Included as part of the Stimulus Bill (the Bill) are the COVID-Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. For a discussion of other aspects of the Bill, see our comprehensive alert here. Among the federal tax changes in the Bill are:
PPP Loan Deductibility
As we discussed in our alerts here and here, tax practitioners were concerned that, because forgiveness of a PPP loan does not cause the borrower to recognize cancellation of indebtedness income, if a taxpayer paid otherwise deductible expenses using the proceeds of a PPP loan that is forgiven, those expenses would not be deductible for federal income tax purposes because the Internal Revenue Code and Treasury regulations provide that no deduction is allowed to the extent the amount is allocable to tax-exempt income. The IRS confirmed these fears by announcing that expenses paid with the proceeds of a PPP loan that is forgiven, or with the proceeds of a PPP loan that the borrower reasonably expects to be forgiven, are not deductible.
The Bill reverses the IRS position by providing that, effective for all tax years ending after March 27, 2020, otherwise deductible expenses paid with the proceeds of a forgiven PPP loan may be deducted for federal tax purposes and that a borrower’s tax basis and other attributes will not be reduced as a result of the exclusion of forgiven PPP loan amounts from gross income.
This relief is not limited to PPP loans. Under the Bill, the same deductibility rules apply to Targeted Economic Injury Disaster Loans and to specified nontaxable Grants to Shuttered Venue Operators paid pursuant to the Bill.
Extension and Expansion of Employee Retention Credit
One of the more successful benefits included in the CARES Act is the Employee Retention Credit (ERC), a fully-refundable payroll tax credit for employers equal to 50 percent of “qualified wages” paid by employers beginning on March 13, 2020. To be eligible for the ERC, a business must (i) be fully or partially suspended due to an order from a governmental authority limiting travel, commerce or meetings during the applicable calendar quarter or (ii) suffer a significant decline in gross receipts—i.e., a reduction in gross receipts of 50 percent or more during a calendar quarter when compared to the same quarter during the previous year. The ERC originally was scheduled to expire with respect to wages paid after December 31, 2020. See our detailed discussion of the program here.
The Bill extends the availability of the ERCs to qualified wages paid through June 30, 2021 and enhances the program in many ways:
- The ERC for wages paid between January 1, 2021 and June 30, 2021 will be equal to 70 percent of qualified wages, rather than 50 percent of such qualified wages;
- For 2021 qualified wages, the ERC cap is increased from $10,000 of wages per employee per year to $10,000 of wages per employee per calendar quarter;
- In 2021, any employer with a reduction in gross receipts of 20 percent (rather than 50 percent) can take advantage of the ERC and, for purposes of calculating the reduction in gross receipts, an employer can use its prior quarter gross receipts to determine eligibility;
- The ERC originally applied to all employee wages paid by an employer with 100 or fewer employees while employers with more than 100 employees could include only wages paid to employees who are not performing services due to the business suspension or significant decline in gross receipts. The 100 employee threshold is increased to 500 employees for the period from January 1, 2021 to June 30, 2021;
- Employers with 500 or fewer employees can receive an advance refund of the credit based on 2021 qualified wages paid during the same quarter of 2020;
- Qualified wages for purposes of the ERC originally could not exceed the amount an employee would have been paid for working an equivalent number of hours during the 30 days immediately preceding the applicable period. This restriction is eliminated for 2021 wages, allowing employees to treat bonus pay as qualified wages in many situations; and
- Beginning January 1, 2021, governmental instrumentalities that were ineligible to claim the ERC during 2020 can take advantage of the ERCs if they are (i) governmental entities with separate tax-exempt status and/or (ii) state colleges, universities or hospitals.
The Bill also made technical changes to the ERC, retroactive to March 13, 2020, which are consistent with prior IRS guidance:
- The Bill clarifies that wages paid with PPP loans that are not forgiven may be qualified wages for ERC purposes;
- Group health care plan expenses may be treated as qualified wages even if the employee does not receive any “regular” wages during the same period; and
- The Bill clarifies that, for eligible tax-exempt organizations, gross receipts for ERC purposes includes the total receipts reported on such an organization’s IRS Form 990.
Extension of FFCRA Tax Credits
As described in detail here, employers who are required by the FFCRA to provide medical leave and family leave to employees are eligible for credits equal to (i) $511 per day for paid sick leave for employees to care for themselves, with a maximum of 10 days – i.e., a maximum of $5,100 per employee, or (ii) $200 per day if the paid sick leave is to care for a family member, subject to a maximum of $10,000 per employee.
These credits were scheduled to end on December 31, 2020 but are extended by the Bill until March 31, 2021. These extended credits are only available to employers who are required to provide the FFCRA leave through December 2020. Employers in that category who voluntarily continue to provide leave under the FFCRA guidelines will be eligible for the tax credits through March 31, 2021.
