This article was updated January 5, 2021.
President Donald Trump on December 27, 2020, signed into law the Consolidated Appropriations Act, 2021 (the Act).
The Act includes the long-awaited COVID-related Tax Relief Act of 2020, which resolves a key area of contention related to the deductibility of PPP-funded expenses. It also includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 that extends or makes permanent numerous tax provisions.
Following is an overview of the key tax-related provisions.
PPP-funded Expenses Are Now Deductible
The Act overrides IRS guidance that provided no deduction was permitted for otherwise deductible expenses if the payment of such expenses results in forgiveness of a Paycheck Protection Program (PPP) loan.
Lawmakers from both parties supported that the original intent of the PPP loan provisions wasn’t to exclude the deduction of the PPP-funded expenses if the loan was forgiven, but the IRS took an alternative view based on existing tax law.
This provision resolves an area of contention between taxpayers, Congress, and the IRS. Importantly, state tax treatment of PPP-funded expenses will continue to vary depending upon each jurisdiction’s conformance to the Internal Revenue Code; the Coronavirus Aid, Relief, and Economic Security (CARES) Act; and the Consolidated Appropriations Act, 2021.
Tax Treatment Clarifications for Loan Forgiveness and Other Financial Assistance
In addition to the PPP, the CARES Act provided for direct financial assistance for existing Small Business Administration (SBA) borrowers, including direct Section 1112 payments of borrowers’ SBA 7(a) and 504 small business loans. The Act overrides recent SBA guidance that provided that this direct financial assistance would be treated as taxable income to borrowers.
This provision instead aligns the treatment of these payments with the treatment of forgiven PPP loans, treating financial assistance as tax-exempt income and permitting the deduction of related expenses by the borrower.
Additionally, it provides matching tax-exempt and deductible expense treatment for the forgivable portion of Economic Injury Disaster Loans (EIDL) Advance loans.
Additional 2020 Recovery Rebates for Individuals
The Act provides for a second round of recovery rebate payments. Eligible individuals will receive an additional tax credit, paid in advance, of up to $600—or $1,200 in the case of married filing joint taxpayers—plus $600 for each qualifying child.
Similar to the CARES Act, the credit is paid as an advance refund and calculated based on the taxpayer’s adjusted gross income (AGI) on its 2019 income tax return. To receive the full credit, taxpayers must have an AGI that doesn’t exceed:
- $75,000 for single filers
- $150,000 for married filing-joint filers
- $112,500 for head-of-household filers
The credit is phased out by 5% for every dollar AGI exceeds these thresholds. The Act clarifies that nonresident alien individuals and adult taxpayers who qualify as a dependent for tax purposes aren’t considered to be eligible individuals.
Employee Retention Tax Credit Extension, Expansion, and Clarification
The Act extends the employee retention tax credit eligibility period by six months to apply to qualified wages paid before July 1, 2021.
In addition, it increases:
- The allowable credit percentage from 50% of qualifying wages to 70% of qualifying wages
- The maximum allowable credit per employee from $10,000 for all calendar quarters to $10,000 for any calendar quarter
The Act also makes other favorable changes for taxpayers. These changes would apply to calendar quarters beginning after 2020. Other clarifications would retroactively apply to the effective date of the CARES Act.
Full Deductions for Business Meals
The Act provides for a 100% deduction for business meals, including delivery and carryout meals, provided by a restaurant for amounts paid or incurred between January 1, 2021, and December 31, 2022.
Extension of Employee Portion of Certain Deferred Payroll Taxes
The Act modifies Notice 2020-65, issued in response to the president’s August 8, 2020,, Executive Order permitting businesses to defer the employee-portion of payroll taxes incurred on wages paid between September 1, 2020, and December 31, 2020.
The Act extends the date for remitting postponed taxes from the period beginning January 1, 2021, and ending on April 30, 2021, to the new period beginning on January 1, 2021, and ending on December 31, 2021.
The employer, however, must still withhold and remit the applicable taxes ratably throughout the repayment period.
Increased Deductions for Charitable Contributions
The Act provides for an extension of the non-itemizer charitable contribution deduction to the 2021 tax year.
