New COVID-19 Relief Bill Contains Numerous Tax-Related Provisions
This article has been updated since original date of publication.
The latest round of economic stimulus legislation is included within the Consolidated Appropriations Act, 2021, which was passed by Congress on Dec. 21, 2020 and signed into law by the president on Dec. 27, 2020. This is a massive piece of legislation that includes all manners of government funding, expansion of the Paycheck Protection Program (PPP), additional unemployment insurance benefits, and more.
Tax Treatment of PPP-Related Expenses
The legislation provides a full deduction for otherwise deductible expenses that were utilized to achieve PPP loan forgiveness. This overrides the IRS ruling that such expenses would be nondeductible. The legislation also confirms that PPP loan forgiveness that is excluded from income will be treated as tax-exempt income for basis purposes thereby allowing partners in a partnership to increase the tax basis in their partnership interest and shareholders of an S corporation to increase the tax basis in their stock.
Read KSM’s summary of PPP-related provisions, including availability of a second round of PPP loans.
Extended and Expanded Employee Retention Payroll Tax Credit
The CARES Act provided for an employee retention credit (ERC) against payroll tax liabilities for eligible employers paying qualified wages through Dec. 31, 2020.
The legislation extends the ERC to include wages paid through June 30, 2021. Furthermore, the legislation expands the credit to have broader applicability to more employers for the first two quarters of 2021. The ERC is expanded in the following manner:
- The credit amount is increased from 50% of qualified wages to 70% of qualified wages.
- Qualified wages per employee will be $10,000 per quarter rather than $10,000 annually. Thus, the maximum credit will be $7,000 per employee per quarter for 2021 rather than the 2020 maximum credit of $5,000 per employee for the year.
- Employers are eligible employers if they experience a decline in gross receipts. The gross receipts test is changed to a decline in gross receipts of more than 20% as compared to the same quarter in 2019.The previous test was a decline of more than 50%.
- There is a new safe harbor election that allows employers to determine the gross receipts test based on the prior quarter rather than looking back to 2019.
- Employers are also eligible employers if their business operations are fully or partially suspended during the quarter due to order from a governmental authority due to COVID-19. This is a continuation of the previous law rather than an additional expansion.
- The definition of qualified wages was previously narrowed to wages paid to employees who were not performing services for employers that averaged more than 100 full-time employees in 2019. This threshold has been increased to an average of more than 500 full-time employees. Thus, the credit will have broader utility to employers in the 100 to 500 employee range.
The legislation also provides that employers who received a PPP loan can also claim the ERC with respect to wages that are not paid for with forgiven PPP proceeds. Thus, any wages for which an ERC was calculated is not a forgivable expense under the PPP program. This provision is effective retroactively to the enactment date of the CARES Act.
Stimulus Payments to Individuals
Eligible individuals will receive a second round of stimulus checks. The stimulus amount is $600 per eligible individual ($1,200 for married couplies filing a joint return), plus $600 per qualifying child. The amount begins to phase out for individuals with income exceeding $75,000 ($112,500 in the case of head of household filers, and $150,000 in the case of married filing joint filers). The phase out is 5% of income in excess of the threshold amounts.
Eligible individuals must have provided valid Social Security numbers to be eligible for the stimulus payments. The payments will be automatically issued based on 2019 tax return information and will be direct deposited if direct deposit information was provided on the 2019 tax return. The Treasury believes that payments may be issued as early as the week of Dec. 28, however, it will take several weeks for all payments to be issued.
These stimulus payments are actually advanced payments of new 2020 tax credits. Thus, individuals that do not receive an advanced payment but are otherwise eligible can receive this benefit by claiming the appropriate credit amount on their 2020 tax return.
Other Key Tax Provisions
- A 100% deduction is allowed for business meals (food and beverages only) provided at a restaurant during 2021 and 2022. This deduction was previously limited to a 50% deduction.
- There is no AGI limitation for cash contributions made by individuals to public charities during 2020 and 2021. This provision was previously applicable only to 2020.
- Individuals that do not itemize their deductions can claim a charitable contribution deduction for cash contributions to public charities made in 2021 of up to $300 ($600 in the case of a joint return). The CARES Act allows for a similar deduction of up to $300 (no increase for a joint return) for 2020.
- The depreciable life for certain residential rental properties held by electing real property trades or business for purposes of Section 163(j) is reduced from 40-years to 30-years. This provision applies to residential real property placed in service prior to 2018.
- Employers are required to pay emergency paid sick leave and emergency paid family leave pursuant to the Families First Act through March 31, 2021. Thus, employers will continue to be eligible to claim payroll tax credits attributable to these wages through March 31, 2021.
- Farmers can retain a two-year net operating loss carryback and/or revoke a previous waiver of the carryback with respect to net operating losses arising in 2018, 2019, or 2020.
The legislation also extends dozens of provisions that were set to expire.
Provisions that were made permanent include:
- The threshold for itemized deductions of unreimbursed medical expenses is 7.5% of AGI
- The Section 179D deduction for energy efficient improvements to commercial buildings
- The exclusion of certain benefits provided to volunteer firefighters and emergency medical responders
- The deduction for higher education expenses is repealed and the phaseout rules for the American opportunity tax credit and Lifetime Learning credit are coordinated into a single phaseout
- The credit for railroad track maintenance expenditures is made permanent
Provisions that were extended through 2025 include:
- Look-thru rule for related controlled foreign corporations
- New Markets Tax Credit
- Work Opportunity Credit
- Exclusion from gross income for discharge of qualified principle residence indebtedness. However, the maximum exclusion amount is reduced to $750,000 (or $375,000 for married filing separate taxpayers).
- Seven-year recovery period for motorsports entertainment complexes
- Accelerated expensing rules for qualified film, television, and theatrical productions
- The exclusion of employer payments of employee student loans pursuant to a Section 127 program
- Extension of the beginning of construction date for certain qualified facilities in determining the carbon oxide sequestration tax credit
Other extended provisions include:
- The treatment of mortgage insurance premiums as deductible qualified residence interest subject to certain phase-outs is extended through 2021
- Classification of certain race horses as three-year property is extended through 2021
- There are a variety of renewable energy credits that have been extended beyond 2020
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