U.S. Capitol Building at sunset

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky

On Dec. 21, 2020, Congress passed additional stimulus legislation. The Consolidated Appropriations Act, 2021 (the Act), which funds the federal government for the next fiscal year, consists of several bills that together mark the fourth package enacted in order to provide continuing economic relief from the COVID-19 pandemic. The stimulus provisions in total have an estimated price tag of $900 billion. It is expected to be signed into law within the next few days.  

The legislative package also contains numerous tax-related items, including renewals of many popular tax extenders. Other provisions in this legislative package are: additional funding for and modifications to Paycheck Protection Program (PPP) loans (via the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act); an extension of the enhanced federal unemployment subsidy and resources for vaccine distribution; a second round of direct payments to many taxpayers; an extension of and revisions to the employee retention credit (ERC); and a temporary allowance for the full deductibility of business meals provided by restaurants.

The Act also overrides the Treasury Department’s guidance, allowing expenses funded by forgiven PPP loans to be deductible for federal income tax purposes.

Lawmakers on both sides of the aisle and President-elect Joe Biden also have discussed the need for additional stimulus legislation in 2021; however, the prospects for this coming together are unknown at this time.

Key provisions

Small business loans

The PPP receives additional funding, but this round is more targeted than the first version introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Designed to target small businesses that have been particularly affected by the pandemic, the new stimulus package includes:

  1. Directing $284 billion to the Small Business Administration (SBA) to fund additional loans of up to $2 million
  2. Targeting businesses with fewer than 300 employees and that have sustained a 25% revenue loss in any quarter in 2020 relative to the same quarter in 2019
  3. Allowing small 501(c)(6) organizations that have 150 employees or less and are not lobbying organizations to apply for funding

In addition, for loans that have not yet been forgiven, the Act extends the covered period for all first draw PPP loans up to March 31, 2021, and expands the list of expenditures eligible for forgiveness to include:

  • Supplier costs,
  • Software or cloud computing software that facilitates operations,
  • Costs related to property damage, vandalism or looting caused by public disturbances that occurred in 2020, that were not covered by insurance,
  • Investments in facility modifications and personal protective equipment, and
  • Other group insurance premiums were added to the list of payroll costs (previously, only group healthcare benefits were eligible premiums).

The Act also provides a streamlined forgiveness process for borrowers with loans of $150,000 or less.

Expenses associated with forgiven PPP loans

The CARES Act provided that if taxpayers used PPP loans for certain eligible expenses, those loans would be forgiven. Further, any forgiveness would be excluded from gross income. Treasury subsequently stated in Notice 2020-32 (reiterated in November in Revenue Ruling 2020-27 and Revenue Procedure 2020-51) that expenses funded with forgiven PPP loans would be nondeductible for federal income tax purposes. In a major win for taxpayers, the Act clarifies Congress’ previous intent that these expenses are deductible.

Employee retention credit

The payroll tax credit available to employers experiencing full or partial suspensions or significant declines in gross receipts has been extended to apply to qualifying wages paid through June 30, 2021. 

The Act also retroactively provides that recipients of PPP loans are eligible to claim the ERC. Plus, eligible healthcare expenses can be considered qualifying wages regardless of whether they are allocable to an employee’s salary. The Act separately excludes wages taken into account in computing the credit from a PPP loan borrower’s payroll costs. 

The Act also makes prospective changes to the credit, which include but are not limited to:

  • Increasing the amount of the credit to 70% of qualified wages from 50%
  • Increasing the cap on the amount of qualifying wages per employee to $10,000 per calendar quarter from $10,000 for the calendar year
  • An employer will qualify under the “gross receipts” test if their revenues in a calendar quarter are less than 80% of their revenues from the same quarter in 2019 (previously, revenues must have been less than 50% from the same quarter in 2019)
  • The employee limit for determining “small employer” status increasing to 500 employees from 100 employees

Individual tax rebates

Rebate checks of $600 per individual (including qualifying children) based on the earned income, Social Security benefits and retirement income of the taxpayer reflected on their 2019 returns. Check amounts will begin to phase out for individuals and couples earning $75,000 and $150,000, respectively.

100% business meals deduction

The Act allows 100% deductibility for expenses for business meals provided by restaurants incurred over the next two tax years (2021 and 2022). The 50% limitation dates back to 1993 and will again be effective in 2023.

Unemployment benefits

The Act extends the $300 per week federal unemployment subsidy payment for 10 weeks, through March 14, 2021.

Extender provisions

Many so-called “extender provisions” were set to expire on Dec. 31, 2020; however, the Act renews them through 2025. These include, but are not limited to the:

  • New Markets Tax Credit
  • Exclusion from gross income for discharged mortgage debt on qualified principal residences (though the maximum amount is reduced to $750,000 from $2 million)
  • Employer credit for paid family and medical leave

Some provisions were made permanent by the Act including:

  • Energy-efficient commercial building deduction under section 179D
  • 7.5% adjusted gross income (AGI) threshold for determining the deductibility of individual medical expenses

Other tax provisions

  • Taxpayers can use their earned income from 2019 to determine their earned income tax credit and refundable portion of the child tax credit.
  • For employers that participated in the voluntary tax holiday, the employee portion of the Social Security payroll tax deferral repayment period was extended until December 2021. The original payback period ran through the first four months of 2021.
  • Individuals that do not itemize their deductions can deduct up to $300 in charitable contributions in 2021. Originally, this was solely allowed for 2020 returns. The 100% AGI limit for cash contributions to a qualified charity, which was also set to expire at the end of 2020, is extended through 2021.
  • The payroll tax credits for paid sick and family leave provided by the Families First Coronavirus Response Act are extended through March 31, 2021.

Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.

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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