PPP- Round 2

 Paycheck Protection Program Round 2: The Highlights

Monday, December 28, 2020

After much deliberation, Congress finally agreed to approve a $900 billion COVID-19 relief package as part of the Consolidated Appropriations Act, 2021. Included in that amount is $284 billion for a second round of the Paycheck Protection Program (PPP). The new relief package includes:

• additional funding for new PPP loans

• the ability to obtain a second PPP loan for small businesses facing significant revenue declines in any 2020 quarter compared to the same quarter in 2019

• clarifications providing for the deductibility of business expenses paid with forgiven PPP loans (a material change from existing IRS guidance)

• loan eligibility for Section 501(c)(6) not-for-profit organizations for the first time

• $15 billion for live venues, independent movie theaters and cultural institutions

• $20 million for the Economic Injury Disaster Loan Program

While based on similar principles as the first round of PPP funding under the CARES Act, the second round of PPP has some key differences that are set forth below. Please note that guidance and regulations related to this second round of PPP have not yet been issued. (The Small Business Administration (SBA) must provide these regulations within 10 days of the enactment of the Act.) We expect to provide updates as such guidance and regulations are issued. Several of the key changes are summarized below.

Limited Eligibility for Second Round PPP Loans

 The second round of PPP loans is available to not only first-time qualified borrowers but also to borrowers that previously received a PPP loan. PPP loans are limited to businesses that (i) employ no more than 300 employees or meet an alternative size standard; (ii) have used the entire amount of their first PPP loan or will use such amounts, and (iii) had gross receipts during Q1, Q2 or Q3 2020 that were at least 25 percent less than the gross receipts from the same quarter in 2019 (applicants may use Q4 2020 if they apply after January 1, 2021). If the business was not in operation for a portion of 2019, then the comparable quarters may be different.
Borrowers should be aware that the second round of PPP did not remove or change the necessity requirement. All borrowers must be able to certify that the "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant" as of the date on which the PPP loan application is submitted. 

Maximum Loan Amount

 Borrowers have an option to calculate the maximum loan amount by multiplying the borrower's average total monthly payroll in (a) the one-year period prior to the date on which the loan is made, or (b) calendar year 2019, by 2.5x. The maximum loan amount has been reduced from $10 million in the first round to $2 million. Similar to the first round, seasonal employers calculate their maximum loan amount differently.

Maximum Loan Amounts for the Hospitality Industry

 Borrowers that have NAICS Code 72 (typically restaurants and hotels) are permitted to use a 3.5x multiplier of their average monthly payroll costs to calculate their maximum loan amount, subject to the $2 million cap.

Choose Your Own Covered Period

 Originally the SBA provided that the covered period (the time in which a borrower must use the funds to qualify for forgiveness), would be an eight-week period beginning on the date the borrower received the loan proceeds. In subsequent amendments, the covered period was expanded to 24 weeks. In this latest round of PPP, borrowers are able to choose the length of their covered period so long as it is at least eight weeks and is not longer than 24 weeks. This subtle change will allow borrowers more control over how to handle potential reductions in workforce once the PPP funds are exhausted.

Use of PPP Funds

 Congress expanded the types of expenses for which PPP loans can be used, which applies to existing PPP loans (except in the event forgiveness has already been obtained) and new loans. In addition to payroll, rent, covered mortgage interest and utilities, the PPP now allows proceeds to be used for:

• Covered Operations Expenditures: payments for business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, HR and billing functions, or account or tracking of supplies, inventory, records and expenses
• Covered Property Damage Costs: costs related to property damaged and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation
• Covered Supplier Costs: expenditures to a supplier of goods that are essential to the operations of the entity at the time at which the expenditure was made and is made pursuant to a contract or order in effect at any time before the covered period or, with respect to perishable goods, in effect at any time during the covered period
• Covered Worker Protection Expenditures: operating or capital expenditures that allow a business to comply with requirements or guidance issued by the CDC, HHS, OSHA or any state or local government during the period beginning March 1, 2020 and ending on the date which the national emergency declared by the president expires related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19. These expenses appear to include PPE, physical barriers that were put in place, expansion of indoor/outdoor space, ventilation or filtration systems and drive-through windows.

