Year-End Appropriations Act Includes Income and Employment Tax Provisions

The recently enacted Consolidated Appropriations Act, 2021 (Act) contains a wide range of tax, appropriations, and other provisions, including pandemic-specific provisions and extensions of provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Following is a summary of some of the key tax provisions of the Act.

New Paycheck Protection Program (PPP) loans

• Provides new PPP loans available to first-time qualified borrowers and to prior PPP loan recipients, with an expanded list of types of eligible borrowers.
• Expands the list of expenditures eligible for loan forgiveness to include not only payroll, rent, mortgage interest, utilities and interest on pre-existing debt, but also specified expenditures for business software or cloud computing, COVID 19-related operating or capital worker protection costs, supplier costs, and costs related to property damage resulting from public disturbances not covered by insurance.
• Allows a previous PPP loan recipient to apply for a “second draw” loan of up to $2 million if the recipient (1) has 300 or fewer employees; (2) has used or will use the full amount of its first PPP loan; and (3) can show a 25% decline in gross receipts during a calendar quarter in 2020 as compared to the same quarter in 2019.

Deductibility of expenditures funded with PPP loans

• Confirms that PPP loan forgiveness does not give rise to taxable income and that tax basis and other attributes of the borrower’s assets will not be reduced as a result of PPP loan forgiveness.
• Provides that eligible expenses funded by PPP loans are deductible, even if the related loan is forgiven. This provision clarifies the law as created under the CARES Act and overrides contrary guidance released by the IRS earlier in 2020.

Payroll and employment credits and withholding

• Extension and expansion of employee retention tax credit. Extends through June 30, 2021 the CARES Act refundable employee retention credit against certain employment taxes. Increases the credit amount from 50% to 70% of qualified wages paid, and the per-employee creditable wages limit from $10,000 per year to $10,000 per quarter (with a maximum $7,000 credit per employee). Reduces the required gross receipts decline for credit eligibility from a 50% reduction to a 20% reduction. Increases the employee threshold at or below which the credit is available for wages paid to working employees from 100 to 500, and expands who may claim the credit to include, among others, previously ineligible state or local run colleges, universities, and organizations providing medical or hospital care. Also retroactively permits a taxpayer that received a PPP loan to claim the credit, but not with respect to wages paid with a PPP loan that has been forgiven.
• Qualified disaster employee retention credit. Reinstates a qualified disaster employee retention credit equal to 40% of qualified wages, up to $6,000 per employee (maximum $2,400 credit per employee) for an employer that conducted an active business in a qualified disaster zone. The credit cannot be claimed with respect to wages for which certain other credits are claimed, including the CARES Act employee retention credit.
• Extension of paid sick and family leave credit. Extends through March 31, 2021 the Families First Coronavirus Response Act refundable employment tax credit for employers required by that act to provide paid sick and family leave for certain employees, and the corresponding credit for self-employed individuals against the self-employment tax. Allows self-employed individuals to elect to use prior-year net earnings from self-employment, rather than current-year, to compute the amount of the credit.
• Extension of employee portion of Social Security tax withholding deferral. Extends the repayment period through the end of 2021 for certain deferrals of withholding, deposit, and payment of the employee portion of Social Security tax for employees whose pretax wages or compensation during any biweekly pay period generally is less than $4,000.

