Congress Passes Coronavirus Relief Bill
On December 21, 2020, Congress passed a Coronavirus Relief Bill (the “Relief Act”) permitting payments of $900 billion in relief for businesses and individuals. The Relief Act has been presented to the President for approval and, as of the time of this article, the President has suggested that certain adjustments be made to the amount of direct payments to individuals included in the Relief Act, as discussed below. Below are the key provisions:
Paycheck Protection Program (PPP)
The Relief Act provides for additional funding of $284 billion in forgivable loans to small businesses. Eligibility is extended to include nonprofits and set-asides for very small businesses and community-based lenders. Businesses who received loans in the first bill (the “CARES Act””) can receive a second loan if they have fewer than 300 employees and at least a 25 percent drop in gross receipts in a 2020 quarter compared to the same quarter in 2019. Second-time borrowers are subject to a $2 million loan limit. Unlike under the CARES Act, publicly traded entities will be ineligible.
PPP loans can be used to pay “qualifying expenses,” which are expanded to include expenses such as covered property damage, supplier costs, or worker protection expenditures, in addition to employee wages or operating expenses like rent and utilities. When used for qualifying expenses, PPP loans are forgivable, and the Relief Act includes a simplified forgiveness application process for loans up to $150,000.
The Relief Act also clarifies tax issues from the CARES Act because after its passage, the Treasury Department ruled that expenses paid with PPP loans were not tax-deductible. The Relief Act states, “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided [under the CARES Act].” Under the Relief Act, PPP recipient businesses will receive a double subsidy: The forgiven loans will not constitute taxable income, and expenses paid with PPP funds may be deducted from income. These tax advantages apply to the initial CARES Act loans and the Relief Act loans.
Of Interest to Lenders
Lender fees for larger loan categories are unchanged from the CARES Act. The Relief Act includes changes for smaller loans. For a loan amount up to $50,000, lenders will receive the lesser of 50% of the principal loan amount or $2,500. For loans of more than $50,000 to $350,000, lenders will receive 5% of the principal loan amount. For loans greater than $350,000, lenders will receive 3% of the principal loan amount.
Hold Harmless Protection
The Relief Act improves lenders’ “hold harmless” protections. Lenders acting in good faith may rely on all documentation and certifications submitted by a borrower and will not be subject to enforcement action for any falsehoods contained in a borrower’s origination or forgiveness application.
An SBA guarantee will be in place for loans under the Relief Act under the same terms as in the CARES Act.
Other Business-Related Provisions
Other notable business-related proviisions include: (1) an increase from 50% to 100% for the business meals deduction for 2021 and 2022; (2) extension and expansion of the employee retention tax credit (enacted by the CARES Act) for wages through June 30, 2021, (3) extension of the new markets tax credit through 2025; and (4) extension of employer-side social security payroll tax credits through March 2021 to offset paid sick and family leave.
The Relief Act permits a bankruptcy court to authorize a debtor in possession or a trustee in certain small business cases to obtain a PPP loan. The loan would be treated as a debt to the extent it is not forgiven and would have priority over certain post-bankruptcy filing administrative expenses in the case.
The CARES Act raised for one year the initial debt threshold to be eligible for small business Subchapter V bankruptcy cases from $2,725,625 to $7.5 million. The Relief Act does not appear to extend this period, which ends in March 2021.
Extension of Unemployment Insurance (“UI”)
The benefits from the CARES Act due to expire on December 26, 2020 are extended by 11 weeks. This includes Pandemic Unemployment Assistance (PUA) providing for UI benefits for workers who traditionally are ineligible, such as gig economy workers and independent contractors. It also includes Federal Pandemic Unemployment Assistance (FPUA), which will provide an additional $300 per week supplement to state UI compensation.
Also extended for 11 weeks will be the Pandemic Emergency Unemployment Compensation (PEUC) in the CARES Act (for a combined maximum of 50 weeks), to expire on March 14, 2021. Self-employed workers with at least $5,000 in income may be eligible under “Mixed Earner Unemployment Compensation” for an additional $100 per week.
Direct Payments to Individuals (“Recovery Rebates”)
A second round of direct payments of up to $600 will be made to individuals. Payments will be made to individuals and each qualified child, with no cap on household size. As in the CARES Act, 2019 income will determine eligibility, with phase out in payment amounts beginning at $75,000 for single filers, $112,500 for heads of household, and $150,000 for those married filing jointly. For example, single filers without qualifying dependents phase out at $87,000, married couples filing jointly with no qualifying dependents phase out at $174,000, and married couples filing jointly with at least two dependents at $200,000. As of publication, these amounts may be changed because of comments by the President.
Employee Payroll Taxes
The deadline for employees who opt for the employee-side payroll tax deferral, is extended from April 2021 to December 31, 2021.
The Relief Act permits rollover from 2020 to 2021 and from 2021 to 2022 of balances in taxpayers’ Flexible Savings Accounts permitting maximum use of the tax benefit even if expenses do not reach the maximum for that year.
Child Tax Credit & Earned Income Tax Credit
Individuals eligible for these tax credits were at risk of having them reduced because of the COVID-caused lower incomes. The Relief Act uses 2019 incomes to offset these possible declines.
This permits taxpayers who take the standard deduction to also deduct charitable contributions up to $600 (married joint filers) and $300 (others) for the year 2021. For 2020, the limit was $300.
We are available to discuss any questions concerning this article and the Relief Act.
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Peter Janovsky is a partner at ZEK and a member of both its Litigation and Bankruptcy groups. His 32 years of experience includes successfully litigating trials, motions and appeals in complex real estate, secured lending, title, partnership agreements, license agreements and many other issues in Courts on all levels.