Consolidated Appropriations Act 2021 – Business Provisions

On Sunday, December 27, 2020, the President signed into law one of the longest bills in US history. This bill, the Consolidated Appropriations Act 2021, is a sprawling 5,593 pages and contains a $900 billion relief package for aid related to the COIVD19 pandemic as well as a $1.4 trillion in annual funding for the federal government in the upcoming year.

Paycheck Projection Program (PPP)

Clarification of Tax Treatment for Forgiveness of Covered Loans. The Consolidated Appropriations Act of 2021 confirms Congress’s original intent in the CARES Act and reverses the Treasury Department’s interpretation of the tax implications of loan forgiveness, clarifying that PPP loan forgiveness will not be included in the gross income of an eligible recipient nor will any deductions paid for with PPP proceeds be disallowed or have it’s tax attributes reduced.

Covered Period Selection. Borrowers have the option of selecting any covered period length between 8 and 24 weeks after the loan origination date.

Additional Eligible Expenses. Employer-provided group insurance benefits are now considered forgivable payroll costs.  The 60/40 ratio (60% payroll expenses and 40% other expenses to achieve 100% forgiveness) has not been changed, but “other expenses” can now include expenses other than rent and utilities. This change only applies to loans that have not been forgiven yet. Additional eligible expenses include:

  • Operations expenditures such as software, product delivery, processing fees, or tracking of payroll expenses
  • Costs related to property damage and vandalism or looting that occurred during 2020 but were not covered by insurance or other compensation. Supplier costs, including those prior to the covered period that were essential to operations
  • Worker protection expenditures (PPE and investments to help recipient comply with federal health and safety guidelines)

PPP Round 2. The Act has provided for a second round of PPP loans. To qualify:

  • Revenue must have decreased by 25% (any quarter in 2019 vs. the same quarter of 2020)
  • Must have been in operation on February 15, 2020. 
  • Must have 300 employees or less
  • Must not be a publicly traded company
  • Must have used all of the first PPP loan in order to apply for second PPP loan

Borrowers may receive a loan amount of up to 2.5x the average monthly payroll costs incurred or paid during 2019 or the one year period prior to the date on which the loan is made, not to exceed $2 million. Entities in industries assigned to NAISC Code 72 (Accomodation and Food Services) may receive loans of up to 3.5x average monthly payroll costs. 

Simplified Loan Forgiveness. Loan forgiveness application and documentation is simplified for loans up to $150,000, which will be forgiven in full when the borrower signs and submits certification providing information regarding the number of employees retained, the estimated amount spent on payroll expenses, and the total loan value. 

Borrowers who have returned all or part of their PPP loan can reapply for the maximum amount forgivable as long as they have not received forgiveness. They can also work with lenders to modify the loan value if loan calculations have increased due to changes in interim final rules. 

Economic Injury Disaster Loan (EIDL)

Extension of EIDL Applications: The Consolidated Appropriations Act of 2021 extended the application deadline for EIDL loans through December 31, 2021. Eligible small businesses can still apply for a maximum loan amount of $2 million, and are now eligible to receive the full $10,000 advance grant regardless of the number of workers employed (previously $1,000 per employee).

EIDL Advance Grant and PPP Loan Forgiveness: The provisions from the previous CARES act reducing PPP loan forgiveness by the amount of advance grant received was repealed with the new act. EIDL Advances will no longer reduce PPP forgiveness. 

Tax Implications: The grants remain excluded from income, and no deductions are disallowed as a result of this income exemption.

Employee Retention Tax Credit (ERTC)

ERTC and PPP Loans. Employers who have received a PPP loan can now also qualify for the ERTC retroactively. To prevent double dipping, qualified payroll that have been taken into account for PPP loan forgiveness will not be eligible for purposes of determining the ERTC for that period. The ERTC however can be applied to qualified wages paid for using the PPP proceeds that were not forgiven by the SBA.. 

Tax Credit Hike. Beginning January 1, 2021, the ERTC rate has been increased from 50% to 70% of qualified wages. The $10,000 qualified wage limitation has also been increased to $10,000 per quarter, previously having been limited to the first $10,000 in wages per employee, per year.  As a result, employers can now enjoy a maximum credit of $7,000 for each employee per quarter, as opposed to the previous $5,000 max credit per employee for wages paid after March 12, 2020 and before January 1, 2021. .  

