Year-End Tax Legislation Update

At the end of 2020, the Consolidated Appropriations Act, 2021 (2021 CAA) was signed into law.  This is a comprehensive government spending bill for the 2021 fiscal year. The package includes $900 billion in pandemic-related stimulus and relief for businesses, nonprofits, and individuals. There are a number of new tax savings opportunities in the bill that you should consider.  It also confirmed the legislative intent to treat the Paycheck Protection Program (PPP) loans forgiven as tax free income by stating that businesses are allowed to deduct ordinary and necessary expenses paid from the proceeds of PPP loans. In addition, it includes a second draw of PPP loans.

Paycheck Protection Program (PPP)

The CARES Act already provided that the forgiveness of the PPP loan is excluded from taxable income.  However, the IRS had previously taken the position that expenses associated with PPP loan forgiveness were not deductible. Congress in the 2021 CAA legislation clarified that expenses associated with the PPP loan forgiveness are fully tax deductible thus making the forgiven loans truly tax free.

The legislation also includes a second round of PPP loans, generally available to businesses with up to 300 employees that have sustained a 25% reduction of gross receipts in one or more quarters in 2020 when compared to the same quarter for 2019.  Many of the terms of the new program are consistent with the original program. Some businesses are excluded and as before there are a number of specific exceptions.  The new program expands the list of costs eligible for PPP loan forgiveness to include certain covered operations expenditures, property damages, supplier costs, and personal protection equipment (PPE).

In Addition, the law contains language that directs the SBA to produce a simplified forgiveness process for all PPP borrowers with less than $150,000 borrowed.  This will essentially involve a simple attestation page with a few data points, like your number of employees, how much you spent on payroll during the coverage period, etc.  You shouldn’t have to submit any supporting documentation with the application but just retain it in your records in case of an audit. If your loan is over $150,000 the old process will remain in place.

Employee retention credit

The employee retention credit is significantly enhanced under the year-end bill. The credit is:

• Computed for wages paid up to $10,000 per “quarter” (old law was “per year”).

• Based on 70% of qualified wages (old law was 50%).

• Available to employers whose gross receipts decline by 25% (old law was 50%).

• Extended for wages paid through June 30, 2021 (from December 31, 2020).

In addition, PPP borrowers are allowed to claim credit on wages not paid with forgiven PPP loan proceeds. The refundable payroll tax credits for paid sick and family leave related to COVID-19 are extended through March 31, 2021.

Payroll taxes

The IRS allowed employees to defer paying their share of Social Security tax on applicable wages paid from September 1, 2020 through December 31, 2020. The new bill allows Social Security tax deferred for that period to be repaid throughout 2021 (rather requiring repayment in the first four months of the year).

Business meals

Under current law, business meals are only 50% deductible. For 2021 and 2022, all businesses, regardless of size or industry, will be permitted a 100% deduction for business-related meals provided by a restaurant. However, there is no change to the limit on entertainment expenses, which are non-deductible after December 31, 2017.

Stimulus checks

Another round of economic impact payments will be paid, this time up to $600 per individual plus $600 per qualifying child (age 16 and younger who are dependents). This amount could be extended to $2,000 for single individuals or $4,000 for a couple, as of writing of this article, by Congress in response to President Trump’s request. Similar to the first round of checks, the benefit phases out for individuals with adjusted gross income (AGI) between $75,000 and $99,000; $150,000 and $198,000 for married couples. Note anyone alive for a day in 2020 qualifies.

Enhanced unemployment benefits

There will be an additional $300 per week unemployment benefit (beyond state-provided benefits) available through March 14, 2021. The enhanced benefit which expired earlier in the year was $600 per week.

Charitable contributions

The CARES Act allowed individuals to deduct cash contributions made to qualified charities during 2020 without regard to the normal income limits. It also allowed non-itemizers to claim an above-the-line deduction for up to $300 of cash donations. 2021 CAA extends both of these provisions for donations made through 2021 and increases the amount of above-the-line deduction available to married couples to $600.

Educator expenses

Eligible educators can deduct up to $250 in qualified expenses. The list of qualified expenses was expanded to include PPE, disinfectant, and other supplies used for the prevention of the spread of COVID-19.

Tax extenders

Some of the typical business tax extenders, such as the work opportunity tax credit, were extended through 2025 as part of 2021 CAA. Most tax extenders that affect individuals were further extended. Some of the provisions such as the principal residence debt exclusion up to $750,000 and the exclusion for employer payments on employee student loans were extended through 2025. Other provisions were made permanent, including the lower 7.5% threshold for medical expenses and the “above-the-line” tuition and fees deduction.

Net Operating Loss Relief for Farmers and Ranchers

2021 CAA allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. This section also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver. These clarifications eliminate unnecessary compliance burdens for farmers. The provision applies retroactively as if included in Section 2303 of the CARES Act. We are waiting for guidance from the IRS as to how to make this NOL elections.

Summary

Take the time to review the new legislation. The big news for businesses relates to the grants and PPP loans. Congress clarified that income from forgiveness of PPP loans and grants are not taxable and qualified expenses paid by using the tax-free money are still deductible. Another round of PPP funding has been authorized for hard-hit small businesses and nonprofits. The program will allow new and existing PPP borrowers with fewer than 300 employees that have experienced at least a 25% decrease in gross receipts in a quarter to obtain additional PPP loans of up to $2 million. Eligible uses of PPP loans, both new and existing, have been expanded to include certain operating expenses and supplier costs, worker protection expenditures, and unreimbursed property damage. The employee retention credit is also significantly enhanced under 2021 CAA.  Do not forget to review any NOL elections. Your tax adviser should be able to help with timely 2020 tax compliance given all of the new tax provisions passed by Congress this year. Just be ready for more new tax laws in 2021 when addressing your long-term tax planning.