The Senate overwhelmingly approved the most recent stimulus bill late on December 22, 2020, just a few hours after the House voted to approve the package. The new bill is massive. At nearly 5,600 pages in length, the Consolidated Appropriations Act of 2021 combines the funding provisions to avoid a government shutdown with the the much-discussed and reported COVID-relief provisions.
Appropriations to continue government operations for the rest of this fiscal year are expected to amount to $1.4 trillion. The COVID-relief component (tax and spending) is expected to cost just under $1 trillion, with the tax provisions related to further COVID response accounting for $167.3 billion over 10 years, according to an estimate from the Joint Committee on Taxation (JCT). The tax extenders, disaster relief, and other assorted tax provisions in the measure would reduce federal receipts by an additional $160.7 billion (combined) over the same period.
On a summary basis, the COVID-relief component of the proposed legislation includes a number of the provisions that were part of the CARES Act, which was enacted on March 27, 2020. Specifically, it reinstates the Paycheck Protection Program (PPP) Loan fund that expired on August 8, 2020. The bill also includes the clarification of the tax deductibility of those expenses paid from (original) PPP loan proceeds that are forgiven and provides a short-term extension of the employee retention tax credit, which was intended to help employers keep employees on their payrolls.
Paycheck Protection Program and Other Loan Matters
The new legislation reinstates and expands the Paycheck Protection Program and clarifies that debt forgiven under the PPP is not includible in gross income. Importantly, it also clarifies that certain business expenses paid with forgiven PPP funds are tax deductible, a position that would contravene the stance taken by the Internal Revenue Service. (see related post)
In addition to the allowance of full tax deductibility for expenses paid with PPP loan proceeds, the bill also provides that tax basis and other tax attributes will not be reduced as a result of those amounts being excluded from gross income. Note that special rules are provided for partnerships and S corporations. This treatment ensures that the tax savings are permanent and will not work to defer the potential income effect into the future.
Other PPP provisions include, among other things, new funding to allow the hardest-hit small businesses and nonprofit entities to receive a second forgivable loan and an expanded list of forgivable expenses (such as the purchase of protective equipment and the cost of structural modifications to ensure workplace safety).
The new PPP “second draw” loans are designed to benefit hard-hit businesses (those with 300 or fewer employees) that used all of their original PPP loans for qualifying purposes. The maximum loan allowable is $2M (again based on 2½ months of average payroll). Businesses that qualify for the second draw loans must show a 25% decline in revenue in any of the first three quarters of 2020 as compared to the same quarter from 2019. A fourth quarter 2020 calculation can be used if the application (for the second PPP loan) is completed after December 31, 2020. The covered period for using the funds of this expanded PPP program would be a period of more than eight weeks and less than 24 weeks.
The bill also includes simplified loan forgiveness procedures for borrowers with PPP loans of $150,000 or less, effectively making the forgiveness of those loans automatic once a one-page online or paper form is submitted.
The legislation further confirms that gross income does not include forgiveness of certain loans, Emergency Economic Insurance Disaster Loan (EIDL) grants, and certain loan repayment assistance, as provided by the CARES Act. The provision is effective for tax years ending after the date of enactment of the CARES Act (March 27, 2020). The legislation provides similar treatment for Targeted EIDL advances and Grants for Shuttered Venue Operators, effective for tax years ending after the date of enactment of the provision
Employee Retention Tax Credit
The CARES Act included a refundable Employee Retention Tax Credit (ERTC) for qualified employers that either fully or partially suspended operations due to a government order or that sustained a significant decline in gross receipts due to the COVID-19. (see related post for details on qualifications)
The ERTC is only applicable for wages paid after March 12, 2020, and before January 1, 2021, and is based on 50% of the “qualified wages” (up to $10,000 per employee per year) paid to each employee. It is computed on a calendar-quarter basis, against the 6.2% employer-side Social Security payroll tax for certain employers carrying on trade or businesses in 2020 that met qualifications.
The computation of qualified wages differs depending on whether the employer’s average number of full-time employees (FTEs) during 2019 was more or less than 100. The ERTC as enacted in the CARES Act is not available to governmental employers, but can be claimed by certain nonprofits.
