On Dec. 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA), an approximately $2.3 trillion omnibus appropriations bill to fund the government through September of 2021 that includes $900 billion of so-called Phase 4 COVID-19 relief intended to help businesses and individuals. The funding package contains more than 70 tax-related provisions, including renewal of the employee retention tax credit, a temporary expansion to 100% of the deduction for business meals and making permanent or extending numerous temporary tax breaks. It does not include federally proposed so-called Mobile Workforce provisions or COVID-related liability protections. The CAA increases IRS funding by more than 3% and includes a more than $200 million increase for IRS enforcement efforts. Portions of the legislation are supplemental in certain respects to the March 27, 2020, Coronavirus Aid, Relief, and Economic Security (CARES) Act, the March 18, 2020, Families First Coronavirus Response Act, and the March 6, 2020, Coronavirus Preparedness and Response Supplemental Appropriations Act. Prior Alerts addressing those relief bills are available here.
The CAA contains $284 billion for the Paycheck Protection Program, direct payments of $600 to most Americans, an additional $300-per-week of unemployment benefits for 10 weeks (including for gig workers and others not traditionally eligible for benefits) through March 14, 2021, (and extends the maximum period for jobless benefits to 50 weeks), $82 billion for education, $25 billion in rental assistance, $13 billion for food stamps and nutritional benefits, $10 billion for child care, $1.8 billion for tax credits to businesses that provide paid leave, $15 billion in payroll assistance for airlines, $15 billion for certain theater operators, $14 billion for transportation, and $52 billion for COVID-19 vaccination and related health and testing expenses.
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I. Certain Tax and Related Provisions Relevant to Businesses
A. Employee Retention Tax Credit
The CAA extends, increases, and amends the CARES Act’s Employee Retention Tax Credit (ERTC). Most significantly, the CAA extends the ERTC for qualified wages paid through June 30, 2021, (from Dec. 31, 2020, in the CARES Act) and increases the credit base to 70% of such wages (from 50% in the CARES Act). The CAA also increases the ERTC base to $10,000 of qualified wages per employee per calendar quarter (from $10,000 per employee in the aggregate under the CARES Act). Eligible employers may also seek advance payment of the ERTC for any calendar quarter. Advance payments are generally estimated based on average quarterly wages from 2019.
The CAA also expands eligibility for the ERTC. First, the CAA raises the threshold for treatment as a “large employer” from 100 employees to 500. The CAA also limits the reduction in quarterly gross receipts that may trigger ERTC eligibility to 20% (from 50% under the CARES Act). An employer’s reduction in gross receipts is generally measured against the same calendar quarter from 2019, but the CAA provides for electing employers and employers not in existence in 2019 to use the preceding calendar quarter to calculate their reduction in gross receipts. Certain specified governmental employers, such as organizations described in Internal Revenue Code § 501(c)(1), colleges and universities, and entities the principal function of which is to provide medical or hospital care, also may now qualify for the ERTC.
The CAA also includes several clarifications and technical corrections with respect to the ERTC. The CAA makes clear that employers may not obtain a “double benefit” by treating wages used to claim the ERTC as wages for purposes of the credits available under Internal Revenue Code §§ 41, 45S, 51, or 1396. For tax-exempt organizations, the CAA clarifies that “gross receipts” for purposes of determining ERTC eligibility shall have the same meaning as in Internal Revenue Code § 6033, used to determine return filing requirements. With respect to employer health plan expenses, consistent with previous IRS guidance, the CAA confirms that amounts paid by an eligible employer to provide and maintain a group health plan constitute qualified wages to the extent excluded from the income of the employee under Internal Revenue Code § 106, and shall be allocated among the employees as the Secretary may prescribe. Except as the Secretary may otherwise provide, allocating health plan expenses to employees pro rata among periods of coverage will be treated as a proper allocation. The CAA also expands the ability to elect out of the ERTC by permitting employers to elect out for a portion of the employer’s qualified wages, rather than the all-or-nothing ability to elect out under the CARES Act. Finally, the CAA provides for the Secretary to issue guidance by which employers who elect out of the ERTC to treat otherwise qualified wages as payroll costs eligible for a PPP loan may still claim the ERTC in respect of such wages if the PPP loan is not forgiven.
