By: Peter Beach
January 8, 2021
Below is a summary of key business and individual tax provisions included in the Consolidated Appropriations Act, 2021 (the “Act”). While many of the provisions are related directly to the impact of Covid-19, some are simply part of the process of accumulating the necessary votes to pass the legislation or extending popular tax provisions that would otherwise expire. The provisions that affect larger groups of taxpayers are discussed in some detail while those that are likely to affect fewer taxpayers and those that simply extend tax benefits provided under current law are mentioned only briefly.
The Employee Retention Credit
The Act modifies the employee retention credit created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) by:
- increasing the credit from 50% to 70% of eligible wages;
- expanding the credit to include $10,000 for any calendar quarter per employee rather than $10,000 for all quarters;
- expanding the definition of ‘small employers’ to those with 500, instead of 100, employees; and
- extending the Employee Retention Credit period (the period during which an employer can pay and count qualified wages) to the end on June 30, 2021, rather than December 31, 2020.
In addition, under the CARES Act, an employer could qualify as a qualifying eligible employer under either of two tests. One of the tests, the “reduction of gross receipts” test, applied to companies that had a 50% reduction in gross receipts for a 2020 quarter compared to the same quarter in 2019. Under the Act, a company that has gross receipts for a 2020 quarter that are less than 80% of the gross receipts for the same quarter in 2019 is an eligible employer.
In addition, wages that are not forgiven under the Paycheck Protection Program can be used as qualified wages for the employee retention credit.
Tax Credit for Employers Offering Qualified Paid Sick and Family Leave
The Act extends the tax credit relating to qualified paid sick and family leave under the Families First Coronavirus Response Act to March 31, 2021, instead of December 31, 2020.
Tax Treatment of Relief under PPP, SBA 7(a) Debt, Targeted EIDL Advances and Shuttered Venue Operator Grants
The Act addresses issues that have arisen with respect to the taxability of certain debt forgiveness and grant provisions created under the CARES Act and the deductibility of related expenses as follows:
- expenses paid with forgiven PPP funds are deductible, providing PPP borrowers relief from what many believe was an unintended consequence of the CARES Act;
- grants made under the SBA 7(a) debt relief program on behalf of certain borrowers are exempt from gross income, and related expenses are deductible (the Act provides similar treatment for emergency EIDL grants); and
- the Act also provides $15 billion for grants for shuttered venue operators. The grants are exempt from gross income and expenses paid with the grants are deductible.
In a related provision, the Act allows the Treasury Department to waive information reporting requirements for any amount excluded from income by (i) the exclusion of covered loan amount forgiveness from taxable income, (ii) the exclusion of emergency financial aid grants from taxable income, or (iii) the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
Additional Recovery Rebates
The Act provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
- The term “eligible individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts.
- The credit is available on the taxpayer’s 2020 return, but the provision provides for Treasury to issue advance payments based on the information on 2019 tax returns. Eligible taxpayers treated as providing returns through the nonfiler portal with respect to their EIP, will also receive payments.
- Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors.
Certain Employee Benefit Provisions
- The Act extends the rule created under the CARES Act permitting employers to include payments for certain student loan payments under a Section 127 Tuition Assistance Plan for another five years. Employers can pay up to a total of $5,250 on an employee’s qualified education loans (incurred by the employee for the education of that employee) tax-free for years before January 1, 2026.
- The Act provides additional flexibility for health and dependent care flexible spending arrangements (FSAs) for 2021 and 2022, including being able to continue to use amounts not used up by the end of each of these years. FSAs thus will have extended grace periods. Additionally, employees can be allowed to make mid-year changes to their FSA elections. The provision also includes specific new rules allowing an extended use period for terminated employees or dependents who reached the maximum age during the pandemic.
