How to Access COVID-19 Money Under the New BillJanuary 5, 2021 – Client Alert
The much-awaited second round of coronavirus relief legislation was signed into law on December 27, 2020. This article summarizes the ways in which individuals and businesses can benefit from this relief.
- Initial Checks. One immediate benefit for individuals is an additional refundable credit in 2020 of $600 if single and $1,200 if married filing jointly, plus $600 for each child under the age of 17. The credit is phased out by 5% of adjusted gross income above $75,000 if single and $150,000 if married filing jointly. The IRS will be sending advance checks to taxpayers for this credit based on their last reported adjusted gross income, so no further action is needed to obtain this benefit unless you don’t receive the check, in which case you can claim the credit on your 2020 tax return.
- Unemployment Payments. Another benefit is an eleven-week extension (from 39 weeks to 50 weeks) of the expanded unemployment coverage that was implemented by previous coronavirus relief legislation. In order for workers to receive unemployment benefits, they must be unable to “telework” with pay. The period for which these benefits can be claimed is extended from December 31, 2020, until March 14, 2021. In addition, workers will be paid an additional $300 per week on top of what they would normally receive from December 26, 2020, until March 14, 2021. These unemployment benefits also apply to self-employed persons, including independent contractors, partners, and sole proprietorships. The states are tasked with implementing this new coverage, and they will no doubt struggle to figure out how to fit a square peg (the self-employed) into a round hole (the entire existing system of unemployment, which has applied up to now only to employees). To get unemployment benefits, you need to apply for unemployment benefits with the state of your tax residence.
- Dischargeable Payroll Loans. The wildly popular dischargeable payroll loan program is back. Second-time loans are limited to businesses with fewer than 300 employees and at least a 25% drop in gross receipts in a 2020 quarter compared to the same quarter in 2019, and the maximum loan size for second-time borrowers is $2 million. The loan is eligible to be discharged in an amount that the employer spends on qualifying expenses during the 24 weeks following receipt of the loan proceeds, and qualifying expenses have been expanded to include covered property damage, supplier costs, and worker protection expenditures in addition to employee wages and operating expenses like rent and utilities. Thus, the “loan” is really a grant to the extent it is discharged. The bill provides a simplified forgiveness application process for loans up to $150,000. As before, and consistent with protecting the self-employed with unemployment benefits, the law applies to the self-employed and defines “payroll” as including the “income” of the self-employed, so the self-employed can benefit from this dischargeable loan program to the extent they pay themselves income (up to a maximum discharge of $15,384). However, only partnerships, and not “general active partners,” can apply for this loan. You apply for the loan through your own bank (most banks are participating). The new bill added a double benefit by clarifying that taxpayers may deduct the expenses paid for with the loans even though discharge of the loans is not taxable.
- Employee Retention Credit. The revised Employee Retention Credit provides an “eligible employer” with a refundable tax credit that can be used to offset such employer’s social security tax liability for certain wages paid to employees from January 1, 2020, through June 30, 2021. An employer is an “eligible employer” with respect to any calendar quarter if (i) it is carrying on a trade or business that has been fully or partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19 during such calendar quarter or (ii) the employer has experienced a decline of at least 20% in gross receipts as compared to those in the same quarter in the prior year due to the pandemic.
The amount of the tax credit is equal to 70% of “qualified wages” paid to each employee by the eligible employer. “Qualified wages” taken into account for purposes of calculating the amount of an eligible employer’s Employee Retention Credit are limited to $10,000 per employee per calendar quarter (for a maximum credit of $14,000 per employee). For a business that has greater than 500 full-time employees, “qualified wages” are wages paid to employees that are not providing services due to a government order or because the employer is experiencing at least a 20% decline in gross receipts. For a business that has 500 or fewer full-time employees, “qualified wages” include all wages paid to employees during any applicable calendar quarter.
- 100% Credit for Sick/Absent Leave. Previous coronavirus relief legislation required employers to pay certain amounts of sick/absent leave to employees due to COVID-19 (the details of which are beyond the scope of this article). To cover the cost of this requirement, the employer was entitled to a 100% immediate credit against all payroll taxes for all such additional sick/absent leave pay. The requirement to pay sick/absent leave to employees expired on December 31, 2020. However, through March 31, 2021, employers that make qualified sick/absent leave payments can continue to receive a 100% immediate credit against all payroll taxes for such payments.
- EIDL Loan Program. The SBA has renewed its Economic Injury Disaster Loan (EIDL) program for COVID-19 related business impacts, which allows certain small businesses to apply for emergency loans up to $2 million through 2021. In order to qualify, the applicant must be located in a low-income community and have suffered at least a 30% decline in revenue during the COVID-19 pandemic. An applicant may be entitled to a $10,000 grant (not a loan) even if the application is ultimately declined. We anticipate the SBA issuing further guidance detailing eligibility and guidelines for the advance grants.
- Distributions and Loans from Retirement Plans. If an individual (or their spouse or dependent) is diagnosed with COVID-19, or the individual experiences adverse financial consequences as a result of the COVID-19 crisis, the individual is allowed to take disbursements and loans of up to $100,000 from 401k and other qualified retirement plans through June 26, 2021, waiving the normal 10% early withdrawal penalty. Any withdrawal amount required to be included in gross income may be spread out over a three-year period for purposes of the regular income tax.
- Business Meals. The new bill permits a 100% deduction for the cost of business meals provided by a restaurant for 2021 and 2022, after which time the deduction reverts to the standard 50% limit.