On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (the Act). The Act contains both the COVID-Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The Act also extends various expiring provisions, and expands previous COVID-19 tax relief. Read more about provisions affecting businesses below. Click here to learn about provisions affecting individual taxpayers.
- Payroll Protection Program (PPP) Second Draw Loans. The Act permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP Second Draw Loan of up to $2 million.
- To be eligible, businesses:
- Must have previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
- Employ no more than 300 employees; and
- Can demonstrate at least a 25% reduction in gross receipts in the comparable quarters in 2019 and 2020.
- Loan terms. For most borrowers the maximum loan amount of a Second Draw PPP Loan is 2.5x average monthly 2019 or 2020 payroll costs (up to $2 million). However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs.
- Loan forgiveness. As with First Draw PPP loans, PPP Second Draw Loans may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of the loan is not included in income as cancellation of indebtedness income.
- Borrowers can apply for a Second Draw PPP Loan until March 31, 2021, through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, eligible non-bank lender, or Farm Credit System institution that is participating in PPP.
- Clarifications of tax consequences of PPP loan forgiveness – The Act clarifies that the non-taxable treatment of Payroll Protection Program (PPP) loan forgiveness that was provided by the CARES Act also applies to certain other forgiven obligations.
Also, the Act clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds and that the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
- Waiver of information reporting for PPP loan forgiveness – The Act allows IRS to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations.
- Extensions and modifications of earlier payroll tax relief – The Act extends the CARES Act credit, allowed against the employer portion of the Social Security payroll tax or of the Railroad Retirement tax, for qualified wages paid to employees during the COVID-19 crisis. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit rate is increased from 50% to 70% of qualified wages and qualified wages are increased from $10,000 for the year to $10,000 per quarter. Many other rules are also relaxed. The Act also makes some technical improvements and retroactive clarifications to the credit as originally enacted.
The Act extends (1) the credits provided by the Families First Coronavirus Response Act (FFCRA) against the employer portion of OASDI and Railroad Retirement taxes for qualifying sick and family paid leave and (2) the equivalent FFCRA-provided credits for the self-employed against the self-employment tax. Under the extension of the employer credits, wages considered are those paid before April 1, 2021 (instead of January 1, 2021). Under the extension of the credits for the self-employed, the days considered are those before April 1, 2021 (instead of January 1, 2021).
Additionally, the Act directs IRS to extend the Presidentially ordered deferral of the employee’s share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to $4,000 every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four-month period ending on April 30, 2021).
- Employee benefits – The Act allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022 instead of being subject to the 50% limit that generally applies to business meals.
The Act temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code).
- Tax provisions made permanent (without other changes) – The Act makes permanent without other changes (1) the railroad track maintenance credit and (2) the exclusion of the aging period in determining the mandatory interest capitalization period in producing beer, wine or distilled spirits.
- Farmers’ net operating losses – The Act allows farmers an election, for those that had in place a two-year net operating loss carryback before the CARES Act, to retain the two-year carryback period rather than claim the five-year carryback as allowed under the CARES Act. The Act also allows farmers to revoke, if they previously elected, the waiver of the carryback of a net operating loss.
- Low-income housing credit. The Act provides a 4% per year credit floor for buildings that aren’t eligible for the 9% per-year credit floor.
- Disaster relief –The Act includes several provisions aimed at “qualified disaster areas,” some of which affect individuals and some which affect businesses as described below. “Qualified disaster areas” are areas for which a major disaster was Presidentially declared during the period beginning on January 1, 2020 and ending 60 days after the day of enactment of the Act. The incidence period of the disaster must begin after December 27, 2019 but not after the day of enactment of the Act. Excluded are areas for which a major disaster was declared only because of COVID-19.
The relief includes relief for retirement funds that consists of the following: (1) waiver of the 10% early withdrawal penalty for up to $100,000 of certain withdrawals by individuals living in a qualified disaster area and that have suffered economic loss because of the disaster (qualified individuals), (2) a right to re-contribute to a plan distributions that were intended for home purchase but not used because of a qualified disaster, and (3) relaxed plan loan rules for qualified individuals.
The relief also provides to employers in the harder-hit parts of a qualified disaster area an up-to-$2,400-per-employee employee retention credit, subject to coordination with certain other employer tax credits. Generally, tax-exempt organizations can enjoy the credit by taking it as a credit against FICA taxes.
Corporations are provided with relaxed charitable deduction rules for qualified-disaster-related contributions, and individuals are provided with relaxed loss allowance rules for qualified-disaster-related casualty.
- Energy provisions – The Act makes changes to energy provisions in addition to making them permanent or extending them.
The Act adds “waste energy recovery property” to the types of property that qualify for the Code Sec. 48 credit (above). And the credit rate assigned is 30%.
The Act makes permanent the energy efficient commercial buildings deduction.
- Tax provisions extended (without other changes) – The Act extends the following tax credits without other changes:
- the new markets tax credit,
- the work opportunity credit,
- the employer credit for paid family and medical leave that was provided by the 2017 Tax Cuts and Jobs Act,
- the carbon sequestration credit,
- the business energy credit (the “Code Sec. 48 credit”),
- the credit for electricity produced from renewable resources (the “Code Sec. 45 credit”) and the election to claim the Code Sec. 48 credit instead for certain facilities,
- the Indian employment credit,
- the mine rescue team training credit,
- the American Samoa development credit,
- the second-generation biofuel producer credit,
- the qualified fuel cell motor vehicle credit as applied to businesses,
- the alternative fuel refueling property credit as applied to businesses,
- the two-wheeled plug-in electric vehicle credit as applied to businesses,
- the credit for production from Indian coal facilities, and
- the energy efficient homes credit.
Additional provisions extended by the Act without other changes are the following:
- the exclusion from employee income of certain employer payments of student loans,
- the 3-year recovery period for certain racehorses,
- favorable cost recovery rules for business property on Indian reservations,
- the 7-year recovery period for motor sports entertainment complexes,
- expensing for film, television, and live theatrical productions,
- empowerment zone tax incentives except for the increased section 179 expensing for qualifying property and the deferral of capital gain for dispositions of qualifying assets, and
- the exclusion from being personal holding company income for certain payments or accruals of dividends, interest, rents, and royalties from a related person that is a controlled foreign corporation.
If you have any questions about these provisions, contact the professional at Gilliam Bell Moser LLP.