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Generous Tax Perks Blossom in New Relief Loan Funding Round

Jan. 14, 2021, 9:46 AM

Expanded tax perks in the new round of Paycheck Protection Program funding are designed to stretch support to small businesses still stuck in widespread shutdowns caused by the pandemic.

The biggest change from the original version of the pandemic aid program is the ability to receive a PPP loan and claim the employee retention tax credit, a CARES Act (Public Law 116-136) perk meant to encourage companies to keep employees on their payroll. In the first iteration, businesses could only choose one or the other.

That flexibility, as well as a forced reversal for the IRS to allow deductions from the loan, means the aid available to businesses now is more generous than it has been at any point in the Covid-19 pandemic. The latest aid law, which relaunched PPP as of Jan. 11, required the IRS to say business expenses like utilities and rent paid with PPP loans could be deductible, a switch from its original position.

“It’s not very often that you get to have your cake and eat it too,” Nicholas Gutzmer, a supervisor at Smolin Lupin & Co. said. “It’s kind of—you get three for the price of one.”

Tax Perks

The new law extended the time businesses can claim the credit to July 1, 2021 and increased the credit rate to 70% of qualified wages, up from 50%.

In addition to opening the door for PPP borrowers, the law also expands eligibility by lowering the threshold of losses to 20% of gross receipts year over year, down from 50%. It also increases the limit on per-employee wages to $10,000 each quarter, up from $10,000 per year and is available to businesses with 500 employees or less.

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Holly Wade, executive director of the research center at the National Federation of Independent Business, projected that because of the expansions, extension, and removal of the PPP exclusion, more businesses are likely to take advantage of it.

In 2020, she said, the credit was overshadowed by the popularity and excitement around PPP. This time around, the challenge will be educating small business owners that the perk is available to them.

“When we survey our members, very few knew about the ERTC, very few applied or or use the credit because of its complication,” Wade said. “But now that it is disconnected from PPP and more generous, it is a great financial benefit for small business owners who are still negatively impacted.”

The tax perks from both the ERTC and deductibility of business expenses also have an unexpected benefit: helping simplify tax returns, Paul Merski, executive vice president for congressional relations at the Independent Community Bankers of America said. Documentation for a loan application and to receive the ERTC will make tax returns and easier process for small businesses, he said.

“The tax changes are beneficial, and kind of liberalized the PPP rules and tax rules so to make it more attractive to have or apply for a PPP loan,” he said. The changes will “lower the tax burden for millions of small businesses that have a PPP loan.”

Mitchell Fagen, an associate of Transactional Tax Planning at Katten Muchin Rosenman LLP, said the government has done a lot to extend lifelines to businesses through various means. It’s ultimately up to businesses to take advantage of them.

“The government is spending a lot of money to help businesses survive this time, and help the economy recover,” he said. Businesses “should all try their best to take advantage of it as as well as they can, to the greatest extent that they can.”

To contact the reporter on this story: David Hood at dhood@bloomberglaw.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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