With a length of 5,593 pages, The Consolidated Appropriations Act (“the Act”), is the longest piece of legislation ever passed by Congress. The Act was signed into law on December 27, 2020 and includes a $900 billion stimulus package. It also provides additional guidance for certain provisions originally introduced under the CARES Act earlier in 2020.
Additional Refundable Tax Credit
Under the Act, eligible taxpayers are provided an additional refundable tax credit. This credit is $600 per taxpayer ($1,200 for married taxpayers filing jointly). It also includes an additional $600 per qualifying child.
The credit is phased out starting at $75,000 of modified adjusted gross income ($112,500 for head of households; $150,000 or married filing jointly) at a rate of $5 per $100 of additional income.
Deductibility of PPP-Funded Expenses, and Update to Eligible Expenses
The Act clarifies that gross income does not include any amount that would occur from the forgiveness of a Paycheck Protection Program (PPP) loan. It also provides clarification related to allowable deductions paid through proceeds of a PPP loan that is ultimately forgiven. Specifically, the Act confirms that expenses paid with PPP loan proceeds will be deductible and that loan forgiveness will be deemed tax-exempt income for purposes of stock basis increase for Partnerships or S Corporations.
It is important to note that the potential for the deductibility of PPP funded expenses may be limited due to inadequate tax basis or amounts at risk. These limitations can be tricky to work through, and we would recommend reaching out to your trusted advisor at Reese Henry to discuss planning considerations that are relevant to your business.
With respect to eligible expenses, the CARES Act originally permitted the following categories:
Payroll – salaries, wages, vacation, parental, family, medical, or sick leave, and health benefits. Borrowers of PPP funds needed to utilize 60% of those funds on approved payroll, or they would not be able to receive full loan forgiveness.
Mortgage Interest – IF the loan was signed prior to February 15, 2020.
Rent – IF the lease agreement was signed prior to February 15, 2020.
Utilities – IF services began prior to February 15, 2020.
In addition to payroll costs, mortgage interest, rent, and utility costs included under the first round of PPP, The Consolidated Appropriations Act added a few new categories of eligible expenses, specifically:
Covered worker protection and facility modification expenditures, which also includes personal protective equipment to comply with all restrictions in place
Expenditures to suppliers that are essential at the time of purchase to continue operations
Covered operating costs such as software and cloud computing services, including those for accounting needs
Employee Retention Credit
The Employee Retention Credit was introduced under the original CARES Act. This was introduced as a refundable tax credit against certain employment taxes equal to 50% of qualified wages an eligible employer pays to employees after March 12, 2020 and before January 1, 2021. This credit was originally available to businesses with 100 or less employees. Employers who had more than 100 employees were only eligible for the credit for wages paid to employees who were laid off or furloughed.
With the Consolidated Appropriations Act, this credit was extended through June 30, 2021. Also, as of January 1, 2021, an employer can claim a tax credit of 70% of wages paid to an eligible employee. The Act also expanded the availability of the credit for employers with 101-500 employees. Employers who have over 500 employees may claim the deduction only for the wages paid to employees who were laid off or furloughed.
Employers can get immediate access to the credit by reducing employment tax deposits that were otherwise required to be made. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
To determine the 80% credit, the employer can include up to $10,000 of wages per employee (including certain health plan costs). Employers (including tax-exempt organizations) are eligible for the credit if they operate a trade or business during the calendar year of 2020 and experienced either:
Full or partial suspension of operations during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19.
A significant decline in gross receipts, which begins on the first day of the first calendar quarter of 2020, for which an employer’s gross receipts are less than 80% of its gross receipts for the same calendar quarter in 2019.
Finally, this credit is now available to an employer who received a Paycheck Protection Program loan. However, to the extent than an eligible employee’s wages are used to substantiate forgiveness of a PPP loan, those same wages cannot be also used to claim the Employee Retention Credit.
PPP Second Draw
The Act has made additional funding available for PPP program (PPP2). To be eligible, businesses must:
Employ no more than 300 employees per physical location,
Have used or will use the full amount of their first PPP loan, and
Be able to show a 25% drop in gross receipts in any calendar quarter of 2020 versus 2019.
Like the original PPP program, the loan amount is based on 2.5 times on the average monthly payroll costs in the one year prior to the loan or in calendar year 2019. However, businesses in the hospitality or food services industries can use 3.5 times the average monthly payroll costs. The maximum amount of the loan in the second round will be capped at $2 million.
TCJA Extensions
The Act made certain updates that were introduced with the Tax Cuts and Jobs Act (TCJA) permanent. Two that are of particular interest:
The reduction in the medical expense deduction floor – Taxpayers who itemize their deductions can deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (was previously 10%).
Deduction for energy-efficient commercial buildings – Commercial building owners with newly renovated or constructed buildings with qualifying systems installed (such as interior lighting, HVAC, and building envelope systems) that reduce energy consumption by at least 50% can claim a deduction of up to $1.80 per square foot. This amount will be adjusted based on inflation after 2020.
Other Miscellaneous Tax Provisions
The Act is temporarily allowing a 100% business expense deduction for meals (rather than the current 50% limit) if the expense is for food and/or drink provided by a restaurant. This is effective for expenses incurred after December 31, 2020 and will expire at the end of 2022.
In the original CARES Act, taxpayers who do not itemize their deductions (i.e., utilize the standard deduction) were given a $300 additional deduction for charitable contributions, if it was a cash donation and made directly to a charitable organization. Under the Act, this charitable contribution deduction has been extended to the 2021 tax year, and the deduction amount for taxpayers married filing jointly will be increased to $600 for 2021. The deduction is limited to $300 for all filing statuses for 2020. Please note that if the taxpayer overstates this deduction, the underpayment penalty will be increased from 20% to 50%.
For taxpayers who itemize their deductions, the Act increased the limit of 60% of and individual’s adjusted gross income to 100% through 2021.
The Act also extends the limit of the deduction for qualified cash contributions of 10% to 25% of a C-Corporation’s taxable income through 2021.
For rental property placed in service prior to January 1, 2018 and which is held by an electing real property trade or business; the Consolidated Appropriations Act provides that the recovery period is 30 years. The real property trade or business may elect out of the limitation on the deductibility of business interest imposed by Section 163(j). If the real property trade or business does make this election, it will be required to use the longer cost recovery period of 40 years for residential rental property.
In the original CARES Act, employers were permitted to make tax-free payments on their employee’s student loans of up to $5,250 until January 1, 2021. Under the Consolidated Appropriations Act, this benefit has be extended until January 1, 2026.
The Act includes extensions on a variety of Renewable Energy Tax Credits, such as the Solar Investment Tax Credit (ITC). The Solar ITC is a 26% tax credit for solar systems on residential and commercial properties. The credit can be claimed when homeowners purchase solar systems and have them installed on their homes, or business that installs, develops and/or finances the project. The credit is a dollar-for-dollar reduction in income taxes that an individual or company would otherwise pay the federal government. Under the Consolidated Appropriations Act, the 26% credit is eligible for tax years 2020, 2021, and 2022, with a step down in the amount of credit to 24% in 2023 and 10% in 2024.
The Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get tax relief. The Child Tax Credit (CTC) allows taxpayers to claim a credit if they have a qualifying child under the age of 17. Under the Consolidated Appropriations Act, if your earned income was higher in 2019 than in 2020, you can use the 2019 amount to figure your Earned Income Tax Credit and your Child Tax Credit for 2020.
Please contact your trusted advisor at Reese Henry to discuss the impact that the Consolidated Appropriations Act may have on your tax situation.