Eligible Employers Modifications. The Act expanded  the gross receipts test for eligible employers, reducing the required gross receipt decline from 50% to 20% of the comparable quarter. The comparable quarters are determined as follows:

  • For businesses that started operations in 2019 – same calendar quarter in 2019 and 2020 (i.e. 2019 Q3 vs 2020 Q3)
  • For businesses that started operations in 2020 – same calendar quarter in 2020 and 2021 (i.e. 2020 Q1 vs 2021 Q1)
  • Alternative Election – businesses can elect to compare immediately preceding quarters (i.e. 2020 Q1 vs 2019 Q4)
  • The above modifications are available to employers beginning January 1, 2021.

The above modifications are available to employers beginning January 1, 2021.

Extended Availability. The ERTC is now available through June 30, 2021.

Advance Payment of ERTC. Beginning January 1, 2021, employers with less than 500 employees can apply to receive the credit in advance for up to 70% of average quarterly wages paid in 2019 (or 2020 for businesses not in existence in 2019). For seasonal employers, wages from a specific calendar quarter may be used instead of the average. The advance will be reconciled against the actual credit later on, increasing the employer’s payroll tax for the calendar quarter if there is an excess.

Employee Retention Tax Credit - 2021

Extension of SBA Loan Debt Relief

Extension of Monthly Payments: The debt relief program provided for by the CARES Act, which covers principal, interest and fees payments for eligible SBA 7(a) Loans has been extended for an additional 3-month period, with payments starting on February 1, 2021. There is an extended 5-month period after the initial 3 months for businesses operating under certain hard-hit industries (food and entertainment, educational services etc.). 

Maximum Covered Payments Per Month: The SBA will only cover a maximum of $9,000 for each month, with the excess amount to be reported as additional interest to be paid at the end of the loan period. 

Limitations on Specified 7(a) Loans: Borrowers cannot receive debt relief assistance for more than one 7(a) loan that were taken out between March 27, 2020 to October 26, 2020.

Tax Implications: The debt relief is also excluded from income, with no expense disallowance as a result of the income exemption.

SBA Loan Enhancements

Temporary Fees Waiver. The SBA is expected to waive or reduce administrative fees related to SBA 7(a) and 504 loan applications.

Increased 7(a) Loan Guarantee. The SBA will now guarantee at least 90% of the balance of 7(a) loans, up from 75% to 85% (depending on loan amount).

SBA Express Loans. The maximum loan amount is temporarily increased to $1 million and the SBA guarantee rate is modified to the following:

  1. Loans less than or equal to $350,000 – up to 75%
  2. Loans greater than $350,000 – up to 50%

All of the above provisions are only applicable through September 30, 2021, as the act specifically provided for a prospective repeal by October 1, 2021.

Grants for Shuttered Venue Operators

Eligibility Requirements The person or entity must be a live venue operator or promoter, which includes the following:

  • Theaters
  • Museums
  • Cinemas
  • Talent managers and representatives

The grantee  must have been operational on or before February 29, 2020 and must have experienced at least a 25% reduction in gross receipts on a quarter-to-quarter basis. The grantee must also be operational, or is expected to resume operations, by the grant date. 

Exclusions. The Act specifically prohibits the following persons or entities from receiving the grant, that meets the following criteria:

  1. At least one of the following:
    1. Publicly-owned companies
    2. Receiving more than 10% of gross revenue from Federal funding
  2. At least two of the following:
    1. Operating in more than one country
    2. Operating in more than ten states
    3. Employing more than 500 employees as of February 29, 2020

Priority Periods The grant is provided on a priority basis with applicants who had experienced a 90% reduction in gross revenues on an April to December 2019 and 2020 comparative period, getting prioritized in the first 14 days. Second priority (over the next 14 days) is provided to applicants with a 70% reduction in revenues. Applications from the remaining eligible applicants will be processed after the initial 28-day priority period.  

