I hope everyone is easing into your holiday season and getting to spend some time off and relax. Well at least until Congress just passed the COVID Stimulus Bill. I have gone through the text of the bill and want to highlight a few of the items in the bill that are of particular importance to craft breweries.
First Things First- The Required Fixes
PPP Loan Forgiveness Expense Deduction
One of the big issues we had coming into the bill was that the expenses that were used to obtain forgiveness for the PPP would not be deductible for tax purposes, which effectively made the PPP loan taxable income to businesses. That was not the original intent of the bill–Congress even stated in the CARES Act that the forgiveness of the loan was not taxable income. However the IRS then interpreted that to mean that expenses related to the forgiveness were not deductible.
That was problematic as that meant you could have a struggling small business that took the PPP and ended up with paying taxes due to getting a PPP loan forgiven. IRS took it one step further that you needed to take that tax hit in 2020, even it you had the loan forgiven in 2021.
As that was not the intention of Congress, they needed to fix this through legislation, which is what they did in this stimulus bill. Crisis averted!
SBA 7a loan payments are tax free
For those that received six months of loan payments on their SBA 7a loans this past summer, that was an enormously help cash flow savings that many breweries took advantage of. The government had made the loan and principal interest on your behalf and all was well in the world. Our friends at the IRS decided to release guidance a few weeks back that through those payments into chaos. Similar to the IRS being a wet blanket on PPP loan expense deductibility, they stated that those payments made on your behalf for six months counted as taxable income.
Again, that would be a huge blow to breweries that received this benefit and would required Congressional action to make those payment non-taxable income, which they did in the stimulus bill. Crisis averted again!
More PPP Action
Couple of other changes happened to the PPP loan program that are important to note.
- You include expenses related to PPE and COVID safety as allowable expenses for forgiveness
- Loans under $150,000 get the automatic rubber stamp loan forgiveness. You will just need to fill a one page form stating that you used the funds appropriately and obtain full forgiveness.
New Stimulus and Benefits Available to Craft Breweries and Small Businesses
Craft Beer Modernization and Tax Reform Act
The long awaited Craft Beer Modernization and Tax Reform Act was added to the COVID Stimulus Bill and was passed. This means that federal excise taxes for craft breweries is now permanently $3.50 per BBL. The temporary bill that was originally passed expired at the end of this year and either required to be extended again or made permanent. Thankfully Congress decided to make this permanent. CBMTRA also allows you to move beer between breweries without incurring federal excise tax, which is also another win for craft breweries.
More SBA 7(a) payments coming
The COVID Stimulus Bill provided an additional three months of loan payments to SBA 7(a) loan holders starting February 1, 2021. Some industries got an additional 8 months on top of that, but that was mainly targeted to restaurants and music venues. Also, these payments are not going to be considered taxable income due to what was mentioned above.
PPP 2: Electric Boogaloo
PPP 2.0 was announced as part of the COVID Stimulus Bill. In order to be eligible for this, you need to show revenue declining at least 25% in a 2020 quarter compared to the same quarter in 2019 ( so for example Q2 2019 to Q2 2020). For most breweries, your qualifying quarter is likely Q2 2020 or Q4 2020. Q4 brings up an interesting question since its not closed out yet, that you can conceivably do some planning if you were close to the 25% threshold.
The rules of PPP 2.0 are similar in that its based on 2.5x average payroll costs and there is some choice as to that period of time you choose. You still also go through a bank to obtain this and will need to request forgiveness for this loan as well. You can’t get PPP 2.0 until you have used up the funds from PPP 1.0.
Before you all rush out to your banker, there was another provision that needs addressing to help you decide if you even want to take PPP 2.0.
Big Changes to the Employee Retention Credit
Back when CARES act came out, businesses had to choose whether they went the route of obtaining the PPP loan or applying for the Employee Retention Credit (ERC). In most cases, businesses were better off taking the PPP loan as that provided a better benefit. The CARES act did not allow you to take both the PPP and ERC.
To freshen you up on the ERC as established in the CARES act, you were able to get up to 50% of $10,000 in wages as a tax credit (basically $5,000 per employee as a tax credit offset and refund ) on your payroll taxes assuming you fell into one of two buckets. The first is that your business was shut down or had reduced operations due to COVID safety protocols or you had a decline in gross receipts of 50% quarter over quarter. Every single brewery that had a taproom qualified for this (and in general continues to qualify for this).
The COVID Stimulus Bill make some significant changes to the ERC that are absolute game changers.
The first is that you can obtain both the PPP and the ERC. The only caveat is that if you used payroll costs for PPP loan forgiveness, you cannot use those same dollars for the ERC. THIS IS A BIG DEAL!!!!!!!!
Due to how this was written in the law, your brewery might be able to retroactively apply for this credit as early as Q3 2020 (which means amending your 941) and can apply for it in Q4 2020. IF YOU THINK THIS APPLIES TO YOU, PLEASE REACH OUT. We are working with Gusto to get this going and will let you know when we can make this magic happen.
The second major change is supercharging the ERC for Q1 and Q2 2021. Starting in 2021, your credit increases up to 70% of $10,000 of wages per quarter per employee ( which results in an up to $7000 credit per employee per quarter). This means that you can have up to $14,000 per employee in tax credits in 2021. Given the high threshold, that may very well mean you might be better off taking the ERC as opposed to PPP 2.0, or at the very least is a very nice consolation prize if you do not qualify for PPP 2.0.
This means a careful and close evaluation is required before jumping in and getting the PPP 2.0 loan.
Changes to the EIDL
A couple of additional changes were made to the EIDL loan program that are very beneficial to breweries. The first is that if you did not receive the full $10,000 EIDL advance grant, you can reapply and get the full grant. The second change is that you no longer reduce your PPP loan forgiveness for the EIDL advance grant that you received.
Stimulus Payments to Individuals
Similar to what was in the CARES act, there is another round of stimulus payments to individuals, however, these payments are up to $600 per person instead of $1200 in the CARES Act. This round of the payments are based on your 2019 tax income and the phaseout of receiving a payment starts at $75,000 of income ($150,000 for married filing jointly).
These are the high notes from this bill. There was much more to the bill than just what is mentioned here, but these were the key ones for breweries. As always, this is always subject to change based on interpretations from the IRS and SBA. If you have any questions, please reach out to me at email@example.com