On December 27, 2020 President Donald Trump signed the Consolidated Appropriations Act (“the Act”) into law, which included a $900 billion coronavirus aid package. The Act includes numerous tax-related provisions that could impact your personal or company tax situation. A summary of the main tax-related provisions is provided below.
SECOND ROUND OF ECONOMIC IMPACT PAYMENTS
The Act provides for a second round of direct payments to individuals subject to the same eligibility and phase out levels as the first round of payments. The amounts per individual changed somewhat: eligible adults will receive $600 for themselves ($1,200 for round 1) and an additional $600 for each qualifying child ($500 for round 1). These direct payments have already started hitting taxpayer bank accounts.
EXTENSION OF PAYROLL TAX DEFERRAL
On August 8, 2020, President Trump issued a memorandum that permitted employers to defer the payment of the employee portion of certain payroll taxes. The deferral period was from September 1, 2020 to December 31, 2020, and the payment of any taxes that were deferred during that period were required to be repaid between January 1, 2021 and April 30, 2021. The Act extends the repayment period to December 31, 2021.
DEDUCTIBILITY OF EXPENSES PAID FOR WITH PPP LOAN PROCEEDS
In April of 2020 the IRS issued Notice 2020-32, which stated that no deduction would be allowed for expenses paid for with forgiven PPP loan proceeds. As business owners hoped for, the Act reversed the IRS’ position and clarified that the receipt of loan forgiveness would not impact a taxpayer’s ability to deduct such business expenses.
SECOND ROUND OF PPP LOANS
The Act included a second round of PPP loans (“PPP2”) that would be available to businesses that met certain criteria.
- Significant revenue decline – A business would have to show a 25% decline in gross revenue in any 2020 quarter compared to the same quarter in 2019
- Number of employees – Businesses must have 300 or fewer employees
- Exhausted first PPP loan – A business would have to have used or will use the full amount of their first PPP loan
In addition to the new eligibility requirements, there are a number of other key updates to the PPP loan program:
- Maximum loan amount – The maximum loan available for PPP2 is $2M (the first round had a maximum loan amount of $10M)
- Increased loans for the hospitality industry – To determine the loan amount a business is eligible for, a business would take their average monthly payroll and multiply it by 2.5. Borrowers with NAICS Code 72 (restaurants and hotels) will be able to use a 3.5x multiplier for PPP2, thus qualifying for a higher loan than they received in the first round.
- Covered Period Flexibility – The covered period for the first round of PPP loans was limited to either 8 weeks or 24 weeks. Borrowers receiving their second PPP loan will be able to choose any covered period provided it is not less than 8 weeks and no more than 24 weeks. This will allow taxpayers to plan around wage and full-time equivalent reductions in order to maximize loan forgiveness.
- Expanded Covered Expenses – The first round of PPP loans required that borrowers use the money on payroll, rent, certain interest expense, and utilities in order to qualify for maximum loan forgiveness. The Consolidated Appropriations Act allows taxpayers the flexibility to use PPP2 funds on a large number of additional expenses. It is important to note, however, that borrowers are still required to use at least 60% of the funds on payroll in order to qualify for full loan forgiveness.
- EIDL Impact on Forgiveness – Under the Act a borrower is no longer required to decrease their potential loan forgiveness by the amount of any EIDL advance. Borrowers that already filed for forgiveness and decreased their loan forgiveness by an EIDL advance will be made whole.
- Safe Harbor Extension – If a business decreased wages by 25% or had a decrease in full-time equivalents during their covered period, their potential loan forgiveness may have to be reduced. However, there is a safe harbor originally included with the CARES Act that indicated that if wage and full-time equivalent levels were restored by December 31, 2020 then loan forgiveness would not be impacted by reductions during the covered period. The Consolidated Appropriations Act extends this safe harbor to September 30, 2021.
- Simplified Forgiveness Applications – The Act promises a simplified forgiveness application process for loans that are $150,000 or less. This SBA has indicated the new forgiveness application will be available on January 19.
It is important to note that the guidance and regulations related to this second round PPP have not yet been issued. The SBA is required to provide these regulations within 10 days of the enactment of the Act.
ENHANCEMENT OF EMPLOYEE RETENTION TAX CREDIT
The Employee Retention Tax Credit (“ERTC”) was originally introduced with the CARES Act, and is a refundable payroll tax credit for employers that satisfy certain requirements. Originally, the credit was available for wages paid or incurred between March 13, 2020 and December 31, 2020. It applied only to employers that either (1) experienced a decline in gross receipts (thresholds listed in the table below) or (2) had operations that were fully or partially suspended during at least one quarter in 2020 due to a governmental order. The Act expanded the ability to use the credit on both a retroactive and prospective basis.