Tax Treatment

 PPP loans will not be included as taxable income. Expenses paid with the proceeds of a PPP loan that is forgiven are now tax-deductible. This covers not only new loans but also existing and prior PPP loans, reversing previous guidance from the Treasury and IRS, which did not allow deductions on expenses paid for with PPP proceeds. In addition, any income tax basis increase that results from the borrower's PPP loan will remain even if the PPP loan is forgiven.

EIDL Advances Do Not Reduce Forgiveness

Prior to the passage of the new Act, borrowers that received an EIDL Advance (advances between $1,000 and $10,000) had that amount subtracted from their total forgiveness, which, in effect, had the effect of repaying the EIDL Advance. The Act now provides that EIDL Advances will not reduce PPP loan forgiveness. The SBA has indicated that borrowers that already received forgiveness and had their EIDL Advance deducted from such forgiveness may be able to amend their forgiveness applications. Further guidance is expected to be issued.

Forgiveness Applications for Loans Under $150,000

 Forgiveness application for loans under $150,000 will be simplified to a one-page certification that includes a description of the number of employees the eligible recipient was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs and the total loan amount. Borrowers should be aware, however, that while the forgiveness application is simplified, all of the rules still apply. Rather than going through the process of showing how borrowers arrived at certain numbers, the simplified application merely asks borrowers to self-certify. Given the liability attached to making a false certification to the SBA, we advise all borrowers to use the long-form application to ensure that the certifications made on the simplified form are true and correct. Furthermore, all borrowers must retain all employment records relevant to the forgiveness application for a period of four years following the date of submission, and all other records relating to PPP and the forgiveness application for a period of three years following submission of the forgiveness application. 

Eligibility for Section 501(c)(6) Not-for-Profit Organizations

 For the first time, Section 501(c)(6) not-for-profit organizations will be eligible to apply for and receive PPP loans. These organizations generally consist of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. These organizations are generally expected to be eligible so long as (i) they do not receive more than 15 percent of their receipts from lobbying activities, (ii) lobbying activities do not comprise more than 15 percent of the organization's total activities, (iii) the cost of lobbying activities did not exceed $1 million during the tax year ending February 15, 2020, and (iv) the organization does not employ more than 300 employees.

© 2020 Much Shelist, P.C.National Law Review, Volume X, Number 363

Washington Tax Break, Dec 21, 2020

 

On Dec. 21, the behemoth 5,593-page deal to provide coronavirus stimulus and keep the U.S. government running in 2021 was finally released to the public.

It passed both the House and the Senate just a few hours later.

Now as lawmakers rush home for Christmas, business groups and observers are poring over the bill – the longest ever passed by Congress – to see which businesses and industries come out the biggest winners.

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Some of the biggest examples of government largesse were known in advance. Airlines received a second round of the Payroll Support Program with a price tag of $16 billion. Amtrak received $1 billion in funding, and emergency grants to music venues added another $15 billion to the total.

Smaller businesses of all stripes will also be able to take advantage of a second round of the forgivable loans from the Paycheck Protection Program.

But a range of other industries – from beer makers to thoroughbred horse racers – got tax breaks to help them in the coming years and months. Here are some notable examples.

The 'three martini lunch' tax deduction

A tax break many picked up on was what critics have termed the “three martini lunch” deduction. The provision, which President Trump has touted in the past, allows a company to fully deduct a business meal as a business expense.

The bill outlines a “temporary allowance of full dedication for business meals” on page 4,946. In an analysis from the American Action Forum, Gordon Gray notes that firms can currently deduct 50% of the cost of business-related meals. After the new year, the deduction increases to 100% for 2021 and 2022. The cost to the Treasury will be somewhere around $5 billion to $6.3 billion, according to early estimates.