The new legislation extends the ERTC through June 30, 2021, and includes the following modifications that would take effect on January 1, 2021:
- Increasing the credit rate from 50% to 70% of qualified wages;
- Expanding eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and providing a safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
- Increasing the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- Boosting the FTE threshold for a business to be treated as a “large employer” (and therefore subject to a restrictive standard for determining the qualified wage base) from 100 to 500 employees;
- Making the credit available to certain governmental employers; and
- Providing rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.
The new legislation also would make retroactive clarifications and technical improvements to the ERTC as originally enacted to:
- Provide that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds;
- Clarify the determination of gross receipts for certain tax exempt organizations; and
- Clarify that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.
These provisions would take effect as if enacted in the CARES Act on March 27, 2020.
FFCRA Tax Credits
The new legislation would extend through March 31, 2021, the refundable payroll tax credits for paid sick and family leave that were enacted earlier this year in the Families First Coronavirus Response Act (see related post). It also would allow self-employed individuals to use their average daily net earnings from self-employment income from 2019, rather than 2020, for purposes of computing these credits.
Meals and Entertainment Expenses
The legislation would provide a 100% deduction for business meal food and beverage expenses (but not business “entertainment” expenses) provided at a restaurant that are paid or incurred before January 1, 2023. Currently, the deduction is limited to 50% for those expenses.
The bill would extend through the end of 2021, the increased limits on deductible charitable contributions for corporations.
Direct Payments/Stimulus Checks
The legislation calls for a refundable tax credit (similar to the credit enacted in the CARES Act) of $600 for a single taxpayer, $1,200 for joint filers, and $600 per dependent child. The credit would phase out beginning at $75,000 of modified adjusted gross income for single taxpayers, $112,500 for head-of-household filers, and $150,000 for joint filers at a rate of $5 per $100 of income. The CARES Act provided payments of $1,200 for single taxpayers, $2,400 for joint filers, and $500 per child dependent, subject to the same phase-out thresholds that are proposed under the new legislation.
The Treasury Department is authorized to issue advance payments (Stimulus Checks) based on the information on 2019 tax returns. Payments for Social Security beneficiaries, Supplemental Security Income recipients, Railroad Retirement plan participants, and Veterans Administration beneficiaries who did not file returns for 2019 would be determined based on information provided by the Social Security Administration, Railroad Retirement Board, or the Veterans Administration.
Taxpayers without an eligible Social Security Number are not eligible for the payment. However, the legislation provides that married taxpayers filing jointly where one spouse has a Social Security Number and one spouse does not are eligible for a payment of $600, in addition to $600 per child with a Social Security Number. Taxpayers who receive an advance payment that exceeds their maximum eligible credit based on 2020 information will not be required to reimburse the government for any overpayment. If the credit based on 2020 information exceeds the amount of the advance payment, taxpayers would be allowed to claim the difference on their 2020 tax returns.
The payments generally are not subject to administrative offset for past-due federal or state debts and are protected from bank garnishment or levy by private creditors or debt collectors.
The legislation extends for one year (through 2021) the $300 above-the-line-deduction, which was established in the CARES Act and was set to expire the end of 2020. It also would increase the amount (from $300 to $600) that married couples filing jointly can deduct for charitable contributions for 2021.
Additionally, the bill extends through the end of 2021 the increased limits on deductible charitable contributions for individuals who itemize.
Earned Income Tax Credit/Child Tax Credit
The bill includes a special temporary rule allowing lower-income individuals to use their earned income from tax year 2019 to determine the earned income tax credit and the refundable portion of the child tax credit (i.e., the additional child tax credit) in the 2020 tax year.
Early Retirement Account Distributions/Qualified Retirement Plan Loans
The legislation clarifies the CARES Act’s rules permitting penalty-free early retirement plan withdrawals and higher limits on loans from qualified plans apply to money purchase pension plans in addition to defined contribution plans and IRAs. This provision would be effective as if enacted in the CARES Act.
Health and Dependent Care Flexible Spending
The legislation also provides temporary special rules that allow further flexibility for taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. It also would permit employers to allow employees to make a 2021 mid-year prospective change in contribution amounts.
