By Jamie Hopkins, Director of Retirement Research at Carson
Congress passed the new $900 billion economic relief and spending bill on Monday. While most of the focus has been on a second round of relief payments to most Americans, there is plenty more in the 5,000-plus pages of the stimulus package.
The goal of this bill is to continue to offer assistance to businesses struggling during the COVID-19 pandemic, provide extra unemployment benefits to those unable to find work, and to stimulate an economy that has persevered through much volatility over the past 10 months.
While we wait for President Trump’s signature, here are 17 takeaways from the new legislation that you should know:
1. Relief Payments
Most of the focus of the bill has been on the $600 relief payments that will be given to most Americans. The $600 is half of the amount allocated to adults by the CARES Act in March. The payment is $600 per individual, so $1,200 for married couples and $600 for each dependent child. Under the CARES Act, it was $500 for each dependent child. Dependent adults were not included in the new bill.
Not every American is eligible to receive the full $600, however. You are eligible if you make less than $75,000 as a single tax filer or less than $150,000 as a married couple filing jointly. If you earned more than the threshold in the 2019 tax year, then you can receive a smaller payment, however the phaseout thresholds are capped at $87,000 and $174,000, respectively.
These payouts are not taxable, and if you qualify in 2020 despite not qualifying in 2019, it will become a tax credit for 2020 and you will receive it when you file.
2. Additional Unemployment Benefits
Originally, the CARES Act provided added unemployment benefits through four main provisions, which increased unemployment payments, extended benefits to those who lost them and helped part-time workers who may not have qualified for state unemployment insurance benefits. Here’s a look at those three programs and what the new bill does to continue them:
- Federal Pandemic Unemployment Compensation: The CARES Act provided $600 per week in added unemployment benefits, but that provision expired at the end of July despite continued high unemployment. In response, President Trump signed an executive order to extend the program by offering $300 per week instead of $600, along with $100 from states. As funding for that program ended, the new legislation takes over by providing $300 a week in unemployment benefits.
- Pandemic Unemployment Assistance: The Pandemic Unemployment Assistance program was created to help part-time, freelance and self-employed workers who may not have qualified for state unemployment insurance benefits. Under the new bill, this program is extended for 11 weeks, with a stipulation that the applicants provide proof of previous employment or self-employment within three weeks of applying. The maximum number of weeks is now set at 50. Generally speaking, the PUA program has been extended to March 14, 2021. Those approved for PUA by March 14 will be able to continue for another four weeks.
- Pandemic Emergency Unemployment Compensation: The Pandemic Emergency Unemployment Compensation provides 13 additional weeks of benefits if a worker exhausts state benefits. However, the program was set to expire on December 26, 2020. The new bill will continue this program through March 14, 2021. The PEUC program has also been extended to provide a total of 24 weeks of benefits. Again, those approved before March 14 can continue receiving benefits under the program for four additional weeks.
- Mixed Earner Unemployment Compensation: Under the new legislation, some seeking unemployment benefits who had mixed income between self-employed and traditional W-2 employment income could be eligible for an additional $100 on top of the FPUC $300 if they had at least $5,000 of qualifying annual self-employment income, 1099, that they lost. This extra benefit would last until March 14, 2021.
3. Vaccine Distribution
The bill sets aside $20 billion for individual coronavirus vaccinations and $8 billion for vaccine distribution. The CARES Act addressed the cost of COVID-19 testing, and this seeks to provide similar aid for those getting vaccinated.
4. Flexibility with FSAs
Typically, a flexible spending account can be used as a tax-advantaged vehicle to meet certain health care expenditures each year. However, FSAs are generally a “use it or lose it” account, which means expenses and distributions need to occur by the end of the year. The new bill would allow for any unused FSA funds to be rolled over from 2020 to 2021 and allow 2021 funds to be rolled over to 2022.
These rules apply to both health- and dependent-care FSAs. The age threshold for dependent-care FSAs was temporarily extended to under 14, up from 13 to account for the extension.
Lastly, the new bill allows for FSA plans to permit a prospective change in election amounts for both health- and dependent-care FSAs mid-year in 2021. This means some companies will have to decide if they will hold a mini open-enrollment period in 2021.
5. Deductible Medical Expenses
Additionally, the deductibility of medical expenses as an itemized expense is normally set at expenses above 10% of adjusted gross income but was lowered to 7.5% as part of the CARES Act for 2020 and was extended for 2021. As such, individuals can deduct unreimbursed medical expenditures that exceed 7.5% of AGI in 2021. This is an important note as you prepare your 2020 taxes.
6. Eviction Memorandum Continued
The original Eviction Memorandum from the Centers for Disease Control and Prevention came in September, ordering a stoppage on evictions for failure-to-pay cases if the tenant made less than $99,000 annually as a single person or $198,000 as a couple. This memorandum, which left it up to the evicted tenant to file a motion with a judge, was set to expire on December 31, 2020. That date has been extended to January 31, 2021.
7. Continuation of the Paycheck Protection Program
Of the $900 billion bill, $284 billion is pegged for the Paycheck Protection Program, the forgivable loan program created under the CARES Act to help small businesses. Many businesses were shut out of the original funding window, which prompted Congress to open a second round of loans, which expired in August.
The new bill also clarifies much of the PPP process – which small business owners (and tax professionals) desperately needed – and set a quick timeframe for the Small Business Administration to create new regulations. Additionally, the bill expanded covered expenses for PPP loans, including some language allowing for disaster relief, which could open up the programs more broadly for remaining funds in the future.
8. PPP Deduction Clarity
There was a debate brewing over whether small businesses could deduct expenses paid with the Paycheck Protection Program funds received. In a big win for business owners, Congress declared that those expenses are deductible and the loan is not included in gross income.