The provision was pushed by Republicans and reportedly agreed to by Democrats in exchange for expanded tax credits for low-income families.

The provision has been touted by some as a way to help the restaurant industry, but critics say it’s more directly aimed at business executives.

Restaurants appear to have come away from the deal with a mixed bag. Industry groups had been pushing for legislation called the RESTAURANTS Act which would provide direct aid, but it wasn’t included in the final deal.

Restaurants can also receive help through the second round of the PPP, but industry advocates have already come out and said the deal falls “woefully short.”

Breweries and winemakers

The deal includes a range of measures for spirits-makers, including the reduction of certain excise taxes and reduced rates for alcohol imports. The industry had been bracing for a tax hike at the end of the year in the event Congress took no action.

In a statement, Chris Swonger, president and CEO of the Distilled Spirits Council, said it would mean “a huge sigh of relief for struggling craft distillers.”

A winery tasting room employee talks to customers in Solvang, California in November. (George Rose/Getty Images)

Breweries have been pushing Congress for months to make the previous tax cuts permanent, getting a majority of lawmakers to co-sponsor legislation that was eventually worked into the overall deal. Jim Trezise, president of WineAmerica, thanked “the hundreds of supporters in Congress for this major breakthrough.”

The spirits industry has been turned upside down in 2020 with many brick-and-mortar alcohol sellers seeing their businesses shut down while online purveyors like Drizly saw 350% growth.

Horse racers

Owners of thoroughbred racehorses, many of whom reside in Senate Majority Leader Mitch McConnell’s home state of Kentucky, also received special attention in the final deal.

The legislation includes a provision to reclassify “certain racehorses as 3-year property,” which will translate into a tax break for owners. The provision allows owners to depreciate the value of qualifying racehorses to save money on taxes, which could help “spur investment in racehorses,” according to thoroughbreddailynews.com.

Senate Majority Leader Mitch McConnell (R-KY) during the final stages of the stimulus negotiations on Monday. (Cheriss May/Getty Images)

The deal also includes the Horseracing Integrity and Safety Act of 2020. The bill will regulate the horse-racing industry at a national level and aim to stop things like the race-day doping.

“I’m proud the Senate agreed to my legislation to preserve our signature racing industry and the 24,000 workers who support it,” McConnell said in a statement.

Targeted changes for farmers and the self-employed

A summary of the tax provisions compiled by the House Ways and Means ranking member Kevin Brady (R., Texas) highlighted a range of other groups who will benefit come tax time.

Farmers and ranchers will now have new rules about how they can claim farming losses by changing rules that had been instituted in the CARES Act. The regulation “eliminates unnecessary compliance burdens for farmers.”

The new rules also impact some self-employed workers and allows others – like educators, volunteer firefighters, and emergency medical responders – to write off certain personal protective equipment or make permanent certain tax benefits.

Thanks to Ben Werschkul for much of this information

Biden's planned Tax Changes

 The Biden Administration Plans Significant Changes in United States 

Individual and Corporate Income Taxes and Estate Taxes

With the upcoming change in the federal administration on January 20, 2021, both individual and business taxpayers should be prepared for potentially major shifts in federal tax laws.  A new administration often seeks to revamp federal tax statutes, but President-elect Biden’s objective for 2021 and subsequent years is to bring about a major overhaul of the federal tax code, not limited to repealing provisions enacted during the Trump administration. All of these changes would likely need the approval of Congress.

The most significant changes that President-elect Joseph Biden and his team have proposed during the last year (the “Biden tax proposals”) are summarized below.

Individual Taxpayers

The Biden tax proposals would increase the highest individual income tax rate from 37 percent to its pre-2017 level of 39.6 percent for taxpayers earning $400,000 or more. It is unclear if, or to what extent, tax rates for other income tax brackets may change.  Individuals earning over $400,000 also may see limitations on itemized deductions and business-related deductions and credits.  

