What small business owners need to know about the new stimulus package
The long-awaited 3rd round of economic stimulus has finally arrived. CWA is combing through the 5,594-page bill which will become law when signed by President Trump. The total bill represents $900 billion of economic relief. The following blog will discuss the major provisions affecting most CWA clients and small business owners and offer guidance on how to prepare to be ready to act.
First and foremost, there is no action needed at this time. As with the previous economic stimulus, once it is signed into law the Small Business Administration (SBA) and the U.S. Treasury will have 10 days to issue regulations on how the bill will be interpreted and implemented. Based on this timeline and the upcoming holiday season, CWA does not anticipate that any of the provisions will require action before January 2021.
Once final regulations are released, CWA will be on the forefront of notifying you on when and how to act.
Here is what you need to know today:
Qualified Paycheck Protection Program (PPP) Expenses are Tax Deductible
Congress voted to overrule the original IRS ruling stating that forgiven PPP loan proceeds would be non-deductible. The new bill makes all qualified PPP expenses deductible, essentially making 100% of PPP proceeds tax-free. This is a major tax break for 2020 and will likely impact prior year-end tax projections for clients.
For most flow-through entities such as a LLC, S-Corporation or Schedule C, this lowers your 2020 estimated tax liability by your effective tax rate, multiplied by your total PPP loan.
For example, if you received a $100,000 PPP loan, your 2020 taxes will decrease by approximately $40,000 assuming you are in the 35% federal and 5% state tax brackets. There is nothing you need to do in order to deduct your qualified PPP expenses in 2020. For CWA clients who operate as a C-Corporation, check with your CWA planning team to determine how this will change any year-end bonus plans you may have already made.
For most CWA clients, you may now be looking at a large refund for 2020. Your planning team will be reaching out to you in the early part of 2021 to discuss how this last-minute year-end Congressional Christmas gift will impact your 2021 tax planning. If you were planning to make a 4th Quarter 2021 estimated tax payment (due 1/15/2021), you should discuss with your planner if this is still necessary. Keep in mind this could also potentially reduce or eliminate the need for a 2020 extension payment (due 4/15/2021).
Paycheck Protection Program Second Round (PPP2)
The new bill allows for businesses who have experienced a 25% decrease in revenue for any 2020 quarter, as compared to the same quarter in 2019, to apply for a second PPP loan (PPP2). The loan amount for PPP2 is calculated identically to your first PPP loan. The PPP2 loan proceeds can be spent on the same list of qualified expenses such as payroll costs, rent, etc.
In addition, PPP2 loan proceeds can also be used for business software or cloud computing services, covered property damage, personal protective equipment (PPE) and expenditures to supplies that are essential at the time of purchase to continue current operations. The PPP2 loan will be forgiven if you maintain the same level of full-time equivalent employees (FTE) during your loan period as compared to the same lookback periods as the first PPP loan and spend at least 60% of the proceeds on payroll over a covered period of at least 8 weeks, and not more than 24 weeks, from the date your loan is funded. PPP2 loans are limited to $2 million. We do not expect the program to run out of money, especially given the 25% revenue drop requirement.
CWA projects that most business owners, outside of orthodontists and some specialists who stayed open, will be able to apply for a PPP2 loan based on collections from April-June 2020 (second quarter of 2020) as compared to April-June 2019 (second quarter of 2019). Orthodontists will have more difficulty showing a 25% revenue decrease depending on their level of contract receivable collections.
More information about the application process will be released once the SBA issues regulations. We do not expect any applications to be accepted by banks until the first or second week of January 2021. The PPP2 loan should allow qualifying business owners to further increase the cash levels of their business until a vaccine is fully distributed. CWA projects they will also be able to receive full forgiveness of the PPP2 loan and be able to deduct 100% of the qualified expenses in 2021.
Simplified Forgiveness Application for Loans $150,000 or Less
The bill expands the simplified application for PPP loans under $150,000. It allows banks to process forgiveness on a one-page application that the borrower certifies and attests to the number of FTE employees and that the money was appropriately spent. The borrower will not need to submit any supporting documentation to the bank but should retain records for four years in the event of an audit. Loans that are over $150,000 will still have to go through the full PPP forgiveness application process.
The new law will streamline both the application for funding and forgiveness of the PPP and PPP2 loan proceeds. As soon as the regulations are released in January 2021, we recommend beginning the filing process for forgiveness on the borrower’s first PPP loan.
Economic Injury Disaster Loan (EIDL) Grants
The new bill repeals the reduction in PPP forgiveness for any EIDL grant up to $10,000. In the prior legislation, the amount of PPP forgiveness would have been offset by the EIDL grant and then required to be paid back to the SBA. This is now repealed and the PPP forgiveness will not be lowered by the amount of the EIDL grant. If you have already received forgiveness and paid back your EIDL grant, we expect regulations and clarification from the SBA on how this will be rectified.
Business Meals Deduction Increased to 100%
The 50% disallowance for business meals is eliminated in 2021 and 2022, allowing business meals to be 100% deductible. This was placed in the bill to help the struggling restaurant industry. Business owners will now receive a full deduction in 2021 and 2022 for all staff, colleagues and referrals business meals.
SBA Loan Payment Relief
The bill extended the requirement that the SBA pay 6 months of principal and interest on any SBA loan that is not a PPP loan for an extra 3 months beginning February 2021. Anyone that has a SBA loan will now receive a total of 9 months of payments made on their loan by the SBA and will no longer need to claim any income for the payments made on their behalf. The payments will be capped at $9,000 monthly.
Family First Coronavirus Response Act (FFCRA)
The FFCRA required small employers to pay up to 2 weeks of full wages for COVID related reasons and up to 10 weeks if an employee could not work due to school or childcare closure. The employer receives a 100% tax credit for the wages paid. The FFCRA was set to expire as of December 31, 2020 and is now extended to March 31, 2021.
Most business owners have already been applying this credit with many offices having employees test positive for COVID-19. There is no need to change the current process other than continuing to recognize the FFCRA and utilize the credit through March 31, 2021 for any of the COVID related reasons.