Tax News in a Nutshell - 03.05.21
Updated: Mar 7, 2021
What’s Up in Washington, D.C.
President Biden’s stimulus plan is moving forward, albeit momentarily at snail pace, as Republican Senator Ron Johnson forced the 628-page Senate version to literally be read aloud on the Senate floor. Viewing available live if you were having trouble dozing off Thursday evening, thank you C-SPAN 2. But even though the performance went well into the night, legislative text is no bedtime story. It’s full of legal jargon and references to other parts of the law that unless you’ve memorized existing Code sections, or at least have them handy for reference, may not make much sense. Yes, reading a bill before a vote has merit, but this move was made in attempts to slow down the bill’s progress, which it did by 11 hours!
It was apparent changes to the House-passed bill would be coming this week in the Senate’s version to continue utilizing the budget reconciliation process that, in the current Senate makeup, would allow passage with no Republican support. Negotiations eliminated the minimum wage hike and severely tightened up the stimulus check phaseout in an attempt to appease moderates. Check out how this quick phaseout might impact certain taxpayers in Tony Nitti’s latest article, though!
The Senate version also varies in changes made to the Employee Retention Credit (ERC), adding a third tranche of credit for wages paid after June 30, 2021 and before January 1, 2022. This round mimics rules for the first half of 2021, but would introduce a credit limitation of up to $50,000 in qualifying quarters for a “recovery startup business” and also allow “severely financially distressed employers” to ignore a limitation that kicks in when FTE count reaches a certain threshold.
In addition, the Senate bill would remove the restriction precluding Shuttered Venue Operator (SVO) grant recipients from receiving a PPP loan after December 27, 2020. PPP loan proceeds would reduce the maximum available SVO grant, but the revision would be an overall welcomed change.
Additional modifications are possible before a final Senate vote on the bill likely this weekend, after which it would then be tossed back to the House to pass recent modifications. Enactment before pandemic unemployment benefits run out in the coming days is reportedly the goal.
Updated guidance and application forms were released implementing President Biden’s recent changes to the PPP. Schedule C filers were disappointed to learn that though PPP loans for this group may be calculated using a gross income approach, rather than net profit as previously required, it is a prospective change only. Borrowers with PPP loans already approved using the net method cannot seek an increase.
In addition, the guidance acknowledges a perceived risk in the significant increases to these loans that may not accurately reflect PPP loan necessity. Schedule C borrowers with gross income in excess of $150,000 electing a gross income calculation who receive a First Draw PPP will not automatically be deemed to have made the good faith certification concerning loan necessity and may be subject to an SBA review. This condition will not apply to Schedule C borrowers receiving a Second Draw loan because the drop in gross receipts requirement will prove loan necessity for them.
Here's a rundown of what we received this past week on these changes:
Guidance on Schedule C borrower changes and removal of eligibility restrictions preventing borrowers with non-financial fraud felony convictions and delinquent Federal student loans. Applies prospectively to both First and Second Draw Loans.
Revised FAQs updated to reflect revisions to loan amount calculation and eligibility.
Schedule C Filer Borrower Loan Application (Gross income elected)
Schedule C Filer Second Draw Borrower Loan Application (Gross income elected)
Revised First Draw Borrower Loan Application (For others)
Revised Second Draw Borrower Loan Application (For others)
SBA data through February 28, 2021 on the 2021 relaunch shows nearly 2.2M loans approved for over $156B in funds. That leaves roughly $128B on the table to be claimed by the current March 31 due date.
Notice 2021-20 brought long-awaited formal guidance for employers claiming the Employee Retention Credit for 2020, with guidance for 2021 periods said to be forthcoming.
The Notice largely incorporates existing IRS FAQs, but new insight is provided on a few key areas:
“Nominal” is defined, somewhat. When used in the context of defining a “more than nominal portion” of business operations we now have a quantitative approach to determine if a partial shutdown has occurred. However, “nominal effect” on business operations, e.g. to determine if a modification caused a partial shutdown, remains unclear. There was an attempt, at least.
Mixed bag of results for PPP borrowers already having submitted forgiveness applications. If an application was already submitted, what’s listed as payroll costs will become important to determining what’s available for the ERC. TL;DR a minimum qualified wage amount will be utilized towards the PPP as listed on the application, with unused amounts available for the ERC.
The Notice confirms wages and health plan expenses are reduced by the amount of the ERC – but not payroll taxes, as suggested by the JCT.
What was not further clarified is FTE count (whether equivalents are in or out), related party wages (whether owner wages are excluded or not), and if 2020 ERC wages can be used towards the R&D credit.
Virtual currency FAQs were updated to let taxpayers know they do not need to check the box “yes” on Form 1040’s page 1 question if the only transaction during the year was a purchase of virtual currency with real currency. The question’s goal is to reveal virtual currency transactions during the year that may require tax reporting, which merely purchasing with cash will generally not have.
Notice 2021-15 clarifies changes to §125 cafeteria plans recently made by the CAA such as added flexibility in carrying over unused 2020 and 2021 balances and mid-year election changes.
It's shaping up to be a long weekend for Congress, but watch for potential enactment of the third round of stimulus relief in the coming days. And if you stayed up all night, cross-legged and wide-eyed, listening to the marathon Senate bill storytelling session - get some sleep!
Information provided is for educational purposes and attempted humor (if any). Please consult your advisers.