Grant Amount The maximum grant amount that an eligible person or entity can receive is the lesser of:

  1. Operational before January 1, 2019 – 45% of gross revenue for 2019;
  2. Operational during 2019 – average of full months revenue multiplied by 6; or
  3. $10 million

Supplemental Grants Additional grants may be awarded after the initial grant if the grantee still experiences a 70% reduction in gross revenues by April 1, 2021. The SBA however, must process all initial grant applications first before supplying any supplemental grants. The supplemental grant is limited to 50% of the original grant received.

Use Of Grant Funds The proceeds from the grant may be used for most of the operational and business expenses, except for the following:

  • Purchase of Real Estate
  • Payment of Interest for Debts Incurred after February 15, 2020
  • Capital Investments 
  • Political Contributions

The funds are to be used within one year of disbursement (18 months for supplemental grants) and may be used for expenses incurred during the covered period March 1, 2020 to December 31, 2021 (March 1, 2020 to June 30, 2022 for supplemental grants).

Tax Implications: The grant received is excluded from income, and no deductions are disallowed as a result of this income exemption.

Meals Deduction

Temporary Allowance of Full Deduction for Business Meals. For amounts paid or incurred after December 31, 2020 and before January 1, 2023, expenses for food or beverages provided by a restaurant are eligible for 100% deduction. 

As always, if you have questions about how this bill impacts you, please contact our office.

Consolidated Appropriations Act 2021 – Individual Provisions

On Sunday, December 27, 2020, the President signed into law one of the longest bills in US history. This bill, the Consolidated Appropriations Act 2021, is a sprawling 5,593 pages and contains a $900 billion relief package for aid related to the COIVD19 pandemic as well as a $1.4 trillion in annual funding for the federal government in the upcoming year.

Individual Economic Stimulus Payments

Eligible individuals are provided a refundable tax credit of:

  • $600 per taxpayer ($1,200 for married filing jointly)*
  • An additional $600 per qualifying child [dependent adults ineligible]

The credit is subject to the same income thresholds for eligibility as the first stimulus payment, but is based on 2019 income. If the credit amount on an individual’s 2020 tax return exceeds the amount of the advanced payment based on 2019 income, taxpayers will receive the difference as a refundable tax credit. The credit amount is reduced by 5% of the taxpayer’s adjusted gross income (AGI) in excess of:

  • $150,000 for a joint return
  • $112,500 for head of household
  • $75,000 for all other taxpayers

*There is pending legislation that may increase the amount of the second round of economic stimulus payments to $1,200 per individual ($2,400 for an eligible married filing joint couple). 

Unemployment Payments and New Unemployment Program

Pandemic Unemployment Assistance (PUA): The Consolidated Appropriations Act of 2021 extends the  duration of Pandemic Unemployment Assistance to 50 weeks (previously 39 weeks) for those who don’t qualify for regular compensation or extended benefits under State or Federal law or PEUC (see below).

Federal Pandemic Unemployment Compensation (FPUC): The Consolidated Appropriations Act of 2021 restores the Federal Pandemic Unemployment Compensation (FPUC) supplement to state unemployment benefits at  $300 per week (reduced from the federal supplement of $600 per week under the Section 2104 of the CARES Act that ended July 31, 2020 ). This federal supplement applies to weeks of unemployment after December 26, 2020 through March 14,2021. 

Pandemic Emergency Unemployment Compensation (PEUC): Pandemic Emergency Unemployment Compensation has been extended to March 14, 2021 and allows individuals receiving benefits as of March 14, 2021 to continue through April 5, 2021, as long as that individual has not reached the maximum number of weeks. The number of weeks of benefits an individual may claim through the PEUC program has been increased from 13to 24.

Mixed Earner Unemployment Compensation: A new unemployment program provides an additional $100 per week to “mixed earners”, those that have both wage (W-2) and self-employment (i.e. 1099) income and earned at least $5,000 in 2019 and

Individual Income Tax Changes

Decrease to the Medical Deduction Floor. The Consolidated Appropriations Act of 2021 permanently reduces the medical deduction floor for years beginning after December 31, 2020 from 10% to 7.5%. 

Extension of Charitable Contribution Deduction for Non-Itemizers. Taxpayers who do not elect to itemize deductions for any tax year beginning in 2021 can deduct up to $300 ($600 if married filing joint) in cash contributions to eligible not-for-profit organizations.

