Impact of Key Provisions of COVID-19 Relief on Businesses

Businesses have been on a roller coaster these past two years. In addition to managing the economic fallout from COVID-19, legislators passed dozens of tax laws and stimulus packages that required management to make important financial decisions on the fly. So, as we enter the 2022 tax filing season, let’s recap the various COVID-19 relief packages and how some of the provisions could impact the preparation and filing of your business taxes.

Families First Coronavirus Response Act

The Families First Coronavirus Response Act (FFCRA), signed by President Trump on March 18, 2020, was the first COVID-19 legislation to pass. It set the stage for future laws by offering support to businesses with government-mandated shutdowns, plummeting sales, and a dwindling workforce.

• Credit for Paid Sick and Family Leave – The FFCRA required certain employers to offer paid sick leave in 2020, but businesses were rewarded with tax credits in return. Refundable payroll tax credits for up to 100% of the cost of qualified wages were awarded to employers who offered paid sick and family leave. The credit was initially set to expire in 2020 but was extended through September 2021.

Potential Impact

As you begin filing your 2021 returns, you may want to revisit if you paid any wages to an employee who was out for COVID-related reasons and have not taken the credit. But, again, you have up to three years from the due date of the quarterly payroll tax returns to amend the forms to take the credit.

CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was a groundbreaking relief bill signed into law by President Trump on March 27, 2020, that supported businesses, governments, nonprofit organizations, and individual taxpayers in more ways than one.

• Paycheck Protection Program – The Paycheck Protection Program (PPP) offered low-cost loans to companies whose business operations were interrupted by the coronavirus pandemic. These loans could be forgiven if businesses spent their PPP funds in specific ways. The program morphed over time, but the PPP could not be used with the Employee Retention Credit in its first iteration.
• Employee Retention Credit – Like the PPP, the Employee Retention Credit (ERC) has been tweaked with each passing tax law. Initially, the ERC was a refundable payroll tax credit equal to 50% of up to $10,000 of qualified wages paid to employees in 2020 if (1) businesses could prove they had at least a 50% decline in gross receipts, and (2) they had less than 100 employees.
• Payroll Tax Deferral: Employer Portion – Businesses could elect to retain the employer’s portion of the Social Security tax assessed for April 1, 2020, and December 31, 2020. The deferred taxes could be repaid in two installments: half due on December 31, 2021, and half due on December 31, 2022.
• NOL Changes – Since 2018, Net Operating Losses (NOLs) faced two separate limitations: (1) NOL carryforwards could only offset up to 80% of current year income, and (2) they could not be carried back to offset prior year income. The CARES Act removed both limitations. Retroactively, the CARES act allowed NOLs to offset up to 100% of income in 2018, 2019, or 2020, and it allowed NOLs from these tax years to be carried back up to five years.
• Business Interest Limitation – Since 2018, the deduction for business interest expense — also called Section 163(j) — was limited to 30% of the taxpayer’s adjusted taxable income. The CARES Act raised this limitation to 50% for all businesses (except partnerships) in 2019 and 2020. Additionally, taxpayers could determine their 2020 Section 163(j) limitation using 2019 adjusted taxable income, which was helpful for businesses whose income dropped significantly from 2019 to 2020.
• QIP Property Eligible for Bonus – In 2017, legislators intended to make Qualified Improvement Property (QIP) eligible for bonus depreciation, but the tax law that they passed had a flaw; QIP was classified as 39-year property, making it ineligible for accelerated depreciation. To correct this mistake, the CARES Act retroactively changed QIP to be 15-year property, making it eligible for bonus depreciation as initially intended.

Potential Impact

If you deferred paying your portion of Social Security tax, you should have paid one half back by January 3, 2022, and the other half is due by January 3, 2023. So, if you have not considered checking into whether you qualify for the ERC, now is an excellent time to act.

Consolidated Appropriations Act

The Consolidated Appropriations Act (CAA) signed into law by President Trump on December 27, 2020, was an omnibus bill that answered questions taxpayers had about the CARES Act and expanded on a few of its key provisions.

• PPP Clarifications – The CARES Act was broad, but it didn’t tell taxpayers how the IRS would treat PPP loans, PPP loan forgiveness, or expenses paid for with PPP funds. The CAA cleared this up. The CAA clarified that (1) PPP funds would not be taxable as gross income even if those loans were ultimately forgiven, and (2) expenses covered by PPP loans could still be deducted on the business’s tax return if they would have otherwise been deductible.
• ERC Extension – The ERC was extended through June 30, 2021, and made the following changes:

1. The credit was raised from 50% to 70% of qualified wages.
2. The per-employee limit was raised from $10,000 per year to $10,000 per quarter.
3. Businesses only had to prove a 20% decline in gross receipts rather than a 50% decline.
4. Employers were eligible if they had less than 500 employees rather than 100.
5. Additionally, the CAA stated that employers who accepted PPP funds could still be eligible for the ERC if payroll that qualified the business for PPP loan forgiveness weren’t also used to calculate the ERC.