The Biden team has discussed introducing a new Social Security tax for individuals earning over $400,000. It is not clear how this proposal would be implemented, but it likely would create a “donut hole” where earnings between $137,700, the current Social Security cap, and $400,000 are not subject to the new tax.

Under the Biden tax proposals, the capital gains tax rate for many taxpayers would remain at its current 20 percent, but there is a possibility that the rate could go as high as 39.6 percent (to equal the proposed highest ordinary income tax rate) for some high-income taxpayers.  It is not clear what income thresholds would be affected, nor how this increased capital gains tax rate would operate in conjunction with other provisions governing an individual taxpayer’s income tax and deductions. 

In connection with its proposed hike in the capital gains tax rate for high-income taxpayers, the Biden administration also proposes to repeal the preferential tax treatment for carried interest.  We note, however, that previous administrations have tried unsuccessfully to bring about this change in the tax system. 

Lower-income taxpayers—again with applicable thresholds not defined in the Biden tax proposals—could see an increase in dependent day care credits and potentially in other similar tax credits. 

Corporate Taxpayers

Three years ago, the Tax Cuts and Jobs Act (TCJA) significantly reduced the corporate tax rate from 35 percent to 21 percent.  The intended result, when coupled with the reduction of the highest marginal tax rate for individuals to 37 percent, was to impose a similar burden on individuals conducting business through partnerships, LLCs and S Corporations and on C Corporations (the combined 21 percent corporate tax rate and 20 percent tax rate on earnings distributed to shareholders as dividends approximated a tax burden of 37 percent for C Corporations).

The Biden tax proposals would increase the corporate tax rate from 21 percent to 28 percent.  This, with the increase in the highest individual income tax rate to 39.6 percent, would reinstitute a higher burden on investments through C corporations as compared to partnerships, LLCs and S Corporations. This difference will not be as extreme, however, as before the TCJA, when a C Corporation paid 35 percent in income tax plus a 20% tax on qualified dividends. 

It is unclear whether the Biden tax proposals’ increase in the individual capital gains tax rate to 39.6 percent for high earners will mean a related increase in C Corporations’ tax on qualified dividends, currently at 20 percent as compared to non-qualified dividends that are taxed at the highest ordinary rate.  If so, a higher corporate income tax rate coupled with an almost-doubled tax on dividends may result in a very large shift away from investment through C Corporations and back to LLCs, S Corporations, and partnerships.   

In addition to a potential shift away from the corporate form, the proposed increase in the corporate tax rate may have an indirect effect on several international tax provisions, discussed below.

The Biden tax proposals also include a possible minimum tax rate of 15 percent, before book income, on corporations earning over $100 million per year. This proposal is still up in the air, with the actual tax rate and earnings threshold not yet determined.  It does appear, however, that the Biden administration will try to impose some minimum tax on large corporations (although this may be mitigated for certain corporations by incentives to domestic production, as discussed below).

President-elect Biden’s focus on taxing large multinational corporations also is expected to result in specific taxes imposed on large banks.  The Biden-Sanders Unity Tax Force Recommendations endorsed taxing “liabilities of ‘ultralarge’ banks to promote financial stability and fund investments in American productivity.”  There is no current definition of what constitutes an “ultralarge” bank, however, nor specification of the proposed tax base or tax rate.

Finally, the Biden administration is expected to attempt to repeal the increase in the bonus depreciation percentage, from 50 percent to 100 percent, instituted by the Trump administration for qualified property acquired and placed in service after Sept. 27, 2017.

Domestic and International Tax Provisions Designed to Keep Wealth and Jobs in the United States

The Biden tax proposals relating to international corporate business are not as clear as those regarding individual and corporate tax rates, but they focus on the aim of bringing back and retaining jobs and wealth in the United States.  One proposal in this regard would be to impose a 10 percent surtax on profits for goods manufactured, or for services rendered, outside the United by an overseas subsidiary of a United States company, which are then resold into the United States, which will result in an overall tax rate on such profits of 30.8 percent. 

