On Sunday, December 27, exactly 9 months after the CARES Act was signed, President Trump signed another historic bill.  The Consolidated Apportions Act of 2021 which includes the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), (collectively the Act).  This massive bill is over 5,500 pages and includes over $2.3 trillion in funding that includes economic relief to Americans and businesses amid the ongoing coronavirus pandemic. This Act will affect every taxpayer.

The following is a high level summary of the individual related provisions:

Recovery Rebates: The new law provides eligible individuals with another round of recovery rebates. This is tax-free and does not need to be repaid.

Individuals will qualify for a $600 rebate, while joint filers will receive $1,200, with a $600 credit for each child under age 17.

Rebate amounts will initially be advanced based on 2019 adjusted gross income, but the rebate is really a credit on your 2020 tax return.  Phase-out will begin at adjusted gross income of $87,000 for single filers, $124,500 for heads of households and $174,000 for joint filers.

Rebates will be phased out by $5 for every $100 in excess of a threshold amount. Therefore, rebates are completely phased out for single filers with adjusted gross income over $99,000, heads of household with $136,500 and joint filers with $198,000.

If your rebate was limited due to the income thresholds or missing dependents on your 2019 tax return, you will still be able to claim the balance of missed credit when filing your 2020 tax return if income does not exceed the above thresholds. You will not be required to repay excess credits on your 2020 tax return if the advance rebate check exceeded the entitled amount. 

$250 Educator Expense applies to PPE: If an educator purchased personal protective equipment (PPE), it will be allowed to be used toward the $250 educator expense deduction. 

Child Tax Credits & Earned Income Tax Credits:  The Act allows taxpayers to calculate both the refundable child tax credit and the earned income credit using either 2020 earned income or 2019 earned income whichever is higher.

Charitable Contributions: Individuals will be allowed to claim an above-the-line deduction up to $300 for cash charitable contributions ($600 for married joint filers) for the 2020 and for the 2021 tax years. Furthermore, individuals will be able to claim unlimited itemized deductions for 2020 and 2021 charitable contributions, which are normally limited to 50% of adjusted gross income. 

Health and Dependent Care Flexible Spending Arrangement: Carryover period for 2020 and 2021 extended a full 12 months after the end of such plan year for any unused benefits and contributions related to health flexible spending and dependent care flexible spending.

The following is a high level summary of the business related provisions:

PPP Loan expenses fully deductible: During 2020, the IRS issued notices prohibiting deduction of expenses paid with PPP Loan funds.  The Act reverses the IRS position; hence, making the PPP Loans forgiveness not taxable.

EIDL Grants do not offset PPP Loan forgiveness: If you received both the EIDL Grant and a PPP Loan, prior to the Act, the SBA offset the PPP Loan forgiveness by the amount of the EIDL Grant ($1,000 – $10,000).  The Act makes the EIDL grants not taxable and removes the offset requirement.  If you have already applied for forgiveness and repaid the EIDL grant watch for updates and work with your banker on pursing a potential refund.

Employee Retention Credit (ERC): Under the CARES Act, employers are allowed a refundable credit against applicable employment taxes equal to 50% of qualifying wages up to $10,000, for a maximum credit of $5,000 for wages paid from March 12, 2020 to December 31, 2020.  This was available to employers experiencing over a 50% decline in gross receipts or whose business was closed by government mandate, and the employer was not eligible for a PPP Loan.  The Act greatly expanded this measure. 

The Act retroactively allows PPP Loan participants to qualify for the ERC on any wages not paid with PPP Loan funds effective to March 12, 2020.  If you met the conditions for 2020 as outlined below, we highly recommend you reach out and discuss this with your KTLLP advisor. This is an immediate refund opportunity.

The CAA expands the ERC to include wages paid from January 1, 2021 to June 30, 2021:

