United States: Businesses have a lifeline: CAA improves PPP loans and extends employee retention credit
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The Consolidated Appropriations Act (CAA) passed at the end of last year provides much-needed stimulus and tax relief for businesses hard hit by the COVID-19 pandemic. Two of the provisions of most interest to business owners are the $ 284 billion funding for forgivable loans through the Paycheque Protection Program (P3) for both first-time borrowers and would-be borrowers. âsecond drawâ, and the extension of employee retention credit.
DEDUCTION FOR PPP FEES
The CARES Act created the Paycheck Protection Program (PPP), which made forgivable loans available to eligible small businesses that suffered losses due to the pandemic. CAA expands the permitted uses of PPP funds, provides a streamlined remittance process for small loans, and clarifies the appropriate tax treatment of loan proceeds and remittances.
Related Reading: Paycheck Protection Program: Updating Loan Forgiveness Requests
The law specifies that the canceled portion of a P3 loan will not be included in the borrower’s gross income for federal income tax purposes. The CARES Act did not address whether expenses paid with the proceeds of canceled loans would be tax deductible, and the IRS, in Notice 2020-32, announced that such deductions would be denied. However, the CAA retroactively rescinds Notice 2020-32.
He confirms that beneficiaries of PPP loans will benefit from two tax advantages:
- Tax-free loan remission; and
- Tax deductions for expenses financed by these loans.
EXTENDED EMPLOYEE RETENTION CREDIT
The CARES Act established an employee retention tax credit to encourage companies to keep their employees on their payroll despite the financial impact of the pandemic. CAA is extending credit until mid-2021 and enhancing many of its benefits.
Related Reading: Make the Most of Employee Retention Credit
Under the CARES Act, the fully refundable payroll tax credit was equal to 50% of a maximum of $ 10,000 per employee in eligible wages paid after March 12, 2020 and before January 1, 2021. The credit was available for wages paid during company operations. fully or partially suspended by a COVID-19 government order, or for a period when the business has experienced a significant drop in gross revenue. Typically, a “significant decline” meant that the gross revenue for a calendar quarter of 2020 was less than 50% of the gross revenue for the same calendar quarter in 2019. It was estimated that the significant decline would continue until the a quarter’s gross revenue reach 80% of gross revenue. revenue for the same quarter in 2019.
Although the credit was available to businesses of all sizes, those with 100 or fewer employees had an advantage: they could claim the credit for salaries paid to all eligible employees, whether or not they continued to work. Companies with more than 100 employees could only claim the credit for salaries paid to employees who were not working. Credit was not available for companies that received PPP loans.
The CAA extends the credit to include eligible salaries paid before July 1, 2021. It also plans several improvements for the first two quarters of 2021:
- Credit increases from 50% to 70% up to a maximum of $ 10,000 of salary per trimester (previously, per year). In other words, the maximum credit for the first part of 2021 is $ 7,000 per quarter (compared to $ 5,000 per year) for each eligible employee.
- The threshold for a âsignificant dropâ in gross receipts goes from 50% to 20%.
- The threshold for the number of employees is reduced from 100 to 500. Thus, businesses with 500 or fewer employees can claim the credit for salaries paid to all eligible employees, whether or not they continue to work.
CAA is also making several changes to the credit that applies retroactively to March 13, 2020. For example, P3 loan recipients can now claim the credit for qualifying wages paid after March 12, 2020, provided the credit is not claimed. for wages paid. with the proceeds of a canceled PPP loan. In other words, a business can apply for the credit if it pays a qualifying salary that is greater than the proceeds of the canceled PPP loan used for the payroll.
EXAMINE YOUR SITUATION
All businesses should carefully review their tax situation to ensure that they are receiving all of the tax benefits available to them. Since up to 40% of the proceeds of the PPP loan can be used to pay rent, utilities, and other non-wage costs during the period covered, businesses that are also eligible for employee retention credit should maximize these non-wage costs when applying for the rebate, leaving more wages available for credit. Businesses wishing to apply for a PPP loan forgiveness, employee retention credit, or both, should also ensure that they have the necessary records to document salaries and other expenses and the source of funds used to pay them.
BOX: OTHER PROFESSIONAL TAX ADVANTAGES
CAA’s big changes relate to PPP loans and employee loyalty credit, but it also brings several other big changes that benefit businesses. For example, the law:
- Allows businesses to deduct the full cost of restaurant business meals otherwise deductible in 2021 and 2022. Previously, business meals were only 50% deductible.
- Makes section 179D âCommercial Building Energy Efficiency Tax Deductionâ permanent.
- Extends the deadline for reimbursement of employee payroll taxes for the period from September 1, 2020 to December 31, 2020, which has been postponed in accordance with the President’s decree. Previously, to avoid penalties and interest, these taxes had to be refunded by April 30, 2021. The CAA extends the refund period until December 31, 2021, allowing businesses to withhold and remit these taxes proportionally to the market price. of the year.
- Extends the Work Opportunity Tax Credit and Empowerment Zone Credits until 2025.
Congress refused to extend mandatory paid sick and family leave under the Families First Coronavirus Response Act, which expired on December 31, 2020. But the CAA is making tax credits available to businesses under 500 employees if they voluntarily offer paid leave according to the Families First Framework of the Coronavirus Response Act until March 31, 2021.
Related Reading: What You Need To Know About The Families First Coronavirus Response Act
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
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