December 28th, 2020 New Legislation Update
December 28th, 2020
Important email sent to all clients of SBS CPA Group, 8th and final email of 2020
Merry Christmas and Happy Holidays:
The newest legislation that just became law will affect at least 90% of our clients and we really suggest you at least skim this email.
Congress passed a 5,593-page bill late at night on December 21st, 2020 and the contents of this bill were kept secret until six hours before the first vote. This bill will have a large effect on 90% of our clients and on all public accounting firms. Please realize we are entering our busiest time of year, and we still have to meet all of our normal deadlines. We will need all of you to understand that it is going to take us longer to return your phone calls, return your emails, and to turn around all of the work we do for you.
The 5,593-page bill just became law on the evening of December 27th, 2020. There will be minor changes and interpretations to the bill over the next couple of weeks. This email summarizes our current understanding of the Bill and all of us need to understand the Bill itself will be changed with technical corrections, and the Internal Revenue Service and the Small Business Administration will interpret parts of it differently than Congress.
If you want us to send emails like this to someone else or to another email address you have please send Shane Lengerich an email at Shane@sbscpagroup.com and please tell him exactly which email addresses you want him to add to our email list. If you do not want to get these emails please use the unsubscribe feature at the bottom of this email and in this case please do not send Shane an email.
This email is split into two sections. The first section is for everyone and is one third of the rest of this email and the second section is just for those people who own a business. This is a very long email because there are a lot of changes in this Bill we want you to be aware of.
First section for individuals.
Another round of Stimulus payments are coming. If you got a stimulus payment the first time you will get another one. The 2nd stimulus payment will be $600 for each taxpayer and $600 for each spouse and an additional $600 for every dependent under the age of 17. Remember to save the documentation the IRS sends you with the payment because we will need a copy of every Notice 1114 the IRS sends you (1st round and 2nd round). When you drop off your taxes tell us exactly how much you received for each stimulus payment and exactly when you received it.
The Stimulus payments are not taxable income to you. The IRS is guessing how much you should get based on previously filed tax returns. If the IRS pays you too much money you will not have to return the extra money paid to you. If the IRS did not pay you enough money, we will handle the additional money you are due on your 2020 income tax returns and you will get a higher refund or owe less tax depending on your personal situation.
The IRS is likely to send stimulus payments by direct deposit between now and 1/15/2021. They will use the same method of payment as they used last time. If you got a paper check last time you will get one this time and your check should be mailed by January 15th, 2021. If you do not get a stimulus payment do not worry about it; instead, we think it will be handled when we file your income tax returns which are currently due to be filed by April 15th, 2021. Right now, it looks like the IRS may stop sending out stimulus payments on January 16th, 2021 and force them to be handled on your 2020 income tax returns we are handling for you instead. This is going to complicate things; however, it seems to be what Congress wants to happen. This section of the Bill is not clearly written and it is the section of the Bill we are least sure about.
We do not handle unemployment claims and you should direct your questions to the Indiana Department of Workforce Development (DWD). DWD is overwhelmed and this new law will likely cause them even more problems. Even though we do not deal with unemployment claims we want to make sure you understand what has happened with the unemployment programs with the new law.
The Federal Government expanded all of the unemployment programs by another 11 weeks. This includes the Pandemic Unemployment Assistance (PUA) Program and the Pandemic Emergency Unemployment Compensation Program which extended Indiana State benefits. The PUA program will provide $300 a week.
We are not sure when these payments will start and you should watch the Indiana DWD website for updates: https://www.in.gov/dwd/indiana-unemployment/individuals/faqs/
The Federal eviction moratorium is extended to January 31st, 2021. The Federal Government is going to block grant 25 Billion dollars to the State and Local Governments based on population. Then the States will distribute that money. We do not know anything about this program other than what is listed in this email. We fully expect each state will handle this program differently. It looks like Indiana and its local Governments will get about 500 Million Dollars. Each state and local Government is to setup a program and roughly speaking:
You qualify if your household makes less than 80% of the median income AND
At least one member of your household has qualified for unemployment benefits or has experienced a reduction in household income, incurred significant costs, or experienced other financial hardship due to or during the Covid-19 pandemic AND can demonstrate a risk of homelessness or housing instability, including having past due utility or rent payment(s), an eviction notice, has unsafe or unhealthy living conditions, or has any other evidence of such risk.
