The U.S. House of Representatives and U.S. Senate passed the Consolidated Appropriations Act, 2021 (bill), a massive tax, funding, and spending bill that contains a nearly $900 billion coronavirus aid package. The emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals and provide funding for COVID-19 testing and the administration of vaccines.
The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020.
The bill earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains a number of important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
The bill allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities.
The bill also extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits and incentives that are set to expire on December 31, 2020.
This alert highlights the main tax provisions included in the bill, which the President has signed into law as of December 28, 2020.
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Paycheck Protection Program
The bill extends and expands PPP relief introduced under the CARES Act as follows:
- An additional (second) PPP loan for small business and nonprofits if the entity can show a 25% decline in gross receipts for any 2020 quarter compared to the same quarter in 2019 – applicants must still certify that the current economic conditions make the loan request necessary to support ongoing operations
- Additional funding for any new first time PPP loan applicants
- PPP Loan eligibility for Section 501(c)(6) nonprofits (previously were not eligible)
- Elimination of the EIDL Advances subtraction when calculating the allowable forgiveness (borrowers that already received forgiveness and had their EIDL Advance deducted may amend their forgiveness application)
- Simplified forgiveness application for loans under $150,000 – rather than an application, a one-page certification statement is now an option
- Certification must include a description of the number of employees retained because of the loan, the estimated total amount of the loan spent on payroll cost and the total loan amount.
- Although an application is not required, the rules still apply. Business and nonprofits should still review all appropriate records and perform the necessary calculations to ensure eligibility before self-certifying.
- Clarification on tax treatment – PPP loan forgiveness will not be included in taxable income and expenses paid with the proceeds of forgiven PPP loans are tax deductible
Employment Retention Credit and Families First Coronavirus Response Credit
The bill extends and expands the ERC and the paid leave credit under the Families First Coronavirus Response Act (FFCRA).
The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:
- The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
- The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
Other Tax Provisions in the CAA
The bill includes changes to some provisions in the IRC:
- Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017.
- Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5% so that more expenses may be deducted.
- Business meal deduction: Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50% of those expenses).