The Consolidated Appropriations Act, 2021 (the Act) was passed by Congress on December 21, 2020, and has been sent to the President for his signature. This Act, consisting of 5,593 pages, incorporated a significant number of changes and enhancements to the CARES Act and existing tax law. Among the most anticipated items in the Act is the treatment of expenses paid with PPP funding that has been or will be forgiven.
PAYCHECK PROTECTION PROGRAM AND EMPLOYEE RETENTION CREDIT
PPP Deductibility Approved
The Act clarifies that eligible PPP expenses will be deductible for federal tax purposes, thereby making the PPP proceeds nontaxable as originally intended.
Since eligible expenses paid with PPP proceeds are deemed tax deductible expenses and the forgiveness received will be considered nontaxable debt relief, the Act provides for a double benefit that reverses the IRS’ and Treasury’s previous guidance on the deductibility of qualified expenses. Any portion of PPP proceeds that are not forgiven will continue to be treated as a loan and subject to the repayment terms of the loan agreement.
Specific items to note regarding taxability and deductibility are as follows:
The following income is deemed to be nontaxable:
- PPP loan forgiveness under the first and second round.
- EIDL advances received.
- Payment of debt relief principal and interest under the CARES Act and SBA debt relief programs mentioned below.
The following amounts are deductible:
- Expenses paid with EIDL advance funds.
The following amounts affect basis:
- Basis increases for PPP forgiven funds, EIDL Advance funds, debt relief principal and interest payments
- Basis decreases for expenses paid with PPP forgiven funds
***Note that the above considerations relate to federal tax law. Additional guidance is needed from the states to determine the tax consequences from a state tax law perspective.
Expanded list of items the PPP funds may be spent on:
- Covered Operations Expenditure – business software or cloud computing service that facilitates business operations, product or service delivery, the processing of payment or tracking of payroll expenses, human resources, sales and accounting functions, or accounting or tracking of supplies, inventory, records and expenses.
- Covered Property Damage Cost – a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Covered Supplier Cost – goods or supplies that are essential to the operations of the entity pursuant to a contract or purchase order made at the time of the loan application. If for perishable goods, made at any time during the covered period.
- Covered Worker Protection Cost – operating or capital expenditure to facilitate the adaptation of the business activities of an entity to comply with published COVID-19 guidance.
- Payroll costs will now include group life, disability, vision and dental insurance.
Repeal of the deduction for the EIDL Advance. The EIDL Advance (up to a $10,000 grant) will no longer decrease the forgiveness amount. For those who have already received forgiveness, the SBA is ordered to make those applicants whole. It should be noted that payroll costs must still comprise at least 60% of all eligible PPP expenses to receive full forgiveness.
Simplified Forgiveness Application
A simplified loan application for those applicants who received up to $150,000 will be developed. The application will be one page with certifications that the applicant complied with all applicable laws and regulations. Additional documentation needed to support the application will be limited. The SBA has been instructed to provide specific guidance to taxpayers within 10-days of the Act becoming law.
PPP Second Draw Loans
The Act includes a second round of Paycheck Protection Program loans available for application until March 31, 2021. These loans are available to eligible entities who:
- Have 300 or less employees,
- Have used or will use the full amount of their first PPP loan, and
- Demonstrate at least a 25% reduction in gross receipts during any quarter in 2020 as compared to the same 2019 quarter.
Loan amounts are based off of 2.5 times the average monthly payroll costs (based on one year before the loan was made or 2019). For entities in accommodation or food service (NAICS code 72) the amounts are based off of 3.5 times the average monthly payroll costs. The maximum loan is $2 million.
Loan proceeds must be used for payroll and covered mortgage, rent, utilities, operations, property damage, supplier costs, and worker protection costs. Payroll must be 60% of the total cost allocation to receive full forgiveness. The limits on FTEs and wage/salary reduction from the first round of PPP loans still apply, but so do the existing safe harbors.
The covered period now allows for at least 8-weeks or up to 24-weeks but ending not later than 24-weeks after receipt of PPP proceeds. This allows recipients to select any period of covered weeks necessary to achieve forgiveness, for instance a recipient may select a 15-week covered period.
Seasonal employers now have the option of selecting any 12-week period between February 15, 2019 and February 15, 2020 for computing average total monthly payroll costs.
Employee Retention Tax Credit
The CARES Act created the employee retention tax credit (ERC) for eligible employers and was calculated based on 50% of the first $10,000 of qualified wages paid to an employee during an eligible quarter capped at $10,000 of eligible wages for the year. The employer must have had its operations fully or partially suspended by a government order, or a significant decline in gross receipts.
Under the Act, an eligible employer was expanded to include those employers that have 500 employees or less which is a significant increase from the CARES Act threshold of 100 employees. The Act increases the credit percentage from 50% to 70% of qualified wages. Qualified wages are increased from $10,000 per year per employee to $10,000 per quarter per employee. Additionally, the Act reduces the 50% drop in gross receipts to 20%, on a quarter-over-quarter basis.
