Highlights of Certain Tax Provisions of the Consolidated Appropriations Act, 2021
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On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA). The CAA incorporates various separate acts, such as the COVID-related Tax Relief Act of 2020 (Subtitle B of Title II of Division N of the CAA), the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Title III of Division N of the CAA), and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the CAA), which extend, modify, or clarify certain provisions of the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Retroactive Clarification of Tax Treatment of Forgiven PPP Loan Amounts. The COVID-related Tax Relief Act of 2020 clarifies that forgiven PPP loan amounts are excluded from gross income. Furthermore, such exclusion from gross income will not result in the denial of otherwise allowable income tax deductions, nor will such exclusion result in any reduction in tax basis or other tax attributes of the borrower's assets. In the case of a borrower that is a partnership or an S corporation, a forgiven PPP loan amount is treated as tax-exempt income that results in an increase in a partner's tax basis in its partnership interest or in an increase in a shareholder's tax basis in its S corporation stock. These provisions apply with retroactive effect, as of March 27, 2020.
Extension of Tax Credits for Paid Sick and Family Leave. The FFCRA required employers with fewer than 500 employees to provide both paid and unpaid leave to certain employees due to certain COVID-19 related absences through December 31, 2020 and contained a corresponding tax credit for employers to subsidize the wages required to be paid to employees. Although Congress has not extended the mandatory employee paid sick or paid family leave benefits, which expired on December 31, 2020, under the COVID-related Tax Relief Act of 2020 employers who voluntarily continue to provide paid sick and family leave beyond December 31, 2020, are eligible for a refundable payroll tax credit to subsidize the cost of providing those benefits through March 31, 2021.
Modifications to the Employee Retention Tax Credit. The CARES Act provided for a refundable payroll tax credit for qualified wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is generally available to employers who were engaged in a trade or business in 2020 and that either: (1) fully or partially suspended operations during any calendar quarter in 2020 due to orders from a governmental authority to limit commerce, travel, or group meetings due to COVID-19; or (2) experienced a greater than 50% reduction in gross receipts in a calendar quarter in 2020 as compared to the same calendar quarter in 2019. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 made changes to the employee retention tax credit, some of which apply retroactively to the effective date of the CARES Act, while other changes apply only prospectively.
- Prospective Modifications to the Employee Retention Tax Credit
- Extension of the Credit. The time period during which wages paid are eligible for the credit has been extended by 6 months from December 31, 2020, to June 30, 2021.
- Increase in Credit Amount. Under the CARES Act, an eligible employer is allowed a credit equal to 50% of the qualified wages paid to certain employees, and the amount of qualified wages taken into account with respect to a particular employee cannot exceed $10,000 for all calendar quarters (effectively capping the credit at $5,000 per employee in 2020). With respect to qualified wages paid to employees between January 1, 2021, and June 30, 2021, an eligible employer is allowed a credit equal to 70% of the amount of such qualified wages, and the $10,000 cap per employee applies to each calendar quarter, rather than all calendar quarters. Thus, an eligible employer could qualify for a maximum credit of $7,000 per employee per quarter in 2021, effectively totaling $14,000 per employee for the first and second quarters of 2021.
- Expansion of Qualified Wages. Under the CARES Act, for an eligible employer with an average of not more than 100 full-time employees in 2019, all wages paid to employees between March 13, 2020, and December 31, 2020, are qualified wages. For "large employers" (i.e.; employers with an average of more than 100 full-time employees in 2019), only the wages paid during the same time period to employees who were not providing services during the eligible period were eligible. For wages paid between January 1, 2021, and June 30, 2021, the threshold for being treated as a "large employer" was modified such that all wages paid by an eligible employer with an average of 500 or less full-time employees can qualify for the credit, regardless of whether the employee provided services during the eligible period.
- Reduction in Threshold for Qualifying as an Eligible Employer. The threshold necessary to qualify as an eligible employer under the quarterly gross receipts test was reduced from 50% to 20%, but only with respect to the period beginning on January 1, 2021, and ending on June 30, 2021. Generally, the 20% decline in gross receipts is determined by comparing the employer's gross receipts from the applicable calendar quarter in 2021 with its gross receipts from the same calendar quarter in 2019.
- Retroactive Modifications to the Employee Retention Tax Credit
- Gross Receipts of Tax-Exempt Organizations. Gross receipts of a tax-exempt organization are determined by reference to Code Section 6033, and would include the gross amount received from all sources (including amounts received as contributions, dues from members, sales and investment income) without reduction for any costs or expenses.
- Allocation of Certain Group Health Plan Expenses to Qualified Wages. Group health plan expenses which are excluded from an employee's gross income are treated as qualified wages, even if no other wages are paid to the employee.
- Coordination between PPP Loans and the Employee Retention Tax Credit. The CARES Act originally provided that employers who received PPP Loans were not eligible to claim the employee retention tax credit. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer may qualify for PPP loan forgiveness as well as the employee retention tax credit to the extent that payroll costs taken into account for purposes of PPP loan forgiveness do not include qualified wages taken into account for purposes of the employee retention tax credit.
Tax Extenders and other Tax Incentives. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends various expiring tax incentives, including:
- the reduction in the medical expense deduction floor under Code Section 213(f), which allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income;
- the employer credit for paid family and medical leave under Code Section 45S;
- the work opportunity credit under Code Section 51;
- the gross income exclusion for discharge of indebtedness on a principal residence under Code Section 108(a)(1)(E);
- the exclusion for certain employer payments of student loans under Code Section 127(c)(1)(B);
- special expensing rules for certain film, television and live theatrical productions under Code Section 181;
- the look-through treatment of payments of dividends, interest, rents and royalties received or accrued from related "controlled foreign corporations" under the foreign personal holding company rules in Code Section 954(c)(6);
- the health coverage tax credit under Code Section 35;
- the treatment of qualified mortgage insurance premiums as qualified residence interest under Code Section 163(h); and
- the $300 charitable contribution deduction for individual taxpayers who do not itemize their deductions.
Among its general tax provisions, the Act allows 100% deductibility of business meal expenses provided by a restaurant through 2022.
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