Landlords can apply for their tenants as long as their tenants cosign the application. Payments will go directly to the landlord or to the utility provider on behalf of the tenant in most cases.
There are roughly 2,500,000 households in Indiana. Roughly 40% of them (1,000,000) will have income below the limits Indiana will have put into place soon. According to third party estimates as many as 250,000 households in Indiana are at risk of falling behind on rent or mortgage payments. If we guess and say half of them are behind that is 125,000 Hoosier households behind on rent. If half apply for rental assistance and if there is $500,000,000 dollars in Rental Assistance available then there would be $8,000 in rental, mortgage, and utility assistance available per household that might apply.
Indiana already has paid out 40 million in rental assistance and Marion County another 15 million. It seems likely that Indiana may use their existing rental assistance portal at: http://www.indianahousingnow.org/.
We do not know any more about these assistance programs than is in this email. If you know someone in need of assistance paying their rent, mortgage payments, or utility bills please send them this portion of the email and we would suggest they go to the Indiana Rental Assistance Portal listed above and then immediately apply for assistance. Indiana has a wait list and they should get on that wait list today. Once the Federal money arrives it is likely Indiana and Marion county will change and replenish their existing programs with money and they will be first come first serve.
Last thoughts for individuals without a business
We have attached to this email our client letter and our 2020 tax planner. Once you have everything that we need to do your 2020 income taxes please drop everything off at our office and remember we do not want you to drop anything off unless you have everything we need. We hope you drop everything off as soon as you are sure you have everything we need. We have a 24 hour drop box and if you wish to email items to us please email your CPA and we will send you a link so you can send us everything through a secure web portal.
Second section is for those individuals with a business
Paycheck Protection Program (PPP) Loan changes
Congress has changed the PPP loan rules for the loans authorized by the Cares Act passed on March 27th, 2020. This is really frustrating for all business owners, for us, for banks, and for the Small Business Administration. It is hard to believe Congress just changed the rules for a law they passed nine months ago; however, they did.
PPP Loan forgiveness and your taxes
Congress just changed the law so that the portion of the PPP loan that is forgiven does NOT count as income and the expenses paid with the PPP loans are deductible. This is a huge deal and means our business clients who received or receive future PPP loans will pay a lot less in taxes than they would have under the prior interpretation of the rules. Best shown with an example. Business 1459 got a PPP loan for $100,000. Business 1459 got all $100,000 of the PPP loan forgiven by the SBA. The $100,000 does NOT count as income and the expenses paid with the money are deductible. This is a massive benefit for businesses that received or will receive PPP loans. Please make sure the PPP loan is recorded on your books as other income in its own category.
Changes to PPP Loan forgiveness
If you have enough expenses to get your PPP loan forgiven under the old rules you need not worry about this section for the 1st batch of PPP loans and this is most people reading this email.
First off EIDL loan advances now do NOT lower PPP loan forgiveness. This is a huge deal for ten of our clients.
Additional items that now qualify for loan forgiveness if paid during the covered period include:
- Most software.
- Property damage, vandalism, or looting damages not reimbursed by insurance.
- Payments to suppliers for goods that are essential to the business operations and are perishable.
- PPE and facility modification due to Covid-19.
- Payroll costs for group life, disability, vision and dental insurance now count for forgiveness and actually count for original loan amounts and borrows can re-apply for this additional amount.
The forms for loan forgiveness have changed for loans under $150,000 and are simpler; however, everyone has to keep all of the information and do all of the calculations listed on the old forms so we are going to continue filling out the old forms and then having you turn in the one-page new form. The new form cannot be filled out unless we verify all of the information on the old form. We have no idea what the banks and SBA are going to do with these new rules and when they will implement them.
There is now a 2nd round of PPP loans available
Far fewer businesses will qualify for this second round of PPP loan funding. In order to qualify for this second round of PPP loan funding, a business has to meet all of the following rules and #5 and #6 are going to make it so most of our clients cannot apply for a second PPP loan:
- Business had to be open and in operation on 2/15/2020.
- Must be a business concern, non-profit, housing cooperative, veterans organization, tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative.
- Cannot employ more than 300 employees.
- Has or will use the full amount of their first PPP loan if they received one.