The maximum allowable charitable contribution deduction under this section remains $300, or $600 in the case of married filing joint taxpayers. However, there’s a corresponding increase in penalties related to underpayments attributable to overstating the non-itemizer charitable contribution deduction from 20% of the resulting understated tax to 50% of the resulting understated tax.
Separately, it also extends the increased 100% AGI limitation on charitable deductions from tax year 2020 to tax year 2021.
The Act extends or makes permanent numerous expiring provisions. A summary is included below.
Permanently Extended Provisions
- Reduction in medical expense deduction floor, from 10% to 7.5% of AGI
- Section 179D energy efficient commercial building deduction, with some prospective modifications
- Exclusion of qualified benefits for volunteer firefighters and emergency medical responders
- Repeal of qualified tuition deduction and increased income limitation for lifetime learning credit
- Railroad track maintenance credit, though the credit reduces to 40% for years beginning after 2022
- Reduction of excise taxes and simplified record-keeping requirements for beer, wine, and distilled spirits
- Refunds in lieu of reduced rates for certain alcohol produced outside the United States
Temporary Extensions Through 2025
- Look-through rule for related controlled foreign corporations
- New markets tax credit
- Work opportunity tax credit
- Exclusion from gross income for a discharge of qualified principal residence indebtedness, though maximum amount excluded is reduced from $2 million to $750,000
- Seven-year recovery period for motorsports entertainment complexes
- Expensing provisions for certain qualifying film, television, and theatrical productions
- Empowerment zone tax incentives, with some modifications
- Employer tax credit for paid family and medical leave
- Exclusion for certain employer payments of student loans
- Extension of carbon oxide sequestration credit
Temporary Extensions Through 2021
- Treatment of mortgage insurance premiums as qualified residence interest
- Credit for health insurance costs of eligible individuals
- Indian employment credit
- Mine rescue team training credit
- Classification of certain racehorses as three-year property
- Accelerated depreciation for business property on Indian reservations
- American Samoa economic development credit
- Second generation biofuel producer credit
- Nonbusiness energy property
- Qualified fuel cell motor vehicles
- Alternative fuel refueling property credit
- Two-wheeled plug-in electric vehicle credit
- Energy efficient homes credit
- Extension of excise tax credits relating to alternative fuels
- Black lung disability trust fund excise tax
- Production credit for Indian coal facilities
- Credit for electricity produced from certain renewable resources (construction must begin by end of 2021)
- Extension and phaseout of energy credit (through 2023)
- Extension of residential energy-efficient property credit and inclusion of biomass fuel property expenditures (through 2023, with credit reduction after 2022)
The Act also includes the following:
- An allowance for personal protection equipment (PPE) and cleaning supplies used to prevent spread of COVID-19 to be considered qualified educator expenses for purposes of the $250 deduction for teachers
- An election for taxpayers with farming losses to disregard certain net operating loss (NOL) carryback changes made by the CARES Act
- An extension through March 31, 2021, of the paid sick leave and paid family leave credits enacted as part of the Families First Coronavirus Response Act in March 2020, as well as additional modifications to those provisions
- Money purchase pension plans included in favorable CARES Act provisions related to retirement plan distributions for COVID-related expenses
- A one-time election to terminate the transfer period for qualified transfers from pension plan under Section 420
- Minimum 4% low-income housing tax credit rate
- Depreciation of pre-2018 residential rental property over 30-year period for taxpayers that made Section 163(j) real property elections
- Eligibility for waste energy recovery property for energy investment tax credit
- Extension of energy credit for offshore wind facilities
- Minimum rate of interest for certain determinations related to life insurance contracts
- Minimum age for distributions during working retirement
- Temporary rule preventing partial plan termination
- Temporary special rule for the determination of earned income
- Temporary expansions related to flexible spending accounts (FSA)
- Special disaster-related rules for use of retirement funds
- Employee retention credit for employers affected by qualified disasters
- Temporary suspension of limitations on charitable contributions associated with qualified disaster relief
- Special rules for qualified disaster-related personal casualty losses
- Increased low-income housing tax credit in qualified disaster zones
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To learn more about how these provisions could impact you or your business, contact your Moss Adams professional.