Meals and Entertainment
The Act temporarily amends the Code to allow a full business deduction for certain business meals. Under the change, 100% (rather than 50%) of the cost of food or beverages provided by a restaurant that is paid or incurred during the 2021 and 2022 calendar years will be deductible, provided that the amounts would otherwise be deductible under the Code.
Educator Expense Deduction for Personal Protective Equipment (PPE)
The Act provides that, not later than February 28, 2021, the IRS must, by regulation or other guidance, clarify that PPE, disinfectant, and other supplies used for the prevention of the spread of Covid-19 are treated as deductible under current law. Under current law, eligible educators (i.e., kindergarten through grade 12 teachers, instructors, etc.) are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses they incur. Such regulations or other guidance will apply to expenses paid or incurred after March 12, 2020.
Money Purchase Plan Distributions Can Qualify as Coronavirus-Related Distributions
The Act provides that, in the case of a money purchase pension plan, a coronavirus-related distribution which is an in-service withdrawal (i.e., a withdrawal made while the beneficiary of the plan is still employed by the plan owner) is treated as meeting the distribution rules of the Code. This provision applies retroactively as of March 27, 2020.
The Act establishes a 4% minimum low-income housing tax credit (“LIHTC”) rate for acquisition LIHTCs and tax-exempt private activity bond-financed developments. The provision is effective for acquisition LIHTCs allocated credits after December 31, 2020 and for bond-financed properties placed in service and receiving allocations from private activity bonds issued after December 31, 2020. It is unclear whether properties that initially receive bond allocations or bond drawdowns before December 31, 2020, but then receive subsequent allocations or drawdowns after that date, are eligible to receive 4% rate on the entire LIHTC basis. Further guidance from IRS is likely needed.
The Act also provides that real property trades or businesses, including LIHTC projects, that elect out of the interest limitation rules can use the 30-year Alternative Depreciation System recovery period for residential rental property placed in service before January 1, 2018.
Clean Energy and Environmental Tax Credits and Incentives
Several important clean energy credits and incentives are being extended and modified, as follows:
- the Energy Efficient Commercial Building Deduction (Section 179D) is extended permanently, will be indexed to inflation and will use updated energy efficiency standards;
- the Carbon Oxide Sequestration Credit (Section 45Q) is extended for two years, through 2025;
- the Renewable Electricity Production Tax Credit for wind farms and other renewables (Section 45) is extended for one year, through 2021;
- the Energy Investment Credit for solar and other renewables (Section 48) is extended by lengthening the phase-out period and applying higher credit rates than the existing phase-out schedule (waste energy recovery property is also added as a new category of qualified property);
- the Energy Efficient Homes Credit (Section 45L) is extended for one year, through 2021;
- excise tax credits and subsidy payments for alternative fuels are extended one year, through 2021;
- the Residential Energy Efficient Property Credit (Section 25D) is extended at the full rate for two years, through 2022 and then is phased down in 2023 (biomass fuel property is also added as eligible for this credit); and
- the Second-Generation Biofuel Credit (Section 40) is extended one year, through 2021.
Other Extensions of Expired Tax Provisions
Several other important tax credits, incentives and other provisions are being extended, including:
- look-thru rules for related controlled foreign corporations are extended for five years, through 2025;
- the New Markets Tax Credit is extended for five years, through 2025;
- the Work Opportunity Tax Credit is extended five years, through 2025;
- Empowerment Zone tax incentives are extended for five years, through 2025; and
- the Paid Family and Medical Leave credit (Section 45S) is extended for five years, through 2025.
Farmers’ Net Operating Loss Changes
The Act 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. It also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver. These provisions apply retroactively as if included in Section 2303 of the CARES Act.
Alcohol Excise Taxes
The Act makes permanent the Craft Beverage Modernization and Tax Reform provisions of the Tax Cuts and Jobs Act.
The Act includes some disaster-related provisions for 2020 disasters apart from Covid-19, such as access to retirement funds, the employee retention credit for qualified disasters, and additional allocations for the low-income housing credit.