On Dec. 21, 2020, Congress passed the Consolidated Appropriations Act of 2021 (“the Bill”), which is a comprehensive bill including COVID-19 relief, tax extenders and funding for the Federal government for the remainder of fiscal year 2021.
In addition to providing for a second round of PPP loans, the Bill contains some notable tax provisions, perhaps the most significant of which is allowing expenses funded with forgiven PPP funds to be tax deductible.
GHJ has summarized this and other key tax provisions below.
PPP Loan Expenditures Become Tax Deductible
Earlier this summer the IRS made it clear that under the CARES Act as written, expenses paid with forgiven PPP funds would not be deductible for tax purposes. Soon after the IRS released their position in Notice 2020-32, several lawmakers from both sides of the aisle spoke out in support of tax deductibility, stating that it was always Congress’s intention through the CARES Act to make PPP forgiveness nontaxable AND to allow for expenses paid with forgiven funds to be tax deductible.
Congress has now formalized its intention in this Bill, stating that “no deduction shall be denied” by reason of PPP loan forgiveness. In addition to statutorily declaring that PPP-financed expenses are tax deductible, Congress also addressed potential tax issues that may have arisen due to the Basis and At-risk rules that apply in the realm of taxation for partnerships, S corporations and certain closely held C corporations. These legislative changes clear the path for taxpayers to receive both the benefit of tax-free forgiveness AND the deduction of their PPP-funded expenditures.
This beneficial tax treatment applies to calendar-year businesses, as well as fiscal-year taxpayers whose tax year ends after the date of the enactment of the original CARES Act.
GHJ Observation: Note that this is a federal change only, and it remains to be seen whether California and other states will follow the federal treatment.
Enhancement of the Employee Retention Tax Credit
The CARES Act included a refundable tax credit against the 6.2-percent employer-side Social Security Payroll Tax for certain employers that either fully or partially suspended operations due to a government order OR that sustained a significant decline in gross receipts. The refundable credit was originally only available on wages paid after March 12, 2020 and before Jan. 1, 2021. And the credit was based on 50 percent of qualified wages paid to each employee, limited to $10,000 of qualified wages per employee per year.
The Bill expanded the credit by making the following changes:
- Extends the applicable wage base to wages paid up to July 1, 2021 (instead of Dec. 31, 2020)
- Increases the credit rate from 50 to 70 percent of qualified wages
- Reduces the decline in gross receipts threshold from a 50 to 20 percent year-over-year decline in gross receipts to qualify for the credit
- Increases the limit on per-employee qualified wages from $10,000 per year to $10,000 per calendar quarter
- Increases the full-time employee threshold for a business to be treated as a “large employer” from 100 to 500 employees
These modifications would take effect on Jan. 1, 2021.
The Bill also made some retroactive clarifications, particularly that employers which received a PPP loan may still qualify for the credit with respect to wages that were not paid with forgiven PPP loan proceeds.
Credit for Paid Sick and Family Leave
The Families First Coronavirus Response Act provided for a payroll tax credit for certain small employers equal to the wages paid to employees who could not work because the employee was quarantined, had to care for an individual who was quarantined or had to care for a child whose school or care provider was closed or if the employee was unable to work for a variety of COVID-19 health reasons. The Bill extends the credit through March 31, 2021.
The Bill also extends the Employer Credit for Paid Family and Medical Leave (Internal Revenue Code section 45S) to qualified wages paid through 2025.
Temporary Full Deduction for Business Meals
The Bill provides a 100-percent deduction for business meal food and beverage expenses provided by a restaurant that paid or incurred before Jan. 1, 2023. Current legislation limits these expenses to 50-percent deductibility.
Note that this does not change the current treatment of business entertainment expenses, which are not tax deductible.
Employee Payroll Tax Deferral
President Trump previously signed an Executive Memorandum on August 8, 2020 to allow certain employees to defer their share of the 6.2-percent Social Security Tax on wages received between Sept. 1, 2020 and Dec. 31, 2020. The deferred tax would have to be repaid ratably from Jan. 1, 2021 thru April 30, 2021.
The Bill extends the due date of deferral repayment from April 30, 2021 to Dec. 31, 2021.
The Bill does NOT forgive the amounts deferred. It merely pushes back the timeline in which the deferred tax has to be repaid. Additional legislation would be needed to forgive the deferred amounts, and it is unclear at the moment whether Congress will take action.
Direct Stimulus Payments
The Bill provides direct payments to eligible individuals, similar to the payments provided under the CARES Act, with some modifications. The direct payments are $600 for a single taxpayer, $1,200 for joint filers and $600 per dependent child. The credit phases out beginning at $75,000 of modified adjusted gross income for single taxpayers, $112,500 for head-of-household filers and $150,000 for joint filers at a rate of $5 per $100 of income. (The CARES Act provided payments of $1,200 for single taxpayers, $2,400 for joint filers and $500 per child dependent, subject to the same phase-out thresholds that are proposed under the Bill.)
The Bill extends for one year (through 2021) the $300 charitable contribution above-the-line-deduction for non-itemizers that was established in the CARES Act and was set to expire the end of 2020. It also doubles the above-the-line deduction for 2021 for married couples filing jointly, from $300 to $600. Additionally, the bill extends the increased limits on deductible cash contributions through 2021, from 60 to 100 percent of Adjusted Gross Income, for individuals who itemize deductions.
In addition to the items discussed above, the Bill extended a number of expiring tax provisions, including the New Markets Tax Credit, Work Opportunity Credit, energy credits, the exclusion from gross income of discharge of qualified principal residence indebtedness and many other provisions.
Please consult your GHJ tax advisor to discuss how the provisions above, as well as the multitude of tax extenders, may apply to you or your business. GHJ will continue to monitor this matter and to provide updates as needed.