President Trump signed into law the $900 billion Consolidated Appropriations Act, on Sunday, December 27, 2020. Part of this act includes the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (CRRSAA or “the Act”). This act is meant to expand upon the CARES Act by issuing a second round of Economic Impact Payments (EIP 2), extending federally subsidized unemployment benefits and enhancing the Paycheck Protection Program (PPP). The most notable provisions of the act are as follows:
Much of the attention around the newly enacted law has been focused on the second round of Economic Impact Payments. As with the first round of payments, this rebate is structured as an advanced tax credit to be used against income in 2020 and will not count as taxable income. The rebate will be available for taxpayers that fall below certain income thresholds based on 2019 tax returns.
A single individual taxpayer with income under $75,000 will receive the full $600, with the phase-out range being between $75,000 and $87,000, and no payment will be received if an individual’s income is over $87,000. A married couple with income under $150,000 will receive the full $1,200 ($600 per spouse). These payments would begin to phase-out at any income over $150,000 and any couple with income over $174,000 would receive no payment. The rebate amounts are reduced by $5 for each $100 that a taxpayer’s income exceeds the limit. Any taxpayer with a qualifying child under the age of 17 will receive an additional $600 per child and their phaseout range will be higher depending on how many children they have.
Social Security recipients and others who received their first payment via Direct Express can expect the second payment in the same fashion. Eligible individuals who have not received an Economic Impact Payment (either the first or second one) are urged to claim it on their 2020 tax returns. This is known as the Recovery Rebate Credit. This credit will likely be in the form of a reduction in taxes owed or an increased tax refund. The credit can be claimed by completing line 30 of the 2020 Form 1040 or 1040-SR.
Paper checks have started to be mailed out as of Wednesday, December 30, 2020, and the official direct deposit payment date is set for Monday, January 4, 2021. The IRS emphasizes that no additional action needs to be taken to receive the second rebate for those that are eligible. Similar to the first round, most individuals will receive their payment via direct deposit, but some people may receive a debit card instead.
Unemployment Compensation Changes
To aid the millions of individuals that have lost their jobs as a result of COVID-19, the passing of the Consolidated Appropriations Act, 2021 extended the benefits of unemployment compensation. Unemployment compensation benefits will continue for an additional 11 weeks into the middle of March. The act also reinstated an additional $300 per week benefit on top an individual’s normally scheduled benefit for an 11-week period. Self-employed individuals who have been collecting unemployment benefits will also have their coverage extended 11 weeks allowing some individuals to collect as late as April 5, 2021.
Small Business Relief
The Consolidated Appropriations Act, 2021 reopened the original Paycheck Protection Program (PPP) and introduced a second loan that will be referred to as the Paycheck Protection Program Part 2 (PPP2). As with the first round of loans, the goal is to continue to provide relief to small businesses (now defined as a company with 300 or fewer employees down from 500) through a variety of ways. Operationally, the PPP2 loans are nearly identical to PPP loans, but the eligibility criteria have changed substantially. For example, a small business must have experienced more than a 25% drop in revenue during any quarter in 2020 (compared to that same quarter for 2019). The maximum loan amount a business can receive is still 2.5 times monthly payroll, but it is now capped at $2 million (lowered from $10 million).
Businesses that may have been denied or have not yet received financing from round one will have the opportunity to reapply through the reopened PPP. Additionally, those business that have received financial support, may be eligible for additional capital through the PPP2. Despite some controversy between the IRS and small businesses on the tax deductibility of expenses, the Act overrides the IRS’s initial stance. Now, small businesses are authorized to take deductions for any expenditures related to original PPP funds and/or new PPP2 funds. Additionally, the Act will now allow all PPP or PPP2 borrowers to choose either an 8-week or 24-weeek covered period. As a reminder, the covered period is essentially the period of time during which expenses are incurred or payments are made in order to determine the forgivability of the loan.
The Act has also authorized four new categories of use for unused PPP or PPP2 proceeds:
1. Covered Operations Expenditures: Expenses “for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.”
2. Covered Property Damage Costs: Expenses “related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”
3. Covered Supplier Costs: “An expense of a business involving payment to a supplier of essential goods that is made pursuant to a contract, order, or purchase order that was in effect at any time before the Covered Period with respect to the applicable Covered Loan (or at any time during the Covered Period with respect to perishable goods)”.
4. Covered Worker Protection Expenditures: Operating or capital expenditures related to complying “with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”
In addition to the above, the Act has made a handful of changes that may benefit small business owners. Borrowers of up to $150,000 seeking forgiveness will find the process to be much more simplified. For example, the Act is now requiring the Small Business Administration to create a loan forgiveness application no longer than a single page. Additionally, the Act has removed the need for small businesses to submit physical proof when filing for the forgiveness certification. Payroll expenses related to group life, disability, vision and dental insurance are all forgivable (at least 60% and up to 100%). Any small business who received initial PPP capital, but returned it due to uncertainty, is now eligible to reapply for the full loan amount under the PPP2.
One of the last major changes from the Act is the expansion of the Employee Retention Credit. Small businesses are now permitted to benefit from both the PPP loan and Retention Credit. Effective January 1, 2021, wages per employee are now eligible for a credit of $10,000 per quarter (up from $10,000 in total). The credit rate itself has also increased from 50% to 70%. This means an employer can receive a refundable payroll tax credit of up to $7,000 per quarter, per employee ($10,000 times 70%). In the Act, the definition of a small employer has increased to 500 employees.
Other Miscellaneous Details
• The deadline to repay deferred payroll taxes has been extended to December 31, 2021.
• The AGI hurdle for medical expense deductions has been ‘permanently’ set to 7.5% for all tax payers, for all future years.
• The Lifetime Learning Credit phase-out range now aligns with the American Opportunity Tax Credit of $80,000-$90,000 for single filers and $160,000-$180,000 for joint filers.
• Charitable cash contributions have been extended as an above-the-line deduction for 2021 and also increased the limit to $600 for joint filers.
• An individual’s ability to deduct 100% of AGI for charitable cash contributions was also extended.
We all are experiencing an unprecedented and challenging time, but the initiatives of the CRRSSA are meant to assist individuals and business owners with their short-term needs.
Please stay in contact with your Financial Advisor at Hefren-Tillotson to ensure you are receiving proper guidance to achieve your goals through your personalized long-term financial plan.