On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “Act”). The Act, which includes the COVID-19-related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, contains information on a wide array of new laws affecting individuals and businesses and clarifies and modifies certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act,” as amended and modified by prior legislation). This article summarizes some of the tax-related highlights of the Act, including:
- Tax treatment of Payroll Protection Program (“PPP”) funded expenses and loan forgiveness
- Recovery rebates
- Extension of certain payroll taxes
- Extension of certain expiring provisions, including the Families First Coronavirus Response Act (“FFCRA”)
- Retroactive allowance of the Employee Retention Credit for PPP borrowers
- Extension and expansion of the Employee Retention Credit for 2021
- Disaster tax relief provisions
- Other tax-related provisions
The Act clarifies that (1)the following loans are not included in gross income, (2)deductions are allowed for otherwise deductible expenses paid with the amounts not included in income even though the loan is forgiven, and (3)tax basis and other attributes will be reduced because those amounts were excluded from gross income:
- PPP loans;
- Emergency Economic Injury Disaster Loan (“EIDL”) grants and target EIDL advances;
- Subsidies for certain loan payments; and
- Grants for shuttered venue operators made under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“PPP2 Act”).
This provision cleared confusion and doubt related to the forgiveness of PPP loans, in particular, that had persisted since earlier this year when the IRS issued contrary guidance. To learn more about that contrary IRS guidance, please read this article. (Please note, the IRS updated its guidance in Revenue Ruling 2021-2, in which it declared its earlier contrary guidance to be obsolete upon the enactment of the Act).
Under the Act, an “eligible individual” will receive a tax credit in the amount of $600 ($1,200 in the case of eligible individuals filing a joint return), plus an additional tax credit in the amount of $600 per qualifying child. The term “eligible individual” means any individual, other than a nonresident alien, a person who qualifies as another person’s dependent, or an estate or trust. The credit phases out at $5 per $100 of additional income at the following thresholds:
- $75,000 adjusted gross income (“AGI”) for an individual;
- $112,500 AGI for a head of household; and
- $150,000 AGI for a joint return.
The credit will be paid in advance based on information in the taxpayer’s 2019 return, similar to the direct payments/rebates under the CARES Act.
Extension of Certain Payroll Taxes
In August 2020, President Trump issued a Presidential Memorandum and the IRS issued guidance with respect to the Presidential Memorandum in the form of Notice 2020-65. Notice 2020-65 allows the deferral of the employee’s portion of payroll taxes. Under Notice 2020-65, the due date for the withholding, deposit, and payment of such taxes on qualifying wages paid between September 1, 2020, and December 31, 2020, was January 1, 2021, through April 30, 2021.
Under the Act, the repayment period has been extended from January 1, 2021, through April 30, 2021, to January 1, 2021, through December 31, 2021. Given the risks associated with deferral of payroll taxes, we highly recommend seeking counsel before taking advantage of this provision.
First, the FFCRA payroll credit for paid sick leave was extended to March 31, 2021. For more information on this, see “Congress Makes Additional Paid Family Leave and Paid Sick Leave Optional – December 29, 2020.”
Second, the table below summarizes certain provisions that were extended under the Act:
Extended Through 2025
Extended Through 2021
Reduction in medical expense deduction floor from 10% to 7.5% AGI (Sec. 213(f))
Look-through rule for related CFCs (Sec. 954(c)(6))
Treatment of mortgage insurance premiums as qualified residence interests (Sec. 163(h))
Energy efficient commercial buildings deduction (Sec. 179D)
New markets tax credit (Sec. 45D)
Credit for health insurance costs of eligible individuals (Sec. 35)
Volunteer firefighters and emergency medical responder benefits (Sec. 139B)
Work opportunity tax credit (Sec. 51)
Indian employment credit (Sec. 45A)
Transition from qualified tuition and related expenses deduction to increased income limitation of lifetime learning, repealing Sec. 222 deduction but increasing phaseout limits on the lifetime learning credit)
Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108(a)(1)(E))
Mine rescue team training credit (Sec. 45N)
Railroad track maintenance credit (Sec. 45G)
Seven-year recovery period for motorsports entertainment complexes (Sec. 168(e)(3)(C)(ii))
Classification of certain race horses as three-year property (Sec. 168(e)(3)(A))
Reductions in excise tax rates for beer, wine, and liquor, special rates for small brewers and distillers, and refunds in lieu of reduced rates for certain alcoholic beverages produced outside of United States (Sec. 263A(f)(4), sec. 5001(c), and adding new sec. 5067 and 6038E)
Expensing rules for qualifying film, television, and theatrical productions (Sec. 181)
Accelerated depreciation for business property on Indian reservations (Sec. 168(j)(9))
Oil spill liability trust fund rate (Sec. 4611)
American Samoa economic development credit (P.L. 109-432, as amended by P.L. 111-312)
Empowerment zone tax incentives (Sec. 1391(d))
Second generation biofuel producer credit (Sec. 40(b)(6))
Employer credit for paid family and medical leave (Sec. 45S)
Nonbusiness energy property (Sec. 25C)
Exclusion for certain employer payments of student loans (Sec. 127(c)(1)(B))
Qualified fuel cell motor vehicles (Sec. 30B)
Extension of carbon dioxide sequestration (Sec. 45Q)
Alternative fuel refueling property credit (Sec. 30C)
Two-wheeled plug-in electric vehicle credit (Sec. 30D)
Energy efficient homes credit (Sec. 45L)
Production credit for Indian coal facilities (Sec. 45(e)(10)(A)(i))
Extension of excise tax credits relating to alternative fuels (Sec. 6426(c))
Black lung disability trust fund excise tax (Sec. 4121)
The Act also contains other extensions for:
- Credit for electricity produced from certain renewable resources;
- Extension and phase-out of energy credit; and
- Extension of residential energy-efficient property credit and inclusion of bio-mass fuel property expenditures.