B. 100% Deductions for Business Meals and Expenses
The CAA allows a 100% deduction for business meals and beverages incurred after Dec. 31, 2020, and before Jan. 1, 2023. Before this change, section 274(n) of the Internal Revenue Code generally limited the amount allowed as a deduction for any expense for food or beverages to 50% of the expense that otherwise would be allowed.
Proposed Regulations issued earlier this year permit a taxpayer to deduct meal expenses if (1) the expense is not lavish or extravagant under the circumstances; (2) the taxpayer or the taxpayer’s employee is present at the meal; and (3) the meal is provided to a business associate. The proposed regulations define a “business associate” as a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business, such as the taxpayer’s customer, client, supplier, employee, agent, partner or professional adviser, whether established or prospective.
The CAA makes permanent or temporarily extends various existing provisions otherwise set to expire. Several of these provisions were included as temporary provisions in the Tax Cuts and Jobs Act (TCJA).
1. Permanent Extensions
Included in the CAA’s permanent extension of already existing provisions are the reduction of excise taxes and simplification of recordkeeping requirements related to the taxation of beer, wine, and distilled spirits and the 7.5% medical expense deduction (applicable to all taxpayers). In addition, the CAA makes permanent a 40% credit for short-line railroads, certain energy-efficient commercial building deductions, a higher-learning tuition deduction, and a volunteer firefighter income exclusion of state tax benefits.
2. Provisions Extended to 2025
The CAA extends to 2025 a number of provisions, including the look-through rule, which provides that dividends, interest, rents and royalties received or accrued by a controlled foreign corporation from a related controlled foreign corporation are not per se subpart F income. Additional provisions that are extended to 2025 include the work opportunity tax credit, the family leave credit, the market tax credit, an exclusion from income for an employer’s payment of student loans, benefits for empowerment zones, and depreciation associated with motorsports. The CAA also lowers the amount from $2 million to $750,000 that taxpayers may exclude from income for the cancellation of principal residence indebtedness.
3. Provisions Extended Through 2021
The CAA provides a one-year extension for the following provisions: the deduction for private mortgage insurance, the health coverage tax credit, the alternative fuels/mixture credit, the second-generation biofuels credit, the non-business energy property credit, the two-wheel electric plug-in credit, the fuel cell motor vehicle credit, the energy-efficient homes credit, the alternative fuel vehicle refueling property credit, the renewable electricity credit, the American Samoa economic development tax credit, racehorse depreciation, and certain credits applicable to Native American business property depreciation, coal credits, and employment credits.
II. Certain Tax and Related Provisions Relevant to Individuals
A. “Recovery Rebate” Payments
The CAA provides for additional recovery rebates of up to $600 for most individual U.S. residents. Married individuals who file a joint return are eligible for a rebate of up to $1,200. The rebate amounts increase by $600 for each child under age 17. No rebate will be made to anyone who is claimed as a dependent on another taxpayer’s federal income tax return. The rebate, which will be delivered via direct deposit when possible, is not taxable income; it is an advance payment of a refundable tax credit on the taxpayer’s 2020 federal income tax return.
The rebate amounts are reduced for higher income taxpayers and begin phasing-out for taxpayers once adjusted gross income exceeds $75,000 (the phase-out threshold is $112,500 for heads of households and $150,000 for joint filers). For these higher-income taxpayers, the rebate amount is reduced by $5 for each $100 that a taxpayer’s adjusted gross income exceeds the phaseout threshold, and it will be completely phased out when adjusted gross income exceeds $87,000 for single filers (with no children), $124,500 for heads of households with one child and $162,000 for joint filers with no children.
The IRS will use the information on the taxpayer’s 2019 federal income tax return to determine rebate amounts. If no 2019 tax return has been filed at the time of determination, the IRS can use information provided by the Commissioner of Social Security, the Railroad Retirement Board, or the Secretary of Veterans Affairs, as appropriate.
