Written Monday, Dec. 28, 2020, at 6:30 AM
After veiled veto threats, expiration of extended unemployment benefits and a cliffhanger government shutdown showdown, the Consolidated Appropriation Act, 2021, is now the law.
Late Sunday night, December 27, President Trump signed into law the 32 Divisions(!) of the mammoth Act, including Divisions N and EE which contain the following:
|Name||Main Payroll Provisions|
|The COVID-related Tax Relief Act of 2020||Extension of FFCRA payroll tax credits|
|The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act||Extension and expansion of the Paycheck Protection Program (PPP)|
|The Taxpayer Certainty and Disaster Tax Relief Act of 2020||Extension and expansion of the Employee Retention Credit (ERC)|
So, what do these new laws mean for you and your business?
This law is the second-largest relief package to date, following the $2 trillion CARES Act passed on March 25, 2020.
The full Appropriations Act, also known as the Federal budget, is 5,593 pages long, with COVID-19 relief running through Divisions M, N, and EE. Before you settle down for an all-nighter, though, note that payroll-related provisions dwell in the specific Acts listed above. We’re not going to discuss non-payroll items, such as the much-touted direct stimulus payment of $600 per taxpayer, extended unemployment, and rental assistance. Let’s turn our attention to what employers need to know.
Families First Coronavirus Response Act (FFCRA) Credit Extension
The Old: Before the new law, payroll tax credits available for FFCRA-mandated paid leave were set to expire on December 31, 2020. For more information about this leave and the credits, check out our blog.
The New: Section 286 of the COVID-related Tax Relief Act of 2020 extends the availability of these credits until March 31, 2021. Notably, there is no extension of the requirement to pay this leave. The new law is just incentivizing employers to voluntarily continue paying the same type of leave previously required by offering the same credits as before.
The Doubts: Prior to this new law, FFCRA payroll tax credits were limited per employee as follows:
Sick leave for self-care: Up to $5,110
Sick leave for other care: Up to $2,000
Family leave for childcare: Up to $10,000
But here’s the catch – those limits were for calendar year 2020. Do the credits newly available in the first quarter of 2021 zero out those limit counters and start again? Or are limit calculations cumulative? Software systems, historically structured around calendar years, would have to do a few backward cartwheels to accommodate tax credit limits that stretch across years. And those cartwheels would have to be executed this week, as the new credits apply to paid leave starting this Friday, January 1, 2021.
The way the law is written, it seems that the limits would be cumulative. But at this early point, we can only look to the Department of Treasury to issue swift guidance.
PPP Loan Expansion
The Old: The CARES Act tasked the Small Business Administration (SBA) with administering forgivable Paycheck Protection Program (PPP) loans, generally for businesses with 500 or fewer employees affected by COVID-19. The loan application process closed on August 8, 2020.
The New: The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act provides nearly $285 billion for a new round of loans for employers with 300 or fewer employees per location who can ALSO show that quarterly gross receipts for any quarter of 2020 dropped at least 25% compared to the corresponding quarter of 2019. In addition, no single loan can exceed $2 million. Businesses that have already received a loan and meet the above requirements can apply for a second loan, though borrowers must use the full loan before disbursement. In addition, $35 billion is set aside for first-time borrowers and $12 billion is set aside for minority-owned businesses.
Under the new law, loan applications must be filed by March 31, 2021.
The Doubts: When will loan applications be accepted? What documentation will be required for establishing a decrease in revenues? What documentation will be required for establishing that first draw loan funds have been exhausted?
The Old: Non-payroll costs eligible for forgiveness were limited to mortgage interest, rent, and utilities, and could only constitute up to 40% of the forgiveness amount.
The New: The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act expands eligible non-payroll credits to include:
This expansion may enable employers to request increases in their loan amount (not treated as a second draw loan). However, the total of all non-payroll expenses STILL can’t exceed 40% of forgiveness amount.
The Doubts: This expanded definition of non-payroll expenses applies to first-round loans as well, provided a forgiveness application has not yet been submitted. But what if an employer applied for forgiveness and was rejected – can they resubmit their application under the new rules if those rules will now qualify them for forgiveness? If a borrower requested a second draw loan, can they still go back and request an increase in their first draw loan based on the expansion of qualified expenses?
