By Thomas L. Hofstetter, Esq. and Robert F. McAnanly, Jr., Esq.

Late in the day on Sunday, December 27th, President Trump signed into law, a comprehensive stimulus package, which was passed by Congress the previous week. There are several key tax-related provisions in the bill. Most notably, clarifying that the Paycheck Protection Program (“PPP”) will be tax-free. Below is an overview of the key provisions.

A $600 per person direct payment to individuals is included in the bill. Congress is still wrangling over this amount, which may be subject to change. The $600 amount is per individual and includes minor dependents. The qualifications mirror the CARES Act qualifications for the earlier $1,200 stimulus, including a phase-out beginning at income of $75,000 (or $150,000 on a joint return). Individuals who received the earlier $1,200 stimulus payment will be eligible for the additional $600 payment.

Federal unemployment benefits provided by the CARES Act have been renewed at $300 per week. The additional $300 per week applies to all workers receiving unemployment benefits through March 14, 2021, unless further extended due to the delay in signing the legislation. Self-employed individuals are eligible for an additional $100 per week.

The bill clarifies that PPP forgiveness is tax-free and the expenses paid with the loan proceeds are deductible. It also clarifies that taxpayers will receive an increase to basis, for the amount of the loan, effectively treating the PPP forgiveness exactly as any other tax-exempt income is treated for tax purposes.

In addition to the change in taxability, the bill also allows additional expenses to qualify for forgiveness. These expenses include certain operations expenditures, certain property damage costs, supplier costs, and worker protection expenditures.

A simplified PPP forgiveness application will be made available for original PPP loans of $150,000 or less. The form is to be less than one page long and very limited additional documentation will be required for forgiveness.

A second PPP loan will be allowed for businesses and self-employed individuals who sustained significant hardships in 2020. The loans are available to entities that employ 300 employees or less and had gross receipts in any calendar quarter of 2020 that were at least 25% less than gross receipts in the same calendar quarter of 2019.

Additional entities are also eligible for the second-draw loans including 501(c)(6) organizations, provided they meet the other qualifications and the expenses are not used for lobbying activities.

Businesses with existing SBA loans received principal and interest payment forgiveness for six months of 2020. The bill clarifies that the forgiveness is tax-free, and the related interest expense is deductible. The bill further clarifies that the $10,000 EIDL Grant that many taxpayers received is not taxable.

In addition to the original six-month forgiveness of payments, most entities are also eligible for another three months of payments beginning on February 1, 2021. Certain entities are eligible for another eight months beginning on February 1, 2021. Entities eligible for the additional eight-month period include most retail establishments, hotels, restaurants, personal care service providers, transportation, and news organizations.

The bill also provides an expansion of the 7(a) loan program by increasing loan guarantees to 90% and waiving fees through September 30, 2021, expanding low interest loan refinancing provisions and expanding the EIDL grant provisions.

The bill provides an extension of the payroll tax deferral included in Notice 2020-65. The extension gives taxpayers from January 1, 2021 through December 31, 2021 for the payment of the deferred payroll taxes, paid ratably. This provision is a deferral of the tax (not a forgiveness of the tax).

The Employee Retention credit provided in the CARES Act was limited to 50% of wages up to $10,000. This has been expanded to allow for 70% of wages up to $10,000. Employers who received the PPP may now qualify for this credit if the wages were not paid with PPP loan proceeds.

In an effort to support the restaurant industry, expenses for business meals after December 31, 2020 and before January 1, 2023 will be fully deductible (rather than limited to 50%) if the expense is paid to a restaurant.

Additionally, beginning in 2021, individuals who take the standard deduction will be allowed a charitable contribution deduction of up to $300 ($600 for married filing joint) for qualified charitable contributions. (Tax year 2020 allows a $300 deduction for all filers). Cash contributions to qualified charities are allowed up to 100% of AGI for tax years 2020 and 2021.

Health and dependent care flexible spending arrangements are allowed to include a carryover from tax year 2020 to tax year 2021. These arrangements are also allowed to include a carryover from tax year 2021 to tax year 2022.

There are various other tax provisions made permanent and some extended through 2025, as part of the legislation.

The SBA will be developing rules to implement the legislation, with regard to the SBA provisions. Such rules will be forthcoming in the days/weeks ahead, to provide additional guidance which we will continue to monitor.

The attorneys at Schenck Price Smith & King, LLP have studied this new legislation and other relevant emergency legislation and welcome your inquiries. We will assist you in determining how best to assess the various benefits and eligibility requirements for each program. Please feel free to contact our attorneys to assess your best course of action in this trying time.

DISCLAIMER: This Alert is designed to keep you aware of recent developments in the law. It is not intended to be legal advice, which can only be given after the attorney understands the facts of a particular matter and the goals of the client.