Taxpayers may now also claim the ERC and receive a PPP loan. However, any wages used to compute the ERC are deemed not to be eligible forgiveness under PPP. Additional guidance is needed to determine if the ERC may be received on eligible wages incurred during 2020 for which PPP proceeds were not used to pay. Should this be the case, employers may want to review their 2020 payroll and compute their eligible credit and apply for that credit on their fourth quarter payroll returns. It should be noted that if you received the ERC you are not allowed to use those same wages to receive credits through other provisions of the Internal Revenue Code such as the increasing research credit, work opportunity credit, and employer wage credit. The Act extends the ERC through July 1, 2021.
Payroll Tax Deferral
On August 8, 2020, the IRS issued Notice 2020-65, which allows for the deferral of certain payroll tax obligations for the period of September 1, 2020 through December 31, 2020. Specifically, this notice allowed for the deferral of the employee portion of social security tax if the amount of bi-weekly compensation was less than $4,000 (determined on a per pay period basis).
As originally issued, the payroll taxes deferred during this period were due to be paid during the period of January 1, 2021 through April 30, 2021, with the full amount being paid back before May 1, 2021 to avoid interest and penalties. Under the new Act, the deferred taxes are to be paid ratably during the period of January 1, 2021 through December 31, 2021, giving taxpayers an additional 8 months over which they can spread the payment. Under the new Act penalties and interest will not begin to accrue until January 1, 2022.
Additional 2020 Recovery Rebate
In addition to the Economic Impact Payment (EIP) previously received by qualifying individuals under the CARES Act in March 2020, the Act introduces an additional EIP consisting of $600 per taxpayer ($1,200 for married filing joint) plus an additional $600 per each dependent child under the age of 17. Like the first EIP, eligibility is based on an income limitation of $150,000 for jointly filing taxpayers, $112,500 for head of household filers, and $75,000 for single and all other eligible filers. The payment would be reduced $5 for every $100 of income in excess of those thresholds. Taxpayers eligible to be claimed as a dependent on another’s return are not eligible to receive a payment.
Treasury has announced that these stimulus checks are expected to come out as soon as next week and will be based on the taxpayer’s 2019 filing information. As with the first EIP, these payments are not included in gross income for tax purposes. Instead, they are treated as an advance against a credit that eligible taxpayers will claim on their 2020 tax return.
If upon filing the 2020 return, the actual credit calculated (based on 2020 numbers) exceeds the advance payment received (i.e., the EIP), the taxpayer will be allowed to claim an additional refundable credit for the balance. If upon filing the 2020 return, the actual credit calculated (based on 2020 numbers) does not exceed the advance payment, the taxpayer may keep the advance payment and no reimbursement to the IRS is required. Taxpayers who were deceased prior to January 1, 2020, will not be eligible to receive the EIP. Congress explicitly stated this in the Act as there was confusion regarding EIPs made to deceased taxpayers in the first round of funding.
Earned Income and Child Tax Credits
To account for the potential diminished earnings of low-income earners in 2020 due to the pandemic, the Act provides for a special “lookback” provision. This provision will allow eligible taxpayers the option of using the earned income amount from their 2019 tax return to compute their eligible credit. Thereby potentially increasing their refundable credit in 2020 even if their earned income decreased.
The CARES Act provided for pandemic unemployment assistance for certain covered individuals who were unable to work due, directly or indirectly, to the COVID-19 pandemic, including self-employed individuals, independent contractors and others who don’t qualify for state benefits. Under the CARES Act, covered individuals were eligible to receive assistance for up to 39 weeks, with the program set to expire on December 31, 2020. Under the new Act, these benefits are extended through March 14, 2021 and covered individuals are now eligible for up to 50 weeks of assistance. In addition, individuals who are eligible for the pandemic unemployment benefits as of March 14, 2021 but have yet to collect their full benefits may continue to collect benefits through the earlier of the date they receive the full 50-week benefit or April 5, 2021.
Similar revisions will be seen for the pandemic emergency unemployment compensation program under the Act. Under the CARES Act, those who qualified for state benefits but exhausted those benefits were eligible for an additional 13 weeks of coverage under this program, with the program set to expire on December 31, 2020. Under the Act, individuals will be eligible for an additional 24 weeks of coverage beyond the state benefits (for a total of 50 weeks of coverage) through March 14, 2021. Those who are eligible for this benefit as of March 14, 2021 but have yet to collect their full benefits may continue to collect benefits through the earlier of the date they receive the full 24-week benefit or April 5, 2021.
The Act also reinstates the emergency increase in unemployment compensation benefits that was originally provided in the CARES Act and had expired as of July 31, 2020. The new Act offers $300 in additional unemployment compensation per week, compared to the $600 offered under the original program, and will be paid for weeks beginning after December 26, 2020 through March 14, 2021.
