After several months of stalled negotiations, the long-awaited, much-debated second Covid-19 stimulus package has been finalized. The Consolidated Appropriations Act, 2021, a 5,500 page spending and stimulus bill, provides $900 billion of pandemic-related assistance to individuals and businesses, including a second round of direct payments and an expansion of the popular Paycheck Protection Program.
The bill overwhelmingly passed both the House of Representatives and the Senate, and although President Trump initially demanded an increase to the direct stimulus payments to individuals that threatened to halt the bill’s enactment, nearly a week later the President signed the bill on Dec. 27, 2020, without the requested changes.
Below are highlights of the tax-related provisions included within the legislation.
Another round of nontaxable direct payments is available to qualifying individuals. Amounts of up to $600 for individuals and $1,200 for a married couple filing jointly, plus $600 for each dependent child under the age of 17 will be sent based on 2019 filing information. Payments begin phasing out once adjusted gross income exceeds $75,000 for a single taxpayer and $150,000 for a married couple. As was the case with the first round of payments, this second payment represents an advance on a tax credit that will be reconciled on the 2020 tax filing.
Paycheck Protection Program (PPP)
Substantial changes to the PPP were made, including:
- Expenses paid for with forgiven PPP funds are now tax-deductible for all borrowers, even those who have already applied for forgiveness.
- The original PPP will reopen and become available through March 31, 2021.
- For borrowers who have not yet received forgiveness, four new types of expenses are eligible non-payroll uses of PPP funds and eligible for up to 40% of total forgiveness: certain operations costs such as software or cloud computing services or administrative costs, public disturbance related property damage/vandalism/looting costs not covered by insurance, covered supplier costs, and covered worker protection costs.
- Borrowers can choose any covered period beginning on the date a borrower receives the loan and ending on a date selected by the borrower during the 8 to 24 weeks after loan origination.
- Streamlined forgiveness for borrowers with loans under $150,000.
- A second draw of forgivable PPP loans of not more than $2 million will be available for qualifying businesses who have or will fully extinguished their round one proceeds. Borrowers must have fewer than 300 employees (down from 500), and be able to establish a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019. Usage of proceeds will follow the same protocol as round one loans. Loans will be equal to the lesser of 2.5 multiplied by average monthly payroll costs for the one-year period before the loan is made or calendar year 2019, or $2 million. The hospitality industry, however, will use a multiple of 3.5.
- PPP forgiveness amounts will no longer be reduced by any Economic Injury Disaster Loan (EIDL) grant received.
Other Loan and Grant Programs
The EIDL advance grant will again be available, allowing businesses who did not receive the full $10,000 advance to reapply for the difference. Also, the EIDL advance will not be taxable and expenses paid with the funds will be tax deductible. The same is true for borrowers of traditional Section 7 SBA loans who had six months of their principal and interest paid under the CARES Act, with the bill requiring the SBA to pay an additional three to eight months beginning in February 2021. In addition to existing programs, a new non-taxable grant is available for eligible shuttered venues, theaters, and museums as well.
The bill provides an additional $300 per week through March 14, 2021. Pandemic Unemployment Assistance (PUA) that expands unemployment benefits to self-employed and others in nontraditional employment was extended as well, with the maximum number of eligible weeks increased to 50 weeks. An additional $100 of extra benefit may also be available for certain workers who have both wage and self-employment income. Unemployment compensation received is taxable income to the recipient.
Credits and Deductions
- Paid Sick and Family Leave credits under the Families First Coronavirus Response Act (FFCRA) were extended from Dec. 31, 2020, to March 31, 2021.
- The Employee Retention Credit (ERC) is extended to July 1, 2021. Businesses may now take the ERC and the PPP, with wages used in computing the ERC not forgivable costs under the PPP program. For periods in 2021, the following changes apply to the ERC:
- The credit percentage is increased from 50% to 70% of qualified wages.
- Qualified wages are increased from $10,000 in total per employee to $10,000 per quarter per employee.
- Qualified wage restrictions apply at 500 employees, rather than 100.
- Drop in gross receipts requirement decreases from 50% to 20% over a prior quarter.
