(Updated 12/28/2020 as of 4:18pm ET)
Quite literally at the 11th hour on December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (hereafter referred to as the “Act”), or better known to most Americans as the much-needed, much-anticipated, hastily-put-together-and-not-fully-read-by-anyone-in-Congress-before-they-voted-on-it Coronavirus Stimulus Package. On Sunday, December 27, 2020, President Trump signed the bill, making it law.
The final bill came in at 5,593 pages of legislation and the majority of the bill’s intention was to serve as the appropriation of federal funds for the rest of the 2021 fiscal year. Instead of creating a completely separate piece of legislation, Congress (in all their wisdom) decided to tuck into this Act about $900 billion worth of Coronavirus stimulus and relief.
There’s a lot to unpack in the bill. Keep in mind that this bill was just passed into law and, as with most pieces of legislation, there’s language in the bill that directs the agencies and departments referenced (i.e. Treasury Department, the SBA, etc.) to create interpretations and guidance based on the legislation. I emphasize this because the information presented below is “as is” based on the passed legislation, but may change based on future interpretations from the respective government agencies impacted by the bill.
In a similar way we did with the CARES Act, we’ll focus on the main points that are going to affect optometrists and private practice owners.
Stimulus: who gets what?
Just like last time, the question of whether or not someone will receive stimulus payments is going to be a solid “maybe.” The maximum stimulus per person is $600 (as opposed to the $1,200 for adults and $500 for children under the CARES Act, hereafter just referred to as “CARES”).
This amount will be reduced once income exceeds the following thresholds:
- Single: $75,000
- Joint: $150,000
- Heads of Household: $112,500
The phaseout will be calculated by reducing the stimulus by $5 for every $100 a taxpayer is over their applicable threshold.
Deductibility of expenses paid with Paycheck Protection Program (PPP) funds
For practice owners, this is arguably the biggest net positive change. When Treasury came out (twice, via Rev Ruling 2020-27 and Notice 2020-32) reaffirming that deducting expenses paid with PPP funds was, essentially, getting a double tax benefit, Congress effectively said “Hold my beer, watch this” and authored Section 276 of the Act (located on page 2,004).
Prior to the Act, the net effect was that owners of practices would essentially be paying taxes on PPP funds at their personal income tax rate, since they were losing the deductibility of those PPP-paid expenses. For more details on pre-Act planning, check out this Review of Optometric Business article I wrote earlier in the month. Alas, the only thing that remains constant in 2020 is change…
For a lot of private practice owners, this essentially turned into tax-free funding to be used in their practice, of which the government also expanded the covered expenses under CARES through additional language in the Act. Speaking of…
Expanded definition of “covered expenses” under PPP
Also tucked into the Act was a significant expansion of what qualifies as “covered expenses” that can be paid with PPP funds and thus qualify for forgiveness. Taken directly from Section 304(b)(3):
“…payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
As we can see, this language seems to suggest and encompasses almost any operational expenses that a practice incurs. From EHR to payroll…from point-of-sale systems to inventory management systems…practice management software systems like EdgePRO or RevolutionEHR (no endorsement; just examples).
Additional expansion of covered expenses are outlines in subsequent sections of the Act, but here’s a small list:
- “Covered property damage” costs due to vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance
- “Covered supplier costs” means expenses paid to a supplier of goods that are essential to the operations of the entity at the time which the expenditure is made (Adam’s note: think COGS and other expenses related to pt care).
- “Covered worker protection” expenditures include any modifications that needed to be made to your practice to protect and mitigate the spread of disease to your team and patients based on guidance issued by DHHS, CDC, OSHA, or equivalents (Adam’s note: think PPE, plexiglass at your checkout, additional sanitation stations, etc.)
Interestingly, I don’t anticipate this part of the Act will apply to a lot of practice owners as most of them have already spent their PPP funds, either literally or figuratively as their 24 week covered period is close to being over or has already passed.
One of three types of practice owners will greatly benefit from these changes: new practices that have just launched, recent acquisitions in which there is not a PPP loan outstanding on the books of the practice, or other practices that for some reason or another did not take out a PPP loan.
Adam’s planning tip: If you find yourself in one of the camps listed above and have NOT taken out a PPP loan, the same advice still applies: MAX OUT THE LOAN! Take out as much as you qualify for at the time of application (more on that in the next section). Worst case scenario is that you have the option of paying it back on very favorable terms.
