Sunday night, after allowing various benefits to lapse, President Trump signed the $2.3 trillion omnibus spending and COVID-19 relief bill (Consolidated Appropriations Act, 2021 (CAA), which includes the COVID-related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The following highlights some of the tax provisions in the CAA.

Deductibility of Expenses Paid with Paycheck Protection Program Loan Proceeds

After the enactment of the CARES Act, many businesses rushed to obtain Paycheck Protection Program (PPP) loans. The PPP loan program experienced a number of hiccups and administrative issues. However, recipients knew that if they complied with certain rules, the loan would be forgiven, and that forgiveness would not give rise to a tax bill.  However, the IRS unexpectedly issued guidance disallowing a deduction for any expenses that are paid for using proceeds of a PPP loan that is eventually forgiven, even if the loan forgiveness occurs in a year subsequent to the year the expenses were incurred.

The CAA overrules the IRS’ guidance and provides that expenses that are paid for using forgiven PPP loan money are deductible. 

A&M Insight: Taxpayers that have received PPP loans and have made estimated tax payments for 2020 on the basis that they could not deduct the expenses that were paid using the PPP loans should revisit their calculations. It is possible that taxpayers could reduce their next estimated tax payment or be entitled to a refund.

Employment Tax Provisions

The CAA modifies several of the employment tax provisions that were included in the Families First Coronavirus Response Act (FFCRA) and the CARES Act.

Extended FMLA and Sick Leave

As part of the FFCRA, employers with fewer than 500 US employees had to provide Family and Medical Leave Act and paid sick leave related to COVID-19 until December 31, 2020. The FFCRA also provided employers payroll tax credits that partially cover the leave expenses. Under the CAA, employers are allowed, but not required, to provide the FFCRA paid leave through March 31, 2021 and if they do, they will be entitled to the FFCRA payroll tax credits.

Employee Retention Credit Extension and Modification

Under the CARES Act, eligible employers (except those receiving a PPP loan) were entitled to a refundable credit equal to 50% of the qualified wages (up to $10,000) of each employee if their operations were fully or partially suspended due to the impact of COVID-19, or if they suffered significant economic loss due to shutdowns. Qualified wages were limited to those paid after March 12, 2020 and before January 1, 2021 and the amount of qualified wages differs based on the employer’s number of employees.

Under the CAA, eligible employers that received a PPP loan are eligible for the employee retention credit, retroactive to the enactment of the CARES Act.  Additionally, the CAA extended the employee retention credit to apply through June 30, 2021, and increased the benefits of the credit for 2021 by:

• Reducing the revenue decline threshold necessary for an employer to qualify (from 50% of gross receipts to 20% of gross receipts on a comparable year-over-year basis);
• Increasing the amount of the credit by:
  • Increasing the maximum amount of wages that qualify for the credit (from $10,000 of wages per employee per year to $10,000 of wages per employee per quarter) and
  • Increasing the percentage of qualified wages that generate a credit (from 50% of qualified wages to 70% of qualified wages);
• Increasing the number of employees that would characterize a “large employer” for purposes of determining the relevant qualified wage base (from 100 employees to 500); and

• Allowing businesses that have been in existence for less than one year to claim the credit.

A&M Insight: Because of the changes to the employee retention credit, taxpayers that have not claimed the credit because they had received a PPP loan can now request a refund of the credit.  Additionally, with the various changes made for 2021, employers should re-evaluate the amount of employee retention credit that they will qualify for.

Longer Repayment Period for Employees who Postponed Payment of Payroll Taxes

As a result of the President’s August 8, 2020, Executive Order, which was previously discussed here, certain employers are able to defer the withholding and payment of the employee portion of their Social Security taxes on wages and compensation paid between September 1 and December 31, 2020. Employees who benefit from this grace period were originally obligated to have the postponed taxes withheld “ratably” from wages and compensation paid between January 1 and April 30, 2021. However, the CAA extends the due date for these taxes from April 30 to December 31, 2021, and as a result, employers must withhold “ratably” from wages and compensation paid between January 1 and December 31, 2021.