- The business had gross receipts (Income) during the 1st, 2nd, 3rd, or 4th quarter of 2020 that demonstrates not less than a 25 percent reduction from the gross receipts of the entity during the same quarter in 2019.You only need this to be true for one quarter and if you use 4th quarter you have to apply after year end 2020. You will have to prove that your quarterly gross receipts dropped by this much. Best shown with examples:
Gross receipts of Business 9874 were:
1st quarter 2019 $100,000 2020 $90,000
2nd quarter 2019 $100,000 2020 $70,000
3rd quarter 2019 $100,000 2020 $100,000
4th quarter 2019 $100,000 2020 $120,000
With this example Business 9874 meets the 25% reduction in gross receipts test for Q2 of 2020 when compared to Q2 of 2019. This company meets this test and qualifies for the 2nd round of PPP loan funding if they meet all of the other six tests.
- Last and hardest to meet is the “Necessity Requirement.” Each business will have to certify that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. This was much easier to certify when the United States was shut down and none of us knew what was coming. The situation is very different now. The stock market is at a record high. Real Estate values are at record highs. The overall unemployment rate America is much lower than it was back during the first round of PPP funding. There is a vaccine being distributed. Most businesses are able to pay their bills and know what to expect moving forward. Indiana is not expected to lock down again. On loans under two million the banks and SBA have been accepting the certification without many questions; however, the current economic situation in the United States is very different than it was in March and April of 2020. There is no doubt that some industries and businesses are still very affected by Covid-19 and can meet this certification especially those in the hospitality and entertainment industries. We feel that significantly less than half of our clients who qualified nine months ago might qualify today. If a business can easily pay all of its bills and is doing reasonably well it does not meet the new certification rules in our opinion. This needs to be looked at on a case-by-case basis. Covid-19 has had an uneven effect on businesses based on business type and geography.
How large are the 2nd round PPP loans
The new 2nd round of PPP loans are based on 2.5 months of average payroll costs in 2019 or on 2.5 months of average payroll costs over the 365 days prior to the date of the 2nd PPP loan application. Restaurants and Hotels starting with NAICS Codes of 72 are eligible for 3.5 months of average payroll costs.
When can I apply for the 2nd round PPP loans
Right now, no one knows. The 5,593-page bill just passed Congress and Banks and the SBA are currently dealing with loan forgiveness from the 1st round of funding and will have to digest all of the changes in the rules for both the 1st and 2nd round of funding. The SBA will have to develop new forms for businesses to use to apply for 2nd round funding and complicating everything is the fact that many government employees are on vacation and New Year’s Eve and New Year’s Day are at the end of this week. CPA firms are going to be swamped for the next four months and their time to help will be limited.
We might guess the SBA will have the new forms posted in early January best case and mid-January worst case. Since Congress has given almost blanket immunity to banks, we expect many banks will want to push these loans on their clients due to the fees they can collect. Each bank will handle this differently. Once the SBA has forms, we expect the banks will be ready to go a week or two after that. It is hard to say, and a new President will be coming to power at noon on January 20th. Covid-19 is likely to be prevalent over the next six weeks as well and this obviously complicates everything. We are not sure when banks will be ready for applications; however, we think mid-January at the earliest and late January is more likely. Everyone is going to have to be patient, because this process is not going to get off the ground quickly.
Covid-19 sick pay has been extended to 3/31/2021.
Interestingly in 2021 and 2022 business meals purchased from a restaurant will be 100% deductible rather than 50% deductible. Entertainment is still not at all deductible.
The new law really protects banks who issued PPP loans. They are off the hook for most liability regarding these loans. This may cause the banks to push businesses to get new loans.
Last thoughts for those with a business
We need to focus on getting payroll and 1099’s out the door in January. Please get us everything we ask for quickly. The IRS has not extended any deadlines and we need to focus on payroll and 1099’s in January.
Business taxes will be more complicated this year. Once you have everything, we need for your taxes please drop everything off at once.
Please be patient with us, Congress just dropped a 5,593-page Bill written in secret on us, and it changes a lot of laws and creates a lot of issues we will need to deal with. Our turnaround times will increase and it will likely take us significantly longer to respond to emails and phone calls and you should expect this.
Mike Sylvester, CPA