COVID-19 Relief and Stimulus Package
As a follow up to the CARES Act, Congress passed additional stimulus on December 21, 2020. It was included as part of the larger Consolidated Appropriations Act of 2021. We provide a synopsis of the stimulus package below.
Of important note to business owners: Included in this bill is another round of PPP for small businesses, with rules similar to those in the CARES Act with a slightly expanded set of qualified expenses and an expansion of the Employee Retention Tax Credit. It also includes another round of stimulus payments to individual tax payers, and various other personal tax clarifications.
Businesses no longer need to choose between an Employee Retention Tax Credit or PPP loan. Businesses can benefit from both, though the same wages cannot be used to qualify for both the credit and for forgiveness.
Differences in the second Paycheck Protection Program (PPP2):
- Eligible to receive a loan at roughly 2.5x monthly payroll with a cap at $2mm (previously $10mm).
- Businesses in accommodation and food service businesses have a 3.5x monthly payroll allotment, with the same $2mm total cap. You can refund what you don't need or use.
- Small businesses are defined as firms with 500 or fewer employees (previously 100).
- Small businesses can apply for a PPP2 loan if revenue is down by at least 20% in any 2020 quarter compared to previous year same quarter.
- Employers with more than 500 employees have much stricter eligibility.
- Covers new expenses including “Operations Expenditures” which means costs associated with business software or cloud computing service that facilitates business operations, product delivery, payroll service, etc.
- One fix to the previous PPP is the treatment of a forgiven loan as non-taxable income and expenses paid with the loan as not deductible. The new PPP2 explicitly authorizes the deduction of expenses used with the loan if it is forgiven. This will be retroactive to the original PPP forgiven loans.
- As with the original program, no more than 40% of the loan can be used for non-employee expenses.
- All new PPP loans will be able to choose a covered period of 8 or 24 weeks.
Old Peak’s takeaway - please review your Q3 and Q4 revenue to determine eligibility. If you applied in the first round of PPP loans, but did not receive a loan, speak to your banker or financial planner to determine if you meet the new criteria.
Payroll Tax Deferral Option
- Payroll tax deferral option is not forgiven but extended to be paid back ratably by Dec 2021 (originally by May 2021).
- All federal employees were opted into the deferral mandatorily.
Of important note to individuals: included in this round is another stimulus check.
- The stimulus payments are based on filed 2019 Adjusted Gross Income. The base amount is $600 for each tax filer, including each child for whom a Child Tax Credit may be claimed (must be younger than 17).
- The amount of stimulus is reduced by $5 for every $100 of AGI over the threshold, depending on tax filing. Those thresholds are:
o Single: $75,000
o Joint: $150,000
o HOH: $112,500
- If your 2020 AGI qualifies you for the stimulus payment, but your 2019 AGI did not, you will receive the eligible credit when you file your 2020 tax return.
- There is no claw back if your 2020 AGI is higher and disqualified you if you received a stimulus payment based on your 2019 AGI.
Other Important Items in the legislation:
Renewal of the 100% of Adjusted Gross Income limit on cash contributions to a charity.
- You can deduct 100% of AGI for cash donations in 2021, as in 2020. The cash contribution limit is typically 50% of AGI.
- Donations must be made directly to the organization, not to a donor advised fund.
- Donations of stock still have a 30% AGI limitation.
There is a $300 above the line deduction (i.e., eligible even if you use the standard deduction and do not itemize your deductions) in 2021, as in 2020. However, in 2021 the deduction is per person, not per tax return as it is in 2020. That is, married joint filers can deduct $600 for cash charitable donations above the line in 2021, while in 2020 only $300.
There is the ability to carry forward unused Flex Spending balances into 2021. Because many parents no longer had the same childcare options as they had planned in 2020, dependent care FSA balances can be carried into 2021. Health FSA balances can also be carried into 2021.
A reduction in the threshold for a medical expense reduction to 7.5% of AGI. Medical expenses to be included in itemized deductions now have a 7.5% AGI hurdle for all taxpayers for the foreseeable future.
A new generous Lifetime Learning Credit that will replace the Tuition and Related Expenses deduction. Lifetime Learning Credit is now synced with the American Opportunity Tax Credit income phaseouts:
• $80k-$90k for single filers
• $$160k-$180k for joint filers