• Payroll Tax Deferral: Employee Portion – When the CARES Act allowed businesses to defer the employer portion of payroll taxes, taxpayers asked about deferring the employee portion, as well. In August 2020, President Trump issued an Executive Order that permitted the deferral of the employee portion of payroll taxes earned between September 1, 2020, and December 31, 2020. Initially, they were required to be repaid by May 1, 2021, but the CAA extended this due date to December 31, 2021.
• Business Meals 100% Deductible – If a restaurant provided food, the CAA made business meals 100% deductible in 2021 and 2022.
• Tax-Free Student Loan Payments for Employees – The CAA extended the ability for employers to make tax-free student loan payments on behalf of employees. Through 2025, employers can make annual payments of up to $5,250 on each employee’s student loans without treating those payments as income to the employee or as payroll for payroll tax purposes. However, they must make these payments using a qualified educational assistance program.
• Shuttered Venues Operators Grant Program – The Shuttered Venues Operators Grant (SVOG) Program awarded up to $10 million to live venue operators, movie theaters, performing arts organizations, and other businesses with fixed seating for their audience members. To be eligible for the SVOG, the company must prove a 25% reduction in revenue, have no more than 500 employees, and cannot have been awarded a PPP loan on or after December 27, 2020, among other requirements.

Potential Impact

Meals you have paid to restaurants during 2021 and 2022 will be 100% deductible, so make sure you account for these meals appropriately. Also, you can give your employees a non-taxable fringe by paying up to $5,250 of their student loan debt through 2025.

American Rescue Plan Act

The American Rescue Plan Act (ARPA) of 2021 was the first COVID-19 legislation passed under the Biden Administration. President Biden signed the ARPA into law on March 11, 2021. While it focused heavily on helping lower-income individual taxpayers’ financial and tax burdens, the piece also included several business-related provisions.

• Credit for Paid Sick and Family Leave Extension – The ARPA extended the paid leave credits enacted by the FFCRA to September 30, 2021.
• PPP Extension – The ARPA added additional funding to the PPP and expanded the program to include nonprofit organizations.
• ERC Extension – The ARPA extended the ERC through the end of 2021, although another tax law passed later in 2021 retroactively terminated the ERC on September 30, 2021.
• Restaurant Revitalization Fund – The Biden Administration wanted to support those most impacted by the pandemic, so they created the Restaurant Revitalization Fund (RRF). This fund provided up to $10 million in tax-free grants to restaurants that were struggling to cover payroll and other operational expenses. Unfortunately, participating in another COVID-19 relief program — like the PPP or the SVOG — may have made businesses ineligible for an RRF grant.
• Shuttered Venues Operators Grant Program Funding – The ARPA boosted funding for the SVOG.
• COVID-19 Economic Injury Disaster Loans – In early March of 2020, a small bipartisan bill deemed the coronavirus a disaster under the Small Business Administration’s (SBA’s) Economic Injury Disaster Loan (EIDL) program. As a result, the ARPA did two things for the COVID-19 EIDL program: (1) it provided additional funding, and (2) it clarified that businesses located in low-income communities received advance payments of EIDL funding would not need to include those grants in taxable income.

Potential Impact

The ARPA again reminded businesses to review whether or not they paid employees for COVID leave. Also, it gave businesses a bigger window to take advantage of the ERC. Therefore, our recommendation is to file the amended 941 to take advantage of the ERC as soon as possible due to the IRS backlog.

New Jersey Legislation

States have also issued their share of tax laws in the past two years. Following are just two noteworthy New Jersey tax laws passed in 2021.

• Unitary Businesses Under New Scrutiny – In 2018, New Jersey enacted legislation that required mandatory combined reporting for unitary businesses where at least one entity was subject to the Corporation Business Tax (CBT). In June 2021, New Jersey announced that companies that failed to file as a combined unit had a chance to participate in an initiative that would waive late filing and late payment penalties and limit their lookback period to only three years. This initiative commenced in June 2021 and ran until January 3, 2022.
• Worker Misclassification Under New Scrutiny – In July 2021, New Jersey passed legislation that furthered state efforts to end employee misclassification. As a result, businesses that erroneously classify a worker as an independent contractor (rather than an employee) may face steeper fines for noncompliance and maybe hit with stop-work orders after only one violation.

As you can see, the past two years have seen many tax-related issues that have added a layer of complexity to this year’s tax filing season that could affect your business return. As a result, now more than ever, it is important to work with your accountant to ensure you are properly prepared to file your return.

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©2022 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.