for loans obtained in 2021

The categories I show below are directly from the new law. I know these paragraphs contain a fair amount of legalese, however I included them in their entirety because they also offer many examples which I believe is helpful.

Covered operations expenditures (payments 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 costs (costs 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 (expenditures made by a borrower to a supplier of goods for the supply of goods that—(A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan); and

Covered worker protection expenditures ((A) operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency with respect to the COVID–19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; (B) such expenditures may include—(i) the purchase, maintenance, or renovation of assets that create or expand—(I) a drive-through window facility; (II) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (III) a physical barrier such as a sneeze guard; (IV) an expansion of additional indoor, outdoor, or combined business space; (V) an onsite or offsite health screening capability; or (VI) other assets relating to the compliance with the requirements or guidance described in subparagraph (A), as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (ii) the purchase of—(I) covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; (II) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (III) other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (C) such expenditures do not include residential real property or intangible property).

At least 60% of expenditures must be for payroll costs.

Other Loan Provisions

• These loans are made without any personal guarantees of shareholders, members, or partners.
• There is no collateral required.
• No SBA fees
• No requirement to prove that the small business is unable to obtain credit elsewhere.
• The interest rate will be 1%

Borrower Certifications

The major certifications are:

• Applicant was in operation on February 15, 2020.
• That the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient; There is a safe harbor rule that states PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan in good faith.
• Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage interest payments, rent, utility, covered operations expenditures, covered supplier costs, and covered worker protection expenditures.
• That the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan. 
• When applying for loan forgiveness at least 60% of the loan proceeds were used for payroll costs.
• That the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan. In other words, you cannot obtain two PPP loans. There is a Second draw loan allowed (covered later in this writing), which is not the same as two PPP loans.
• Applicant has not and will not receive a Shuttered Venue Operation grant from SBA.
• The fact that information provided is true and accurate and making a false statement is punishable under the law by imprisonment of not more than five years and a fine of up to $250,000.

Loan Forgiveness

This is probably the coolest part of the Paycheck protection program. The amount of the loan that will be forgiven is the actual amount spent during the 8-week or 24-week covered period following the loan origination date for payroll costs (defined above), interest on any covered mortgage obligation, rent, utilities, covered operations expenditures, covered supplier costs, and covered worker protection expenditures. The 8-week covered period only applies to loans obtained before June 5, 2020. All loans obtained subsequent to June 4, 2020 use a 24-week covered period. Borrowers who secured their loans before June 5, 2020 have the option of an 8-week or 24-week covered period. This election is made on the application for forgiveness.

The amount of loan forgiven may not exceed the principal borrowed. There are reductions to the forgiveness amount if the employer reduces the average number of full-time employees. There is also a reduction of forgiveness if there is a substantial reduction (in excess of 25%) in compensation of an employee. These rules do not apply to loans of $50,000 or less.

The SBA had stated that EIDL advances received by a borrower were to be deducted from the loan forgiveness amount. This provision has been repealed.

Loan forgiveness must be applied for within 10 months after the end of the covered period.

Borrowers must submit documentation to the lender when seeking forgiveness. The lender has 60 days to issue its decision on forgiveness.

Simplified Loan Forgiveness for loans of $150,000 or less

Borrowers will sign and submit a one-page form with the loan amount and number of employees retained.

Estimate loan amount spent on payroll.

Attest to complying with PPP requirements and record retention.

While no documentation is required with the application, borrowers must retain records of employment records, for the 4-year period following submission of loan forgiveness application and 3-years for other eligible expenses. The SBA has the right to audit these records.

Tax Impact of Forgiven Loans

Normally when a taxpayer receives cancellation of a debt, it is considered taxable income; however, these loans are considered an exception and are not taxable income!

In addition, any expenses paid with forgiven PPP funds are deductible.

