New Stimulus Legislation Makes PPP-Financed Expenses Deductible and Offers Other Tax Benefits | Kelley Drye & Warren LLP
On December 27, 2020, following an unexpected delay, President Donald Trump signed a stimulus bill that overturned the IRS’s position that spending funded by Paycheck Protection Program loans ( “PPP”) canceled were not deductible. The new legislation, known simply as the Consolidated Appropriations Act, 2021 (the “Act”), also expands the reach of the PPP program and enhances other benefits created in the original Aid, Relief and Relief Act. economic security against coronaviruses (the “CARES Act”) or the Families First Coronavirus Response Act (the “FFCRA”). This customer notice describes some of the potential tax benefits extended or improved under the new legislation.
Deductibility of expenditure financed by PPP
Under the PPP, companies were able to obtain loans to finance labor costs and the payment of some other vital expenses. Under the initial P3, if the proceeds of a P3 loan were used to finance labor costs, interest on certain mortgage bonds, certain rent payments, and certain utility payments, all or part of the loan could be forgiven. The lion’s share of the proceeds from PPP loans was to go to employees. While the surrender of a non-PPP loan is generally taxable for a borrower, Section 1106 (i) of the CARES Act provided that the surrender of a PPP loan under Section 1106 (b) of the Act CARES was to be excluded from gross income.
On April 30, 2020, in Notice 2020-32, the IRS declared that expenses, including payroll expenses, would not be deductible for federal income tax purposes if funded by P3 loans. canceled. The rationale behind Notice 2020-32 was that allowing a deduction for expenses funded with a canceled PPP loan could confer an inappropriate double taxation benefit which is prohibited under section 265 (a) (1). ) of the Internal Revenue Code. Advisory 2020-32 was an unpleasant surprise, as there was an indication that Congress had intended expenses funded by canceled PPP loans to be deductible.
The law effectively cancels Notice 2020-32, providing that “no deduction will be denied, no tax attribute will be reduced and no base increase will be denied, due to the exclusion of expected gross income” from the Article 1106 (i) of the CARES Act. Thus, Congress has confirmed that taxpayers can effectively obtain a double tax advantage on canceled P3 loans.1
Expansion of employee retention credit
The CARES Act provided for a potentially refundable tax credit to certain employers of up to 50% of the wages the employer continued to pay certain employees in the face of a government-imposed COVID-19 shutdown or loss of income exceeding certain thresholds. The credit was granted on certain taxes on employment, including the employer’s share of the taxes on old age insurance, survivors and disability (i.e. social security) and a part of the Railroad Retirement Tax Act.
The Act extends the availability of credit, among others:
- Increase the amount of credit from 50% of the qualified salary to 70% of the qualified salary;
- Increase the maximum amount of eligible salaries taken into account in calculating the credit from $ 10,000 per employee in total to $ 10,000 per employee for each calendar quarter;
- Extension of credit availability from December 31, 2020 to June 30, 2021; and
- Reduce by 50% to 20% the reduction in gross receipts (compared to the same calendar quarter of the previous year) that potentially triggers the availability of credit for some employers.
Full charge of certain business meals for 2021 and 2022
The law creates a new exception to the 50% limit under Section 274 (n) (1) of the Internal Revenue Code on business meal expenses that can be deducted. For the period beginning January 1, 2021 and ending December 31, 2022, the limit is increased from 50% to 100% “for food or beverages provided by a restaurant”.
Extension of the deferral of certain tax obligations on the payroll
On August 8, 2020, President Donald Trump issued a memorandum directing the US Treasury Department to defer the withholding, filing, and payment of certain labor taxes. On August 28, 2020, the IRS issued Notice 2020-65, which was intended to provide advice to employers on how to implement the protocol. The memorandum and opinion deferred the collection by the employee of social security taxes (imposed at a rate of 6.2%) and an equivalent amount of railway pension taxes from a employee, in each case for wages paid from September 1, 2020 to December 31. 2020, and only for employees whose salary (or compensation) payable during a bi-weekly pay period was generally less than $ 4,000. Advisory 2020-65 addresses the need to pay employee Social Security deferred taxes by requiring employers to withhold and pay employee social security deferred taxes in proportion to wages and salaries paid between January 1 2021 and April 30, 2021.
The law extends the end of the payment period until December 31, 2021.
Extension of tax credits for paid holidays FFCRA
The FFCRA has demanded that some employers with less than 500 employees offer paid sick leave and paid family leave to eligible employees until December 31, 2020. The FFCRA has made available to employers a tax credit equal to salary sick leave and family leave that employers were required. payable under the warrant.
The Law provides that the tax credit will now be available for eligible sick leave salaries and eligible family leave salaries paid until March 31, 2021. However, the Law does not appear to extend the period during which such salaries must be paid. paid. Thus, certain employers will be able to take advantage of tax credits for sick leave and family leave paid voluntarily between January 1, 2021 and March 31, 2021 and which meet certain other requirements.
1 Although the Act does not impose limits on the deductibility of expenses financed by canceled PPP loans, there remains the possibility that other rules limit deductions for such expenses.