Before the end of the year, the much-hyped second stimulus spending bill became law. Most of the bill contained spending provisions for various sectors of the economy. But I will be reviewing some of the more popular provisions that can apply to normal people and lawyers.
Stimulus Checks
A second $600 stimulus payment will be given to single people making under $75,000 and $1,200 to married couples filing jointly with income under $150,000. The income will be determined based on what was reported on your 2019 tax returns.
Just remember that if you brag about getting stimulus money on social media, people will know much (or how little) you made in 2019.
Paycheck Protection Program, Round Two
Businesses who did not get the initial PPP funding will be eligible to try again this time around under the old eligibility requirements. Businesses that have previously received PPP funding will be eligible for a second forgivable loan but with more stringent rules. Here are the general rules, so far, but they will be tweaked through regulations from the Small Business Administration in the coming weeks.
To qualify for the second draw of PPP funding, the applying business must meet these general requirements. (There are some additional detailed requirements that are outside the scope of this column.):
- The business must have less than 300 employees.
- The business must not be of a type listed here, unless it is a nonprofit organization (e.g., Legal Aid organizations) or a religious teaching program.
- The business must not be engaged in lobbying.
- The business must not have a board member who is a resident of the People’s Republic of China (PRC). A business is also ineligible if an owner that holds 20% or more of its economic interest is a business organized in the PRC or Hong Kong.
- The business must show a 25% reduction in gross receipts in the first, second, third, or fourth quarter of 2020 compared to the same quarter in 2019.
The last requirement is worth noting because a business that did better financially in 2020 compared to 2019 can still qualify for the second draw if only one of the 2020 quarters shows a 25% reduction compared to the same quarter in 2019. The statute is very specific about this so it is doubtful that the SBA will be able to close this loophole through regulations. So check your books and bank statements closely.
Expanded List Of Eligible Expenses
The second PPP loan provides additional expenses that can be forgivable:
- Covered operation expenses. Payments for any business software or cloud computing services that facilitate business operations, product or service delivery, payroll processing, human resources, sales and billing functions, or accounting for supplies, inventory, records, and expenses. (Sorry, legal fees are not included.)
- Covered property damage costs. Costs related to property damage from vandalism or looting due to public disturbances in 2020, which expenses were not covered by insurance or other compensation (such as GoFundme donations).
- Covered supplier costs. These costs include contractual payments to a supplier of goods.
- Covered worker-protection expenses. These cover expenses incurred to meet worker and customer COVID-19 safety guidelines set by the federal or state government agencies. This would include face masks, hand sanitizers, protective shields, or other equipment that prevents the spread of the coronavirus.
Forgiven Loans Are Not Taxable Income, And Qualified Expenditures With Loan Money Are Tax Deductible
As with the initial PPP loan, any forgiven loan amount will not be taxable income. But now, business expenses incurred with PPP money are now tax deductible. This overrules IRS guidance stating that business expenses used with PPP money are not tax deductible because the money is used with tax-free money.
Simplified PPP Loan Forgiveness Procedure For Loans Under $150,000
For loans under $150,000, the applicant will only need to submit a one-page application form certifying that they have met the requirements for forgiveness. But you may be required to submit documentation proving the 25% reduction of income and spending the funds on allowable expenses.
Retirement Withdrawal Rules Are Back To Normal
The CARES Act of 2020 gave special rules in regards to retirement accounts. First, required minimum distributions after the age of 70½ have been waived. Also, early withdrawals of up to $100,000 were not subject to the early penalty, and if the withdrawals were repaid, the repayments will be treated as rollovers, and the withdrawals will not be considered taxable income. Unfortunately, these rules only applied in 2020 and the old rules are now back in place.
Tax-Free Student Loan Payments Extended To 2026
The CARES act of 2020 allowed employers to pay up to $5,250 toward an employee’s student loan without including the payment in income only for 2020. Generally, this meant that $5,250 will be subtracted from the employee’s W-2 income. The new law now extends this benefit until 2026. If you paid $5,250 toward your student loans, make sure that this is reflected on your 2020 W-2s as soon as possible.
Student Loan Cancellation Might Be Coming
Okay, student loan forgivenss is not part of the stimulus bill but still worth noting. As of this writing, it appears that the Democrats will control the Senate (and the legislative and executive branches of government) by a razor-thin margin. This means that a student loan cancellation bill can be on the horizon. Democrats have called for canceling student loans of up to $50,000. While I have my doubts as to whether loan forgiveness will stimulate the economy, I don’t write the laws.
If your federal student loans are $50,000 or less, you may want to keep a close eye on this topic and consider whether it is worth it to continue making payments.
Hopefully the financial help from the government described above will tide us over until the vaccines kick in (unless you’ve already been infected) and things start to go back to normal again.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.