The rebates will not be reduced or offset to pay debts owed to other federal agencies, past-due legally enforceable state income tax obligations or unemployment compensation debts. In addition, the rebates will not be reduced or offset by other assessed federal taxes that would otherwise be subject to levy or collection.
The CAA requires the Department of the Treasury to coordinate with the Social Security Administration and other relevant federal agencies to conduct a public awareness campaign regarding the availability of the rebates, including information with respect to individuals who may not have filed a federal income tax return for 2019.
B. Charitable Contribution Provisions
Allowance of Partial Above-the-Line Deduction. To encourage Americans to contribute to charitable organizations in 2021, individuals who claim the standard deduction will be permitted to deduct up to $300 ($600 for married couples filing a joint return) of cash charitable contributions “above the line” on their 2021 federal income tax returns. This “above the line” allowance will not apply to cash contributions to supporting organizations or donor advised funds.
Increased Limitations for 2021. The CARES Act increased the deduction limitations on 2020 cash charitable contributions by corporations and by individuals who itemize their deductions. The Consolidated Appropriations Act extends this benefit to 2021.
- For individuals, the limitation on cash contributions to 60% of individual adjusted gross income is temporarily suspended for 2021. However, cash contributions are still limited to the excess of adjusted gross income over the amount of all other charitable contributions, with any excess cash contributions carried forward to subsequent tax years.
- For corporations, the limitation for cash contributions is increased from 10% to 25% of taxable income in 2021. Any excess corporate cash contributions will be carried forward to subsequent tax years.
- The limitation on deductions for charitable contributions of food inventory is increased from 15% to 25% for 2021.
These increased deduction limitations likewise will not apply to cash contributions to supporting organizations or donor advised funds.
C. Exclusion for Employer Student Loan Repayment
The CARES Act expanded the exclusion from gross income for up to $5,250 of employer educational assistance to include employer student loan repayments made before Jan. 1, 2021. The CAA extends this benefit to employer repayments made before Jan. 1, 2026. An employee may not deduct any employer-paid student loan interest expense excluded under this provision.
III. Paycheck Protection Program Provisions for Small Businesses
The CAA clarifies, expands, and revises the Paycheck Protection Program (PPP) as follows:
A. Clarification of Tax Deductibility
In order to obtain forgiveness of PPP loans under the original PPP, borrowers were required to utilize the loan proceeds on payroll costs, rent payments, utility payments, interest on real property mortgages, and interest on secured tangible personal property. The Treasury Department previously issued guidance stating PPP borrowers would not be able to deduct any expenses to the extent they were covered by PPP loan amounts expected to be forgiven. The CAA changes applicable law to allow PPP borrowers to deduct all qualifying expenses, including those expected to be covered by forgiven PPP loan amounts. The CAA further clarifies that forgiven PPP loan proceeds are not taxable income and that use of PPP loan proceeds for forgivable expenses will not reduce any tax attribute or deny any basis increases.
B. Expansion of PPP
The CAA provides a second round of funding for PPP loans that is substantially different from the first round of PPP funding. This new round of PPP loans expands permitted use of the funds, but limits both types of eligible businesses and the maximum loan amount. This round of PPP will be funded with $284 billion and will be available until no later than March 31, 2021.
1. Eligible Businesses
To qualify for this new round of PPP funding, eligible business entities must: (a) have 300 or fewer employees; and (b) have gross receipts during the first, second, or third quarter of 2020 that are 25% or more less during the same calendar quarter of 2019. An applicant business must meet the comparison receipt test for only one calendar quarter. Accordingly, a business with gross receipts of $1 million, in second quarter 2019 and gross receipts of $750,000 in second quarter of 2020 would qualify regardless of the gross receipts’ comparison for any other calendar quarter. Applicants submitting after Jan. 1, 2021, may use fourth quarter gross receipts. Nonprofit entities, churches, and religious organizations are eligible businesses and may apply. Similar to the original PPP, entities reporting under NAICS Code 72 (generally hotels/restaurants) are subject to special qualification rules. Entities applying under NAICS Code 72 with more than 300 employees are eligible so long as they employ 300 or fewer individuals at each location. Additionally, the SBA affiliation rules for NAICS Code 72 businesses are excluded. The CAA also contains special qualification provisions for news organizations, farmers, and ranchers.