Consistent with President-elect Biden’s intent to bring jobs back to the United States, the Biden tax proposals include a 10 percent advanceable “Made in America" tax credit for companies making investments that will create domestic jobs. This credit will be available to companies with respect to a broad range of investments designed to create jobs in the United States, including, inter alia, for revitalizing closed facilities in manufacturing areas, for retooling existing factories to increase competitiveness and employment, and for expenses or new investments arising from bringing back to the United States production or service jobs. The credit will apply to the increment of increased wages—above a company’s pre-COVID baseline (with no precise date specified)—for manufacturing jobs paying up to $100,000.  To consolidate the effect of this credit, companies that move business and jobs offshore could lose deductions to which they are currently entitled.

The Biden tax proposals would also increase the Global Intangible Low-Tax Income (GILTI) tax rate from the current minimum rate of 10.5 percent to 21 percent, although the exact mechanisms of how this increase would be effectuated are unsettled.  The plan would change the calculation to a country-by-country minimum tax rather than the current approach, which in some circumstances allows businesses to blend foreign income taxed at a high rate with foreign income taxed at a lower rate. The plan would also eliminate GILTI’s exemption for deemed returns under 10 percent from qualified business asset investments.

Finally, the Biden tax proposals focus on tougher anti-inversion rules to prevent United States companies from moving their headquarters to other jurisdictions for tax reasons.

Real Estate-Related Proposals

The Biden tax proposals also target real estate investments.  For example, the Biden team has discussed raising revenue by completely repealing IRC § 1031, which provides for deferral of capital gains tax on like-kind exchanges. A full repeal of section 1031 would affect real estate owners at all income levels, but there is an alternate proposal to limit section 1031 exchanges to taxpayers who earn less than $400,000.  

More generally, investors in real estate who earn over $400,000 could see certain tax breaks, such as bonus depreciation, eliminated or scaled back.  At the other end of the spectrum, first-time home buyers could enjoy a tax credit of up to $15,000, and there may be special credits for real estate renovations in certain distressed areas.  There also may be a new low-income renters’ tax credit with the goal of reducing rent and utilities bills.

In addition, the Biden administration is expected to try to make changes to the statute providing tax incentives for investment in “Opportunity Zones,” which was enacted by the Trump administration.  The main focus will be on scrutinizing whether benefits awarded to investors promote the welfare of communities located in these “Opportunity Zones.”  

Estate and Gift Tax

The Biden tax proposals endorse significant amendments to estate and gift taxes. The most significant proposal is elimination of the step-up basis for inherited property or, in other words, carrying over the decedent’s basis to the heir(s). This change would be revolutionary and would affect taxpayers at all income levels.

Another proposal would reduce the estate tax/lifetime gift tax exemption from its current high of $11.5 million per spouse. President-elect Biden has proposed reducing the exemption to the pre-Trump level of $5.3 million per spouse, but there has also been discussion of reducing it even lower to its 2009 levels of $3.5 million for estate taxes and $1 million for lifetime gifts.

Other Proposals

The Biden administration hopes to advance its policies by applying tougher taxes on industries such as pharmaceuticals and fossil fuels and by enacting tax incentives to encourage businesses to use clean energy. Specific details of these various plans have yet to be outlined.

One proposal would impose a tax penalty on pharmaceutical companies that increase prescription drug prices by more than the rate of inflation. Another would eliminate a deduction for consumer drug advertising. 

The Biden tax proposals would eliminate fossil fuel subsidies, although they do not state whether this includes both direct and indirect subsidies. On the other hand, the Biden administration plans to incentivize investment in renewable energy, energy efficiency, and electric vehicles by reinvigorating the energy investment tax credit and the electric vehicle tax credit and by enhancing tax incentives for carbon capture, use, and storage. 

Thanks to Kastalantz & Fink LLP for this information