12.28.20 | Client Alert
The Consolidated Appropriations Act, 2021 (the “Act”) was finally signed into law yesterday after months of stalled negotiations in Congress. The new Act incorporates the COVID-19-related Tax Relief Act of 2020, which consists of new tax law provisions as well as extensions of certain expiring tax laws. The bill, which is now the second-largest financial rescue package in history, consists of $900 billion in largely pandemic relief and $1.4 trillion for regular government funding through the September 30, 2021 fiscal year. It allocates nearly $325 billion for business relief, including $284 billion for the Paycheck Protection Program (“PPP”). The bill also provides relief to individuals with another round of direct stimulus payments, extends the federal unemployment benefits through March 14, 2021, and extends some popular individual tax breaks.
The Berdon tax team will provide a detailed analysis of important provisions in the days to come. In the meantime, below are highlights of key PPP and tax-related provisions.
Tax Deductibility of PPP Business Expenses. The new Act includes a technical clarification to provide that PPP expenses are tax deductible even if the loan is forgiven. This change overrides the current IRS position, which disallows the deduction of PPP expenses when there is a reasonable expectation of loan forgiveness. The ability to write-off PPP expenses is welcome news for small business owners and will provide an additional tax benefit.
Second Round of Small Business PPP Loans. Qualifying small businesses will have an opportunity to receive a second PPP loan. However, for the second go-around, businesses must have 300 or fewer employees (instead of 500), and the business must be able to prove that gross receipts decreased by 25% or more as compared to the same quarter in 2019. If the business was not operational in 2019, the business must demonstrate at least a 25% reduction of gross receipts as compared to the first quarter of 2020. The maximum loan amount is generally the lesser of $2,000,000 or 2.5 times the average total monthly payroll costs incurred or paid by the eligible entity during the 1-year period before the date on which the loan is made or calendar year 2019. For an eligible entity that is assigned a North American Industry Classification System (NAICS) 72 code (such as hotels and restaurants), the maximum loan amount is the lesser of $2,000,000 or 3.5 times the average totally monthly payroll costs incurred or paid during the 1-year period before the date on which the loan is made or calendar year 2019.
Cash Payments for Individuals. This time around, direct stimulus payments of $600 will be sent to each eligible individual ($1,200 for married couples filing jointly), plus an additional $600 for each qualifying child. (There is a separate measure, if passed into law, that would increase the stimulus payments to $2,000 per individual and $4,000 per couple. However, as of the date of this alert, this measure has not yet been enacted into law.) The stimulus payments are treated as advanced rebates of a 2020 tax credit. Eligibility is phased out when the taxpayer’s adjusted gross income (based on 2019 income) exceeds (1) $150,000 in the case of a joint return or surviving spouse, (2) $112,500 in the case of a head of household, and (3) $75,000 in the case of a single taxpayer.
Extension of Pandemic Unemployment Assistance. The new Act provides $300 a week of additional unemployment payments until March 14, 2021, which is half the weekly amount as provided under the CARES Act, set to expire on December 31 of this year. As before, self-employed workers may qualify for the extended assistance.
Temporary Full Allowance of Business Meal Deduction. To help struggling restaurants during the pandemic, Congress temporarily lifted the 50% meals limitation on tax deductibility and will allow a 100% tax deduction for restaurant provided business meals paid or incurred in 2021 and 2022.
Extension of Charitable Contribution Provisions. Previously, the CARES Act temporarily increased the limitation on charitable contributions of cash to public charities from 60% of Adjusted Gross Income (AGI) to 100% of AGI for 2020. In addition, individual taxpayers could claim a $300 above-the-line charitable contribution for the 2020 tax year. The new Act extends these benefits to the 2021 tax year. Thus, an individual who does not elect to itemize deductions for the taxable year will still be permitted to take a charitable deduction up to $300 ($600 in the case of a joint return).
Beneficial Rules for Medical Expense Deduction, Health Savings Account, and Flexible Spending Account Arrangements. Beginning in 2021, the Act permanently reduces the income threshold for the medical expense deduction from 10% of AGI to 7.5% AGI, thereby allowing unreimbursed medical expenses above 7.5% of AGI to be tax deductible. It also allows unused amounts from the 2020 plan year in health savings accounts and dependent care flexible spending accounts to be carried over to the 2021 plan year. Similarly, unused amounts from the 2021 plan year can be carried over to the 2022 plan year.
