The Act in its current form was signed into law by President Trump on Dec. 27, 2020.
The latest round of coronavirus relief measures included in the Consolidated Appropriations Act (the Act), passed by Congress on Dec. 21, 2020, contain several meaningful tax provisions, including a second round of stimulus payments, a significant expansion of the employee retention credit, clarity on the deductibility of expenses paid with forgiven Paycheck Protection Program (PPP) loans and a host of extenders and other provisions.
The following is a brief highlight of some of the tax related measures included.
The Act provides for a second round of recovery rebate credits (stimulus payments) to eligible individuals in the amount of $600 ($1,200 in the case of eligible individuals filing a joint return) plus an additional $600 for every qualifying child. The amount of the credit is reduced (but not below zero) by 5 percent of the taxpayer’s adjusted gross income in excess of $150,000 for a joint return, $112,500 for head of household and $75,000 for all other taxpayers. Generally, advance refund payments will be made based on a taxpayer’s 2019 tax return.
Employee Retention Credit
The Act significantly bolsters the Employee Retention Credit (ERC) originally introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March. The Act makes changes to the time period for which companies may claim the credit, who is eligible to claim the credit and the amount of credit.
Under the CARES Act as originally enacted, an eligible employer may claim a credit for up to 50 percent of qualified wages, and total qualified wages for all quarters are limited to $10,000 per employee. This results in a maximum potential credit of $5,000 per employee for calendar year 2020.
Under the Act, the duration of the credit eligibility has been extended from the end of 2020 through the second quarter of 2021. In the case of calendar quarters beginning after Dec. 31, 2020, the Act has increased the credit to 70 percent of qualifying wages and simultaneously increased the wage limitation by allowing up to $10,000 per employee per quarter. This results in a maximum potential credit of $14,000 per employee for the 2021 calendar year, or a potential maximum credit of $19,000 per employee during the entire credit period (2020 and 2021).
Under the originally enacted CARES Act, the definition of qualifying wages was more expansive for employers with no more than 100 employees. Beginning Jan. 1, 2021, this more expansive definition of qualifying wages is now available to companies with no more than 500 employees. Also, beginning in 2021, certain qualifications in order to be considered an eligible employer are also favorably revised. In 2020, one way that an employer may qualify for the credit is if gross receipts for a quarter are less than 50 percent of gross receipts compared to the same quarter in the prior year. This test has been favorably changed from 50 percent to 80 percent for the first and second quarters of 2021, lowering the threshold to make more employers eligible for the credit.
Lastly, prior to the Act, companies that received a PPP loan were unable to claim an ERC, even if such loan was not forgiven. Under the Act, employers with a PPP loan are now eligible to claim an ERC; however, any wages used for forgiveness of the PPP are ineligible to also be claimed for the ERC. This change relating to eligibility of PPP borrowers is retroactively effective back to the passing date of the original CARES Act legislation. Special provisions have been provided in the Act for handling the prior quarters cumulative effect resulting from this change.
Credits for Sick Pay and Extended Family Medical Leave
The Act extends certain credits for offering paid sick leave and expanded family medical leave under the Families First Coronavirus Response Act (FFCRA). These credits, introduced in early 2020, were expected to expire at the end of the year; however, the credits have now been extended through March 31, 2021.
The related mandate that employers provide paid sick and expanded family medical leave is still set to expire on Dec. 31, 2020, and has not been extended. Therefore, while the FFCRA mandated that certain employers provide employees with paid sick and expanded family medical leave, the new Act offers the credit to these same employers who voluntarily continue to provide these payments during the first quarter of 2021.
The Act includes several PPP related provisions as well as other small business lending provisions.
Most notably from a tax perspective, the Act affirmatively provides for the tax deductibility of expenses paid for with forgiven PPP loan proceeds. This legislative fix would negate recently issued U.S. Department of the Treasury (Treasury) guidance indicating the expenses would be nondeductible and should be disallowed in the current tax year in anticipation of forgiveness. The guidance treating expenses as non-deductible has created cash flow concerns for many of the impacted businesses since it effectively reduces cash available for business operations, either due to a resulting tax payment obligation or a reduction of potential refund amounts available under the favorable net operating loss carryback rules provided by the CARES Act.