- Business meals from a restaurant will be 100% deductible for 2021 and 2022, rather than 50%.
- Above-the-line charitable donations for non-itemizers will be available in 2021 as well and increased to $600 for those married filing jointly in 2021.
- The increased individual AGI threshold from 60% to 100% and increased corporate limitation from 10% to 25% of taxable income for qualifying cash contributions is extended through 2021.
- A special temporary rule allows taxpayers taking the Earned Income Tax Credit or the Child Tax Credit the ability to use income from their 2019 tax year to determine a 2020 credit.
- Favorable depreciation rules for taxpayers electing out of tax code Section 163(j) business interest expense limitation rules.
- Educators’ deductible costs now include personal protective equipment and other coronavirus prevention related supplies.
- Farmers may elect to retain the two-year carryback of a net operating loss (NOL), rather than claim a five-year carryback as provided for in the CARES Act. Farmers may also revoke the election to waive the carryback of an NOL.
- The employee portion of certain payroll taxes deferred under President Trump’s memorandum on wages paid from Sept. 1, 2020 through Dec. 31, 2020 have an extended repayment period now through Dec. 31, 2021, rather than April 30, 2021.
- Taxpayers can roll unused health and dependent care flexible spending amounts from 2020 to 2021, and from 2021 to 2022.
Extension of Certain Expiring Provisions
The bill revives several provisions that were set to expire at the end of 2020—some permanently, some for shorter durations. Here are a few of the provisions made permanent:
- 7.5% AGI threshold for unreimbursed medical expenses as an itemized deduction.
- Section 179D, which allows for a deduction upon making energy efficient improvements to commercial buildings and systems.
- The deduction for qualified tuition expenses will expire at the end of 2020 but be replaced with increased income phaseout thresholds on the Lifetime Learning Credit.
A few provisions were extended for five years, until Dec. 31, 2025 (when many of the TCJA provisions are slated to sunset as well), including:
- The New Markets Tax Credit;
- The Work Opportunity Tax Credit;
- The Employer Credit for Paid Family and Medical Leave;
- Tax-free forgiveness of principal residence mortgage debt forgiveness;
- Immediate expensing of certain qualified film and television and live theatrical productions; and
- Allowing employers to pay up to $5,250 of an employee’s qualified tuition, student loan, and interest tax-free to the employee.
In addition, a host of expiring energy credits, including the credits for nonbusiness energy property, energy efficient homes, and fuel cell motor vehicles were extended through the end of 2021.
Non-Covid-19 related disaster relief was provided in the bill as well for qualified disaster areas with respect to major disaster declarations during the period beginning on Jan. 1, 2020, and ending 60 days after the enactment of the Act.
Rules similar to those of the CARES Act for tax-favored withdrawals from retirement plans also apply to those affected by major disasters as well. The early withdrawal penalty will not apply for distributions not in excess of $100,000 over the aggregate amounts treated as qualified disaster distributions received for all prior taxable years. Also, distributions may be repaid at any time during the three-year period beginning on the day after the distribution was received and taxpayers may include distributions into income over three years, unless an election to include the entire distribution into income in year one is made.
Additionally, an Employee Retention Credit (ERC) is available for businesses affected by qualified disasters as well, and while similar, should not be confused with the ERC of the CARES Act. The credit equals 40% of qualified wages paid to each eligible employee for the taxable year, not to exceed $6,000 of wages per employee for the year. Wages for these purposes cannot include any taken into account under the CARES Act ERC, cannot be used for other credits, and are not allowed to be used as forgivable PPP payroll costs.
Finally, the bill modified the allowance of personal casualty losses for disaster areas and provided the potential for corporations to make qualified disaster relief contributions up to 100% of their taxable income.
The bill provides significant relief and opportunity for businesses and individuals. While some areas add complexity and create a whole host of new questions, the potential value within is important for those impacted by the coronavirus pandemic. Additional relief legislation continues to be discussed as well; whether it happens at all or takes several more months is yet to be seen.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Tony Nitti, CPA, MST, is a partner with RubinBrown in Denver. Amie Kuntz is a CPA, MA, with the Denver office.