More Pandemic Relief
The Consolidated Appropriations Act of 2021
On Monday Congress passed significant legislation that President Trump is expected to sign into law soon.
Rumor is that this bill set the record for length of legislation, and by a large margin. The 5,593-page document contains multiple pieces of legislation combined into one, including routine (if there is such a thing in Congress anymore) budgetary language, and even language apparently discussing the structural integrity of furniture cushions prevalent in the new “work from home” environment (I wish I were making that up). Portions of the law are referred to as the Taxpayer Certainty and Disaster Relief Act of 2020 and the COVID-related Tax Relief Act of 2020. Devoid of a clever acronym, its overall title is the Consolidated Appropriations Act, 2021, referred to below simply as the Act.
In context, portions of the Act represent the fourth phase of major federal legislation created in response to the COVID-19 pandemic. It was preceded by (1) the Coronavirus Preparedness and Response Supplemental Appropriations Act of 2020, which set in motion funding for various government agencies; (2) the Families First Coronavirus Response Act, the tax aspects of which we explained in a previous article, and (3) the CARES Act, which we have covered in numerous articles, many of which are summarized in BNN’s own Tax Provisions of the CARES Act. Much of this week’s new legislation is accomplished via modifications to existing language in the CARES Act and to a lesser extent the Families First Coronavirus Response Act.
The purpose of this article is to provide a rough summary of the new law’s stimulus and tax-related features. It assumes readers are somewhat familiar with the CARES Act, but provides references to earlier BNN articles for those who would like more context. We anticipate more articles to be forthcoming as we dig deeper into the details of this behemoth, as well as related guidelines and forms expected from the SBA/Treasury.
Paycheck Protection Program (“PPP”)
The Paycheck Protection Program (“PPP”) is the flagship provision of the CARES Act, and the new Act makes a number of significant (and favorable) changes to it. Those changes include a second round of PPP loans for eligible participants (even for some who obtained earlier loans), expanded uses of loan proceeds, elective changes to the covered period, a greatly simplified forgiveness application for loans below $150,000, and more. The PPP-related changes deserve their own discussion, and they receive it: For more information on new PPP features from a borrower’s perspective, please refer to our stand-alone article authored by colleague Josh Lapierre. For a look at the Act’s features from a lender’s perspective (PPP and otherwise), please refer to Joe Jalbert’s article, published in our financial services newsletter.
PPP expenditure deductibility
One new PPP-related feature will be covered both here and in Josh’s article: The tax-deductibility of PPP-funded expenditures. Most readers are aware of a stand-off between members of Congress and Treasury Secretary Mnuchin, as discussed in a previous BNN article by Matt Landon. Until this week’s legislation, it appeared that while all are in agreement that forgiven loan proceeds are not taxable, the IRS asserted in May that the expenditures made with those funds would be nondeductible, much to the consternation of Congress, which intended for the expenditures to be fully deductible. Congress, though, had not indicated its intentions in the form of legislation, and a letter several of its members wrote to Secretary Mnuchin encouraging him to reverse his stance went unheeded.
In a very effective rebuke that overrules Mnuchin’s rules, this week’s legislation repeatedly makes it very clear that expenditures made with PPP funds (whether the loan is forgiven or not) will be fully deductible, assuming they would be deductible outside of the PPP context.
New stimulus payments to individuals
The CARES Act introduced direct Economic Impact Payments to individuals (aka “Recovery Rebates”) earlier this year in the amount of $1,200 per adult and $500 per dependent, subject to a number of limitations including phaseout of the benefit based on income. Another round of payments is authorized by the new Act. The program’s specs are similar to those of the earlier round (discussed in an April 2020 BNN article), but the payment amounts have been changed to $600 per adult (a reduction) and $600 per dependent under the age of 17 (an increase).
Employee Retention Credit
The CARES Act introduced a credit (described in an April 2020 BNN article by Andy Smith and Matt Landon) that permanently decreased a portion of the employer’s share of the 6.2% Social Security tax payable based on employees’ wages. That credit has been expanded by (1) extending the benefit past what would have been its 12/31/20 expiration date and (2) increasing its potency for periods following 12/31/20.