Changes to the Child Tax Credit and Earned Income Credit. Taxpayers may elect to substitute the earned income for the preceding tax year, if that is greater that the taxpayer’s earned income for 2020.

As always, if you have questions about how this bill impacts you, please contact our office.

“Last-Minute” 2020 Year-End Tax-Saving Moves for Individuals

There are only a few days left before the year ends, but here are some actions you can take before the new year to improve your situation for 2020 and beyond.

Consider President-elect Biden’s proposals. As the year comes to an end, it is hard to predict what, if anything, that the Biden Administration has proposed will become law and take effect in 2021. Most experts believe that taxes will need to be increased after the economic effects of the pandemic to help pay for the increased federal spending as a result of the pandemic. But enacting any major tax legislation is likely to be a slow process and may not affect 2021 taxes.

Here are some of the Biden Administration’s most noteworthy tax proposals:

Tax increase proposals

  • Raise the highest individual income tax rate to 39.6% from 37%.
  • Cap itemized deductions for the wealthiest Americans at 28%.
  • End favorable capital gains rates, including those rates on qualified dividends, for anyone with income over $1 million.
  • Eliminate the step-up in basis at death (taxing all appreciated investments at death)
  • Reducing the estate and gift tax exemption to its pre-Tax Cuts and Jobs Act (TCJA) level.

Tax decrease proposals.

  • $8,000 tax credit to help offset the costs of child care.
  • Exclusion from income for student loans that have been forgiven.
  • A refundable tax credit for low- and middle-income workers who contribute to IRAs and employer-provided retirement savings plans.

Solve underpayment of estimated tax/withheld tax issues.

Add an extra amount of withholding from your paycheck to solve an underpayment of estimated tax problem. Employees may discover that their prepayments of tax for 2020 have been too small because, for example, their estimate of income or deductions was off and they are underwithheld, or they failed to make estimated tax payments for unanticipated income, such as gains from sales of stock. Or they may have an underpayment of estimated tax because of the additional 0.9% Medicare tax and/or the 3.8% surtax on unearned income. To reduce an estimated tax underpayment penalty, an employee can ask their employers to increase withholding for their last paycheck or paychecks to make up or reduce the deficiency. If you are significantly underwithheld annually, you can file a new Form W-4 or simply request that the employer withhold a flat amount of additional income tax. If you are unable to add an additional withholding amount on your final paycheck, you can make a final estimated tax payment for 2020 (due on Jan. 15, 2021) to cut or eliminate the penalty for a Q4 underpayment only. It doesn’t help with underpayments for preceding quarters. By contrast, tax withheld on wages can wipe out or reduce underpayments for previous quarters because, as a general rule, an equal part of the total withholding during the year is treated as having been paid on each quarterly estimated payment date.

Charitable donations.

Use IRAs to make charitable donations. Taxpayers who have reached age 70½ by the end of 2020, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD—a direct transfer from the IRA trustee to the charitable organization. Such a transfer (up to $100,000 for 2020) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. But, since such a distribution is not includible in gross income, it will not increase Adjusted Gross Income (AGI) for purposes of the phaseout of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified level.

Taxpayers who have reached age 72 by Dec. 31 normally must take required minimum distributions (RMDs) from their IRAs or 401(k) plans (or other employer-sponsored retired plans) by Dec. 31. As a result of the CARES Act, there is no such requirement for 2020.

A QCD before Dec. 31, 2020 can still be a good idea for retired taxpayers who don’t need their as-yet undistributed RMD for living expenses. A 2020 QCD will reduce the taxpayer’s retirement account balance and therefore reduce the amount of the RMD that must be withdrawn in future tax years.

Charitable donation by non-itemizers. Non-itemizers can deduct up to $300 of cash charitable donations that they make in 2020 ($600 for married filing joint taxpayers).

Higher limit on charitable contributions. In response to the Coronavirus (COVID-19) pandemic, the limit on charitable contributions of cash by an individual in 2020 was increased to 100% of the individual’s adjusted gross income (AGI). For previous years, the limit was 60% of a taxpayer’s AGI. While this increased limit was extended to 2021 by the CAA, 2021, taxpayers should consider increasing 2020 contributions to take advantage of the increased limit.

