What to Know About the Latest Coronavirus Relief Bill
Lawmakers approved a $900 billion pandemic aid bill that includes key provisions effecting alarm and systems integration businesses.
Congress on Monday night passed a COVID-19 economic relief package totaling $900 billion that provides a $600 payment for most Americans, adds $300 to extended weekly unemployment benefits and provides more than $300 billion in aid for small businesses.
The legislation, the Consolidated Appropriations Act, 2021, also ensures tax deductibility for business expenses paid with forgiven Paycheck Protection Program loans, provides fresh PPP funding, makes Sec. 501(c)(6) not-for-profit organizations eligible for loans for the first time, and offers businesses facing severe revenue reductions the opportunity to apply for a second loan.
Key provisions in the bill that affect alarm and systems integration businesses include:
Small businesses struggling after nine months of pandemic-induced economic hardships will be allocated $325 billion in aid. The bill provides more than $284 billion to the U.S. Small Business Association (SBA) for first and second PPP forgivable small business loans and allocates $20 billion to provide Economic Injury Disaster Loan (EIDL) grants to businesses in low-income communities.
In addition, shuttered live venues, independent movie theaters and cultural institutions will have access to $15 billion in dedicated funding while $12 billion will be set aside to help business in low-income and minority communities.
Also, $25 billion in emergency rental aid and an extension of the national eviction moratorium through Jan. 31, 2021.
The bill also extends the employee retention tax credit and several expiring tax provisions and temporarily allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020, and expires at the end of 2022.
The press will pick up on this as “three martini lunches” (while we might need them, there’s no place to have them), but what it really means is that true business meals, and meals for travelling employees will be fully deductible. This will be a shot in the arm for the restaurant industry, which buy the way, have fire alarms that will need servicing. It will also restore a legitimate business deduction.
PPP Loans Update
The new round of PPP, or PPP2 as we call it, contains many similarities to the first round of the PPP but also has several important differences. The following is a high-level summary of the PPP provisions.
PPP2 loans will be available to first-time qualified borrowers and, for the first time, to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 or fewer employees and have used or will use the full amount of their first PPP loan and can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019. This is a significant requirement in that the SBA will be looking at business impairment as well. Be careful not to abuse this requirement by moving around revenue and expenses on your quarterly income statements. There will be several instances of this and the SBA will not tolerate it well.
- PPP2 also makes the forgivable loans available to Sec. 501(c)(6) entities (think alarm associations) provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.
PPP2 will also permit first-time borrowers from the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations (those with North American Industry Classification System [NAICS] codes starting with 72) with fewer than 300 employees per physical location. (While this doesn’t directly affect the alarm industry, it may help some of your restaurant customers upgrade fire systems and pay their monitoring bills).
- The bill allows borrowers who returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
PPP Loan Terms
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest and utilities. PPP2 also makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating costs such as software and cloud computing services and accounting needs.
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the same parameters PPP1 had when it stopped accepting applications in August.
PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.
The new COVID-19 relief bill also:
Creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
Repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
Includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
Tax Deductibility for PPP Expenses
The bill also specifies that business expenses paid with forgiven PPP loans are tax-deductible. This has been a major issue for many Alarm Business owners who took out PPP loans in the first round.
Although he CARES Act specified that the loan proceeds were not taxable as income when the loan was forgiven, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).
In November, the IRS then expanded on this position by issuing Rev. Rul. 2020-27, which held that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period.
The COVID-19 relief bill clarifies that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by Section 1106 of the CARES Act.
This provision applies to loans under both the original PPP and subsequent PPP loans. This is tremendous news for alarm company owners who obtained PPP loans as it should provide a significant decrease in 2020 taxes.
There will be some clarification as we approach year-end, and the IRS and Congress will probably discuss some additional clarification. We may also see some executive orders further clarifying the ACT. Please watch for more articles and updates.
Mitch Reitman is Managing Principal of Reitman Consulting Group, a member of the SSI Editorial Advisory Board and an SSI Industry Hall of Fame inductee. He can be reached at (817) 698-9999 or MReitman@Reitman.US.
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