request less than $150,000 in second-draw proceeds don’t have to verify arevenue reduction up front, but will berequired to provide documentation ifthey apply for forgiveness.
The list of permitted uses has alsobeen expanded under the new law.
Proceeds can, of course, continue to be
used to cover payroll costs and operat-
ing expenses. They also can be used
to pay for personal protective equip-
ment and modifications to the business
that are necessary to adapt the business
to meet new health and safety stan-
dards. These capital expenditures might
include physical barriers, ventilation
systems, expansion of outdoor spaces,
PPP funds also can be forgiven if
they’re used to repair damage caused by
protests and other disturbances in 2020,
as long as the damage wasn’t covered by
insurance. Proceeds can now be used
to cover supplier costs, which include
expenses related to contracts and other
purchase orders for supplies that were
in effect before the business took out the
Payments for operations expenseslike cloud computing services, business software, accounting or HR needsalso qualify.
The new rules give business own-
ers flexibility to choose the length of
their “covered period,” which is the
period over which at least 60% of loan
proceeds must be spent on qualifying
expenses. That period begins on the
date proceeds are disbursed and ends at
least eight weeks later, but no more than
24 weeks later.
Some business owners may be eligiblefor larger loans under the new rules.The SBA will allow those businesses torequest an increase in their loans if eligible, either by returning all or a portionof the loan or requesting an increase ifthe business hasn’t yet accepted the loanproceeds. Those requests must be madeelectronically to the SBA no later thanMarch 31 under current rules.
Year-End Stimulus: What Changedfor Retirement Plan Participants
The year-end COVID- 19 stimulus bill extended some of the relief createdunder the CARES Act earlier in 2020.But much of the retirement relief related to COVID- 19 was not carried overinto 2021. Rather, the law provided newforms of relief for different situations —some of which are entirely unrelated tothe pandemic.
It’s important to pay close attentionto the fine print to make sure clientsunderstand what types of new penaltyrelief might be available in 2021 — andthe details will be key to preventingunpleasant tax surprises for clients inthe future.
CAA RETIREMENT DISTRIBUTION
Some key COVID- 19 relief provisionswere allowed to expire at the end of2020, including the rules that allowedpenalty-free coronavirus-related distributions from retirement plans.
And the year-end Consolidated
Appropriations Act of 2021 (CAA) pro-
vides the same type of tax relief for non-
COVID- 19 disasters, such as wildfires
and hurricanes. Taxpayers impacted by
any type of federally declared disas-
ter that is not related to COVID- 19 are
permitted to withdraw up to $100,000
from a qualified plan or IRA within 180
days of the CAA’s passage (i.e., by June
As usual, these disaster-related distributions are exempt from the 10% earlywithdrawal penalty that would typicallyapply — but are subject to ordinaryincome tax treatment. However, taxpayers who take qualified disaster distributions are also permitted to spread thetax liability over three years (and repaythe distribution over a three-year periodwithout tax implications).
Also, required minimum distributionsare back on the table for 2021. In otherwords, the year-end stimulus bill did notextend the RMD waiver into 2021. Planparticipants aren’t required to do anything special if they skipped their 2020RMD under the CARES Act rules. 2021RMDs are calculated using the year-endaccount balance just like any other year.
DID THE 2021 CAA HELP
The CAA did permanently lower thethreshold for deducting medical expenses. Under prior law, medical expensescould be deducted only if they exceeded10% of adjusted gross income (AGI).The CAA made a 7.5% limit permanent.
This lowered threshold can helpmore retirement plan participants takepenalty-free distributions from 401(k)s and IRAs. Usually, a 10% penaltyapplies for distributions if the accountowner has yet to reach age 59½. Thatpenalty does not apply, however, todistributions taken for tax-deductiblemedical expenses.
In other words, if the client’s medical expenses for the year exceed 7.5%of AGI and are thus deductible as itemized deductions, the client could opt totake a penalty-free withdrawal to coverthose costs. However, the penalty-freewithdrawal must be equal to or less thanthe actual amount of medical expensesincurred by the client. Clients shouldalso be aware that they will be responsible for ordinary income taxes on thewithdrawal — and that the withdrawalcould potentially push them into a higher income tax bracket.