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How the New Stimulus Package Helps Individuals, Small Businesses

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Now that the Consolidated Appropriations Act of 2021 (2021 CAA) has officially been signed into law by President Trump, clients will likely be wondering which of the unprecedented relief options made available during 2020 will continue into 2021.

While Congress did act to provide ongoing protections for individuals and small businesses alike, not every relief option will continue into 2021 — even as the Covid-19 pandemic continues to impact employers and employees.

As the new year approaches, it’s important for advisors to take a moment to understand some of the primary issues that are likely to impact clients in the new year, both at the individual and small business level.

See: 10 Tax Changes in New COVID Relief Package

Individual Provisions

The 2021 CAA authorizes a second round of $600 stimulus check for individuals with income that falls below the applicable threshold levels.

As with the initial round of stimulus checks, stimulus availability begins to phase out for individuals who earn at least $75,000 annually ($150,000 for joint filers). However, clients should be advised that politicians continue to debate whether the $600 stimulus should be increased to $2,000 — so that payments may be delayed.

Importantly, the law also provides up to $300 per week in enhanced unemployment benefits through March 2021, and also extends unemployment compensation for self-employed and gig workers who would otherwise not qualify to collect unemployment benefits. 

Employment Benefit Impact

The CARES Act authorized a non-taxable student loan repayment benefit. Employers are permitted to repay up to $5,250 annually toward an employee’s student loan payments on a tax-free basis to the employee.

The 2021 CAA extended this provision to amounts repaid under a qualified educational assistance program before January 1, 2026.

On the other hand, the FFCRA mandate that required all small business owners to permit employees to take Covid-19 related paid leave was technically allowed to expire on December 31.

However, the law provides that employers may voluntarily permit paid leave and receive a tax credit for wages paid during the employee’s leave through March 31, 2021. This tax credit has also been extended to self-employed taxpayers who can satisfy the existing criteria for leave.

Employers should consider whether they now wish to implement a program to continue paid FFCRA sick leave in the absence of a federal mandate — also considering whether state and local rules might require paid time off after the federal rule expires.

The 2021 CAA also extended the period for repaying deferred employee payroll taxes. Employers were permitted to defer withholding the employees’ share of Social Security employment taxes from Sept. 1, 2020, through Dec. 31, 2020.

Previously, amounts were required to be repaid by April 31, 2021. Under the 2021 CAA, that repayment period is extended through Dec. 31, 2021 (penalties will begin to accrue January 1, 2022 absent additional action).

Small business clients should also be advised that the 50% limit on the deduction for business meals has been lifted. Business meal expenses incurred after Dec. 31, 2020, and before Jan. 1, 2023, will now be fully deductible if the meal was provided by a restaurant.

Small Business Relief: Expanded PPP Loan Options

The 2021 CAA contains $284 billion in relief for a second round of Paycheck Protection Program (PPP) loan funding. Notably, businesses with 300 or fewer employees that have already spent an initial PPP loan are now eligible for a second loan. These “second draw” loans are available through March 31, 2021. 

To qualify for a second draw loan, the business must demonstrate at least a 25% reduction in gross receipts during 2020 when compared to the same quarter in 2019.

Second draw PPP loans may be for up to 2.5 times average monthly payroll costs for the year prior to the loan. However, PPP loans are now capped at $2 million regardless of the business’ payroll costs. The $2 million cap applies to both new loans and second draw loans. 

Under the 2021 CAA, all borrowers are now permitted to choose whether to use the eight-week or the twenty-four week covered period for spending down loan proceeds.

Importantly, Congress has also provided long-awaited clarification on the availability of typical business expense deductions.

The 2021 CAA overrides previous IRS guidance and provides that businesses remain eligible to deduct for otherwise available business expenses even if those expenses are paid out of PPP loan proceeds that are forgiven. The law also reaffirms that those forgiven amounts will not be included in income. 

Conclusion

It’s likely that we’ll continue to see additional guidance with respect to these relief provisions and the PPP loan program well into the 2021 tax year.

Advisors should stay tuned to make sure clients are reaping the full benefits they’re entitled to under the law.

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