Economic Injury Disaster Loan Program (EIDL). Businesses that received a cash advance through the Economic Injury Disaster Loan (EIDL) program will no longer have to deduct the advance from their PPP loan forgiveness amount. In addition, the Act clarifies that EIDL grants are not includible in gross income.
Nontaxable Grants for Shuttered Venue Operations. Entertainment venues, such as theaters, live music operators, and performing arts organizations that were fully operational on February 29, 2020, and experienced a significant decline in revenue during the pandemic may be eligible to receive initial grants equal to the lesser of $10 million or (i) for businesses in operation for all of 2019, 45% of gross earned revenue for 2019 or (ii) for businesses that commenced operations after January 1, 2019, six times the amount of the average monthly gross earned revenue for each full month during 2019 or $10 million. Supplemental grants may also be available for up to 50% of the initial grant amounts received. Grants received under this program are nontaxable and recipients are not eligible for both shuttered venue grants and PPP loans.
Extension and Expansion of Employee Retention Credit. The new law extends the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) employee retention credit by continuing the program through June 30, 2021. It increases the credit rate from 50% to 70% of qualified wages and increases the limit on the creditable wages from $10,000 per year to $10,000 per each calendar quarter for each employee. The provision also expands eligibility for the employee retention credit by decreasing the reduction in the gross receipts requirement from 50% to 20%. Moreover, employers who receive PPP loans may still qualify for the credit with respect to wages that are not taken into account in PPP loan forgiveness requests.
Extension of Deferred Payroll Taxes for Employees. Employers that opted to defer the employee Social Security tax under the August 8th Presidential Memorandum were previously required to withhold and pay the deferred payroll taxes ratably between January 1, 2021 and April 30, 2021 with interest, penalties, and additions to tax beginning to accrue on May 1, 2021 with respect to any unpaid taxes. The Act allows employers until December 31, 2021 to withhold and pay back the deferred payroll taxes. Penalties, interest, and additions to tax will only begin to accrue after January 1, 2022 with respect to any unpaid taxes.
Extension of Tax Credits for Paid Sick Leave and Family Leave. Under the Families First Coronavirus Response Act (FFCRA), payroll tax credits for paid sick leave and family leave due to COVID-19 reasons were set to expire on December 31, 2020. The Act extends the employer’s eligibility for tax credits for the covered period until March 31, 2021 but does not mandate the employer to provide paid leave beyond December 31, 2020.
Depreciation of Certain Residential Rental Property Over a 30-year Period. The Tax Cuts and Jobs Act limits the deductibility of business interest expense unless the taxpayer is an eligible electing real property trade or business. Previously, an electing real property trade or business was required to use a 40-year Alternative Depreciation System (ADS) life for depreciating residential rental property placed in service before 2018. A 30-year ADS life was available only for property placed in service on or after January 1, 2018. The Act retroactively permits the 30-year ADS life to apply to all residential rental property.
Tax Breaks for Green Energy. There are several green energy provisions in the new bill, including an extension of the tax credit for electricity produced from certain renewable resources until January 1, 2022, and the extension of the energy credit until January 1, 2024. Moreover, the Act makes permanent the deduction for energy efficient building eligible expenditures.
Disaster Tax Relief for 2021. The new Act expands certain disaster relief provisions included in earlier 2020 legislation. For example, eligible taxpayers of qualified disaster distributions may take a distribution of up to $100,000 from a retirement plan without penalty and the amounts withdrawn are includible in income over a three-year period or may be contributed back to the plan during the three-year period and treated as a nontaxable rollover.
Lookback Period for Earned Income Tax Credit and Child Tax Credit. The bill allows certain taxpayers to calculate the Earned Income Tax Credit and Child Tax Credit for the 2020 tax year using 2019 tax information if taxpayers earned less in 2020 so that they can benefit from a higher credit amount.
Expansion of Educator Expense Deduction. Currently, educators who work in schools can deduct up to $250 of unreimbursed expenses as an above-the-line deduction. The Act requires that the Treasury issue regulations (no later than February 28, 2021) to clarify that personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 (purchased after March 12, 2020) qualify as above-the-line educator expenses.
In addition to the above provisions, the Act includes several tax extenders and makes permanent certain tax breaks for individuals and businesses that were scheduled to expire at the end of 2020. We are in the process of reviewing and analyzing the impact of these various tax law changes and will keep you informed in the coming days.
As always, please contact your Berdon advisor if you have any questions.
Have a healthy and happy new year.
Berdon LLP New York Accountants