Temporary Rule Preventing Partial Qualified Plan Termination

The CAA extends through March 31, 2021, the period during which the population covered by qualified plans may fall below 80% of the previously covered workforce without triggering a partial plan termination.

Energy Tax Provisions

The CAA makes significant changes to the energy tax credits, including those for wind, solar, and carbon capture. For onshore and offshore wind projects, the CAA extends the current 60% production tax credit (PTC) by another year, giving new projects that begin construction in 2020, and enter service on time, a PTC of 1.5 cents per kilowatt-hour for 10 years. The CAA also gives offshore wind projects the option of electing into the full 30% investment tax credit (ITC) so long as they begin construction by 2025. The CAA extends the solar ITC at the current rate of 26% for two years, delaying the phasedown to the 22% rate until 2023 and delaying the reversion to the permanent 10% rate until 2024. Lastly, the CAA gives carbon-capture projects an additional two years to begin construction, and now allows tax credits for projects that begin by 2025.

A&M Insight: Considering the significant changes the CAA makes to a number of energy tax credits, taxpayers should revisit their planning to determine whether they may benefit from accelerating certain investments to better leverage time-limited tax incentives, while taking into account that the CCA does not impact the IRS’ continuity requirements, which generally require a project to be placed into service within four years of beginning construction.

Other Tax Provisions

Look-Through Rule for Related Controlled Foreign Corporations (CFCs)

The CAA extends through December 31, 2025, the look-through rule under section 954(c)(6), which provides that dividends, interest, and other passive payments between related CFCs are not foreign personal holding company income under subpart F.

Temporary Allowance of Full Deduction for Business Meals

The CAA temporarily repeals the TCJA changes to the deductibility of business meal expenses that are provided by a restaurant, increasing the deduction for those expenses from 50% to 100% for 2021 and 2022. Business meals are not provided by a restaurant remain subject to a 50% limitation and entertainment expenses generally remain nondeductible.

Individuals Receive Second Round of Direct Payments

The CAA provides a second round of refundable credits for individual taxpayers against their 2020 tax liability in the amount of $1,200 for married couples (MFJ) and $600 for all other taxpayers, increased in each case by $600 for each qualifying child.

The CAA retains the phaseout rules from earlier this year, with complete phaseout being reached sooner because of the smaller credit amount. Specifically, the amount of the credit will be reduced (but not below zero) by 5 percent (i.e., by $5 for every $100) of the taxpayer’s adjusted gross income (AGI) that exceeds:

• $150,000 if the taxpayer’s status is MFJ, with a complete phaseout if his or her AGI is $174,000;
• $112,500 if the taxpayer’s status is Head of Household, with a complete phaseout if his or her AGI is $124,500; and
• $75,000 for all other taxpayers, with a complete phaseout if his or her AGI is $87,000.

Additional Tax Provisions Made Permanent or Extended Through 2025

Other tax provisions that the CAA makes permanent include:

• Short-line rail maintenance credit, at a reduced credit rate of 40%; and
• Excise tax relief for beer, wine, and distilled spirits.

Other tax provisions that the CAA extended for five years include:

• New markets tax credit;
• Work opportunity credit;
• Exclusion from gross income of the discharge of qualified principal residence indebtedness, up to $750,000;
• Expensing rules for certain film and television production costs; and
• Empowerment zone tax incentives.

A&M Taxand Says

After several canceled signings, the fact that President Trump actually signed the bill is a welcome surprise (although many had initially assumed that it was a foregone conclusion).  With that said, Democrats and President-elect Biden have already called for the next round of COVID-19 relief negotiations to begin. To that end, the House passed a bill last night that would increase the amount of the direct payments from $600 to $2,000. With many experts anticipating a surge in cases, notwithstanding the beginning of the roll-out of the vaccine, this may be the first challenge the new Administration will face.