2. Loan Terms and Amounts
Similar to the original PPP, a borrower may elect an eight-week or 24-week loan term, which is referred to as its covered period. The CAA provides further flexibility to borrowers by allowing them to select the end of their covered period, which will begin on loan origination and end on a date unilaterally selected by the borrower that is more than eight weeks after loan origination, but less than 24 weeks after loan origination. The maximum amount that a PPP borrower may obtain is the lesser of: (a) its average monthly payroll cost during calendar year 2019 or the 12 months immediately preceding loan origination multiplied by 2.5; or (b) $2 million. The CAA contains special rules allowing new eligible businesses, i.e., those not in existence on Feb. 15, 2020, to qualify for loans. Similar to the original PPP legislation, there are special rules for calculating payroll costs for seasonal employees and a NAICS Code 72 eligible business is eligible to receive a loan amount equal to the lesser of: (a) its average monthly payroll cost during calendar year 2019 or the 12 months immediately preceding loan origination multiplied by 3.5; or (b) $2 million.
3. Permitted Uses and Forgiveness
PPP borrowers must use loan proceeds on so-called covered expenses to obtain forgiveness. These covered expenses include all of the permitted expenses set forth in the original PPP which included: (a) payroll costs; (b) interest on real property mortgage obligations, excluding prepayments; (c) interest on personal property security obligations, excluding prepayments; (d) rent; and (e) utilities. The CAA expands the list of covered expenses that qualify for forgiveness to also include: (w) covered operations expenditures; (x) covered property damage costs; (y) covered supplier costs; and (z) covered worker protection expenditures. A covered operations expenditure is any payment for business software or cloud computing that facilitates business operations in any manner, including, among other things, internal HR procedures, payroll processing, or accounting. A covered property damage cost is any damage related to vandalism or looting as a result of public disturbances that were not covered by insurance. A covered supplier costs means any cost for the supply of goods that are essential to the operations of the entity incurred by contract or purchase order prior to the loan period. Purchase of perishable goods during a borrower’s loan term will qualify as a covered supplier cost. A covered worker protection expenditure means any operating or capital expenditure incurred by an eligible business to comply or adapt to guidance issued by HHS, CDC, OSHA, or any state or local government since March 1, 2020. Covered worker protection expenditures would include redesigning a business to increase social distancing, constructing barriers to ensure social distancing, PPE equipment, and air filtration systems.
The CAA requires PPP borrowers to spend at least 60% of the loan proceeds on payroll costs to achieve full forgiveness regardless of how much they spend on other covered expenses. Borrowers spending less than 60% on payroll costs will have a portion of their loan not forgiven. Unforgiven loan amounts will bear interest at 1% and have a five-year maturity date. Borrowers will also be subject to the employee reduction forgiveness and salary reduction tests set forth in the original PPP.
C. Revisions to Original PPP
To obtain maximum forgiveness under the original PPP, borrowers were required to spend loan proceeds on: (a) payroll costs; (b) interest on real property mortgage obligations, excluding prepayments; (c) interest on personal property security obligations, excluding prepayments; (d) rent; and (e) utilities. The Act revises the original PPP to allow borrowers to spend loan proceeds on (w) covered operations expenditures; (x) covered property damage cost; (y) covered supplier cost; and (z) covered worker protection expenditure. Borrowers who used loan proceeds outside of the original text of the PPP can now have such amounts forgiven so long as the loan proceeds were spent on the expanded uses set forth above. The CAA allows borrowers under the original PPP to unilaterally select the end of their covered period, which will begin on loan origination and end on a date unilaterally selected by the borrower that is more than eight weeks after loan origination, but less than 24 weeks after loan origination. The CAA also eliminates the requirement that PPP borrowers reduce their PPP loans by any EIDL advance received.
IV. More Relief May Be Forthcoming
The White House, Congress and all of the executive agencies are committed to making sure that businesses and individuals are provided with resources during this COVID-19 crisis.