As the 2020 year wrapped up, many small businesses were still reeling from the impacts of the COVID-19 pandemic. Between limitations on capacity due to health and social distancing measures, small businesses still faced challenges with decreased revenues and limited operations.
A survey conducted among small businesses in July of 2020 found that 43% had temporarily closed due to the pandemic. Overall employment had been reduced by 39% compared to January of 2020. Not only has the pandemic had a severe impact on small businesses, but also their employees.
The passage of the Consolidated Appropriations Act of 2021 (CAA) offered some COVID-19 relief. Signed into law on December 27, 2020, the CAA had some provisions that specifically targeted small businesses. We’ve outlined some of the highlights below.
Paycheck Protection Program
One of the signature provisions under the CARES Act was the Paycheck Protection Program (PPP). Businesses could apply for a PPP loan, administered by the Small Business Administration to cover payroll. If businesses spent the loan proceeds on qualifying expenses and the businesses retained their employee headcount, the loan could be forgiven.
However, the $349 billion allocated was disbursed by the SBA within two weeks. Many small businesses found that they were unable to get a PPP loan before the funds were gone. Another round of funding was added in April of 2020, adding $320 billion more to PPP.
The Consolidated Appropriations Act re-introduced PPP. It added $284 billion and also some notable changes from the original program.
Second Draw PPP Loans
Eligible businesses could apply for a “second draw” PPP loan. If they had received PPP funding previously, they could apply for another loan. Businesses had to be under 300 employees and have at least a 25% reduction in gross receipts in one quarter of 2020 compared to the same quarter in 2019.
Eligible PPP Expenses
Under the CARES Act, businesses could only spend PPP funds on payroll, mortgage payments, rent, and utilities. Under the CAA, businesses could use PPP funds for the following:
- Software or cloud computing services related to operating costs
- Property damage related to civil unrest
- Supplier costs
- COVID-19 protective measures, including personal protective equipment or barriers
Small businesses need to spend 60% of the funds on payroll and 40% on non-payroll costs over a 24-week period. The program opened for applications in January of 2021.
Clarification of Tax Implications
The original legislation around PPP loans left some questions around taxes. If businesses received a PPP loan, and the loan was fully forgiven, it could be excluded from gross income.
However, the IRS took the position that any expenses incurred with PPP funds were not deductible. The CAA clarified this and stated that expenses paid for with PPP proceeds could be deducted. The same tax provisions apply to second draw loans.
New EIDL Grants
Economic Injury and Disaster Loans were an existing program under the SBA. The CARES Act expanded the program to include the COVID-19 pandemic as a qualifying disaster.
In addition to applying for an EIDL, businesses could also request an advance on EIDL funds while waiting for approval. Advance funds of up to $10,000, in the form of a grant, could later be forgiven.
The CAA provided another $20 billion in EIDL grants for low-income communities and $15 billion for the entertainment industry.
For taxation, funds received from an EIDL are a loan. The advance grants received are not taxable income.
Employee Retention Credit
The CARES Act passed the employee retention credit to encourage businesses to maintain their workforce. Eligible employers needed to have their operations suspended in full or in part due to the COVID-19 government shutdown. They also needed to have a drop in gross receipts of 50% or more compared to the same quarter of the prior year.
The refundable credit against payroll tax was originally 50% of up to $10,000 in employee compensation. The CAA increased the credit to 70% of qualified wages. It also raised the limit from $10,000 per-employee wages for the year to $10,000 per quarter.
It also changed the eligibility from a 50% drop to a 20% drop. The CAA also extended the credit to cover a period of closures or reduced revenue through June 30, 2021.
Tax credits have a huge impact on businesses. Unlike a deduction, tax credits reduce the business’s tax liability, dollar for dollar. If a business has a tax liability of $15,000 and receives a $6,000 credit, the amount owed is now $9,000.
Deferred Payroll Taxes
Under the CARES Act, businesses could defer on the employer’s share of Social Security taxes. Businesses would normally pay the required deposits between March 27 and December 31 of 2020. Any businesses under strain would likely want to defer the payments to retain more cash for operating.
Under the deferral, the first half of deferred taxes are due on December 31, 2021. The second half is due by December 31, 2022.
Employers could also defer the employee portion of payroll taxes during the period of September 1st, 2020, and December 31st, 2020. The CAA extended the timeframe in which the deferred amounts from employees are to be repaid.
Employees need to repay the amounts of their portion of Social Security taxes not withheld. This means that they would see an increase in withholding between the repayment period.
Originally, the repayment period was to be between January 1st, 2021, and April 30th, 2021. The CAA extended this period to all of 2021 for the deferred employee portion to be withheld and paid.
Understanding the Benefits of the Consolidated Appropriations Act
CAA included many provisions in addition to these listed. It extended the supplemental unemployment compensation benefits. Other provisions were unrelated to COVID-19 relief but changed the tax code related to business meal deductions, retirement plans, and charitable deductions.
While we hope that this gives you a general overview of the CAA, nothing in this article should be construed as tax or legal advice. You will want to consult with a CPA or attorney regarding the Consolidated Appropriations Act impact on your small business.