PPP 2.0 – The Sequal
There are a number of changes to the additional round of funding for the PPP, who qualifies, and how you qualify. Put succinctly, if you received PPP funding in the first round, you are eligible to apply for another loan up to $2 million, provided you:
- Have 300 or fewer employees
- Have used or will use the full amount of your first round of PPP funding
- Can show gross revenue decline of at least 25% in ANY quarter of 2020 compared to the same quarter in 2019
(Adam’s planning tip: if you think you’re on the cusp and trying to qualify (and are a cash basis practice), this should really prompt you to try and delay the receipt of any income on your books before year-end close on 12/31/2020).
Notably, the loan amount is still the same for optometry practices in that it’s calculated based on 2.5x the average monthly payroll. However, you now have the ability of choosing which payroll period you use in calculating the amount of your loan: either 2019 numbers or the previous 12 months (which, given the nature of when the Act became law, will be calendar year 2020).
If you’ve met the three criteria/bullet points referenced above, here are two additional questions to ask:
- “Did I increase my payroll in 2020 compared to 2019?”
- “Did I max out my original loan amount under PPPv1?”
If you answered “yes” and “no” to #1 and #2 above respectively, then you’ll likely qualify for additional PPP funding (even though you’re still using the same multiplier of 2.5).
While the vast majority of the funding for PPP is for additions to loans originated on or before August 8, 2020, if you’re a practice owner or independently-contracted 1099 OD and haven’t already applied for a PPP loan, the Act opens up a window and provides funding for these situations…$35 billion to be exact.
Adam’s planning tip: if you find yourself in the situation of either not maximizing the amount that you qualified for under CARES or just plainly didn’t apply because you weren’t aware of the program or didn’t think you qualified…TALK TO YOUR LENDER! The amount of funding mentioned above for first-time borrowers is (only) $35 billion. No one knows how quickly that will be allocated to borrowers.
The same calculations apply when determining the forgiveness amounts: at least 60% of the funds need to be used on covered expenses (which, based on expanded definitions mentioned above shouldn’t be a problem for practices) over a period of either 8 or 24 weeks. Almost all of our clients are opting for the 24 week period as it produces the highest probability of 100% forgiveness.
Adam’s note: I anticipate PPP for ODs and practice owners is going to be “a lot about nothing” because (1) practice owners may not have seen a >25% drop in revenue and/or they haven’t increased their payroll in 2020 compared to 2019 numbers. Run the calculations I mentioned above. If you didn’t have a >25% increase, “do not pass go, do not collect $200.”
Simplified PPP forgiveness process for loans of $150,000 or less
Earlier in the year, Treasury and SBA issued guidance and a simplified forgiveness application process for loans <$50,000. Under the new Act, Congress is actually encouraging simplicity (ironic in a 5,000+ page bill) when it comes to forgiveness by mandating the following:
- The forgiveness form will be no longer than one page
- Only required to provide:
- Description of the number of EEs the eligible recipient was able to retain because of the covered loan
- the estimated (emphasis mine) amount of the covered loan that was spent on payroll
- total loan value
- attests that they’ve accurately provided required certification
- complied with the terms of the loan
- retain records relevant to the form for 4 years for payroll costs and 3 years for other covered expenses
Increase in shareholder basis for forgivenen PPP loans
This topic is going to admittedly get a bit thick, so I’ll try and give you as much information as you need to understand it but not so much that it makes your eyes roll back in your head and bring back nightmares of that one accounting class you had to take in high school.
Section 276(a)(3)(A) reads that PPP forgiveness income will be treated as tax-exempt income for purposes of sections 705 (partnerships) and 1366 (S Corporations).
Tax-exempt income in the aforementioned entity structures INCREASES the basis in your company. Why is this important? A couple of reasons, but we’ll focus on the short-term implications for this article.
The biggest impact this has is for practices that may be showing a loss on their books for 2020 due to COVID or other accounting measures. Why does this matter?
A business owner can only utilize a loss from their business to the extent that they have basis in their business. Remember, the entity itself doesn’t pay taxes–all income from the business “flows through” to your personal tax return. Therefore, your basis as a shareholder (S corporation) or partner (partnership) is always adjusted based on the various flows of income, losses, gains, and distributions from and to the business.
Basis is INCREASED whenever there is income on Line 1 of your K-1, separate income like interest income and capital gains, contributions of capital (you putting your own personal money into the business) and tax exempt income (emphasis mine).
Basis is most notably and firstly DECREASED by distributions to the shareholder or partner. There are other items that decrease basis, but distributions are important for the context of this conundrum.
