In its continuing efforts to mitigate the economic effects of COVID-19, on December 27, 2020, Congress and the POTUS enacted the Consolidated Appropriations Act (CAA) which includes the COVID-related Tax Relief Act (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA). The combined effect of these Acts is to offer clarification on various tax provisions under the CARES Act and to offer additional tax benefits to businesses. A few tax highlights of these Acts are summarized below.
Deductibility of Expenses Paid with PPP Loan Proceeds
Under the CARES Act, businesses were able to obtain loans under the Paycheck Protection Program (PPP) which could be forgiven under certain circumstances. Further, if the PPP loan is forgiven, then the business is not required to include the loan forgiveness in its gross income. However, confusion remained on whether businesses could deduct expenses paid for with the PPP loan proceeds that were ultimately forgiven.
The CAA, and the Acts thereunder, clarify the tax treatment of expenses that are otherwise-deductible expenses for businesses that received loans under the PPP. Specifically, the new Acts provide that if a PPP loan is forgiven, businesses are allowed to deduct otherwise deductible expenses paid for with the PPP loan process. Further, tax basis of assets and other tax attributes of the PPP borrower’s assets will not be reduced as a result of loan forgiveness.
Extension of Certain Deferred Payroll Taxes
In August, the president issued a memorandum that allowed employers to elect to defer employees’ payroll taxes from September 1, 2020 to December 31, 2020. Under IRS Notice 2020-65, employers were required to increase the withholdings on the employee’s pay and to pay the deferred amounts between January 1, 2021 and April 30, 2021. If not paid by April 30, 2021, then the employer could be liable for penalties and interest on any remaining deferred tax liability. Under the CAA, the repayment period for the deferred taxes has been extended through December 31, 2021.
Business Meal Deductions
Under current law, businesses are entitled to deduct business related meals at a rate of 50 percent of the cost of those meals. Under the CAA, businesses will be able to deduct 100 percent of their business meal expenses that are incurred during 2021 and 2022. This provision is limited to food and beverages provided by a restaurant. Documentation of the business purpose including the person(s) and nature of the business purpose is essential.
Extension and Changes to the Employee Retention Tax Credit
The CARES Act provided eligible employers with a refundable payroll tax credit for those who paid qualified wages from mid-March through December 31, 2020. The employee retention credit was equal to 50 percent of qualified wages for each eligible employee, with qualified wages limited to $10,000 per employee. The CAA extends the employee retention credit through June 30, 2021.
Further, from January 1, 2021 through June 30, 2021, the following changes apply to the employee retention tax credit:
- The credit rate increases to 70 percent of the employee’s qualified wages.
- The limit on qualified wages per employee increases to $10,000 per calendar quarter.
- Qualified wages include allocable health care costs even if no other wages are paid.
- Qualified wages do not include any wages taken into account under the paid sick leave and paid family leave provisions of the FFCRA.
- Eligible employers included those whose operations were completely or partially suspended due to orders from a government authority and those employers with gross receipts in any quarter that are less than 80 percent of gross receipts from the same quarter in 2019. Further, eligible employers can use the immediately-preceding quarter receipts to determine eligibility.
- The definition of a large employer increases the threshold number of employees to 500.
- Employers not in existence for all or part of 2019 can now claim the credit.
Extension of Paid Leave Tax Credits
Under the FFCRA, employers with less than 500 employees were required to provide paid leave to certain individuals impacted by COVID-19. Under the FFCRA, this leave requirement went through December 31, 2020. Further, employers were able to claim a credit against payroll taxes to mitigate the cost of this leave. Under the CAA, employers are not required to offer leave beyond December 31, 2020. However, under the CAA, eligible employers that do continue to offer this leave can continue to receive the payroll tax credit through March 31, 2021.
Implementation of the provisions of the CAA, and the Acts thereunder, are continuing to develop and Varnum’s Tax Team will provide updates as they become available.