After months of negotiations between congressional Democrats and Republicans, and the White House on another round of stimulus legislation, the possibility of a breakthrough at last looks promising.
In May, the House Democrats released their version of COVID-19 Phase 4 legislation, the Health and Economic Recovery Omnibus Emergency Solution Act (HEROES Act) (read our overview of the HEROES Act). In July, the Senate Republicans released their version, collectively referred to as the Health, Economic Assistance, Liability Protection, and Schools Act (HEALS Act) (read our overview of the HEALS Act). Although the House passed a pared down version of the HEROES Act in October, the bill did not pass in the Senate, nor was the Senate able to pass a simplified version of its own HEALS Act.
Stimulus bill negotiations continued to stall primarily due to the parties failing to come to an agreement on funding for state and local governments, liability protection for businesses against coronavirus-related lawsuits, and an additional round of stimulus checks to individuals. Another point of disagreement has been the size of the next stimulus package. Democrats have pushed for proposed legislation totaling as much as $3 trillion, while Republicans have insisted to stay under $1 trillion.
On December 1, a bipartisan group of House and Senate lawmakers revealed a $908 billion legislative framework, which served as the starting place for negotiations of a stimulus package. Due to the ongoing disagreements between the parties on state and local aid and liability protections, those provisions were separated from the $908 billion package into a separate $160 billion bill. The remaining $748 billion proposal, tentatively titled the Emergency Coronavirus Relief Act of 2020 (ECRA), contains the less controversial provisions and is likely to serve as the foundation for the bill that is planned to be attached to the $1.4 trillion omnibus spending measure to keep the government open. This alert will highlight a few of the more notable provisions contained in the ECRA.
Paycheck Protection Program
The ECRA provides several changes to the Paycheck Protection Program (PPP), including a provision regarding the deductibility of expenses paid with PPP loan proceeds. The U.S. Department of the Treasury and IRS took a position that since businesses are not taxed on the proceeds of a forgiven PPP loan, such expenses are not deductible. This position received significant pushback from PPP loan recipients and tax professionals, so to clarify legislative intent behind the PPP, the ECRA specifically allows for the full deduction of expenses paid with PPP loan proceeds that are forgiven.
There are four types of additional nonpayroll costs that PPP proceeds could be used toward under the ECRA (but would still be subject to the requirement that 60 percent of proceeds must be used for payroll costs):
- Covered Operations Expenditures – This includes payments for software of cloud computing services that facilitate business processes
- Covered Property Damage – Costs related to property damage and vandalism or looting that occurred during 2020 public unrest and were not covered by insurance
- Covered Supplier Costs – These are expenditures made by a borrower pursuant to a contract, order, or purchase order in effect prior to the date of disbursement of the PPP loan and are for the supply of goods that are essential to the operations of the borrower’s business
- Covered Worker Protection Equipment – Cost of personal protective equipment that a borrower was required to purchase to comply with CDC, OSHA, or U.S. Department of Health & Human Services requirements. These can be capital expenditures such as installing a drive-thru window, air filtration systems, health screening costs, and physical barriers such as sneeze guards.
PPP participants also would receive additional clarity on selecting a covered period. Until now, PPP loan recipients could choose between (1) the 24-week covered period beginning on the PPP loan disbursement date and (2) if the borrower received its PPP loan prior to June 5, 2020, the borrower could elect to use an eight-week covered period. However, the ECRA would allow borrowers to select the end date of their covered period. This is a beneficial clarification for those needing more than eight weeks but not the full 24 weeks and aligns certain full-time employee (FTE) and pay-rate reduction provisions with the payroll periods that the borrower includes.
Under the rehired exception and wage rate restoration exception, the ECRA would extend the date by which FTE and rate restorations would need to be made to fall under the respective safe harbors from December 31, 2020, until September 30, 2021.
For borrowers of $150,000 or less, the ECRA provides that the covered loan amount will be forgiven if the borrower submits a one-page online or paper form, which must be released by the U.S. Small Business Administration (SBA) within seven days of ECRA enactment. In this form, the borrower will need to attest to compliance of Section 7(a)(36) of the Small Business Act.
Borrowers of more than $150,000 but less than $2 million would no longer be required to submit the payroll tax filings, state unemployment filings, or the canceled checks, receipts, or other proof of payment for nonpayroll costs. However, borrowers within this range should still maintain these records for four years after the forgiveness submission for payroll records and three years for nonpayroll records.
There also are opportunities for taxpayers to receive additional PPP funds in two ways:
- Second Draw Loans – Taxpayers with 300 or fewer employees that sustained a 30 percent revenue loss in any quarter of 2020 (as compared to the same quarter in 2019) may receive a PPP loan based on the lesser of two and a half times its average monthly payroll cost or $2 million. The general requirements for qualifying for loan forgiveness and use of loan proceeds would be the same as original PPP loans.
- Supplemental Funding Request on Initial PPP Loan – In May, the SBA issued an interim final rule allowing a borrower to request a supplemental PPP loan if, subsequent to the time of application, regulations were issued that would have increased the loan amount it could have received. However, if the lender already submitted a Form 1502, which tells the SBA the name of the borrower and the loan amount, the borrower could not use this process for additional funding. The ECRA would remove the Form 1502 requirement and allow supplemental requests in all cases that the loan amount would have changed due to new rules. This is an important development for partnerships.
In addition, the ECRA would provide expanded funding opportunities for farmers and ranchers, §501(c)(6) organizations, and shuttered venue operators. If you fall into one of these categories, consult your tax advisor on how you could potentially take advantage of these provisions if enacted.
Other Stimulus Provisions in the ECRA
The ECRA also would extend several Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provisions that were set to expire by year’s end, as well as provide additional funding for programs like COVID-19 testing and vaccine administration. Specifically, the ECRA would:
- Extend pandemic unemployment insurance programs through April 2021 with weekly $300 payments (previously, these payments were $600 per week)
- Extend the moratorium on student loan payments, interest, and collections on government-held federal student loans through April 30, 2021
- Provide $10 billion to support child care providers struggling due to the COVID-19 pandemic
- Provide $25 billion in rental assistance through the Coronavirus Relief Fund, with 90 percent of the funds required to be used for payment of rent, utilities, and related housing stability services with 10 percent of funds available for housing stability services
- Provide grants and funding to support COVID-19 testing and tracing efforts by states, localities, and territories
- Extend §1112 of the CARES Act, which provides payment of principal, interest, and associated fees on qualifying SBA 7(a) loans
- Provide additional funding for other SBA loan programs to increase guarantees on SBA 7(a) loans and reduce fees on 7(a) and 504 loans; provide loan subsidies for 7(a) loans; and once again provide Economic Injury Disaster Loan grant advances
- Increase support for healthcare providers, including providing additional funding for the Provider Relief Fund
As previously noted, the ECRA is a framework of what might be attached to the spending bill, so any of these provisions could change. In addition, there are talks that the spending bill may contain another round of stimulus checks (amount still unknown, but current discussion is $600 to $700 per qualifying individual) and a measure to extend various tax provisions that previously expired or are set to expire at December 31, 2020, e.g., employee retention credit, various energy credits, deduction for qualified tuition and related education expenses, etc. BKD will provide an updated alert once we have more clarity around what the final bill will look like.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. For more information, contact your BKD Trusted Advisor™ or use the Contact Us form below.