Let’s go back to what I was talking about a couple of paragraphs above: a business owner can only use losses in a year in which they have basis in their business. We now find ourselves in an interesting situation, because if your practice books a loss but you don’t have any basis in the business, you won’t be able to use that loss until your basis increases.
What do you need for your basis to increase? There are a number of things you could do (contribute personal capital, etc.), but most notably you need your PPP loan to be forgiven.
So here’s the good news and the bad news.
The good news is that you’ll eventually be able to benefit from the language of the Act.
The bad news is that you may have to wait until 2021 (assuming your PPP hasn’t yet been forgiven and thus basis will not be able to be increased) in order to personally and fully benefit from this provision of the Act.
An important note: all of which I’ve talked about is only really applicable to those practices that are trying to book a loss for 2020. There’s a difference between LOSSES and EXPENSES. If your gross income (top line of your profit/loss statement) is higher than your total expenses and thus you’re still showing positive net income for the year, you can disregard the above paragraph and chalk it up to a drive-by education and refresher on basis in a flow-through entity. :)
I’ve given you enough information at this point to end this section with the following phrase: if you have any additional questions (which you most likely do), talk to your team of advisors. The intent here was to illustrate that, when you file your 2020 taxes, the benefit of the deductibility of PPP-paid expenses may not be fully realized on your return.
EIDL advance deduction has been repealed
Based on a variety of guidance and interim rules put out over the course of 2020, it was interpreted by the various agencies (Treasury and SBA) that any EIDL grant that was received from someone that also procured a PPP loan would be deducted from the amount that qualified for forgiveness. Said another way, the act of applying for and receiving approval for PPP forgiveness turned the EIDL grant into a loan, which you were then to repay.
Section 333(c) of the Act rescinds that formula and is retroactive.
Adam’s planning tip: if you’ve already received forgiveness and paid back your EIDL loan, talk to your advisors and lenders on next course of action. It’s retroactive…but how it all plays out logistically with your lender will need to be addressed individually.
Extending debt relief payments, fees for SBA loans (other than PPP loans)
If you used an SBA loan (commonly referred to as “7(a) loans”) to fund either your practice and/or the acquisition of your building, you’ll be eligible for an additional 3 months of debt relief payments from the SBA. Section 325 of the bill rewrites part of Section 1112 of the CARES Act (15 U.S. Code § 9011) and makes a number of changes and Section 327 of the Act impose temporary fee reduction by amending Section 7(a)(18)(A) of the Small Business Act (15 U.S. Code § 636). The summary of those changes are as follows:
- For SBA loans that had previously had 6 months of their payments paid by the SBA and whose loans fall under SBA 7(a) loans, the SBA will pay an additional 3 months of your payment beginning with the first payment due on or after February 1, 2021.
- New loans made through this program will only have 6 months of debt relief payments paid by SBA (once your deferment/grace period has expired)
- The amount of payment is capped at $9,000 (including all principal, interest, and any fees associated with your payment).
- All SBA fees assessed to borrowers are rescinded on new loans originated between now and 9/30/2021. (Adam’s note: it’s a little unclear to what extent fees will be eliminated or reduced because part of the Act reads “…collect no fee or reduce fees to the maximum extent possible.” If there are fees that are deemed unable to be removed, those would still be applicable, though how those are defined are beyond the scope of this article and are unknown at this time).
It was thought that Section 328 of the Act may apply to ODs, but after further reviewing the Act I don’t believe this will be applicable. This piece of the Act is directed towards manufacturers (those with NAICS codes that start with 31, 32, or 33). Moreover, the companies that would have been issued these types of loans are defined as “development companies” which are defined as “enterprises incorporated under state law with the authority to promote and assist the growth and development of small business concerns in the areas covered by their operations. (15 U.S. Code § 662(6).) Unless I’m missing something, I don’t believe that an optometry practice would fall under these definitions.
Adam’s planning tip: the use of 7(a) loans is wide ranging, much more than PPP loans. If you were planning on expanding your practice, purchasing land or a building for your practice, etc. the terms of SBA financing just got more appealing and economically in your favor. In addition, if you currently have an SBA loan, make sure you work with your lender to ensure that February, March, and April’s payments are paid by SBA. This ensures making sure you have auto-pay turned off on your bank accounts. I’d rather not try and figure out how to get my payment back.
Section 127 Tuition Reimbursement Program extended through December 31, 2025
Section 127 plans traditionally only included expenses as they were incurred (think of paying for an optician to earn their ABO certification). This basically allowed employers to help with the cost of educational expenses for their team members by allocating tax-free dollars. A section of CARES expanded Section 127 plans to include student loan payments. Under CARES, this was set to expire on January 1, 2021.