Repayment of Social Security Tax Deferral
As described in our alert here, pursuant to President Trump’s executive order, employers were permitted to defer collection of Social Security Tax from employees with respect to wages paid beginning September 1, 2020, and ending on December 31, 2020. Effectively, the due date for remitting such taxes was deferred until April 30, 2021. Under the Bill, the due date is further extended until December 31, 2021, thereby allowing employers to spread out the collection of such taxes from employees through 2021.
Enhanced Charitable Contributions
The Bill included a special rule that allows taxpayer who do not itemize deductions to deduct charitable contributions, subject to a limit of $300 for individuals or $600 for joint filers. This provision also provides that, although a deduction is allowed, taxpayers’ adjusted gross income will not be reduced for purposes of determining other allowable deductions and credits.
The Bill also extends the enhanced charitable deductions for corporations and for individuals who itemize deductions. As described in more detail here, for cash contributions made on or before December 31, 2021, an individual now may elect to take an itemized deduction for cash charitable contributions up to 100 percent of his or her gross income. A corporate taxpayer may deduct such cash contributions made prior to the end of 2021 up to 25 percent of its taxable income. These increased limitations apply only to contributions to public charities (not private foundations) and do not apply to contributions to donor advised funds. With respect to contributions by a pass-through entity (i.e., an entity treated as a partnership or S corporation for federal income tax purposes, including a LLC), the election to apply the special limitations is made by each partner or shareholder.
Creation of New Disaster Relief Tax Incentives
The Bill also creates a new regime of tax benefits to incentivize responses to disasters within 60 days of the disaster declaration. Although this provision of the Bill is effective retroactively to disasters declared on or after January 1, 2020, it specifically excludes disasters declared in response to COVID-19. Under the new disaster relief provisions, for a 60-day period beginning on the date of a qualified disaster declaration:
- Disaster-affected employers are eligible for an employee retention credit (substantially similar to the ERCs allowed for COVID-19 described above) equal to 40 percent of qualified wages (up to $6,000) per employee. Tax-exempt entities are allowed a credit against payroll taxes for similar qualified wages;
- Limitations on charitable contributions to organizations to assist with such disasters will be suspended;
- The requirement that personal casualty losses equal at least 10 percent of adjusted gross income will be suspended for casualties related to qualified disasters; and
- Persons affected by a qualified disaster can make withdrawals of up to $100,000, subject to certain conditions, without being subject to the 10 percent penalty.
Extension of Renewable Energy Tax Credit Provisions
Many credit and incentive provisions that were scheduled to end or phase-out after December 31, 2020 were extended. Of note, the Production Tax Credit (PTC) for wind projects and the Investment Tax Credit (ITC) for solar projects both were scheduled to phase-out for projects placed into service after December 31, 2020 (subject to certain safe harbor rules for commencing construction prior to that date).
Under the Bill, the 26 percent ITC remains available for projects that begin construction through the end of 2022, rather than expiring at the end of 2020. The ITC will drop to 22 percent for projects that begin construction by the end of 2023, and then to 10 percent for large-scale solar projects and to zero percent for small scale solar projects in 2024.
The PTC will remain at 60 percent for projects that begin construction by the end of 2021, rather than being reduced to 40 percent. Absent any future changes in law, the PTC still will be eliminated starting in 2022.
The Bill also included a variety of extensions of expiring tax provisions including:
- Returning the medical expense deduction floor from 10% of adjusted gross income to 7.5% of adjusted gross income for tax years after beginning after December 31, 2020;
- For buildings placed in service after December 31, 2020, making the deduction for energy efficient buildings permanent and indexing for inflation the dollar limits eligible for the deduction;
- Extending the application of the advantageous look-through rule for related controlled foreign corporations (CFCs) for five years until tax years beginning before January 1, 2026;
- Expensing of otherwise capitalizable expenses for qualified film, television and live theatrical production expenses for qualified film, television productions and live theatrical productions commencing after December 31, 2020 and before December 31, 2025;
- Extending the employer credit for paid family and medical leave, which exists separately from the FFCRA credits described above, through tax years that begin in 2025; and
- Extending the exclusion from an employee’s income for a payment by an employer of certain of the employee’s student loan principal and/or interest for payments made before January 1, 2026.
Deduction for Business Meals
For 2021 and 2022, business expenses paid or incurred for food and beverages provided by a restaurant are fully deductible. To obtain the deduction, the business meal expenses must be paid or incurred after December 31, 2020 and before December 31, 2023.
For questions about the tax provisions in the Bill or other tax issues, please contact Wendi L. Kotzen or Christopher A. Jones.
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