Other Individual Deductions and Exclusions
The legislation also includes provisions that would require the Secretary of the Treasury to issue guidance or regulations providing that personal protective equipment (PPE) and other supplies used for the prevention of the spread of COVID-19 are treated as eligible expenses for purposes of the educator expense deduction. Any such changes would be retroactive to March 12, 2020.
An additional provision provides that certain emergency financial aid grants under the CARES Act are excluded from the gross income of college and university students. It also would hold students harmless for purposes of determining eligibility for the American Opportunity and Lifetime Learning tax credits. This provisions would be effective as of the date of enactment of the CARES Act (March 27, 2020).
Other Relevant Provisions
Extension of Certain Deferred Payroll Taxes
An Executive Order issued by President Trump on August 8, 2020, allowed employers to defer withholding employees’ share of Social Security taxes or the railroad retirement tax equivalent from September 1, 2020, through December 31, 2020, and required employers to increase withholding and pay the deferred amounts ratably from those wages and compensation paid between January 1, 2021, and April 31, 2021. (see related post)
Under the memorandum, penalties and interest on deferred unpaid tax liability would begin to accrue beginning on May 1, 2021. Under the new legislation, the repayment period will be extended to the end of 2021. Thus, penalties and interest on these payroll tax deferrals would not be imposed until January 1, 2022.
Extension of Federal Unemployment Assistance
The legislation would provide $300 in weekly federal unemployment insurance payments on top of state-level benefits for four months – a drop from the $600 which had applied earlier in 2020 under the CARES Act. The additional payments would continue through March 14, 2021.
The bill also extends the Pandemic Unemployment Assistance (PUA) program, with expanded coverage to the self-employed, gig workers, and others in non-traditional employment, and the Pandemic Emergency Unemployment Compensation (PEUC) program, which provides additional weeks of federally funded unemployment benefits to individuals who exhaust their regular state benefits.
The bill would provide an extra benefit of $100 per week for certain workers who have both wage and self-employment income but whose base unemployment insurance benefit calculation does not take their self-employment into account.
Modification of Various Tax Extenders
Once enacted, the law will work to extend a number of temporary provisions within the Internal Revenue Code. Commonly referenced as “Tax Extenders,” these provisions expire over a broad swath of “end dates.” While many are scheduled to expire on December 31, 2020, others are not set to lapse under current law under 2022.
The more commonly used extenders that are now permanent include:
- The lower adjusted gross income (AGI) threshold (7.5% instead of 10%), above which out-of-pocket medical expenses can be claimed as an itemized deduction
- The above-the-line deduction for qualified tuition and related expenses under Internal Revenue Code Section 222, which would be repealed after 2020 and replaced with increased income phase-out thresholds for the Lifetime Learning Credit under Internal Revenue Code Section 25A(d)(2)
- Lower excise tax rates on small brewers, vintners and distillers
- The deduction for energy efficient commercial buildings under Internal Revenue Code Section 179D
The more commonly used extenders that are now extended for five years include:
- The New Markets Tax Credit under Internal Revenue Code Section 45D(f) with a $5 billion annual allocation
- The Work Opportunity Tax Credit under Internal Revenue Code Section 51(c)(4)
- The Employer Credit under Internal Revenue Code Section 45S for paid family and medical leave, originally enacted as part of the Tax Cuts and Jobs Act
- The expanded exclusion for employer-provided educational assistance, including student loan repayment benefits as enacted as part of the CARES Act
- The gross income exclusion for discharge of indebtedness on a principal residence under Internal Revenue Code Section 108(a)(1)(e) – however, the legislation would limit the maximum exclusion to $750,000 (down from $2 million) and in so doing align the maximum exclusion with the maximum mortgage balance on which interest may be claimed as an itemized deduction
The legislation also addresses certain less-common Tax Extenders set to expire on December 31, 2020, and extends these provisions into the future either one or two years.
This economic relief is welcome news for many American taxpayers and businesses. This summary and commentary will be supplemented as we learn more about the language in the new legislation and as developments emerge. Please check our website frequently for updates.