Before you even ask…no, this does not apply to you as a practice owner. Not more than >5% of total benefits paid under this plan can benefit any >5% shareholder in your business. So unless you plan on allocating a significant amount of money to this program (at which point I’d just ask you why you’re not paying off your loans directly), do not pass “Go,” do not collect $200.
Adam’s planning tip: if you have an associate that is paying back their student loans, this is a program that could be implemented into the practice to benefit them as a bonus on top of their salary. Note: you cannot offer this IN LIEU OF a bonus.
Employee Retention Credit (ERC)
The Employee Retention Credit was an additional tool that employers could use to offset the cost of keeping people on payroll (up to $10,000 max payroll per employee) and it was “paid for” as a 50% credit to the employer’s payroll tax (7.65% FICA tax that the employer pays on their TOTAL payroll).
For example, if you had a $50,000 salaried individual, you could pay up to $10,000 of their salary through a credit against the assessed FICA payroll taxes your practice had to pay. In addition, if the total payroll tax deposits are less than the credit being applied for, the IRS will grant an advance payment (“IOU”) to the business owner.
The Act expands the ERC in the following notable ways for optometric practice owners:
- The credit equals 70% of wages (instead of 50%)
- It’s extended, but only through July 1, 2021
- The credit is allowed on $10k of wages PER QUARTER (changed from annual)
- Revenue only needs to drop below 80% of the same quarter in 2019 (changed from 50%)
Adam’s planning tip: if you’ve exhausted your PPP funds and don’t qualify for additional funding based on the calculation mentioned above, you may be able to use this strategy to help offset payroll costs as it *only* requires a 20% drop in revenue compared to 25% for PPP funding calculation.
Families First Coronavirus Response Act
The refundable payroll tax credits for sick and family leave created under FFCRA have been extended through March 31, 2021.
100% deductibility of meals and entertainment
While not directly related to optometry, I know we’re all itching to get back to normal and meet up at our favorite meetings like Vision Expo (East and West), SECO, and our various state and local organized meetings.
For 2021 and 2022, 100% of business meals will be deductible (up from 50%, which was changed under the Tax Cuts and Jobs Act passed at the end of 2017).
Interesting note: the food or beverage must be provided by a restaurant, which is sure to stir up some controversy on where the line is drawn on defining a “restaurant.”
This is example #23,612 of where we’re sure to see additional guidance issued by Treasury in the future. The reading never ends…
Starting December 26, 2020 there will be an additional $300/week of federal unemployment benefit tacked onto the state benefit. Interestingly, this is NOT retroactive. I don’t see this impacting too many optometrists, but if you find yourself unemployed you’ll have an additional amount that can be added to any state benefits you may receive.
The Act included 11 weeks unemployment benefits, including the extension of Pandemic Unemployment Assistance. The PUA was the federal program created and funded for those that wouldn’t have otherwise qualified for unemployment benefits.
Extension of eviction moratorium
If you’re an OD that also has rental properties and are in an unfortunate situation where your renters have been unable to pay rent because they’ve been out of work, the moratorium on evictions has been extended through January 31, 2021.
What notably didn’t make the cut…
Student loan forbearance or deferrals. As of now, the moratorium on zero interest, zero payments for federal loans (NOT those that have been refinanced with private lenders) is set to expire on January 31, 2021.
However, not all is lost. Based on precedent, it would not surprise me to see President-elect Biden extend this program through additional months in 2021. Student loan debt has been a topic he has not shied away from, proposing some pretty aggressive strategies to address the significant amount of outstanding student loan debt.
What you need to do
Digest the information above and take inventory of your list of action items and then prioritize accordingly. Communicate with your advisory team and map out a game plan.
As a kid, my dad owned a cabinet shop and I started working there when I was in the 4th grade. The mantra that was always communicated was “measure twice, cut once.” Translation: there are certain things you can’t undo.
Throughout most of 2020, my advice to clients on a lot of the unknowns around PPP and CARES was to “wait and see.” I’m usually one for taking action, but there was still so much that was unknown that we wanted to be sure we had all the information needed to make an educated and informed decision.
There’s still going to be additional guidance that comes out in the coming days and weeks, so I’d use the information presented above as just that: information. If you don’t HAVE to act right now, then we’re learning that the path of least work is to wait until you have all available information before you MUST make a decision.
If you’re wondering how to piece all of these strategies together and how they impact you, we’d be happy to have a conversation with you and give you our thoughts on your current plan.