On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the CA Act). The CA Act enhances and expands certain provisions of the Coronavirus Aid, Relief, and Economic Security Act, also known as the “CARES Act”. Below is a summary of some of the major tax provisions included in the CA Act:
Provisions Impacting Businesses
Expenses Related to PPP Loans Are Now Deductible: One of the major provisions in the CARES Act included a loan forgiveness program under the Small Business Administration’s Paycheck Protection Program (the “PPP loan”). A PPP loan may be forgiven if its proceeds are used for “payroll costs” or certain other expenses. The CARES Act was silent on the deductibility of otherwise allowable payments of eligible expenses by a PPP loan recipient if the loan is later forgiven. And the IRS held that expenses that gave rise to PPP loan forgiveness were not tax deductible. The CA Act reverses this rule and permits taxpayers whose PPP loans are forgiven to deduct the expenses associated with their loans to the extent they would otherwise qualify as ordinary and necessary business expenses. This rule applies retroactively to the effective date of the CARES Act so that expenses paid using funds from PPP loans previously issued under the CARES Act are deductible, regardless of when the loan was forgiven.
The PPP Loan Program is Extended and Expanded to Allow Second Draw Loans: The CA Act provides $284 billion for loans under the Paycheck Protection Program to new and repeat borrowers who can certify need due to negative effects of COVID-19. The covered period for obtaining loans under the program has been extended from the prior deadline of December 31, 2020 to March 31, 2021. Recipients who received a PPP loan under the CARES Act would be allowed to apply for a second PPP loan equal to 2.5 times their average monthly payroll (during calendar year 2019) or the one-year period prior to the date the loan was made, up to a maximum of $2 million. To be eligible for full loan forgiveness under the second PPP loan, at least 60% of the loan must be spent on payroll over a covered period of eight to 24 weeks.
Employee retention tax credit modified and extended through June 30, 2021: The CARES Act provided an eligible employer with a refundable payroll tax credit equal to 50% of certain “qualified wages” (including certain health plan expenses) paid to its employees beginning March 13, 2020 through December 31, 2020 if the employer is engaged in a trade or business in 2020 and the wages are paid
- while operation of that trade or business is fully or partially suspended due to a governmental order related to COVID-19 (the “suspension test”) or
- during the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019. The employee retention tax credit can be used to offset all federal payroll taxes, including federal withholding tax, and the employer’s and employee’s share of social security tax and Medicare, but not the federal unemployment tax.
The CA Act makes several changes to the employee retention tax credit beginning on January 1, 2021 and through June 30, 2021:
- Increases the credit rate from 50% to 70% of qualified wages.
- Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
- Increases the limit on per-employee creditable wages from $10,000 for the year ($5,000 annual cap) to $10,000 for each quarter ($28,000 annual cap).
- Increases the 100-employee delineation for determining the relevant qualified wage base to 500 full-time employees.
- Allows certain public instrumentalities to claim the credit. Under the CARES Act, federal, state, or local government (and their agencies) were not eligible for the credit. The CA Act permits federal credit unions, public colleges and universities, and public medical and healthcare providers to receive the employee retention tax credit if they otherwise satisfy the requirements for the credit.
- Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers.
- Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.
PPP borrowers may receive Employee Retention tax credit. The CARES Act denied the employee retention tax credit to any employer that receives a loan under the PPP program. The CA Act permits an employer that receives a PPP loan to receive the employee retention tax credit with respect to wages that are not paid for with forgiven PPP proceeds.
Extension of credits for paid sick and family leave. The Families First Coronavirus Response Act provides an “eligible employer” with refundable payroll tax credits to cover wages paid to employees while they take time off under new paid sick and family leave programs between April 1, 2020 and December 31, 2020. The CA Act extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, through the end of March 2021.
100% Deduction for Business Meals. The Tax Cuts and Jobs Act of 2017 (the “TCJA”) limited the deductibility of business meal expenses to 50% of the cost for food and beverages provided by a restaurant. The CA Act permits businesses to deduct 100% of these business meals expenses during 2021 and 2022 tax years.
Extension of Look Through Rule for Related Controlled Foreign Corporations. Section 954(c)(6) of the Internal Revenue Code provides that dividends, interest, rents, and royalties received or accrued by a CFC from a related CFC will not be treated as “foreign personal holding company income” currently includible in the income of a United States shareholder under the subpart F regime so long as the source of such payment is not itself subpart F income or income that is effectively connected with a U.S. trade or business. This rule was scheduled to sunset on December 31, 2020, but the CA Act extends its application to taxable years of CFCs beginning before January 1, 2026 and to taxable years of United States shareholders with or within which such taxable years of CFCs end.
Provisions Impacting Individuals
Additional 2020 recovery rebates for individuals. This provision provides a refundable tax credit in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
Extension of certain deferred payroll taxes. On August 8, 2020, the President issued a memorandum to allow employers to defer withholding and payment of the employee’s portion of the Social Security tax if the employee’s wages are below a certain amount and paid during the period of September 1, 2020 through December 31, 2020. The presidential memorandum also required employers to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January 1, 2021 and April 31, 2021 with penalties and interest on deferred unpaid tax liability beginning to accrue on May 1, 2021. The CA Act extends the repayment period through December 31, 2021. Penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.
Increased Above-the-Line Charitable Contribution Deduction. The CARES Act allows taxpayers that do not itemize deductions to take an “above-the-line” deduction for charitable contributions of up to $300 to qualified charitable organizations in 2020. The CA Act extends the deduction through 2021 and doubles the deduction to $600 for married filers. The CA Act also provides that taxpayers that overstate the deduction will be subject to increased penalties (from 20% to 50%).
Application of special rules to money purchase pension plans. The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans. The CA Act clarifies that money purchase pension plans are included in the retirement plans qualifying for these temporary rules.
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We have presented a lot of new detailed information in this article pertaining to additional stimulus, PPP expansion and modifications, Employee Retention Credit, and various other tax provisions. Please contact your MKSH advisor so we can help you determine which benefits you or your business may be eligible for.