This feature deserves an article all its own to cover the many details and restrictions within, but in general the program now runs through 7/1/21, and beginning with 2021 wages the $10,000 annual wage cap per employee is changed to a quarterly cap, and the credit amount is now 70% of that amount instead of 50%. The headcount for determining “large employer” (which in turn determines whether all employees’ wages are included, vs. only those who are unable to provide services) is increased from 100 to 500. To qualify for the expanded credit, gross receipts must have decreased relative to 2019 or the employer’s activities must have been suspended in whole or in part by governmental-imposed restrictions.
The CARES Act prevented an employer who received a PPP loan from also using the Employee Retention Credit. The new Act alters this restriction by allowing both to be used in tandem, but the credit cannot apply to wages paid with forgiven PPP funds. This benefit applies retroactively, and allows an employer to “catch up” by treating prior qualifying outlays as occurring during the quarter that the Act is signed into law.
Observation: This could impact Q4 2020 payroll tax filings, assuming the bill is signed into law this month. To be clear, the NEW wage cap and percentage specs are NOT available retroactively; the OLD specs must be used for pay incurred through 12/31/20.
100% deduction for business-related meals
Under Sec. 210 of the Act, for expenditures incurred beginning 1/1/21 and ending 12/31/22, business-related meals and beverages are fully deductible to the extent provided by a restaurant.
Observation: This is an unexpected change from the current 50% limitation, and one undoubtedly designed to indirectly impact a segment of the economy that has been hit very hard by restrictions that are curtailing and even destroying many businesses.
Renewed (but reduced) federal unemployment payments
Supplementing state-provided unemployment benefits, the federal government earlier this year provided weekly $600 unemployment payments of its own to qualifying individuals. Those benefits expired in the summer, but under the Act, benefits will be renewed, this time with $300 weekly benefits provided between late December 2020 and mid-March 2021.
Emergency Paid Sick Leave and Family and Medical Leave
In March of this year, BNN colleague Drew Cheney authored an article describing employer credits allowed under the Families First Coronavirus Response Act for paid sick leave of employees incurred through 12/31/20 and an expansion of benefits first provided in the Family and Medical Leave Act of 1993. The new Act leaves much of the criteria in place, but extends those credits through 3/31/21.
Federal funding distributed by states
Prior legislation distributed $150 billion in funding to the states (allocated based on population), to be spent between 3/1/20 and 12/31/20 on costs deemed necessary by the states, at their discretion, in their efforts addressing COVID-19. The Act gives the states a one-year extension of time to spend those funds until 12/31/21.
As is common with late-year tax legislation, a number of nearly-expired tax provisions have been extended. Unlike many years when Congress’ defibrillator provided only one more year, many now have been extended for multiple years or even permanently. A partial list is as follows:
- The favorable 7.5% of AGI medical expense floor has been extended permanently. It was set to revert to 10% after this year.
- A phaseout of the Lifetime Learning Credit based on income has been adjusted permanently, to allow more families to utilize this credit.
- A number of benefits provided to producers and sellers of beer, wine, and spirits have been enhanced (although Congress apparently saw the need to specifically exclude smugglers from eligibility).
- The New Markets Tax Credit, Work Opportunity Credit, and income exclusions related to principal residence debt or student loan debt discharge have been extended through the end of 2025.
- Numerous energy-efficient and alternative fuel tax benefits have been extended for one or more years.
Above-the-line charitable contribution deduction
The CARES Act allowed a $300 deduction for charitable contributions by taxpayers who claim the standard deduction. It was previously unclear whether this amount was available per tax return or per taxpayer. The Act clarifies that up to $600 can be claimed by a married couple filing a joint return.
As noted earlier, the information above is offered at a summary level, covering only a portion of this law’s features.
With this legislation, Congress truly took a shovel to Santa’s reindeer stalls to fill SBA staff members’ Christmas stockings, because throughout this massive bill, the SBA, Treasury, and numerous other government agencies were tasked by Congress with drafting detailed regulations, reports, and related forms within 10 days of the date of this Act’s enactment. Once that guidance on how to implement portions of the Act is available, and we have had a chance to further digest this bloated text, we will provide further guidance to help you navigate these new rules.
For more information, please contact your BNN tax service provider at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.