The Act also includes similar clarifying provisions providing deductibility of expenses for amounts forgiven under several other non-PPP provisions of the CARES Act.
Beyond tax clarifications, the Act also expands upon who can qualify for a PPP loan as well as the categories for which loan proceeds can be used. The four new categories for which loan proceeds can be used are covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures. The covered period of a PPP loan is modified to be no shorter than eight weeks after the loan disbursement date, but not more than 24 weeks after that date, with the exact end date of the covered period being determined by the borrower. The Act calls for a simplified loan forgiveness application to be utilized in connection with loans that are $150,000 or less.
Borrowers may now also request, in more cases, an increase of their original loan amount based upon subsequently issued regulations. This provision would also allow borrowers who returned all or a portion of a loan to reapply for the difference up to the maximum applicable amount. In addition, for qualifying borrowers, a second round of PPP loans are available. Please see our Small Business Administration (SBA) Loan Assistance page for additional information on second round eligibility and other non-tax related changes to the PPP loan program.
Temporary Increase in Deductibility of Meals
The Act temporarily removes the 50 percent deduction limitation generally applicable to business meal expenses. Under the provision, such expenses paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for restaurant provided food and beverage will be 100 percent deductible.
Health and Dependent Care Flexible Spending Arrangement
The Act allows a cafeteria plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement to amend the plan to allow participants to carryover any unused benefits or contributions remaining in such flexible spending arrangement from the plan year ending in 2020 to the plan year ending in 2021. In addition, the plan may also allow unused benefits or contributions remaining in the 2021 plan year to be carried over to the plan year ending in 2022.
Changes to Expiring Tax Provisions
The Act contains numerous provisions permanently extending certain tax provisions, extends some provisions through 2025 and extends certain other provisions for varying periods of time. Key extenders include the following:
Energy Efficient Commercial Buildings Deduction
Under pre-Act law, for property placed into service before January 2021, taxpayers could claim a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation and hot water systems of commercial buildings. This includes a $1.80 deduction per square foot for construction on qualified property. A partial $0.60 deduction per square foot is allowed if certain subsystems meet energy standards, but the entire building does not, including the interior lighting systems, the heating, cooling, ventilation, hot water systems and the building envelope. The Act makes this deduction permanent and also adds an inflation adjustment to the amount of the deduction for tax years beginning after 2020.
Energy-Efficient Homes Credit
The Internal Revenue Code (IRC) provides a credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria. The Act extends the credit for energy-efficient new homes by one year, to homes acquired before Jan. 1, 2022.
Look-Thru Rule for Related Controlled Foreign Corporations
Under pre-Act law, for tax years of foreign corporations beginning before Jan. 1, 2021, dividends, interest, rent and royalties received or accrued from a controlled foreign corporation (CFC) that is a related person are not treated as a foreign personal holding company income (FPHCI) to the extent attributable or properly allocable to income of the related person that is not subpart F income or income treated as effectively connected with the conduct of a U.S. trade or business (ECI). The Act extends this look-thru rule for related CFCs through 2025.
New Markets Tax Credit
The IRC provides a New Markets Tax Credit, which is available to both individual and corporate taxpayers and is equal to 39 percent of the capital invested in a qualified community development entity. Under pre-Act law, a $5 billion allocation was made for 2020 with no allocation thereafter. The Act extends the $5 billion New Markets Tax Credit allocation for each calendar year from 2020 through 2025. The Act also extends by five years, through 2030, the carryover period for unused New Markets Tax Credits.
Work Opportunity Credit
The IRC provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit program. Under pre-Act law, the credit is based on qualified first-year wages paid to employees hired before Jan. 1, 2021. The Act extends the credit to employees hired through 2025.