In addition, the Economic Injury Disaster Loans are also tax-free and expenses can be deducted.
9. PPP Loan Simplification
For businesses that may need a smaller loan, the process just got a lot easier. For loan applications under $150,000, a business will now need to submit a certification to the lender with just three things: the number of employees you are able to keep due to the loan, how much of the loan will be used to cover payroll costs, and an attestation that you’re going to do what you say you will with the money (and that you’ll keep records to prove it).
This simplification is designed specifically to help small businesses with the hope that they continue to retain employees despite pandemic-related struggles. Full information on loan forgiveness eligibility and required costs allocated to employee payroll is available on the U.S. Small Business Administration website.
In addition, the SBA has been charged with creating a one-page forgiveness document and also restricted the lender from asking for any more information than is required on the one-page document for forgiveness for these $150,000 and under loans. This document must be public within 24 days of the passage of the bill.
The easier forgiveness option could encourage most businesses that took out PPP loans to wait to file until the SBA delivers this one-page document.
10. Expansion of PPP Loan Program
Under the new bill, PPP loans can be used to cover additional eligible expenses, which include business operational expenses; property damage costs from public disturbances; costs related to protecting employees in alignment with national or local health mandates; supplier costs that were essential to business operation; and group life, disability, dental and vision insurance.
The CARES Act provided coverage for only payroll, mortgage or rent, and utilities. These are still covered under the new bill.
In addition, some businesses will be eligible for a second PPP loan. While Congress expanded the application timeline and allocated more money to the program after the CARES Act, the new bill allows for businesses with fewer than 300 employees to apply for a second PPP loan. The business must have suffered a 25% drop in at least one quarter’s revenue from 2019 to 2020.
The maximum for a second loan is $2 million, whereas the first round of loans allowed up to $10 million. Certain companies, like hotels and restaurants, might be eligible for higher loan amounts than before as there was a cap on the PPP loan at 2.5 times average monthly payroll. Under the new bill, these companies can take up to 3.5 times but are still subject to the $2 million cap. Other provisions do apply, so if you’re interested in a second PPP Loan, check with your financial advisor.
11. Employee Retention Tax Credit Expanded
Under the CARES Act, the Employee Retention Tax Credit (ERTC) could not be used if you received a PPP Loan. However, under the new bill, businesses can receive this credit as long as the funds are used for wages not paid with PPP funds. With this new rule and the expansion of the credit’s coverage, it becomes an attractive option for small businesses.
The ERTC covers 70% of qualified wages each quarter, a bump from the original 50% coverage, and the end date was pushed to July 1, 2021, from January 1, 2021. While the CARES Act capped coverage at $10,000, the new bill increases the credit to $10,000 per quarter. In essence, this changes the tax credit from $5,000 to $14,000 per employee, which is a significant tax benefit for 2021. However, you must still see a drop in gross receipts from 2020 by 20% and have fewer than 500 employees to qualify, which is up from the 100 employee limit in the 2020 version.
12. Economic Injury and Disaster Loan Funding
While most business owners elected to take the PPP loan under the CARES Act, the previous legislation also created the Economic Injury and Disaster Loan program through the SBA. This program did not limit the use of funding to payroll, mortgage and utilities like the PPP program did. The EIDL program will receive $20 billion for targeted grants under the new bill.
13. Extension of Repayment Period for Deferred Payroll Taxes
The CARES Act allowed certain companies to defer their side of the payroll tax. Certain employers could defer payroll taxes on their side from March 27, 2020, to December 31, 2020. By the end of December 31, 2021, 50% was due, and the remaining 50% was due by the end of December 31, 2022.
In August 2020, President Trump signed a memorandum allowing employee deferral of the payroll tax for Social Security as long as that employee’s bi-weekly pay period, pre-tax wages were less than $4,000. Some employers set this up and others did not, in part because it was still a deferral of the tax, and it was expected to be due by the end of April 2021.
The new bill extends the repayment period for the employee payroll tax deferral to December 31, 2021. Penalties and interest on the deferred tax liability would not begin to accrue until January 1, 2022.
14. Allocated Funds to Businesses in Underserved Communities
The new bill provides $9 billion to Community Development Financial Institutions and Minority Depository Institutions. There was a problem in the first round of PPP loans as many smaller businesses were shut out of the first round of funding. This provision is meant to allocate money to business owners of color who may not have the same access to resources.
15. Business Meal Expense
The Tax Cuts and Jobs Act reduced the ability to deduct certain business expenses. One of these expenses was business meals. In light of the COVID-19 impact on restaurants, the deduction restriction was lifted, allowing for business meals with clients to be 100% deductible in 2021 and 2022, as opposed to the current 50% deductibility.
16. Transportation Aid
The new bill allocates $45 billion to the transportation industry, which has been hit extremely hard by the pandemic. It expands CARES Act programs put in place that will help airline employees, transit workers, bus companies and more.
17. Aid for Entertainment Venues
The new bill also provides $15 billion in assistance for live entertainment venues, independent movie theaters, and other cultural organizations as many in-person entertainment activities took a major hit during the pandemic.
As businesses, individuals, local governments and more adjust to the new provisions, the main takeaway for most Americans is that you’ll likely be receiving another relief check, and there are added benefits if you are or become unemployed.
Meanwhile, much of the new bill is meant to help struggling small businesses stay afloat until the pandemic is under control.
The big question now becomes if the bill will be signed into law by President Trump. After Congress passed the bill, Trump publicly called for $2,000 individual relief payments instead of the $600 payments the bill provides. If Trump vetoes the bill, it will delay the new provisions.
Meanwhile, the Biden Administration is set to take office in January with a focus on its first 100 days, which means we could see additional legislation start moving through Congress. How much of that legislation includes support or expansion of programs currently in place is yet to be seen.