Retroactive Modification of CARES Act Employee Retention Credit Requirements
The Act modifies the provisions of the CARES Act and the Small Business Act to retroactively allow businesses that took a PPP loan to also claim an Employee Retention Credit (“ERC”) for 2020. It also clarifies that allocable health care costs paid to an employee by an employer are eligible for the ERC even if no wages are paid to the employee, and further that “qualified wages” as defined for ERC purposes now includes both wages paid to the employee and their allocable health care costs.
However, any qualified wages taxpayers use to claim an ERC are not eligible to be forgiven as payroll costs for PPP loan purposes, and in fact the general rule now is that qualified wages are eligible for the ERC and the taxpayer must proactively make an election to treat qualified wages as “payroll costs” for PPP loan forgiveness. If a taxpayer elects to count the wages for PPP forgiveness and the PPP loan is not completely forgiven, to the extent such loan is not forgiven the associated payroll costs will be treated as qualified wages and will still be eligible for the ERC. The Act directs the SBA to provide guidance on how this will be administered.
It is currently unclear how these elections are to be made when a taxpayer has already applied for PPP loan forgiveness. Employers will want to review the records to determine if they had ERC eligible quarters and what their qualified wages were, and then decide how to use these costs in the most tax-efficient manner.
Employers can claim the ERC for past quarters by filing amended Form 941. The Act also includes a provision that appears intended to allow employers to claim the full credit that would have been available to them in 2020 in the fourth quarter of 2020, which would be consistent with the retroactive nature of these provisions. However, the cross-references for what amount this would apply to only include the new CARES Act provision related to allocable health care costs and not the rest of the section it modified, which includes wages. It is unclear if this was a mistake, and we will need further guidance on this.
Extension and Modification of the Employee Retention Credit
The Act extends and expands the availability of the ERC credit through June 30, 2021. For 2021 the ERC increases to 70% of qualified wages, and a maximum of $10,000 in qualifying wages per employee per calendar quarter may be counted in determining the credit. For eligible employers with 500 or fewer full-time employees, the credit is based on the qualified wages paid to all employees from January 1, 2021, through June 30, 2021. Additionally, employers with 500 or fewer employees can elect to take an advance payment of the ERC amount during the first two quarters of 2021.
- Creates a minimum 4% low-income housing tax credit rate for buildings placed in service after December 31, 2020;
- Provides a 30-year depreciation schedule for residential rental property placed in service before 2018 and held by an electing real property trade or business;
- Creates a new type of energy property, “waste energy recovery property,” that is eligible for the energy investment tax credit;
- Extends the availability of the energy investment tax credit for offshore wind facilities for tax years prior to January 1, 2026;
- Creates a new minimum interest rate for meeting the cash value accumulation test for life insurance contracts;
- Reduces the minimum age for distributions from a qualified plan during working retirement for certain employees in the building and construction industry to 55;
- Creates a temporary rule preventing partial termination of qualified plans during a plan year that includes the period between March 12, 2020, and April 1, 2021, as long as the number of active participants covered by the plan on March 31, 2021, is at least 80% of the active participants covered by the plan on March 13, 2020;
- Creates a temporary 100% deduction for business meals, including delivery and carryout, provided by a restaurant, from January 1, 2021, and expiring on December 31, 2022;
- Creates temporary changes in determination of earned income for qualifying for child tax credit and earned income credit;
- Extends the charitable contribution deduction for non-itemizers for 2021;
- Temporarily expands flexible spending accounts to allow for carry-over of unused benefits or contributions;
- Allows farmers who elected a two-year net operating loss (“NOL”) carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act and allows farmers to revoke a previous election waiver to carry back an NOL; and
- Creates reductions in excise tax rates for beer, wine, and liquor, special rates for small brewers and distillers, and refunds in lieu of reduced rates for certain alcoholic beverages produced outside of the United States.
Disaster Tax Relief Provisions
The Act also includes tax provisions applicable to employers and persons within “qualified disaster zones” that existed at any time from January 1, 2020, until 60 days after the enactment of the Act (February 25, 2021). However, “qualified disaster zones” does not refer to any area that was declared a disaster zone only because of the effect of COVID-19. These provisions include:
- Exemption from the 10% penalty for certain distributions from retirement plans;
- An Employee Retention Credit based on wages paid by employers affected by qualified disasters; however, this provision specifically denies employers use of the same wages in qualifying for the ERC under the CARES Act or other potential credits;
- Temporary suspension of limitations on charitable contributions by corporations making disaster relief contributions; and
- Temporary increase in low-income housing tax credits for buildings located in qualified disaster zones.
Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For more information about the tax provisions related to the CARES Act, please reach out to Dan Eller, Alee Soleimanpour, or M. John Way today.