There is an issue to be aware of for Partnerships (including LLCs that file as partnerships) and S corporations (including LLCs that file as S corporations). In order to deduct losses a taxpayer must have basis in the entity. Although forgiven PPP funds are not considered taxable income, they do increase the basis of a taxpayer. The issue is while companies incurred PPP expenses in 2020 if they do not receive forgiveness of the loan until 2021, then it is not considered income until 2021 and they may not be able to deduct losses in 2020. In that case the loss would be suspended in 2020 and taken against 2021 income.

For example, let’s look at an S corporation with a single shareholder. We’ll assume the shareholder has a $0 basis at the beginning of 2020. We’ll further assume that the S corporation received $200,000 in PPP funds and has a $200,000 loss and has not received forgiveness of its PPP loan in 2020 but will in 2021. The last assumption is the $200,000 loss occurred because the corporation was at a break even and the $200,000 loss was generated by using PPP funds to pay for expenses. Since the $200,000 loan is not forgiven in 2020 the shareholder does not have basis to deduct the loss. The $200,000 loss would be suspended and carried to 2021.

Loan Provisions for Loans not Fully Forgiven.

Any portion of a loan not fully forgiven will have an interest rate of 1% and a maturity date of five years. Borrowers that obtained a loan before June 5, 2020 will have signed a loan agreement that states there is a two-year maturity. These borrowers would have to amend their loan agreement with the lender in order to take advantage of the five-year maturity. For most borrowers this should not be a major problem as most if not all loan proceeds will typically be forgiven if funds were used for eligible expenses.

Other Provision

As I stated earlier there were many changes in the PPP rules. If a borrower received less than the maximum amount of their loan because of the changing provisions or if they returned all or part of their original loans, then they may reapply for the difference if thy have not received forgiveness.

PAYCHECK PROTECTION PROGRAM SECOND DRAW LOANS

This interim rule addresses the implementation of the Economic Aid to Hard-Hit Businesses, Nonprofits and Venues Act (the Economic Aid Act).

The purpose of this program is to “provide assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic.”

These loans must be applied for by March 31, 2021.

Loan Provisions

Second Draw PPP Loans are generally subject to the same terms as First Draw PPP loans. I will now discuss the differences between these two types of loans.

Eligibility

• While First Draw loans allowed businesses that employ less than 500 employees the second draw program reduces this figure to 300 employees.
• Borrower must have received a First Draw Loan and have used or will use the full amount of the initial PPP loan for authorized purposes before the disbursement of the Second Draw PPP Loan.
• The borrower must have experienced a revenue reduction of at least 25% in one of the quarters of 2020 when compared to the 2019 corresponding quarter. The example given in the rule states a borrower with gross receipts of $50,000 in the second quarter of 2019 and $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40% and is therefore eligible. A business may also choose to compare all of 2020 against 2019 to show a 25% reduction. This threshold is more difficult to reach because you only need one quarter of at least a 25% reduction, however some entities do not prepare financial statements and if the entire year is down by at least 25% the entity can simply supply its tax returns as proof. If the borrower was in business for only part of 2019, then there are some different rules used to measure the 25% decline.

The ruling states forgiveness of a First Draw PPP loan is excluded from the gross receipts calculation.

Maximum Loan Amount

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $2 million. (Remember that First Draw PPP loans could be up to $10 million.) The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll or $2,000,000.

The reason for the additional payroll of hotels, motels and restaurants is because these groups of businesses were some of the hardest hit economically by the pandemic.

Application and documentation requirements

While the provisions are basically the same as First Draw PPP loans there is no additional documentation required if the applicant used calendar 2019 figures to determine its First Draw PPP loan amount, uses the 2019 figures for the Second Draw amount and has the same lender for both loans.

For loans greater than $150,000 documentation of the 25% revenue reduction must be provided. Acceptable forms of documentation include annual tax forms, quarterly financial statements, or bank statements.

For loans of $150,000 or less this documentation is not required until on or before the date the borrower applies for forgiveness.

