Consolidated Appropriations Act, 2021
Summary of Key Provisions
Dear Clients and Friends,
In late 2020, President Trump signed the Consolidated Appropriations Act, 2021 (The Act) into law. From a tax perspective, there are only a few new provisions that provide new forms of stimulus or relief; however, several small changes have been made to the stimulus programs enacted in the earlier CARES Act.
Please find below a summary of the key income tax related changes and stimulus programs available from the Consolidated Appropriations Act, 2021:
Businesses
Expansion and Extension of Employee Retention Tax Credit
The Employee Retention Tax credit (ERC) is a refundable tax credit against employer Social Security tax that was enacted with the CARES Act. Originally, the ERC was not available to Taxpayers who received a PPP loan, and accordingly there was only minor participation in this program. However, the Act has substantially expanded and updated the ERC, as follows:
The ERC is now available to employers who also applied for and received a loan under the Payroll Protection Program (PPP). Previously, these two stimulus programs were mutually exclusive.
The ERC has been extended in order to apply to compensation paid to a covered employee through June 30, 2021. The credit had originally been set to expire on December 31, 2020.
Employers are eligible to claim the credit if they can demonstrate a 20 percent decline in gross receipts in the first two quarters of 2021 as compared to those same quarters in 2019 (previously employers had to demonstrate a 50 percent decline in gross receipts).
For qualified wages paid from January 1, 2021 through June 30, 2021, the ERC is expanded to 70 percent (from 50 percent) of qualified wages. The wage limitation is increased from $10,000 per year to $10,000 per quarter. Accordingly, the maximum credit per employee in 2021 is $14,000.
The ERC may also be taken retroactively for qualifying wages paid after March 12, 2020, to the extent those wages were not forgiven (or expected to be forgiven) with PPP loan proceeds. Qualifying employers should amend applicable employment tax returns to claim the ERC and request a refund.
Our expectation is that many Taxpayers will now qualify for the ERC, and should regroup as soon as possible with their CPA and payroll service company in order to determine eligibility.
Please see the following link for more information and on the mechanics of how to claim the credit: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
Business Meals Deduction
The business meals deduction generally allows for businesses to deduct the full amount of meals, including beverages, provided at a restaurant. The deduction is allowed for the 2021 and 2022 tax years only.
Payroll Tax Deferral
On August 8, 2020, President Trump issued a memorandum indicating that employers may defer their employee’s share of payroll taxes from September 1, 2020 through December 31, 2020. The deferred payroll taxes would be remitted ratably beginning January 1, 2021 through April, 2021. The Act extends the “payback period” to December 31, 2021. Penalties and interest will begin to accrue on deferred payroll taxes to the extent they are not repaid on January 1, 2022.
Paycheck Protection Program (PPP) Expansion
The Act expands the PPP established by the CARES Act, which provides loans to assist small businesses with certain expenses incurred during the COVID-19 emergency. The Act provides for a “second round” of PPP loans, which are available to businesses that have:
No more than 300 employees,
Already used the entire amount of its first PPP loan (or will) and,
Gross receipts during any of the four quarters of 2020 that were at least 25% less than the gross receipts from the same quarter in 2019.
As with the first round, the loans are available through private financial institutions that participate in the Small Business Administration’s lending network. In this second round, the maximum loan amount is as much as 2.5 times the businesses’ average monthly payroll expense, or $2 million, whichever is less.
PPP and Business Expenses
The Act includes a clarification of the tax treatment of business expenses paid for using the proceeds of PPP loans. In Notice 2020-31, the IRS determined that any business expenses paid for by the proceeds of a forgiven PPP loan cannot be deducted. However, The Act expressly provides that the intent of the original legislation within the CARES Act was that such expenses can give rise to a deduction. Accordingly, business expenses paid for by the proceeds of a forgiven PPP loan may be deducted as business expenses.
Exclusion of Loan Forgiveness
The Act clarifies that forgiveness of Economic Injury Disaster Loans (EIDL) granted to small businesses under the CARES Act are excluded from taxable income, consistent with the tax treatment of forgiven PPP loans.
Individuals
Recovery Rebate
The Act includes a direct payment of $600 to U.S. citizen and resident alien individuals in an effort to stimulate the economy, including an additional $600 for each child dependent under the age of 17. The direct payments are generally structured as they were under the first round of stimulus payments, where the payment is actually a credit against 2020 taxes.
Individuals with adjusted gross income in 2019 in excess of $75,000 ($150,000 for joint filers) will receive a reduced stimulus payment, with the amount reduced to zero for individuals with adjusted gross income of $87,000 ($174,000 for joint filers).
The rebate is not available to:
Nonresident aliens
Individuals who can be claimed as dependents
Estates and trusts
Individuals without Social Security Numbers
If the IRS has direct deposit information on file for you, your payment will be received as an ACH transfer to that account. Otherwise, your payment will be mailed as a check or debit card. The payments are scheduled to be sent on January 4, 2021.
A Final Note