Tax considerations due to the CAA for banking and financial institutions

Authored by Joseph Vermeulen and Mary Miske

The Consolidated Appropriations Act, 2021 (CAA), which was signed into law in late December, included the COVID-related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). The bill comprised another round of stimulus packages and tax provisions for businesses and individual taxpayers, several of which had originated in the Coronavirus Aid, Relief and Economic Security (CARES) Act that was signed into law in March 2020. The following are highlights of the CAA most pertinent to banking and financial institutions, and their executives.

Stimulus package

Additional funding for the Payroll Protection Program (PPP)

The CAA provided a second round of PPP loans more targeted toward small businesses particularly affected by the coronavirus pandemic. The bill assigned $284 billion to the Small Business Administration to supply PPP loans of up to $2 million per eligible business. To qualify for a second loan, businesses must have fewer than 300 employees and have incurred a 25% revenue loss in any quarter in 2020, compared to same quarter in 2019 or experienced a reduction in annual gross receipts of 25% or more in 2020 compared to 2019 (if the business was in operation in all four quarters in 2019). The CAA also allows for small 501(c)(6) organizations that have 150 or fewer employees and are not lobbying organizations to apply for PPP loan funding.

Please note, the new funding is also available to first time applicants under most of the original rules. A company or nonprofit organization must generally have 500 or fewer workers, although companies in some industries can qualify with more. The applicant must also certify that “current economic uncertainty makes this loan request necessary” to support continuing operations. Applicants must have been in operation on Feb. 15, 2020, to qualify. Self-employed business owners, including independent contractors, are also eligible for loans, but a rule imposed by the Small Business Administration requires sole proprietorships to have shown a profit on their 2019 tax return to qualify.

In addition, a streamlined forgiveness process was created for borrowers with loans of $150,000 or less.

Individual tax rebates

The CAA also authorized a second round of stimulus checks to individuals and qualifying children. While the second round is half of that authorized under the CARES Act, it allows for up to $600 per individual and qualifying children, subject to income thresholds. The payment amounts start to phase out at $75,000 for individual filers and $150,000 for married couples filing jointly. 

Unemployment benefits

The CAA extends the $300 per week federal unemployment subsidy payment through March 14, 2021.

Business tax provisions

Expenses funded by forgiven PPP loans

A recent popular topic associated with PPP loans was the deductibility of expenses funded with forgiven loan proceeds. The IRS and Treasury Department guidance issued in 2020 stated these expenses were not deductible for federal income tax purposes. However, the CAA overrides this previous guidance and allows otherwise deductible expenses funded by PPP loans to be deducted for federal income tax purposes. Please consult your tax advisor regarding treatment of these expenses for state tax purposes.

Employee retention credit (ERC)

The ERC was created by the CARES Act as a way to encourage businesses to keep employees on their payroll if an eligible employer had been financially impacted by the pandemic. The CARES Act limited the credit to 50% of qualifying wages paid from March 2020 to Dec. 31, 2020 (with qualifying wages limited to $10,000). The CAA retroactively eliminated the CARES Act prohibition on PPP recipients from claiming an ERC. In addition, the CAA made a handful of prospective changes for the period after Dec. 31, 2020, that are beneficial to businesses, including: 

  • The credit increased to 70% of wages (up from 50%);
  • The limit of $10,000 per employee per year was changed to $10,000 per employee per calendar quarter, and is applicable to wages paid from Jan. 1, 2021, through June 30, 2021; and
  • To be eligible, an employer must carry on a trade or business during the first quarter and second quarter of 2021 and experience either:
    – a full or partial suspension of operations due to COVID-19 as a result of governmental order, or
    – the business experienced either: 
    more than 20% reduction (down from 50%) in gross receipts in the current calendar quarter compared to the same calendar quarter in 2019 or
    more than 20% reduction in gross receipts in the immediately preceding calendar quarter compared to the same calendar quarter in 2019. 
  • The CAA also changed the definition of a large employer to those with more than 500 employees (up from more than 100 employees.)

Business meals

Dating back to 1993, 50% of the associated costs of business meals have been deductible, assuming they meet the proper business requirements under Internal Revenue Code section 274(k). Due to the restaurant industry practically having to shut down as a result of the pandemic, the CAA included a provision that business meals will be 100% deductible if the food or beverages are provided by a restaurant in 2021 or 2022. Congress will need to provide further guidance on the definition of “restaurant.” 

Tax credit extensions

The CAA includes provisions to extend various tax credits without other changes, including but not limited to: 1) the New Markets Tax Credit, 2) the Work Opportunity Tax Credit, and 3) the employer credit for paid family and medical leave provided by the Tax Cuts and Jobs Act of 2017 (TCJA).

The CAA also extends the credits provided by the Families First Coronavirus Response Act against the employer portion of OASDI for qualifying sick and family paid leave before April 1, 2021.

Individual tax provisions

Charitable contributions

As a result of the TCJA, for many individual taxpayers, the benefit of itemized deductions on a personal tax return may have been replaced by the increased standard deduction due to the limitation of the state tax deduction. The CARES Act created a temporary tax change that allowed individual taxpayers to claim an above-the-line deduction up to $300 for qualified charitable donations made before Dec. 31, 2020. The CAA extended this temporary provision to 2021 returns and increased the deduction allowed on a joint return to $600. In addition, in response to the pandemic, the CARES Act increased the limit on cash charitable contributions by an individual in 2020 to 100% of the individual’s adjusted gross income (AGI). The CAA extended this rule through 2021.

Mortgage insurance premium deduction extended

The CAA also extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to phase out based on the taxpayer’s AGI. 

Flexible spending arrangement (FSA) carryovers

Individuals who established an FSA for either health or dependent care are familiar with the idea of “use it or lose it.” Generally, employers may offer one of two options, although they are not required to offer either. It can either (1) provide a grace period up to two and one-half months after the end of the plan year to use the money in the FSA, or (2) allow individuals to carry over $550 per year to use the following year. The CAA provided temporary rules related to FSA funds for 2020 and 2021. For plans that include a grace period, the grace period was extended to 12 months or, for plans that include a carryover of $550, the CAA expanded this to be any unused funds. 

Extension of exclusion for certain employer payments of student loans

Eligible student loan repayments by an employer will continue to be eligible for the annual maximum $5,250 education assistance income exclusion through 2025.

Qualified principal residence indebtedness

The exclusion from income of a discharge of qualified principal residence indebtedness was extended to such discharges before Jan. 1, 2026. However, the $2 million limit was reduced to $750,000 ($375,000 for married filing separate taxpayers.)

The above summarizes only a few of the provisions included in the CAA. Please contact your Baker Tilly tax advisor for additional information or clarification related to the CAA and its provisions.

For additional resources related to COVID-19 issues, or to learn how Baker Tilly’s banking and capital markets industry Value Architects™ can help, contact our team.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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