  • Increases the ERC credit from 50% to 70% of qualified wages for 2021 only. The 50% credit still applies to 2020 and this was not changed retroactively.
  • For the first two quarters of 2021, the law expands eligibility for the credit by reducing the required year-over-year calendar quarter comparison of gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.  The 50% test still applies to 2020, as this was not changed retroactively.
  • For 2021, increases the limit on the per-employee wages credit from $10,000 for the year to $10,000 per quarter. As such, a credit of up to $14,000 per employee is available in 2021.
  • Increases the 100 employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees.
  • Allows certain public institutions to claim the credit.
  • Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.
  • Clarification of tax treatment of certain loan forgiveness and other business financial assistance under the CARES Act:  The Act clarifies that gross income does not include forgiveness of EIDL Loans, Emergency EIDL grants and SBA 7(a) Loan Subsidies. 
  • 100% business meals deduction for meals provided by restaurants:  Business meals in the past have been 50% deductible.  The Act carves out meals provided by restaurants in 2021 and 2022 are 100% deductible.  Presumably, meals purchased at a grocery store, for instance, would remain only 50% deductible. However, we recommend you start breaking out business meals provided by restaurants into a separate account on your profit and loss statement.
  • Corporation Donations to Qualified Disaster Relief deductible up to 100% of taxable income: Corporations are allowed a 10% deduction related to charitable contributions.  The Act allows for a 100% deduction for “qualified disaster relief contributions” paid between January 1, 2020 and within the next 60 days.
  • Energy Efficient Commercial Buildings Deduction (179D): The Act made this provision permanent and set it to be inflation indexed after 2020.   This is good news for general contractors and certain subcontractors.
  • New Market Tax Credit: The Act extends the $5 billion New Markets Tax Credit allocation from 2020 through 2025.
  • Work Opportunity Tax Credit (WOTC): The Act extends the credit through 2025.   Keep this in mind as a planning opportunity as your hire employees in the new year.
  • Empowerment Zone Credits: The Act extends the credit through 2025.
  • Employer Credit for Paid Family and Medical Act: The Act extends the credit through 2025 for wages paid after December 31, 2020.
  • Indian Employment Credits: The Act extends the credit through 2021.
  • Paid Sick and Family and Medical Leave Credits: The Act extends employer credits for Families First Coronavirus Response Act (FFCRA) wages paid for those who are unable to work or telework due to circumstances related to COVID-19 until March of 2021. 
  • Payroll Tax Deferral: Employers that chose to defer payment on their employees’ share of Social Security taxes in 2020 can withhold and remit the taxes ratably from January 1, 2021 to December 31, 2021.

Paycheck Protection Program (PPP) Second Draw (PPP2): The PPP allowed small businesses to receive a forgivable Small Business Administration (SBA) loan. The second draw will have many of the same rules as the first PPP, but with a cap of $2 million per loan.

For PPP2, an eligible employer employs no more than 300 employees per physical location, has or will use all of the first PPP loan, and demonstrates at least a 25% reduction in gross receipts in any quarter of 2020 relative to the same 2019 quarter. 

Loan funds can be used for expanded costs including payroll, medical or family leave, insurance premiums, mortgage, or rent, etc.  

Similar to the original PPP, borrowers may be eligible for forgiveness of the principal amount of the covered loan in an amount equal to the costs incurred and payments made during the covered period for payroll costs, which must be 60% of the covered expenses, payment of interest on any covered mortgage, or rent, and any covered utility payment. Guidelines will continue to be issued regarding the amount of the loan forgiveness that will be reduced based on a formula that accounts for any reduction in the number of the borrower’s employees (FTE) during the covered period, as well as a formula that accounts for reductions in the total salary or wages of any lower paid employee. 

The SBA has 15 days to issue guidance on how to apply for the second draw.  If an original PPP loan was received, these funds must be used before applying for a second draw PPP loan.  There is no requirement to have the original PPP loan forgiven prior to applying for a second draw.

Selection of Covered Period for Forgiveness.

As with the original PPP, PPP2 allows the borrower to elect a covered period ending at the point of the borrower’s choosing between 8 and 24 weeks after origination.

Simplified Application for loans under $150,000.

A simplified application process is now available for loans under $150,000, up from $50,000.  SBA must establish this form by January 21, 2021 and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. In addition, borrowers are required to retain relevant records related to employment for four years and other records for three years. The Administrator may review and audit these loans to ensure against fraud.

Calculation of Maximum Loan Amount for Farmers and Ranchers under the Paycheck Protection Program.

The new law establishes a specific loan calculation for the first round of PPP loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, and who report income and expenses on a Schedule F, and were in business as of February 15, 2020. These entities may utilize their gross income in 2019 as reported on a Schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. This provision applies to PPP loans before, on, or after the date of enactment, except for loans that have already been forgiven. If this applies to you, please consult with your banker.

Eligibility of 501(c)(6), Destination Marketing Organizations and Housing Cooperatives

PPP2 was expanded to include Code Sec. 501(c)(6) organizations and marketing organizations, and housing cooperatives, if the organization has 300 or fewer employees and it does not receive more than 15% of receipts from lobbying and the lobbying activities do not comprise more than 15% of activities. There are additional conditions, please contact your advisor.

As you have questions, please reach out to your KTLLP advisor.  We are thankful for your business and your support in the coming year.  We wish you a Happy New Year.