Taxpayers who do not itemize their deductions can still benefit from making a charitable donation to a qualified organization. For tax years 2020, taxpayers can deduct a qualified contribution up to $300 for married and single as an above the line charitable deduction. For tax year 2021 married taxpayers receive an increased deduction amount of up to $600.
For Taxpayers who itemize, the expanded charitable contribution threshold was extended through tax year 2021. This means eligible taxpayers may deduct their charitable contribution up to 100% of their AGI.
In conjunction with the passage of additional Coronavirus relief, the Act also extended many provisions that were set to expire on December 31, 2020. These extenders are a welcome addition to the Act for taxpayers. While not encompassing, the following highlights a few of the more prominent extenders.
The following provisions were made permanent in the tax code after years of being temporary and having to be extended with new legislation. This provides for more certainty for many taxpayers.
- Reduction in medical expense deduction floor. This provision allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of AGI instead of 10% for years beginning after December 31, 2020.
- Energy efficient commercial buildings deduction (Section 179D). This provision allows an increased deduction for buildings that meet above-industry standards of energy efficiency in the year they are placed in service. The energy efficiency standards are updated and the deduction rate is indexed to inflation for years beginning after December 31, 2020.
- Benefits provided to volunteer firefighters and emergency medical responders. This provision excludes from income certain state and local benefits for volunteer firefighters and first responders for years beginning after December 31, 2020.
- Transition from deduction for qualified tuition and related expenses to increased income limitation for lifetime learning credit. After 2020, this provision repeals the qualified tuition deduction and replaces it by increasing the phase-out limits on the Lifetime Learning credit to match the American Opportunity Credit.
- Railroad track maintenance credit (Section 45G). This provision provides short line railroads a tax credit for their expenditures on rail line maintenance. The credit rate was reduced from 50 percent to 40 percent for taxable years beginning after December 31, 2022.
- Craft Beverage Modernization Act. These provisions make the reduced excise rates for small brewers and distillers permanent. The provisions also make improvements to the administration of the lower rates and tightens anti-abuse rules.
The following provisions have been extended through December 31, 2025:
- New Markets Tax Credit IRC 45D
- Work Opportunity Credit
- Qualified personal residence indebtedness which allows for a discharge of up to $2,000,000 of mortgage principle to be forgiven tax-free has been amended to limit the discharge to $750,000 for joint filing taxpayers or $375,000 for a single taxpayer.
- Employer payments of student loans. This payment was historically only for tuition and other education assistance items such as books and materials. Under the CARES Act employers were given the ability to provide $5,250 per year to employees to assist with their student loan repayments.
- Expensing rules for certain productions of qualified film, television and live theatrical productions
The following provisions have been extended through December 31, 2021:
- Deductibility of mortgage insurance premiums on a qualified residence
- Health insurance credits for eligible individuals
- Nonbusiness energy property credit – improvements to a home are still capped at $500 lifetime
- Section 45(L) energy efficient home credit for builders
BUSINESS DEDUCTION AND CREDIT PROVISIONS
For Corporations the Act extends the ability to deduct charitable contributions up to 25% of taxable income. Another enhancement of the Act is allowing Corporate taxpayers to deduct up to 100% of a qualified charitable donation made to a qualified organization in a qualified disaster area.
100% Business Meal Deduction
For tax years 2021 and 2022 the deduction for eligible business meals is now 100% which is an increase from the previous 50%. Meals may be deducted in full provided they are paid or incurred during 2021 or 2022 and are from a restaurant and can be dine in, take out, or delivery. Entertainment expenses continue to be generally non-deductible.
Residential Rental Property
For those taxpayers who made an eligible election to opt of IRC Section 163(j), the ADS life has been adjusted to a 30-year life for all residential rental property regardless of when it was placed in service. Prior to this Act, the ADS life for this type of property was 40-years if it was placed in service prior to January 1, 2018. This change in recovery period could provide substantial depreciation adjustments for 2020.
Low Income Housing Credit
The Low Income Housing Credit now provides for a new minimum credit rate of at least 4% related to the acquisition and housing of bond-financed developments.
Disaster Relief Provisions
The Act specifically states that COVID-19 is not a qualified disaster pursuant to the Robert T Stafford Disaster Relief and Emergency Assistance Act. The Act does continue to allow for qualified disaster distributions of retirement funds up to $100,000. The retirement distribution income may be includable over a 3-year period. In addition, the Act increased the maximum eligible loans a taxpayer may take out against a qualified retirement fund from $50,000 to $100,000.
Shuttered Venue Operators
A live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative may receive a grant to pay for payroll, rent, utilities and protective equipment. Eligible entities in the first 14 days of program must have a 90% decrease in revenues, 70% decrease in revenues in the following 14 days and then at least 25% decrease in revenues thereafter.
Debt Relief Program
Resumes the payment of principal and interest on small business loans guaranteed by the SBA under the 7(a), 504 and microloan programs. The SBA will pay the principal and interest for 3 additional months starting 2/2/2021 and for an additional 5 months if the entity has a NAICS code starting in 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812. The monthly payment is limited to $9,000.