Client Alert – Business Provisions of the CARES Act
By John Morgan - JMorgan@reesbroome.com
January 8, 2021
On December 27, 2020, President Trump signed into law the Covid-19 relief package that Congress passed on December 21, 2020. Although it appeared in the immediate aftermath of the bill becoming law that some of its provisions, namely those concerning economic stimulus payments, would be amended by subsequent legislation, it seems highly likely at this point that additional relief is unlikely until President-Elect Joe Biden takes office on January 20, 2021. The election of two Democratic Senators from Georgia, giving Democrats a de facto majority in the Senate, makes it more likely that additional relief packages may ultimately become law.
Paycheck Protection Program – Round 2
An additional $284 billion of funding is being provided for a second round of the popular Paycheck Protection Program (“PPP”), a key feature of the CARES Act from the Spring of 2020. Under the new round of the PPP, previous PPP recipients may apply for another loan, up to a cap of $2 million, provided that they have 300 or fewer employees, have used or will use the full amount of their first PPP loan, and can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
Under the new round of PPP, borrowers may receive a loan up to 2.5 times their average monthly payroll costs in the prior year. In recognition of their especially acute impact from the Covid-19 pandemic, certain borrowers such as restaurants and hotels may borrow up to 3.5 times their average monthly payroll, still subject to the $2 million cap.
This law also makes clear that ordinary business expenses paid with the proceeds of PPP loans are tax-deductible for borrowers. The CARES Act did not specify whether such expenses paid with PPP loan proceeds were tax-deductible or not, and the IRS subsequently published guidance saying that they were not deductible. This legislation definitively resolves the issue for proceeds from both rounds of the PPP – the expenses are deductible.
The new law creates a simplified forgiveness process for loans of $150,000 or less. A one-page certificate is now available to such borrowers, which must include a description of the number of employees the borrower was able to retain because of the loan, among other information.
Additionally, some first-time borrowers will be able to apply for PPP loans, as well as some not-for-profit organizations, churches, sole proprietors, business leagues, and chambers of commerce.
To be eligible for forgiveness, a minimum of 60% of the PPP funds must be spent on payroll costs over a covered period of either 8 or 24 weeks.
Stimulus Payments – Round 2
Another round of economic stimulus payments was approved, many of which have already been issued to taxpayers. Payments in the amount of $600 per person and dependent child have been or will be issued, with a phase-out of the stimulus for single taxpayers with adjusted gross income in excess of $75,000, and for married couples filing jointly with over $150,000 of adjusted gross income. Similar to the first round, these payments are actually an advance payment of a refundable credit on taxpayers’ 2020 income tax returns.
In the immediate aftermath of Congress passing this relief, President Trump vetoed the bill, based in part on the amount of the economic stimulus payments, demanding that the payments be increased to $2,000 per taxpayer before ultimately relenting and signing the bill after it became clear that the Senate would not approve such a measure. With both the Senate and the White House shifting from Republican to Democratic control later this month, coupled with President-Elect Biden’s statements that the December law was intended to be a “down payment” on further relief, it seems likely that increased stimulus checks, or further relief, are on the horizon.
There are many other relief provisions from the December law, and it is beyond the scope of this article to explain them all. Some provisions of note include $120 billion to supplement unemployment benefits by $300/week from December 26, 2020 through March 14, 2021, and $45 billion in transportation funding, including $16 billion for especially hard-hit airlines.
Separately, the executive branch extended student loan forbearance through January 31, 2021, closing what was expected to be a one-month gap in which payments on federal student loans would once again become mandatory, and interest on them would begin to accrue once again. President-Elect Biden has not been specific with his plans on further extending this forbearance, but he has expressed support for forgiving up to $10,000 of student loan debt per borrower.
Rees Broome’s Summary
The December legislation resolved many questions about the Paycheck Protection Program that resulted from contrary messages from Congress and the IRS. Additional economic stimulus payments may aid some families on the financial brink, but it remains to be seen whether these payments truly represent a “down payment” on additional relief, as President-Elect Biden has indicated. As always, the attorneys at Rees Broome are available to answer your questions about Covid-19 relief.