December 2020 Updates
Smart business, accounting, tax, and planning ideas from your MMKR CPAs!
PPP expenses will now be deductible and details on new PPP loans
After the IRS issued guidance deeming any expenses paid via Paycheck Protection Program loans as nondeductible, Congress stepped in to correct this. As part of the newest COVID-19 relief bill, Congress set the record straight for these expenses. Expenses paid via PPP loans will follow normal deductibility rules regardless of whether or not any of the loan is forgiven. This tracks with the original intent for tax-free loans when the PPP program was initially put in place in April. The loan forgiveness itself remains nontaxable as well.

The PPP was also funded again for new applicants, including those that have previously received funds from the program. This round of funding is $284 billion with a maximum loan size for second-time borrowers of $2 million. To qualify for this round of funding you must have a maximum of 300 employees, a decrease from the 500 employees for the first round. Additionally, the applicant must have already used or plan to use their original PPP fundings. However, the bigger change is intended to direct funds to those businesses most impacted by the pandemic. The applicant must certify that they have had a loss of revenue of 25% or greater. The applicant will compare 2020 quarterly gross receipts to gross receipts from the respective quarter in 2019. At least one quarter in 2020 must show a loss of 25% or more under this comparison.

The intention of this round is to fund 2.5 months of payroll expenses, taking the average monthly payroll in 2019 and multiplying it by 2.5. There is an additional focus on restaurants and the food industry as they are allowed to calculate their loan based on 3.5 months of the average monthly payroll. The same 24 week covered period applies. Qualifying expenses have been expanded to include property damage, supplier costs, and worker protection expenditures in addition to payroll, rent/mortgage, and utilities. Spending at least 60% of the loan amount on payroll costs is now a requirement.

The forgiveness process remains the same and this second round of loans will also be nontaxable when forgiven. The SBA has also increased the simplified/automatic forgiveness amount to PPP loans of less than $150,000. As it currently stands on Tuesday, December 22nd, the application process is not open. The President still needs to sign the bill into law and the SBA and Treasury must then issue guidelines for this second round. We will continue to monitor this area for any updates.

Questions? Contact us!
Tax implications of new COVID-19 relief and omnibus spending bill
There were a number of tax-relevant items included in the latest COVID-19 relief bill that was combined with the omnibus spending bill. The "Consolidated Appropriations Act, 2021" addressed items related to PPP loans, tax extenders, and even the meals deduction. Below is a brief summary of some topics, the text for this bill is just being released as this memo is being drafted. We expect to unwind and find more information out in the coming days and weeks.

  • Direct payments to individuals - up to $600 per taxpayer or qualified dependent
  • Phaseouts begin at:
  • $75,000 for single filers
  • $112,500 for heads of household
  • $150,000 for married filing jointly
  • 11-week extension for unemployment insurance compensation benefits
  • The $300 ($600 for MFJ) above-the-line charitable contribution was extended through 2021
  • Business meals will now be 100% deductible in 2021 and 2022, rather than the traditional 50% limitation
  • The Child Tax Credit and Earned Income Tax Credit will look to 2019 income if it's more beneficial than 2020 income in determining the credit amounts
  • Employee Retention Tax Credit was extended through July 1, 2021
  • The maximum refundable credit was also increased from $5,000 to $14,000
  • Businesses may also now participate in both this credit and the PPP.
  • Employer-side Social Security payroll tax credits have been extended through March 2021

A number of temporary tax provisions set to expire at the end of 2020 have been included in the newest COVID-19 relief deal. Some of these have simply been extended temporarily again while others have been made permanent.

  • Medical expense deduction floor is now set permanently at 7.5% of AGI
  • Previously was set to return to 10% in 2021
  • Lower excise tax rates for beer, wine, and distilled spirits also become permanent
  • The following all received a 5-year extension, now set to expire at the end of 2025:
  • Work Opportunity Tax Credit
  • New Markets Tax Credit
  • Employer credit for paid family and medical leave
  • Mortgage forgiveness exclusion
  • Empowerment zone tax incentives

Questions? Contact us!
New reporting standards for nonemployee compensation
Nonemployee compensation will now have its own form for filing. The IRS has brought back the Form 1099-NEC starting with the 2020 tax year. The form will report the same information as the Form 1099-MISC has previously. The separate form continues the recent focus the IRS has placed on properly identifying employees vs. independent contractors.

Generally, the amounts reported on Form 1099-NEC are subject to self-employment tax, any amounts that would not be subject to this should be reported in box 3 of Form 1099-MISC. Below is a list of several examples of payments to be reported on Form 1099-NEC if they exceed $600.

  • Professional service fees
  • Attorneys, accountants, architects, contractors, engineers, etc.
  • Payment for services
  • Commissions paid to nonemployee salespersons
  • Fees paid to a nonemployee
  • Taxable fringe benefits for nonemployees
  • Directors' fees

Form 1099-NEC has the same due date as other payroll reporting, February 1, 2021. 

If you have questions on determining the difference between an employee and an independent contractor, our accountants at MMKR are here to help. 
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High five to another busy season (almost) done!
The MMKR elves wish you and your loved ones a very safe & Happy Holiday Season and a joyful New Year!
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