Extension of Expensing Rules for Certain Productions
Taxpayers may claim a deduction of up to $15 million of the aggregate cost ($20 million for certain areas) of a qualifying film, television or theatrical production in the year the expenditure was incurred. Under pre-Act law the qualified film, television or theatrical production had to begin before Jan. 1, 2021, to be eligible. The Act extends this deduction by applying it to productions commencing before Jan. 1, 2026.
Empowerment Zone Tax Incentives
The designation of an economically depressed census tract as an Empowerment Zone renders businesses and individual residents within an Empowerment Zone eligible for special tax incentives, including: the 20 percent wage credit under IRC Section 1396; liberalized IRC Section 179 expensing rules (1379A); tax-exempt bond financing under IRC Section 1394; and deferral under IRC Section 1397B of capital gains tax on sale of qualified assets sold and replaced.
Under pre-Act law, Empowerment Zone designations expired on Dec. 31, 2020. The Act extends through Dec. 31, 2025, the period for which the designation of an empowerment zone is in effect. However, the Act also makes changes to limit some of the associated benefits. IRC Section 1397A’s enhanced expensing rules will not apply to any property placed in service in tax years beginning after Dec. 31, 2020, and IRC Section 1397B will not apply to sales in tax years beginning after Dec. 31, 2020. The Act also provides that where a nomination of an empowerment zone included a termination date of Dec. 31, 2020, termination will not apply to the designation if, after the date of the Act's enactment, the entity that made such nomination amends the nomination, in such manner as the Internal Revenue Service (IRS) may provide, to provide for a new termination date.
Employer Credit for Paid Family and Medical Leave
Under pre-Act law, for qualifying leave wages paid before Jan. 1, 2021, the IRC provided a credit to eligible employers for qualifying paid family and medical leave. The credit amount ranges from 12.5 percent of qualified leave wages up to a maximum of 25 percent of qualified leave wages. The Act extends this credit to qualifying leave wages paid through 2025.
Exclusion for Certain Employer Payments of Student Loans
Under IRC Section 127, educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The CARES Act added to the educational payments excluded from an employee’s gross income “eligible student loan repayments” (below) made after March 27, 2020, and before Jan. 1, 2021. These payments are subject to the overall $5,250 per employee limit for all educational payments. Eligible student loan repayments are payments by the employer of principle or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent). The Act extends the exclusion for loan repayments through 2025.
Credit for Electricity Produced from Certain Renewable Resources
An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities (the production credit). Alternatively, a taxpayer may claim a credit for energy property (the energy credit) by electing to treat the qualifying facility as energy property. Under pre-Act law, qualifying facilities generating electricity using wind, closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash (both of which used municipal solid waste), qualified hydropower and marine and hydrokinetic renewable energy facilities had to have begun construction on those facilities before Jan. 1, 2021, to be eligible for either credit. The Act extends the date by which construction of these types of qualifying facilities must begin prior to Jan. 1, 2022, for the following facilities: wind facilities, qualifying closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash, qualified hydropower and marine and hydrokinetic renewable energy facilities.
Extension and Phaseout of Energy Credit for Business Solar Property
Prior to the Act, construction on qualified property was required to begin prior to Jan. 1, 2022, in order to qualify for the credit. Additionally, the amount of credit was scheduled to decrease from 30 percent of costs to 26 percent of costs, and finally to 22 percent of costs under a phasedown provision based upon when construction begins. However, if the property was not placed in service before Jan. 1, 2024, the credit amount was further reduced to 10 percent of costs, irrespective of when construction began. The Act pushes out the effective date for each of these provisions, including the beginning of each phase-down period, by two years.
Benefits Provided to Volunteer Firefighters and Emergency Medical Responders
Under pre-Act law, for tax years beginning in 2020 only, for any member of a "qualified volunteer emergency response organization," gross income did not include any "qualified state and local tax benefit" (i.e., certain state or local tax relief provided for performing volunteer emergency response services) or any "qualified payment" (i.e., payments provided by state or local governments on account of performing volunteer emergency response services). The Act make this exclusion permanent.
