The holidays brought plenty of cheer with the passage of the federal Consolidated Appropriations Act (CAA), which combined the $900 billion in stimulus relief for the COVID-19 pandemic and $1.4 trillion in omnibus spending.
The package provides an abundance of economic gifts for businesses, including the highly anticipated deductibility of Paycheck Protection Program (PPP) expenses, expansion of the Employee Retention Credit (ERC) and another round of stimulus dollars.
The legislative fix for expense deductions, which overrode recent IRS rulings, is one of the largest bonuses of the CAA. The act also clarifies that the loan forgiveness is to be treated as tax-exempt income, which creates a tax basis for partnership and S corporation owners. However, it is likely not recognized until the debt is forgiven (in 2021 for most) possibly creating some tax timing issues pending further guidance.
The CAA also reopened the PPP for new borrowers and second round loans. However, for repeat borrowers, the program’s requirements are more restrictive as a qualifying entity must have both a reduction of gross revenue of 25% for any quarter of 2020 compared to 2019 and less than 300 employees.
The maximum loan is reduced from $10 million to $2 million for this round and is again based on 2.5 times average monthly payroll; 3.5 times average monthly payroll for the restaurant and hospitality industries with some added flexibility for seasonal employers.
Previous PPP recipients must also use their full first round loan before getting another loan and again must certify as to the economic necessity of the loan.
More considerations
Another holiday bonus is the expansion of the non-payroll expenses that qualify for PPP forgiveness, including operational expenses (primarily software and cloud services) as well as certain supplier costs and worker protection equipment.
Given the previous expansion of the covered period to 24 months, this may not be of significance to many who had ample payroll to cover the entire loan forgiveness. But, as we untangle the ERC provisions, the interplay gets interesting.
The CAA extends and expands the ERC, which is a refundable tax credit that encourages businesses to keep employees on their payroll, through June 30, 2021, including:
- Allowing PPP recipients to also take the ERC where previously it was an either/or rule;
 - Lowering the gross receipts reduction test to 20% for 2021 from 50% in 2020;
 - Increasing the credit rate from 50% for 2020 to 70% of qualified wages for 2021;
 - Doubling the cap on wages from $10,000 per employee for 2020 to $10,000 for each of the first two quarters of 2021;
 - Increasing from 100 to 500 the number of employees counted for determining qualified wages.
With these changes, the total credit is now potentially $19,000 per employee over the 18-month period instead of $5,000, and can be in addition to the PPP loan.
An employer whose operations were partially suspended due to a COVID-19-related governmental order does not need to meet the gross receipts test.
This is significant in that if you had been subject to a 50% decline in 2020, there is a good chance you would not benefit from both the PPP and ERC provisions due to lack of qualifying payroll expenses. If you meet the criteria of a partial shutdown or interruption, then modeling out the interplay of the PPP and ERC is critical since the qualifying expenses and time periods will most likely overlap and you can’t use the same payroll dollars for both the forgiveness and credit.
If you believe you can qualify for both the ERC and PPP, you will want to review your projections to maximize the benefit as the ERC ends on June 30, and you must apply for the PPP by March 31, so you will again face competing forces and overlapping timelines.
Jim Mahoney is CPA managing partner of Glastonbury accounting and advisory firm MahoneySabol.
