As the year comes to an end, Congress continues spending money to help a battered economy. In fact, just a few days back, President Trump signed a new stimulus program into law. The plan—like all government plans—is complex. I thought I would share a few of its provisions and how it could work for you.
The legislation includes $600 direct stimulus payments per eligible individual. Eligible individuals include the taxpayer (or, in the case of a joint return, the taxpayers) filing the return as well as any children for whom a Child Tax Credit may be claimed (they must be younger than age 17). The AGI thresholds (unchanged from the CARES Act) where a taxpayer’s payment begins to be phased out are: $75,000 for Single Filer, $150,000 for Joint Filer, and $112,500 for Head of Household. The phaseout range varies from taxpayer to taxpayer depending on the number of eligible individuals in the family.
Congress will extend unemployment benefits of up to $300 per week (compared to $600 per week in the original stimulus). This benefit kicks in from December 27th and runs through March 14th.
PPP and EIDL loan changes
The government created the original PPP (Paycheck Protection Plan), to help employers retain their employees. That original program is now closed, but it’s still relevant, as loan forgiveness applications are now being requested. A new round of PPP loans is also going out, but they are more restrictive than they were in the original plan.
New PPP Loans
The main issue here is an eligibility/necessity test, which is based upon whether the loan is necessary to support the applicant’s ongoing operations. That’s a hard test to pass; it implies you’d go out of business without the loan. Assuming you pass this first test, the following requirements also have to be met:
- The borrower must demonstrate a 25% reduction in revenue compared to the same quarter in 2019.
- The borrower cannot have more than 300 employees.
- The revenues are from the normal operations of the business, so they do not include any PPP funds received in the spring.
This legislation is clearly targeted towards the hardest-hit entities, such as restaurants, hotels, etc. Most businesses with whom our firm typically works will not qualify.
Existing PPP loan forgiveness changes
If you received a loan back in the spring of 2020, then that loan forgiveness got a lot simpler.
- If your loan was for less than $150,000, you will only have to fill out a simple one-page form for forgiveness. The original eligibility rules still apply (use funds for employees, rent, utilities, etc.).
- Originally, the PPP loan was tax free, but the expenses used to pay them were not tax deductible. However, the new plan makes those expenses tax deductible, which is a huge change.
- If your loan is more than 150K but less than 2M, the forgiveness process is also simpler. Documentation needs are reduced, and just like you would for a loan under 150K, you will provide an affidavit stating that you used the money for the purposes it was intended. The process also includes a record-keeping requirement for up to four years.
- Borrowers can pick an eight-week or 24-week forgiveness period, regardless of the loan application date.
- The EIDL (Emergency Injury Disaster Loan) grants, of up to $10,000, are no longer required to be subtracted from your PPP loan. In other words, that $10,000 could be yours to keep.
Other notable tax deductions/changes
- In 2020, you could deduct up to $300, above the line, for charitable deductions. In 2021, this has changed slightly so that couples are not limited to the $300 and can do $600. Individuals continue to be capped at $300. With the 2018 tax law changes, 84% of people stopped itemizing their deductions, which means very few people take charitable deductions. This change is to promote charitable giving.
- Since the mid 1980’s, only 50% of business meals were deductible. That percentage has now changed to 100% through 2021.
- Educators can write off COVID-19-related expenses above the line as educator expenses. These expenses may include protective gear, sanitization, special equipment, etc.
As always, let your Bluerock team know if you have any questions. Be safe and healthy… and happy New Year!