Extended Safe Harbor
The Old: Under the CARES Act, a safe harbor from forgiveness reduction applies if wage/FTE reductions between February 15 and April 26, 2020, were restored by a payroll comparison date to be chosen by the employer and which could be no later than December 31, 2020.
The New: The payroll comparison date can now be no later than September 30, 2021.
Flexibility of Covered Period
The Old: Borrowers who received loans prior to the Paycheck Protection Program Flexibility Act (PPPFA) passed on June 5, 2020, were able to choose an 8-week or 24-week covered period. Borrowers after the PPPFA had to use 24 weeks as their covered period.
The New: Borrowers receiving second-round loans, or those with first-round loans who did not yet apply for forgiveness can choose any ending date for their covered period that is between 8 and 24 weeks from the date of their first loan disbursement. However, the covered period must end by September 30, 2021.
The Doubts: This flexible definition of covered period applies to first-round loans as well, provided a forgiveness application has not yet been submitted. But what if an employer applied for forgiveness and was rejected – can they resubmit their application under a different period if that new period will now qualify them for forgiveness?
Expansion of Simplified Forgiveness
The Old: Loans of less than $50,000 were eligible for a simplified forgiveness process (Form 3508S), under a de minimus process. For these loans, full forgiveness was available even if there had been wage or FTE reductions. However, if the employer was part of an affiliated group which borrowed in total more than $2 million, the simplified process was not available.
The New: Loans of less than $150,000 will be eligible for the simplified process. In addition, loans between $150,000 and $2 million will not require submission of documentation, only certifications and record retention.
The Doubts: Will the $2 million affiliated group rule still apply to less than $150,000? Will the $150,000 simplified process mirror the $50,000 rules such that wage and FTE reductions will be disregarded?
Deductibility of Expenses
The Old: Since its inception, the deductibility of PPP expenses for income tax purposes has probably been the biggest PPP controversy. Proponents of deductibility claimed that this was Congress’s intention, inadvertently omitted from the CARES Act, while opponents claimed that allowing a corporate tax deduction for expenses paid with a Federal grant would be egregious double-dipping. The IRS held its ground, insisting that expenses claimed for PPP would not be deductible for corporate tax purposes.
The New: The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act grants full deductibility of PPP expenses.
The Doubts: Well, this one’s pretty clear and welcome news to struggling businesses.
PPP and ERC Coordination
The Old: Employers who receive a PPP loan were excluded from claiming the Employee Retention Credit created by the CARES Act.
The New: The new law allows employers to claim the ERC even if they’ve received a PPP loan. That’s big news and can translate into thousands of dollars of newly found credits. Caveat though– any wages for which retention credits are claimed are not qualified PPP Payroll Costs for forgiveness. Fair enough.
The Doubts: Will employers need to go back and amend prior quarters to claim those employee retention credits? A special rule buried in Division EE charges the Treasury with creating a mechanism for avoiding amendments. What will that mechanism be? Will it be ready fast enough to avoid fourth quarter amendments?
Extension and Expansion of the Employee Retention Credit
The Old: ERC was set to expire on December 31, 2020. It provided a payroll tax credit of 50% of qualified wages paid up to $10,000 per employee for 2020.
The New: The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends the credit through June 30, 2021. In addition, for the first and second quarters of 2021, the credit is 70% of wages paid up to $10,000 per employee PER QUARTER, not per year. That’s a big increase in credits.
The Doubts: Again, this one is pretty clear.
Extension of Employee Social Security Deferral Repayments
The Old: President Trump’s Executive Memorandum signed on August 8, 2020, allowed employers to allow their employees the option of deferring their social security tax contributions for the last four months of 2020 (September through December). The deferred taxes would be withheld “ratably” during the first four months of 2020 (January through April).
The New: The deferred taxes can now be withheld over the entire 2021, reducing the amount of employee deductions on each payroll. At the same time, employees can opt to have their deferrals withheld at a faster rate.
The Doubts: IRS guidance provided that a Form W-2c for 2020 would be necessary upon completion of withholding. Will deferrals paid through December 31, 2021, still necessitate only a 2020 W-2c, or will a 2021 W-2c be required as well? And what mechanism will the IRS put in place to avoid issuing late deposit penalty notices for the 2021 deposits of 2020 liabilities?
We are awaiting further clarity with the release of both IRS and SBA guidance, Be sure to check this space frequently for continuing Viventium coverage and updates.
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