The most important retroactive change relates to the interplay between PPP loans and the ERTC. Originally employers were not allowed to claim the credit if they received a PPP loan. The Act changes this rule and allows employers to take advantage of both a PPP loan and the ERTC on both a retroactive and prospective basis, provided the ERTC is not claimed on wages included on the business’ PPP loan forgiveness application.
The remaining significant changes to the ERTC apply on a prospective basis only, for wages paid between January 1, 2021 and June 30, 2021. Below is a summary of the key changes.
|Original – Wages Paid Between 3/12/2020 – 12/31/2020||Enhanced – Wages Paid Between 1/1/2021 – 6/30/2021|
|The percentage of qualified wages for which the credit could be claimed:||50%||70%|
|The amount of wages that could be used for the credit on a per employee basis:||$10,000 per year
*Maximum credit per year = $5,000
|$10,000 per quarter
*Maximum credit per quarter = $7,000
|The required decline in gross receipts in order to claim the credit:||50% decline when comparing any one quarter in 2020 to the same quarter in 2019||20% decline when comparing any one quarter in 2021 to the same quarter in 2019
20% decline when comparing the immediately preceding quarter to the same quarter of 2019.
If an employer wanted to claim the credit for Q1 2021 they would have to either:
(1) Experience a decline in gross receipts of at least 20% when comparing 2021 Q1 to 2019 Q1,
(2) Experience a decline in gross receipts of at least 20% for the immediately preceding quarter compared to the same quarter of 2019. In this case, that would be comparing 2020 Q4 to 2019 Q4
|Change in “large employer designation:
”Large employers” are only allowed to take the credit on wages paid to individuals who were not working. Employers not considered “large employers” can take the credit on wages paid to any employee.
|More than 100 employees||More than 500 employees|
The enhancement of the ERTC provides planning opportunities for businesses so that they receive the maximum benefit of both the ERTC and PPP loan forgiveness.
EXTENSION OF THE FAMILIES FIRST CORONAVIRUS RESPONSE ACT PROVISIONS
The Families First Coronavirus Response Act (“FFCRA”) went into effect in March of 2020 and required covered employers (employers with fewer than 500 employees) to provide paid sick leave and family/medical leave for certain employees. In addition to the requirement to pay wages, covered employers were offered a tax credit equal to the amount of wages paid.
The FFCRA requirement for paid leave was set to expire on December 31, 2020, but the Act extends the requirement and associated tax credits to March 31, 2021.
CHARITABLE CONTRIBUTION DEDUCTIONS – ENHANCEMENT OF CARES ACT PROVISIONS
The CARES Act permitted taxpayers that do not itemize their deductions to take an “above-the-line” deduction for charitable contributions of up to $300. The Consolidated Appropriations Act increased the amount of the “above-the-line” allowed for joint filers to $600.
Another provision of the CARES Act suspended the 60% AGI limitation on cash contributions for individuals and increased the limitation on cash contributions for corporations from 10% to 25% for tax year 2020. The Consolidated Appropriations Act extends this benefit to tax year 2021.
As a way to help the restaurant industry, the Act allows businesses to deduct 100% of business meal expenses during 2021 and 2022 (typically the deduction for business meals is equal to 50%).
Each year Congress passes legislation often referred to as the tax extenders, and this year’s tax extenders were included in the Consolidated Appropriations Act. While it is beyond the scope of this document to analyze each of the tax extenders in detail, the complete list is provided below.
- Reduction in medical expense deduction floor from 10% to 7.5%
- Energy efficient commercial buildings deduction (Section 179D)
- Exclusion from income of some benefits provided to firefighters and emergency medical responders (Section 139B)
- A repeal of the deduction for qualified tuition and related expenses, and a corresponding increase to the phaseout limitations for the lifetime learning credit
- Railroad track maintenance credit (Section 45G)
- Certain provisions related to beer, wine, and distilled spirit production
Provisions Extended through 2025:
- Look-thru rule for related controlled foreign corporations
- New markets tax credit (Section 45D)
- Work opportunity tax credit (Section 51)
- Exclusion from gross income of discharge of qualified principal residence indebtedness
- 7-year recovery period for motorsports entertainment complexes
- Expensing rules for certain productions
- Oil spill liability trust fund rate
- Empowerment zone tax incentives
- Employer credit for paid family and medical leave (Section 45S)
- Exclusion for certain employer payments of student loans
- Extension of carbon oxide sequestration credit (Section 45Q)
For more answers to questions about the Consolidated Appropriations Act, contact your Larson advisor today.