Transition from Deduction for Qualified Tuition and Related Expenses to Increased Income Limitation on Lifetime Learning Credit
Under pre-Act law, different phaseout rules and income levels applied for the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Also, under pre-Act law, a “higher education expense deduction" was allowed for qualified tuition and related expenses paid during the year. Taxpayers could not claim both an education credit (AOTC or LLC) and the deduction. The Act removes the different phaseout rules for the AOTC and LLC and replaces them with a single phaseout, effective for tax years beginning after Dec. 31, 2020. The Act also repeals the “higher education expense deduction” effective for tax years beginning after Dec. 31, 2020.
Reduction in Medical Expense Deduction Floor
Under pre-Act law, the adjusted gross income (AGI) threshold, which must be exceeded to claim an itemized deduction for unreimbursed medical expenses, was set to increase from 7.5 percent to 10 percent of AGI. The Act makes the 7.5 percent threshold permanent.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness and Reduction in Maximum Indebtedness Limits
Under pre-Act law, discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately), was potentially excludable from gross income in tax years beginning before Jan. 1, 2021. The exclusion also applied to qualified principal residence indebtedness discharged pursuant to a binding written agreement entered into before Jan. 1, 2021. The Act extends this exclusion to discharges of indebtedness before Jan. 1, 2026. However, the Act reduces the maximum acquisition indebtedness limits to $750,000 ($375,000 for married individuals filing separately) in the case of discharges of indebtedness after Dec. 31, 2020.
Nonbusiness Energy Property
The IRC provides credits for certain purchases of nonbusiness energy property. A credit is allowed for 10 percent of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights and roofs) of principal residences. Additionally, credits of fixed dollar amounts are allowed ranging from $50 to $300 for energy-efficient property, including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners and circulating fans. These credits are subject to a lifetime cap of $500. Prior to the Act, these credits applied only to property placed in service by Dec. 31, 2020. The Act extends this credit to property placed in service by Dec. 31, 2021.
Residential Energy-Efficient Property Credit Extended
Under pre-Act law, individual taxpayers were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property and qualified geothermal heat pump property. Under a phasedown provision, the REEP applicable percentage was scheduled to decrease from 30 percent for property placed in service before Jan. 1, 2020, to 26 percent for property placed in service after Dec. 31, 2019, and before Jan. 1, 2021, and to 22 percent for property placed in service after Dec. 31, 2020, and before Jan. 1, 2022. The REEP credit did not apply to property placed in service after Dec. 31, 2021. The Act extends the phasedown period of the credit by two years, allowing a 30 percent rate on property placed in service before Jan. 1, 2022, a 26 percent rate on property placed in service before Jan. 1, 2023, and the 22 percent rate on property placed in service after Dec. 31, 2022, and before Jan. 1, 2024. Therefore, the REEP credit will no longer apply for property placed in service after Dec. 31, 2023.
Qualified Fuel Cell Refueling Property Credit
The IRC provides a credit for purchases of new qualified fuel cell motor vehicles and allows a credit of between $4,000 and $40,000, depending on the weight of the qualifying vehicle purchased. The Act extends this credit through 2021.
2-Wheeled Plug-in Electric Vehicle Credit
The IRC provides a 10 percent credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500). Battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours. The Act extends this credit so that it applies to vehicles acquired before Jan. 1, 2022.
Excise Tax Brewers, Wine Makers and Distillers
Previously, Congress had passed the Craft Beverage Modernization and Tax Reform Act (CBMTRA). CBMTRA had temporarily lowered the excise tax on a barrel of beer from $7.00 to $3.50; however, this lower excise tax was set to expire at the end of 2020. CBMTRA also expanded the amount of credit that winemakers may claim on up to the first 620,000 gallons of wine produced. CBMTRA also included a temporary exclusion that allowed for tax-free transfer of beer between bonded facilities. Prior to the CBMTRA, this tax-free transfer was only permitted between facilities with common ownership. The Act makes permanent each of these changes enacted by CBMTRA.
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