Retirement plans.

Establish a Keogh plan. A self-employed person who wants to contribute to a Keogh plan for 2020 must establish that plan before the end of 2020. If that is done, deductible contributions for 2020 can be made as late as the taxpayer’s extended tax return due date for 2020.

Relief with respect to withdrawal from retirement plans. A distribution from a qualified retirement plan is generally subject to a 10% additional tax unless the distribution meets an exception under Code Sec. 72(t).

2020 legislation provides that the Code Sec. 72(t) 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000. A coronavirus-related distribution is any distribution made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan, made to a qualified individual.

A qualified individual is an individual

  1. Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
  2. Whose spouse or dependent (as defined in Code Sec. 152) is diagnosed with such virus or disease by such a test, or
  3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

Other relief also applies to coronavirus-related distributions, including the ability to recognize income over a 3-tax-year period.

Other.

Make year-end gifts. A person can give any other person up to $15,000 for 2020 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so. Besides avoiding transfer tax, annual exclusion gifts take future appreciation in the value of the gift property out of the donor’s estate, and they shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).

Watch out for the use-it-or-lose-it rule. Unused cafeteria plan amounts left over at the end of a plan year must generally be forfeited (use-it-or-lose-it rule). A cafeteria plan can provide an optional grace period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year. Benefits or contributions not used as of the end of the grace period are forfeited. Under an exception to the use-it-or-lose-it rule, at the plan sponsor’s option and in lieu of any grace period, employees may be allowed to carry over up to $500 of unused amounts remaining at year-end in a health flexible spending account.

Taxpayers should make sure they understand their employer’s plan and should make last-minute purchases before year end to the extent that not doing so will result in losing benefits. In most cases, a trip to the drug store, dentist or optometrist, for goods or services that the taxpayer would otherwise have purchased in 2021, can avoid “losing it.”

Paying by credit card creates deduction on date of credit card transaction. Taxpayers should consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase their 2020 deductions even if they don’t pay their credit card bill until after the end of the year.

Increase 2020 itemized deductions via a “bunching strategy.” Many taxpayers who claimed itemized deductions in prior years will no longer be able to do so. That’s because the standard deduction has been increased and many itemized deductions have been cut back or abolished. Paying some otherwise-deductible-in-2021 itemized deductions in 2020 can decrease taxable income in 2020 and will not increase 2021 taxable income if 2021 itemized deductions would otherwise have still been less than the 2021 standard deduction. For example, a taxpayer who expects to itemize deductions in 2020 but not 2021, and usually contributes a total of $1,500 to charities each year, should consider making a total of $3,000 of charitable contributions before the end of 2020 (and skipping charitable contributions in 2021).

Please contact our office for additional guidance and tax savings strategies that may be applicable to your personal situation.

You Can Deduct $300 for Charitable Contributions This Year While Taking Standard Deduction

The Coronavirus Aid, Relief and Economic Security (CARES) Act included several temporary tax changes to help charities, including the special $300 deduction designed especially for people who choose to take the standard deduction.

Under this new change, individual taxpayers can claim an “above-the-line” deduction of up to $300 for cash donations made to qualifying tax-exempt organizations during 2020. “Above-the-line” deduction means this deduction lowers both adjusted gross income and taxable income.

Before making a donation, the IRS reminds taxpayers that they can check the special Tax Exempt Organization Search Tool on the IRS website to make sure an organization is eligible for tax-deductible donations.

Cash donations include those made by check, credit card or debit card. They do not include securities, household items or other properties. Additionally, cash contributions made to supporting organization and donor-advised funds do not qualify.

Be sure to keep good records of charitable contributions. By law, special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. This includes obtaining a receipt or acknowledgement letter from the charity and retaining a cancelled check or credit card receipt.

Furthermore, the CARES Act includes other temporary provisions designed to help charities. These include higher charitable contribution limits for corporations, individuals who itemize their deductions and businesses that give food inventory to food banks and other eligible charities.

For more information about these and other Coronavirus-related tax relief provisions, please contact our firm.