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Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

TAX PROVISIONS OF CONSOLIDTAED APPROPRIATIONS ACT, 2021

Last week I covered the following provisions of the recently adopted stimulus legislation:

• Unemployment Benefits
• Recovery Rebates
• Payroll Protection Program
• Economic Injury Disaster Loans and;
• Payroll sick and family leave

This writing covers what I believe to be the more important income tax provisions contained in the new law.

EXTENSIONS OF EXPIRING PROVISIONS

EXTENSIONS MADE PERMANENT

Reduction in Medical Expense Deduction Floor. The new law permanently changes the floor from 10% to 7.5%. In order to count medical expenses as itemized deduction they must exceed 7.5% of your Adjusted Gross Income (AGI).

Energy Efficient Commercial Buildings Deduction. Commercial buildings are allowed a deduction of up to $1.80 per square foot for energy efficient improvements. Energy efficient envelope, HVAC or lighting system can qualify for this deduction. In order to obtain the full $1.80per square foot deduction a building’s total energy and power cost must be reduced by 50% or more in comparison to the minimum standards. If a 50% standard is not reached there may be deductions of up to $0.60 per square foot if there is a 10% reduction in energy and power based on the envelope, 15% reduction based on HVAC or 25% reduction based on lighting.

Benefits provided to Volunteer Firefighters and Emergency Medical Responders. Any reduction in state, local and foreign real property taxes, personal property taxes or income taxes are not counted as taxable income for these workers. Additionally, payments of up to $50 per month are also allowed tax free.

Qualified tuition and related expenses deduction has been eliminated. Although the qualified tuition and related expenses deduction is eliminated the American Opportunity Tax Credit and the Lifetime Learning Credit now both have the same phase-outs. These benefits phase-out for Single, Head of household and Qualifying widowers between $80,000 and $90,000 of Modified Adjusted Gross Income ($160,000 – $180,000 for those married filing jointly). There is no credit allowed for married taxpayers filing separately.

Railroad Track and Maintenance Credit. Allows a 40% credit (formerly 50%) for qualified railroad track maintenance expenditures.

Reduced excise tax rates for beer, wine, and distilled spirits.

PROVISIONS SET TO EXPIRE DECEMBER 31, 2020 EXTENDED THROUGH 2025

New Markets Tax Credit. This is a credit designed to encourage investment in low-income communities. It allows investors to claim credits against their Federal income tax. The credits are 5% of the investment for each of the first 3 years and 6% of the investment for each of the next 4 years.

Work Opportunity Credit. This allows employers a 40% credit on first year wages paid members of a targeted group. Targeted group members are as follows:

(A) a qualified IV–A recipient,(someone receiving Temporary Assistance for Needy Families under the Social Security Act for any 9-month period during the 18-month period ending on the hire date.

(B)a qualified veteran,

(C)a qualified ex-felon,

(D)a designated community resident,

(E)a vocational rehabilitation referral,

(F)a qualified summer youth employee,

(G)a qualified supplemental nutrition assistance program benefits recipient,

(H)a qualified SSI recipient,

(I)a long-term family assistance recipient, or

(J)a qualified long-term unemployment recipient.

Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness. In most instances when a taxpayer discharges indebtedness for less than the full amount of the debt, the taxpayer must report taxable income. If, for example, a taxpayer owes a credit card company $20,000 and settles their debt for $8,000, the taxpayer would have $12,000 of discharge of indebtedness income. There is an exception for Qualified principal residence indebtedness discharged before January 1, 2026. The maximum allowed for discharge is $750,000 ($375,000 for married taxpayers filing separately).

Employer Credit for Paid Family and Medical Leave. Per the IRS website, “the credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.  The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.  In certain cases, an additional limit may apply.”

Exclusion for Certain Employer Payments of Student Loans. Employers may pay up to $5,250 to an employee or to a lender of principal or interest of any qualified education loan and it is not considered to be taxable income to the employee.

