Right before the end of 2020, Congress passed a $900 billion stimulus package. In addition to funding an additional round of Paycheck Protection Program (PPP) loans, the Act contains a wide range of tax provisions. Together, they provide renewed relief to struggling businesses.
Deductibility of PPP Expenses
As many hoped, the Act provides for expenses paid with the proceeds of PPP loans to be fully deductible for tax purposes, whether or not the loan is or is expected to be forgiven. This fulfills the initial Congressional intent in the CARES Act from March 2020, and overrules prior IRS guidance to the contrary. In addition, the Act confirms that tax-exempt PPP forgiveness income increases tax basis for partners of partnerships and S Corporation shareholders.
At this time, it is not clear if all states will follow. Some may decouple from this provision and prevent the deduction of PPP expenses.
Expanded Employee Retention Credit
The Employee Retention Credit (ERC), a refundable credit against employment taxes paid by employers whose business was shut down by government order or who experience a significant decline in gross receipts, was part of the initial CARES Act legislation. However, because a business had to choose between receiving a PPP loan and taking advantage of the ERG, it had experienced limited usage.
The ERC, due to expire at the end of 2020, has been extended through the first two quarters of 2021. In addition, the Act retroactively amends the CARES Act to remove the exclusion from the ERC for PPP borrowers (although a credit cannot be obtained for wages treated as covered expenses for PPP purposes).
For the first two quarters of 2021, the ERC has been increased and access has been expanded.
The credit amount is Increased from 50% of qualified wages to 70%.
The cap on qualified wages is increased from $10,000 total to $10,000 par quarter, affectively increasing the maximum credit from $5,000 per employee to $14,000.
The reduction in gross receipts required to qualify if the business has not been shut down by government order is 20% year-over-year, reduced from 50%.
Businesses of less than 500 employees can now take the credit for all employees, as opposed to only employees not providing services; this cap was originally 100 employees.
Some non-profits, such as colleges and universities and health care providers, now qualify as eligible employers.