Tax Highlights of the Consolidated Appropriations Act
On December 27, 2020, the Consolidated Appropriations Act, H.R. 133 (Act), was signed into law by President Trump. As the name suggests, the Act combines numerous bills into a single sprawling legislative package spanning 5,593 pages. Notable tax and economic provisions from the bill include:
PPP Loans:
The Act makes numerous changes and clarifications to the Cares Act PPP Loan program, including:
- Employers will be able to deduct expenses paid with forgiven loan proceeds. This change reverses the Department of Treasury’s position that such expenses were not deductible, as they were attributable to tax-exempt income.
- Owners of pass-through entities will receive an increase in basis attributable to the tax-exempt income triggered by the loan’s forgiveness, which will allow them to utilize the now deductible expenses.
- Loan proceeds can be used for an expanded list of covered expenses, which include (subject to limitations): software and cloud computing services that facilitate business operations, property damage from public disturbances, certain supplier costs, and worker personal protection expenditures, among others.
- Simplified Loan Forgiveness will be available for loans of up to $150,000 based solely on borrower representations and will allow the use of estimates. Records must be retained for four years after the application is submitted.
- EIDL grants of up to $10,000 will no longer reduce PPP forgiveness.
The Act provides for a “second draw” PPP loan. The program allows qualifying entities to receive a second PPP loan, which is generally available for taxpayers who:
- Incurred at least a 25% decrease in gross receipts during any quarter of 2020 compared to the gross receipts from the same calendar quarter during 2019.
- Employs not more than 300 employees.
The second loan amount is 2.5 times the average monthly payroll for the year prior to the loan (or calendar year 2019) for most businesses and 3.5 times for those hardest hit like restaurants. The maximum loan is $2M. Once received, second draw loans will primarily operate in the same fashion as the original PPP loans, as modified by this Act. Borrowers can choose the covered period as any 8-to-24-week period, beginning on the loan origination date. The SBA currently indicates that the ‘second draw” program will be available through March 31, 2021.
Employee Retention Credit (ERC):
The Act extends and expands the ERC that was established in the Cares Act last March. The credit is in the form of a payroll tax credit. The ERC was previously not available to a business that took a PPP loan, but that prohibition has now been lifted retroactively. However, payroll costs paid with forgiven PPP loan proceeds cannot be used to claim the ERC (i.e., no double-dipping); this increases the importance of using PPP loan proceeds for other eligible (non-payroll) covered expenses for some taxpayers. Using segregated accounts for PPP loan proceed disbursements is more critical, as well, to be able to trace payroll cash flows for both PPP and ERC purposes.
The primary retroactive change was the removal of the PPP loan recipient restriction on claiming the ERC. The computational elements of the Cares Act ERC available for 2020 remain largely the same. The Expanded ERC available for the first two quarters of 2021 contains material changes to the credit availability and calculations.
Cares Act ERC:
The Cares Act ERC requirements are still intact for 2020 payroll. The credit is equal to 50% of qualifying wages up to a maximum of $10,000 of wages for each employee ($5,000 max credit per employee).
Qualifying Employer is an employer carrying on a trade or business during 2020, and that:
-
- Had operation of that business fully or partially suspended due to an order from a governmental authority that limited commerce, travel, or group meetings due to COVID-19.
OR
-
- Had a reduction in gross receipts of more than 50% for the current quarter (Q1 2021), compared to the same quarter from 2019 (Q1 2019).
Under the second prong, eligibility for the credit will cease when the 2020 gross receipts for subsequent quarters (after the credit is first claimed) are greater than 80% of the gross receipts from the same quarter end in 2019.Qualifying Wages: For employers with 100 or fewer employees, all wages paid during the qualifying employer periods above are eligible, subject to the per employee cap. For employers with more than 100 employees, qualifying wages are limited to wages to employees who are not working during the qualifying employer periods above
Expanded ERC:
The expanded version of the ERC is only available for the first and second quarters of 2021. The credit is equal to 70% of qualifying wages up to a maximum of $10,000 of wages for each employee per quarter ($14,000 max credit per employee).
Qualifying Employer is an employer carrying on a trade or business during 2021, and that:
-
- Had operation of that business fully or partially suspended due to an order from a governmental authority that limited commerce, travel, or group meetings due to COVID-19.
OR
-
- Had a reduction in gross receipts of more than 20% for the current quarter (Q1 2021), compared to the same quarter from 2019 (Q1 2019).
Under the second prong, a taxpayer can elect to use the immediately preceding quarter as the comparative measuring period (e.g., Q4 2020 to versusQ4 2019).Qualifying Wages: For employers with 500 or fewer employees, all wages paid during the qualifying employer periods above are eligible, subject to the per employee cap. For employers with more than 500 employees, qualifying wages are limited to wages to employees who are not working during the qualifying employer periods above.
While the Cares Act ERC for 2020 is now retroactively available for PPP loan recipients, it still requires that a business have either been suspended by governmental order or have incurred a material 50% quarterly reduction in gross receipts to be eligible. The expanded ERC for 2021 both 1) materially increases the available credit on a per-employee basis and 2) significantly decreases the reduction in quarterly gross receipts required to be eligible for the credit.
Miscellaneous Provisions:
- Economic Impact Payments – Stimulus payments will be issued to eligible individuals. Household payments are limited to $600 per spouse, plus $600 per dependent child under age 17. Eligibility phases-out for married taxpayers between $150,000 to $174,000 of 2019 AGI, and between $75,000 and $87,000 of 2019 AGI for single taxpayers.
- Business Meals – 100% deductible (rather than 50% deductible) for purchases from a restaurant during 2021 and 2022.
- Charitable Donations – The above the line deduction for non-itemizers, which is new for 2020,has been extended to 2021 and increased from a $300 maximum (for 2020) to $600 for 2021.
- Charitable Donations – For cash donations, the 100% AGI limitation in 2020 has been extended to 2021. Donations are generally limited to 60% of AGI. The provision does not apply to donations to private foundations and donor-advised funds.
- FSA – Health and Dependent Care FSA plans can allow participants to carry over unused balances for plan years ending in 2020 or 2021.
- Medical Expense – The AGI limitation has been permanently extended at 7.5% of AGI.
Please note that the Act contained many additional tax provisions and extenders not covered above, as well as many non-tax related changes in the law. We have touched on the items that we believe have the broadest scope and the largest economic impact.
At Brown CPA Group, we are closely monitoring continuing developments and interpretations concerning this legislation. Please reach out to your Brown CPA Group professional team to discuss how we can assist your business needs.
Contributors: David Thibault, Managing Partner; Barry Burchel, Tax Director