Phaseout of Energy Credit. The Federal credit that exists for solar power will remain at 26% for projects started in 2021 and 2022 and placed in service before January 1, 2024. Originally the credit was scheduled to drop to 22%. For projects started after December 31, 2022 and placed in service before January 1, 2024 the percentage drops to 22%. For projects after 2023 the credit drops to 10%.

Treatment of Mortgage Insurance Premiums as Qualified Residence Interest. Mortgage insurance premiums paid by a taxpayer in connection with acquisition indebtedness of a qualified residence is treated as qualified mortgage interest. This deduction phases out 10% for each $1,000 the taxpayer’s Adjusted Gross Income (AGI) exceeds $100,000 ($50,000 for married individuals filing separately).

Credit of Health Insurance Costs of Eligible Individuals. Internal Revenue Code provides a refundable credit (the health coverage tax credit) of 72.5 percent of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance. The credit was set to expire December 31, 2020 but has been extended for 1 year until December 31, 2021.

Extension and modification of employee retention and rehiring credit. The CARES Act contained a provision that an eligible employer would be allowed a 50% credit against the payroll taxes of eligible wages. An eligible employer was one that had its operations fully or partially suspended during the calendar quarter due to a governmental order related to COVID-19 (the “suspension test”) or (ii) during the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019 (the “gross receipts test”).  The provision was changed to a 70% credit and qualified wages originally were not to exceed $10,000 per employee for the year. The $10,000 figure has been changed to $10,000 each quarter. The credit which originally was set to end with wages paid before January 1, 2021. This has been extended to wages before July 1, 2021.

Temporary Allowance of Full Deduction for Business Meals. As a general rule meal expenses are normally 50% deductible. For 2021 and 2022 if food or beverages are provided by a restaurant, they may be deducted at 100%.

Depreciation of certain residential rental property over 30-year period: The law provides that the recovery period applicable to residential rental property placed in service before Jan. 1, 2018 and held by an electing real property trade or business is 30 years if the entity elects out of the limitation on the deductibility of business interest. The business interest limit is 30% of adjusted taxable income (50% in 2019 and 2020) if gross receipts exceed $26 million. Entities with gross receipts under $26 million are not subject to this provision. Normally the depreciable life is 27.5 years.

Temporary Special Rule for Determination of Earned Income. The law allows taxpayers to substitute their 2019 earned income for their 2020 earned income when calculating the earned income tax credit and additional child tax credit for 2020 if it is more beneficial.

Charitable Contributions Deduction by Non-Itemizers. Beginning in 2021 taxpayers are allowed a $300 charitable contribution even if they do not itemize. For married taxpayers filing jointly the limit is $600.

Disaster Tax Relief

The law provides that Presidentially declared disaster areas (not including COVID-19) which were declared disaster areas after December 31, 2019 and before 60 days after the date of the enactment of this law qualify for relief.

Disaster-Related Rules for Use of Retirement Funds. Taxpayers eligible for disaster relief may withdraw up to $100,000 of funds from either an IRA or other retirement plan without incurring a 10% early withdrawal penalty. The income is spread over 3 years for income tax purposes and may be partially or fully repaid within the 3-year time frame.

Increased Loan Amounts from Retirement Plans. The law allows taxpayers qualifying for disaster relief (Non COVID-19 related) are able to borrow $100,000 (normally this figure is $50,000) if the money is borrowed within 180 days of the law’s enactment.

In addition, eligible participants eligible with outstanding loans with a repayment due from the first day of the disaster incident period through the date that is 180 days after the last day of such incident period can delay the loan repayment for up to one year or, if later, until the date that is 180 days after the date of enactment.

Employee Retention Credit for Employers Affected by Qualified Disasters. An employer that conducted an active trade or business in a qualified disaster zone at any time during the declared disaster may take a credit of 40% of wages for up to $6,000 per employee.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation