The Consolidated Appropriations Act, 2021
December 28, 2020
By Richard Shapiro
UPDATED: 12/28/2020, 9:15 AM
Government Funding, COVID-19 Relief … and More: A Tax Summary
After months of unproductive efforts at reaching consensus, Congress used the 2021 governmental funding legislation (the “Act”) as the vehicle to pass much needed COVID-19 relief, and more. Spanning 5593 pages, the mammoth $2.3 trillion legislation contains some $900 billion of relief related to the pandemic.
The legislation was overwhelmingly approved by the House and Senate on December 21. Despite veto threats, it was signed by President Trump on December 27.
In very broad terms, the COVID relief provisions address almost all aspects of the economy (other than direct aid to state and local governments), including in part –
- Funding for new Paycheck Protection Program loans (see below)
- Unemployment assistance
- Vaccine development and distribution
- Testing and tracing
- Support for health care providers
- Funding for addiction and mental health
- Transportation funding
- Child care grants
- Agricultural assistance
- Community development assistance
- Postal service assistance
- Nutrition assistance
- Rental assistance
- Student loan forbearance
- Emergency assistance for educational assistance and connectivity
- Funding for live venue operators
The following is a high-level summary of selected tax and related provisions contained in the Act. Future Alerts will provide additional detail as appropriate.
Individual Rebate Checks
The Act provides an additional 2020 refundable credit for eligible individuals of $600 for single filers ($1200 for joint filers), plus a $600 credit per qualifying dependent child (under the age of 17). Rebates are subject to phase-out thresholds beginning at $150,000 of adjusted gross income (“AGI”) for joint filers or a surviving spouse, $112,500 in the case of a head of household, and $75,000 for all others.
Eligible individuals must have a valid social security number and must not be a nonresident alien, a trust or estate, or an individual claimed as a dependent by anyone else. A qualifying child must also have a social security number or adoption taxpayer identification number.
It is anticipated that the checks will be forthcoming very shortly and will be based on 2019 filing information.
Payroll Protection Program (“PPP”) Loans
- Deductibility of Expenses Reimbursed by Forgiven PPP Loans
Perhaps the most controversial issue arising out of the original COVID relief act in March 2020, the CARES Act, was the deductibility, or more precisely the non-deductibility, of expenses reimbursed by a forgiven PPP loan. That was the position initially taken by the IRS in Notice 2020-32 and reaffirmed in Rev. Rul. 2020-27, notwithstanding comments by leading Congressional tax writers that such position was inconsistent with the PPP’s intent. Both as to original PPP loans and to subsequent PPP loans (see below), the Act is quite emphatic – (1) no amount is included in the gross income of an eligible recipient by reason of forgiveness of indebtedness; and (2) no deduction is denied, no tax attribute is reduced and no basis increase is denied by reason of such exclusion from gross income. Further, in the case of an eligible recipient that is a partnership or S corporation, any amount excluded from income by reason of forgiveness of indebtedness is treated as tax-exempt income for purposes of IRC Sec. 705 (Determination of Basis of Partner’s Interest) and IRC Sec. 1366 (Pass-Through of Items to S Corporation Shareholders), respectively. This provision applies to taxable years ending after the date of enactment of the CARES Act.
- Amendments to the Original PPP
The Act reopens the original PPP by making available a limited amount of funding for those who have not yet borrowed. In addition, a number of changes have been made to the original program, which will not apply to a loan for which the borrower received forgiveness before the date of enactment of the Act. These include (i) additional eligible “non-payroll” expense categories; (ii) a more flexible covered period for forgiveness; and (iii) a simplified forgiveness application for covered loans up to $150,000.
- The additional eligible expense categories are:
- Covered operations expenditure. A payment for any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions or accounting or tracking of supplies, inventory, records and expenses.
- Covered property damage cost. A cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Covered supplier cost. An expenditure made by an entity to a supplier of goods for the supply of goods that (i) are essential to the operations of the entity at the time at which the expenditure is made; and (ii) is made pursuant to a contract, order, or purchase order (A) in effect at any time before the covered period with respect to the applicable covered loan or (B) with respect to perishable goods, in effect before or at any time during the covered period.
- Covered worker protection expenditure. An operating or capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control (“CDC”), or the Occupational Safety and Health Administration (“OSHA”) or any equivalent requirement requirements established or guidance issued by a state or local government, during the period beginning on March 1, 2020 and ending on the date on which the national emergency declared by the President under the National Emergencies Act related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 expires.
This category includes the purchase, maintenance, or renovation of assets that create or expand a drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an expansion of additional indoor, outdoor, or combined business space; an onsite or offsite health screening capability; or other assets relating to the compliance with requirements of certain COVID-19 guidance. It also includes the purchase of certain specified personal protective equipment (“PPE”), particulate filtering face-piece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or other kinds of identified PPE.
Covered worker protection expenditures do not include residential real property or intangible property.
- The Act gives a borrower the option to choose any covered period beginning on the date of the origination of a covered loan and lasting between 8 and 24 weeks, not just 8 or 24 weeks.
- For covered loans not more than $150,000, the forgiveness application will be an attested certification not more than one page in length, that will require the borrower to only provide a description of the number of employees the borrower was able to retain because of the covered loan and the estimated amount of the covered loan amount spent on payroll costs. No other application or documentation will be required at the time of the application for forgiveness.
- PPP Second Draw Loans
The Act provides for a second round of loans to those who have already borrowed under the initial program. Eligible entities – having not more than 300 employees – must be a business concern, nonprofit organization, housing cooperative, veterans organization, tribal business concern, self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative. In general, the entity must show a 25% reduction in gross receipts during a quarter in 2020 relative to the same quarter in 2019. Entities not eligible for this tranche of PPP loans includes entities listed in Title 13, section 120.110 of the Code of Federal Regulations (Businesses Ineligible for SBA Loans) other than nonprofits and religious organizations; entities involved in political and lobbying activities; business concerns affiliated with entities in the People’s Republic of China or Hong Kong; registrants under the Foreign Agents Registration Act; and entities that receive a grant under the shuttered venue operator grant program (a program created as part of the Act).
The maximum loan is generally determined by multiplying the average total monthly payroll costs incurred by the entity during (i) the one-year period before the date on which the loan is made or (ii) calendar year 2019 by 2.5, subject to a limit of $2,000,000. Eligible entities assigned a North American Industry Classification System (NAICS) code 72 (“Accommodation and Food Services”) can borrow 3.5 times average monthly payroll costs, again subject to the $2,000,000 cap. Rules are also provided for seasonal employers.
Loan proceeds can be used to pay payroll costs, mortgage interest, rent or utilities as well as the four new categories of expenses described above. The amount of forgiveness attributable to non-payroll costs cannot exceed 40% of the total amount forgiven, as in the case of original PPP loans. The covered period is any 8 to 24 week period beginning on the date of the origination of the covered loan.
Extension of Certain Deferred Payroll Taxes
Under a Presidential Memorandum issued on August 8, 2020, the Treasury was directed to defer the withholding, deposit and payment of certain payroll taxes paid from September 1, 2020 through December 31, 2020, and in Notice 2020-65, the IRS issued implementing guidance. Specifically, the deferral applied to the employee portion of the old age, survivors, and disability insurance (OASDI) tax (6.2%) for any employee whose pre-tax wages or compensation payable during any bi-weekly pay period generally was less than $4,000 (or the equivalent with respect to other pay periods). This was a deferral and not a tax holiday. Thus, for those employees whose payroll taxes were in fact deferred, the obligation to pay was postponed until the period beginning January 1, 2001 and ending April 30, 2021, during which time the deferred taxes were to be withheld and collected ratably from wages paid (in addition to the normal payroll taxes on those wages). Interest, penalties and additions to tax would begin to accrue on May 1, 2021. The Act extends the due date for that deferral to be repaid to December 31, 2021, with interest, etc. to begin accruing as of January 1, 2022.
Extension of Credits for Paid Sick Leave and Paid Family Leave
Employer tax credits provided under the Families First Coronavirus Response Act in connection with COVID-19 related paid sick leave and paid family leave are extended from December 31, 2020 to March 31, 2021.
