The $900 billion federal coronavirus relief bill, or stimulus bill, was signed into law on December 27, 2020. Officially titled the “Consolidated Appropriations Act, 2021,” or the Act, this omnibus spending bill to fund the federal government also revised and expanded numerous COVID-19 measures enacted earlier in the year by the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Among its general tax provisions, the Act temporarily (through 2022) allows 100% deductibility of certain business meal expenses, extends the $300 charitable contribution deduction for non-itemizers, extends the payback period on the deferral of payroll taxes, and enacts various disaster tax relief provisions.
Several significant and contentious issues were not addressed. These include funding for state and local governments, repeal of net operating loss provisions contained in the CARES Act, liability protections for businesses, and state income tax certainty for individuals working remotely in a different state than their state of residence due to COVID-19.
Eligible individuals will receive a refundable tax credit of: $600 per taxpayer ($1,200 for married taxpayers 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 taxpayers filing jointly) at a rate of $5 per $100 of additional income.
An eligible individual is any individual other than (i) a nonresident alien, (ii) an individual for whom a dependency deduction is allowable to another taxpayer for the tax year, or (iii) an estate or trust.
The Treasury Department is authorized to issue advance payments of this credit in the same way it made stimulus payments under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Paycheck Protection Program
Additional funding of $284 billion was provided for the Paycheck Protection Program (PPP).
The funding provides a “second draw” PPP loan for businesses with fewer than 300 employees that have had a reduction in gross receipts during any quarter of 2020 of at least 25 percent compared to the same quarter in 2019. If a business was not operating during 2019, but was operating on February 15, 2020, the business can still qualify for a second draw PPP loan if the business experienced at least a 25 percent reduction in gross receipts during the second, third, or fourth quarters of 2020 as compared to the first quarter of 2020. In any event, if a business received a PPP loan under the original PPP program, that business must have spent the full amount of those loan proceeds on eligible expenses in order to receive a second draw PPP loan.
The amount of the second draw PPP loan is generally limited to the lesser of (i) 2.5 times the business’s “average total monthly payroll costs,” or (ii) $2 million. However, for businesses assigned an NAICS code starting with 72 (i.e., businesses that provide customers with lodging and/or prepare meals, snacks, and beverages for immediate consumption), the limit is the lesser of (i) 3.5 times the business’s average total monthly payroll costs, or (ii) $2 million.
A business’s average total monthly payroll costs are generally determined, at the election of the business, using either the one-year period before the date the loan is made, or calendar year 2019. For new entities that did not exist during the one-year period preceding February 15, 2020, average total monthly payroll costs are determined by dividing the total payroll costs paid or incurred by the business as of the date the business applies for the second draw PPP loan by the number of months in which those payroll costs were paid or incurred.
The Act also expands eligible PPP expenses to include certain operating expenses (e.g., software and cloud computing expenses), property damage incurred during the 2020 public disturbances that is not covered by insurance, certain supplier costs, and certain worker protection expenditures incurred to comply with COVID-19 health guidelines. However, borrowers must still use 60 percent of the loan proceeds for payroll costs in order to be eligible for full forgiveness of the loan.
The Act further permits borrowers to deduct, for federal income tax purposes, ordinary business expenses paid with PPP loan proceeds. This change applies to expenses paid with proceeds from an original PPP loan as well as proceeds paid from a second draw PPP loan.
Employee Retention Credit
Six significant changes were made to the employee retention credit (ERC) enacted originally as part of the CARES Act.
- Businesses that received a PPP loan can now retroactively qualify for the ERC. However, any payroll costs for which a business claims an ERC are not eligible to be forgiven as part of the PPP process. In other words, while a business may now both claim the ERC and receive a PPP loan, forgivable PPP expenses do not include “qualified wages taken into account in determining the” ERC.
- Businesses can elect to not include certain qualified wages in the computation of the ERC and, if a business makes such an election, those wages would then be eligible for forgiveness if they were paid with PPP loan proceeds.
- Businesses have an extra six months to claim the credit. The expiration date was extended from January 1, 2021 to July 1, 2021.
- The credit percentage and total amount of qualified wages are increased for 2021. The credit percentage has been increased from 50 to 70 percent of qualified wages and the total amount of qualified wages eligible for the credit has been increased from $10,000 per employee for all quarters to $10,000 per employee for each quarter.
- Percentage reduction in gross receipts needed to quality for the credit has been reduced. Businesses can qualify for the credit if their reduction in gross receipts was greater than 20 percent for the same calendar quarter in calendar year 2019.
- For 2021, the employee threshold needed to be considered a large business is raised from 100 to 500. This means that, for eligible employers that had an average number of full-time employees in 2019 of 500 or fewer, all employee qualified wages are eligible for the credit, regardless of whether an employee is furloughed. For employers with more than 500 employees, only the qualified wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit.
- Small employers can receive advance payments. Specifically, a small employer may elect for Q1 and/or Q2 of 2021 to receive an advance payment of the credit for that quarter in an amount not to exceed 70 percent of the average quarterly wages paid by the employer in 2019 (or, in 2020 if the employer was not in existence in 2019).
For more details and information about tax provisions of the bill, contact us. We are here to help.
The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll…