On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA, 2021) was signed into law by the President. The CAA, 2021 is the fourth major relief legislation enacted in response to the coronavirus pandemic. Some of the provisions, as you will read below, grant retroactive relief to 2020.
Paycheck Protection Program Loans
The Paycheck Protection Program (PPP) that began with the 2020 CARES Act was extended, with some provision modifications. The Act clarifies the deductibility of ordinary and necessary business expenses paid with PPP loans, even when all or a portion of the loan is forgiven, and it expands the definition of expenses qualifying under the loan program. This applies retroactively to include loans under the CARES Act.
For more information on the updated PPP loan provisions, see Need another PPP loan for your small business? Here are the new rules from January 6, 2021.
Employee Retention Credit
The CARES Act introduced this refundable credit, which was significantly liberalized in the new legislation.
Note: PPP borrowers were not eligible for the employee retention credit under the CARES Act but are now eligible under the new legislation, retroactively to 2020, but only with respect to wages not paid with forgiven PPP loan proceeds.
In general, the 2020 credit remains available to businesses with full or partial suspension by government order of operations or those whose gross receipts declined more than 50% compared to the same quarter of the prior year. The 2020 credit is available for 50% of compensation (wages and certain healthcare expenses) paid from March 13, 2020, to December 31, 2020. The 2020 credit is limited to the first $10,000 of compensation per employee per year. Note that no changes were made to the 2020 credit in the CAA, 2021, other than making the 2020 credit available to businesses that obtained a PPP loan.
The significantly enhanced 2021 credit is available to businesses with full or partial suspension by government order of operations, or those whose gross receipts decline by more than 20% compared to the same quarter of 2019 (not 2020). The 2021 credit is available for 70% of the compensation paid from January 1, 2021 to June 30, 2021. The 2021 credit is limited to the first $10,000 of compensation per employee per quarter.
After applying the above limitations, the maximum 2020 credit available is $5,000 per employee for all of 2020. The maximum 2021 credit available is $7,000 per employee, per quarter, from January 1, 2021, to June 30, 2021. The 2020 credit, if not previously claimed, may be claimed on the 2020 fourth-quarter Form 941 (due February 1, 2021) or by filing amended quarterly Forms 941 for the applicable quarters in 2020. The 2021 credit may be claimed on the 2021 first and second quarter Forms 941.
Delayed Payment of Payroll Tax
In August 2020, President Trump signed a memorandum allowing employers to delay payment of the employee portion of certain payroll taxes. This was available for employee wages less than $4,000 for any biweekly period between September 1, 2020, and year-end. Repayment was to be between January 1, 2021 and April 30, 2021. The repayment period has been extended to December 31, 2021.
In March of 2020, a requirement was enacted in some circumstances for paid sick and family leave. The Department of Labor issued regulations and then revised those regulations. “U.S. Department of Labor Revises Regulations to Clarify Paid Leave Requirements under the Families First Response Act,” News Release, September 11, 2020. Employers receive a refundable tax credit for such payments. This credit was extended through March 31, 2021.
Employers may not be required to make payments for the first three months of 2021. But if they do, they should be eligible for this credit.
Business meals are generally 50% deductible. Under this new legislation, business meals provided by restaurants are now 100% deductible in 2021 and 2022. The meals must be consumed either at the restaurant or via takeout/delivery. Entertainment expenses remain non-deductible.
The Work Opportunity Tax Credit was extended through 2025. The credit focuses on targeted groups that have faced barriers to employment.
The Section 179D deduction related to energy-efficient commercial buildings was made permanent.
In response to the pandemic, the IRS is permitting employers that qualify to switch from the lease valuation rule to the cents-per-mile method in 2020 beginning on March 13, 2020 and continuing through 2020. Previously, employers that used the automobile lease valuation method were not permitted to change to the cents-per-mile method.
As passed, the new legislation provides for 2021 refundable tax credits (stimulus payments) of $600 per individual, plus $600 per qualifying child (dependents, 16 and younger). While many have pushed for increased payments, the higher amount has not prevailed as of this publication. The credits phase out for single filers with an adjusted gross income of $75,000 to $99,000, or $150,000 to $198,000 for married couples filing jointly. These stimulus payments are not taxable.
Over and above state benefits, there is an additional $300 per week available through March 14, 2021. The supplement was $600 per week under the expired provision. Unemployment benefits are taxable.
This Act extends through 2021 the CARES Act provision which allowed 2020 cash contribution deductions to qualified charities without regard to the normal Adjusted Gross Income (AGI) limitations. For C corporations, the CARES Act also increased the deductibility of such contributions to 25% of taxable income. This increased deduction limit for Corporations that applied to 2020 now also applies to 2021.
The above-the-line deduction for non-itemizers was $300 for 2020. This is extended to 2021, but joint return non-itemizers are now entitled to deduct up to $600 in 2021.
Medical expenses must exceed 7.5% of Adjusted Gross Income (AGI) to be deductible (this was previously scheduled to increase to 10% of AGI after 2020). The CAA, 2021 makes the 7.5% threshold permanent.
The new legislation extends through 2025 an exclusion from taxable income for home mortgage discharge of indebtedness (subject to limitations).
The CARES Act excluded up to $5,250 of employer-made student loan repayments from taxable income. This was set to expire after 2020. This provision was extended through 2025 under the CAA, 2021.
Education-related tax benefits are scheduled to change after 2020. The new legislation repeals the deduction for qualified tuition and fees in favor of expanding the income limits of the Lifetime Learning Credit (so the phaseout limits match the American Opportunity Credit), effective beginning in 2021.
The nonbusiness energy property credit is extended by one year. A credit is available for purchases of “nonbusiness energy property” (qualifying energy improvements to a taxpayer’s main home). The new legislation extends this credit, which was due to expire at the end of 2020, through 2021.
The residential energy-efficient property credit is extended by two years. Individual taxpayers are allowed a tax credit, known as the residential energy efficient property credit, equal to the applicable percentages of expenditures for certain property, including qualified solar electric property and qualified solar water heating property. This credit was due to expire at the end of 2021, with a phase-down of the credit during 2020 and 2021. The new legislation extends the phase-down period of the credit by two years-through the end of 2023, after which the credit won’t apply.
Note: Arizona has not yet conformed to the provisions of the CAA, 2021.
The 5,593 pages in the new law are said to be the fifth-largest bill in the country’s history. The massive text has been characterized as a spending bill, but as highlighted above, it does have important tax aspects.
Despite “2021” in the Act’s name, the overall tenor of the late-2020 tax legislation is tax relief with important 2020 aspects. Other than the stimulus program, the relief generally targets particular taxpayers and industries most impacted by COVID-19. As we enter 2021, additional near-term tax legislation seems likely, with a presumed focus on continuing to assist those most impacted by the pandemic.