While much of the media surrounding the Consolidated Appropriations Act has focused on individual relief like the extended Unemployment benefits boost and the second round of direct checks to individuals, the small business community also received new and extended forgivable loans, tax credits and tax relief.

  • The new law makes PPP loans that are forgiven non-taxable. The original Cares Act stated that the forgiven loans would not count as income, but the IRS upended that intent by declaring that expenses paid by the PPP money didn’t count as expenses-making the loan taxable. The new CAA does away with that ruling and makes all forgiven PPP loan amounts non-taxable, a huge benefit for the many small businesses that received PPP loans.
  • PPP Round 2 launches and PPP Round 1 reopens. For small businesses that missed the boat on PPP Round 1, the program reopens to give those businesses a second chance to take advantage of the popular program. The new bill creates a new pool of money to start PPP Round 2. Targeting the hardest hit businesses with less than 300 employees, a small business that had a decline in revenue of 25% from one quarter of 2019 to the same quarter of 2020 qualifies to apply once again for 2.5 times monthly payroll in a forgivable loan. Some of the hardest hit employers like restaurants can apply for a loan of 3.5 times monthly payroll. The funds must be spent on 60% payroll costs to receive 100% forgiveness.
  • The CAA makes changes to the rules for the Employee Retention Credit (ERC) and extends and sweetens it for 2021. The ERC was utilized by only a fraction of the companies who took advantage of the PPP loans last year, but the new changes make this credit accessible to a whole new group of small businesses. As the ERC is not as familiar to many, lets take some time reviewing this credit. For 2020, small businesses with less than 100 full time employees could take the ERC; for 2021 that employee count was increased to 500. To be eligible, a small business would need to show decline in revenue of 50% in 2020; the revenue reduction drops to 20% for 2021, again making many more small businesses eligible. Revenue reduction is calculated by taking revenue in any quarter in 2020 or 2021 and comparing it to the same quarter in 2019 (there are also alternate methods.) Once eligible, in 2020, a company can receive a credit of 50% for up to $10,000 in wages per employee. So eligible companies could receive up to $5000 per employee for 2020. Moreover, the credit is refundable, which means you don’t simply use it to offset current or future taxes-with a refundable credit, you may reduce all available taxes and the IRS will send a check for the difference.

Here are the big changes: Originally, a small business couldn’t take advantage of both the PPP and the ERC, and most received PPP loans. The new loan retroactively makes small businesses eligible for both-although one can’t use the same wages for both credits. Most small businesses had the covered periods of the PPP ending around the start of the 4th Quarter. For a qualifying business, most wages paid in the 4th quarter could be eligible for the credit. For 2021, the changes are even more significant. As noted, the size of the qualifying business increased from 100 to 500, and the revenue reduction needed decreased from 50% to 20%. On top of that, the credit increased from 50% to 70% on wages of up to $10,000, and the limit is per quarter not per year. As example, an employee who makes $10,000 or more per quarter, would have yielded a max credit for 2020 of $5000. That same employee can yield a $14,000 credit in 2021.

Disclaimer: This article is meant to provide a general review and understanding of complicated tax laws, both for eligibility and application. This article is not meant to provide tax advice for the reader’s specific situation. Always consult an accounting professional or labor attorney for specific tax advice on applying for and qualifying for these programs. Furthermore, guidance on these laws may change at any time and this article may not be updated to reflect those changes.

About the author: Arch Wallace is the President and founder of Checkright and has spent almost 20 years employed in the accounting and payroll industry. He can be reached at archw@checkright.net.