On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law by the President. It funded an additional round of the Paycheck Protection Program (PPP) loans (see our article for details), but it also clarifies a number of tax provisions, that together provide critical renewed relief to struggling businesses.
Below is a summary of the key provisions:
Can I deduct PPP expenses?
It will come as a relief to many to learn that the new stimulus package allows for expenses paid with the proceeds of PPP loans to be fully deductible for tax purposes. This is whether or not the loan is to be forgiven. This point reverses the initial guidance of the IRS and fulfills the Congressional intent in the CARES Act from March 2020. In addition, the new stimulus package confirms that tax-exempt PPP forgiveness income increases the tax basis for partners of partnerships and S Corporation shareholders. However, at this point, it is unclear whether all states will follow these guidelines or move to prevent the deduction of PPP expenses.
Expanded Employee Retention Credit (ERC)
The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. This applies to the taxes paid by employers whose business was shut down by government order or who experience a significant decline in gross revenue. It was part of the initial CARES Act legislation, but because a business had to choose between receiving a PPP loan and taking advantage of the ERC, it had limited usage.
The ERC, which was due to expire at the end of 2020, has been extended through the first two quarters of 2021. The new stimulus plan retroactively amends the CARES Act to remove the exclusion from the ERC for PPP borrowers (although a credit cannot be obtained for wages treated as covered expenses for PPP purposes).
Here’s what’s changing in the first two quarters of 2021:
- The credit amount for qualified wages is increased from 50% to 70%
- The cap on qualified wages is increased from $10,000 total to $10,000 per quarter, effectively increasing the maximum credit from $5,000 per employee to $14,000.
- The reduction in gross revenue required to qualify, if the business has not been shut down by government order, is 20% year-over-year, reduced from 50%.
- Businesses of less than 500 employees can now take the credit for all employees, as opposed to only employees not providing services; this cap was originally 100 employees.
- Some non-profits, such as colleges and universities and health care providers, now qualify as eligible employers.
Business Meal Deduction
You can now deduct 100% of the cost of meal and beverage costs provided by a restaurant as a business expense. This applies if the meals are “ordinary and necessary” and incurred in the course of business to current or potential customers, consultants, clients, or similar business contacts. Although this type of expense is surely much lower due to COVID-19, it is an improvement over the original 50% cap.
Extension of FFCRA Tax Credit to 2021
The federal Families First Coronavirus Response Act (“FFCRA”), which requires that employers with fewer than 500 employees provide sick and family leave benefits for certain COVID-19 related reasons, is due to end on December 31, 2020. Many believed that the FFCRA’s sick and family leave provisions would be extended into 2021 as part of the new pandemic relief package, but these provisions were not extended, meaning that employers will not be required to provide paid leave under the FFCRA after December 31, 2020.
However, the new relief package extends the FFCRA tax credit, which reimburses employers for the cost of providing FFCRA leave, through March 31, 2021. As a result, beginning on January 1, 2021, employers are no longer required to provide FFCRA leave; however, covered employers who voluntarily offer such leave may utilize payroll tax credits to cover the cost of benefits paid to employees through the end of March 2021.
The new stimulus package extends a number of other key tax provisions, including:
- A variety of tax credits, including those for the renewable energy industry
- The expanded deductibility of charitable contributions, enacted in the CARES Act
- The reduction in the excise tax on beer, wine, and spirit makers is now permanent
- The 30-year period for depreciation of qualifying residential real property for those making the real property trade or business election in calculating interest expense limitation
- The look-through rule for payments between related controlled foreign corporations (CFCs)
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