Extension and Modification of Employee Retention Tax Credit
The CARES Act provided a refundable payroll credit for 50% of “qualified wages” paid or incurred by eligible employers to employees after March 12, 2020 and before January 1, 2021. The credit can be claimed on a quarterly basis. The credit is available to employers carrying on a trade or business during calendar year 2020 and whose (i) operations are fully or partially suspended due to a COVID-19 related shutdown order or (ii) gross receipts decline more than 50% as compared to the same calendar quarter in the prior year. What are qualified wages is a function of the average number of full-time employees during 2019. In the case of employers with greater than 100 full-time employees, qualified wages are wages paid when they are NOT providing services due to COVID-19. In the case of employers with 100 or less full-time employees, all employee wages qualify for the credit, whether the business is subject to a shutdown order or is open during the covered time period.
Under current law, the amount of wages taken into account in determining the credit is limited to $10,000 per employee (i.e., a maximum credit per employee of $5,000). Also, employers with a PPP loan are not eligible for the employee retention credit.
The Act makes the following changes:
- The credit is extended through June 30, 2021.
- The credit percentage is increased from 50% to 70%.
- The per employee limitation is increased from $10,000 in total to $10,000 per quarter.
- The threshold for the change in treatment of qualified wages is raised to more than 500 employees.
- Employers with over 500 employees can claim the credit only for employees who are paid not to work.
- An eligible quarter requires a gross receipts decline of more than 20% instead of more than 50%.
- Rules are provided allowing new employers that were not in existence for all or part of 2019 to be able to claim the credit.
- The above changes apply to calendar quarters beginning after December 31, 2020.
- Employees that receive PPP loans may still qualify for this credit with respect to wages that are not paid with forgiven PPP proceeds (retroactive to the effective date of the CARES Act).
Temporary Allowance of Full Deduction for Business Meals
The Act allows for full deductibility (rather than the current 50%) for business meals provided by a “restaurant” and paid or incurred after December 31, 2020 and before January 1, 2023. All other requirements for deductibility would need to be met.
The CARES Act encouraged individuals to make charitable contributions during 2020 by providing an above-the-line deduction for cash contributions up to $300 regardless of whether the individual elects to itemize deductions. It also loosened the limitations on deductions for certain cash contributions during 2020; for individuals, the 60% of AGI limitation was suspended, allowing individuals who itemize to take a charitable contribution deduction for up to 100% of their AGI.
The Act extends the CARES Act provision to 2021, increases the deduction to $600 in the case of a joint return and extends the AGI limitation suspension to 2021. The penalty (IRC Sec. 6662) for taxpayers who overstate this deduction for non-itemizers is increased from 20% to 50%.
Depreciation of Certain Residential Rental Property
As a result of the 2017 Tax Cuts and Jobs Act (“TCJA”), an electing real property trade or business can elect out of the IRC Sec. 163(j) interest expense limitation, but must then use the longer alternative depreciation system (“ADS”) lives to depreciate nonresidential real property, residential rental property and qualified improvement property.
Under the Act, such an electing real property trade or business may depreciate residential rental property placed in service prior to 2018 over 30 years, rather than the 40 years previously required under prior law.
Extension of Certain Expiring Provisions
An annual ritual of Congress is the need to address expiring federal tax provisions. This year, the Act became a convenient means for Congress to accomplish this task. Some examples from this year’s expiring provisions are as follows:
- Unreimbursed medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income (IRC Sec. 213). The Act makes the 7.5% floor (scheduled to increase to 10% in 2021) permanent.
- The energy-efficient commercial buildings deduction (IRC Sec. 179D) is made permanent (inflation-adjusted after 2020).
Extended for Five Years (Until December 31, 2025)
- The New Markets Tax Credit (IRC Sec. 45D)
- Employer credit for paid family and medical leave (IRC Sec. 45S)
- The Work Opportunity Credit (IRC Sec. 51(c)(4))
- Exclusion from gross income of discharge of qualified principal residence indebtedness (IRC Sec. 108(a)(1)(E)) (limit lowered to $750,000 for married couple, $375,000 for a single taxpayer)
- Exclusion for certain employer payments of student loans (IRC Sec. 127(c)(1)(B))
- Special expensing rules for certain film, television, and live theatrical productions (IRC Sec. 181(g))
- Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules (IRC Sec. 954(c)(6)(C))
Also, a number of energy credits are extended until December 31, 2021.