Please note that this blog is based on laws effective on December 28, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
On December 27, 2020, President Trump signed the COVID-Related Tax Relief Act of 2020 (COVIDTRA). Below are the main, time-sensitive provisions of COVIDTRA. Click here to read about some of the non-time sensitive provisions.
PPP and EIDL Expenses are Deductible
In a major win for many businesses, COVIDTRA clarifies that expenses paid with forgiven PPP loans are deductible. This counters the IRS’ previous position that the expenses would be nondeductible. COVIDTRA also confirms the same tax treatment for forgiven Economic Injury Disaster Loans (EIDL).
Recovery Rebate/Stimulus Payment
COVIDTRA provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly). The advance payments will be distributed in a similar fashion to the first round of payments.
The credit will be based on the income shown on the 2020 tax return. If a taxpayer receives advance payment(s) that exceed the amount of the computed eligible credit, the excess is not required to be repaid. If the computed eligible credit exceeds the advance payment(s) received, that amount will be treated as a tax credit on the 2020 tax return.
PPP Second Draw Loans
The SBA Administration is required to establish regulations within 10 days of enactment; therefore, we will keep our eyes out for more details on this. Here is what we know about entities that qualify for the second round:
- Maximum loan amount is $2 million.
- Entities must not employ more than 300 employees.
- Entities have or will use the full amount of their first PPP loan; and
- Demonstrate at least a 25% reduction in gross receipts in the first, second, third quarter, or fourth quarter of 2020 relative to the same 2019 quarter.
- The loan will be up to 2.5X of average monthly payroll costs; accommodation and food service enterprises may receive loans of up to 3.5X of average monthly payroll costs.
- The same rules related to loan forgiveness that applied in the first round will apply in the second round, with the exception of an expanded definition of covered costs.
Employee Retention Credit
COVIDTRA now allows businesses to retroactively request a PPP loan and claim an Employee Retention Credit (ERC) in 2020. In our experience, businesses generally requested a PPP loan and elected to forgo the ERC, as the PPP loan was deemed more valuable.
The ERC is a refundable payroll tax credit available to businesses that suffered either a full or partial suspension of operations (due to government orders) during at least one quarter in 2020 or had a more than 50% drop in gross receipts in the first, second, third quarter, or fourth quarter of 2020 relative to the same 2019 quarter. Affected businesses are eligible for a maximum credit of $5,000 per employee. As the government will not allow businesses to double dip (meaning claim PPP benefits and the ERC on the same payroll costs), we will need more guidance on exactly how to claim the ERC on a retroactive basis.
Charitable Contributions Deductible by Non-Itemizers Expanded
Individuals claiming the standard deduction can take an above the line deduction of qualified charitable contributions in 2020. Qualified charitable contributions are cash contributions to qualified charities (generally, 501(c)(3) organizations; notably donor advised funds are not a qualified charity for this purpose). Before COVIDTRA, the limit was $300; but the Act clarifies that the 2020 limit is $600 for married filers. If you claim the deduction, be sure to have proper documentation as the penalty for tax underpayments due to overstating this deduction is significant: 50%.
While COVIDTRA has been passed, it is now up to other governmental agencies (the Treasury and SBA, notably) to write the regulations associated with the Act. As these regulations are written we will keep you informed of additional developments. In the meantime, please contact us today with any questions.