Other business provisions

• Temporary suspension of limitation on food and beverage deduction. Allows full deductibility (rather than the standard 50% limitation) for business meal costs incurred in 2021 or 2022, but only for food or beverages “provided by a restaurant.”
• Residential real property recovery period. Allows taxpayers engaged in a real property trade or business that elect not to have the Section 168(j) business interest deduction limitations apply to residential real property placed in service after 2017 to have the 30 year alternative depreciation system (ADS) recovery period also apply to residential real property placed in service before 2018.
• Farmer NOL carrybacks. Allows farmers who elected a two-year net operating loss (NOL) carryback prior to the CARES Act to retain that two-year carryback rather than the five-year carryback provided for in the CARES Act. Farmers who previously waived an election to carry back an NOL may revoke the waiver.
• Low-income housing tax credit. Increases the 2021 and 2022 credit ceiling available to housing credit agencies in states with qualified disaster zones and sets a permanent 4% floor for buildings placed in service after 2020 that are not eligible for the 9% credit. Individual taxpayer provisions
• New “recovery rebate.” Provides “additional 2020 recovery rebates” to eligible individuals of $600 per taxpayer ($1,200 married filing jointly) plus $600 per qualifying child under age 17. “Eligible individual” excludes nonresident aliens and persons who qualify as another person’s dependent. The credit phases out for individuals with modified gross income of between $75,000 ($150,000 married filing jointly) and $87,000 ($174,000 married filing jointly). The credit may be claimed on the taxpayer’s 2020 return, but the Act directs the Treasury to issue advance payments based on information from 2019 tax returns. Taxpayers who receive advance payments in excess of their eligible credit are not required to repay the advance. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, the taxpayer is able to receive the difference as a refundable tax credit.
• Charitable contributions deduction for non-itemizers. The CARES Act allowed individuals who do not itemize deductions to take an above-the-line deduction of up to $300 (including for married filing jointly filers) for cash contributions to qualified charitable organizations in 2020. The Act extends the $300 deduction for individuals through 2021 and allows a $600 deduction for married filing jointly filers.
• Education deductions and credits. Replaces the separate income phaseout rules for the American opportunity tax credit and Lifetime Learning Credit with a single phaseout rule applicable to both and repeals the “higher education expense deduction” for qualified tuition and related expenses, effective for tax years beginning after 2020. Permanent extensions. The Act made permanent the following:
  • Reduction in medical expense deduction floor. Permanently reduces the threshold at which individuals may deduct unreimbursed medical expenses from 10% to 7.5% of adjusted gross income.
  • Energy-efficient commercial buildings deduction. Makes permanent the deduction for certain energy-efficient improvements to commercial buildings and provides for an inflation adjustment those amounts for years after 2020.
  • Railroad track maintenance credit. The railroad track maintenance credit was made permanent, but the amount of the credit for applicable expenditures paid or incurred during the tax year is reduced to 40%.
  • Provisions related to the production of and excise taxes related to beer, wine and spirits. Reduces various excise rates for small brewers and distillers and makes permanent the special rule for the production period for beer, wine, and distilled spirits.
  • Benefits provided to volunteer firefighters and emergency medical responders. Makes permanent the exclusion from gross income for members of a qualified volunteer emergency response organization of certain state or local tax relief and other payments provided for performing volunteer emergency response services.

Five-year extensions. The Act provides five-year extensions to the following:

• Employer credit for paid family and medical leave. Extends through 2025 the general business credit for eligible employers on wages paid to qualifying employees pursuant to a family and medical leave program.
• New markets tax credit. Extends through 2025 the annual $5 billion New Markets Tax Credit allocation and extends the carryover period for unused New Markets Tax Credits by five years, through 2030.
• Look-thru rule for related controlled foreign corporations. Extends through 2025 the “CFC look-thru rule” that allows an owner of a controlled foreign corporation (CFC) not to treat dividends, interest, rent, and royalties received or accrued from that CFC as foreign personal holding company income.
• Empowerment zone tax incentives. Extends through 2025 the period for which the designation of an empowerment zone is in effect and provides that a designation with a termination date of December 31, 2020 will not automatically terminate if the nomination for the designation is amended to provide for a new designation termination date. Also provides that certain empowerment zone-related expensing rules and gain recognition rules will not apply in tax years beginning after 2020.
• Exclusion for employer payments of student loans. Extends through 2025 the exclusion from an employee’s gross income of “eligible student loan repayments” by the employer.
• Gross income exclusion for discharge of qualified principal residence indebtedness. Extends through 2025 the exclusion from gross income for discharged qualified principal residence debt and reduces the maximum acquisition indebtedness exclusion limits to $750,000 ($375,000 for married individuals filing separately).
• Other five-year extensions:
  • Seven-year recovery period for motorsport entertainment complexes;
  • Expensing rules for qualified film, television, and theatrical productions;
  • Oil spill liability trust fund tax rate; and
  • Work opportunity credit.

Two-year extensions. Extends through 2025 the date by which the construction of a qualified facility must begin for purposes of the carbon oxide sequestration credit.

One-year extensions. The Act provides one-year extensions to the following:

• Treatment of mortgage insurance premiums as qualified residence interest. Extends through 2021 the date by which certain mortgage insurance premiums must be paid or incurred to allow treatment as deductible qualified residence interest.
• Other one-year extensions:
  • Nonbusiness energy property credit;
  • Qualified fuel cell refueling property credit;
  • Alternative fuel refueling property credit;
  • 2-wheeled plug-in electric vehicle credit;
  • Credit for health insurance costs of eligible individuals;
  • Second generation biofuel producer credit;
  • Indian coal facility production credit;
  • Indian employment credit;
  • Energy-efficient home credit;
  • Mine rescue team training credit;
  • Classification of certain racehorses as 3-year property;
  • Accelerated depreciation for business property on Indian reservations;
  • Black Lung Liability Trust Fund excise taxes; and
  • Alternative fuel excise tax credit.

Energy credit extensions. The Act also includes several provisions related to renewable energy tax credits. A summary of those changes is available at COVID Relief Bill Includes ITC and PTC Extensions.