Additional Tax Related Provisions of the Consolidated Appropriations Act, 2021

The initial attention generated by the Consolidated Appropriations Act, 2021 (“the Act”) focused on the economic relief provisions – enhancement and expansion of the Paycheck Protection Loan program, extension of unemployment benefits, a second round of stimulus checks, etc. – but the Act also addressed a number of tax and tax related issues. And, as it should, it appropriated funds for the government to spend for the balance of the 2021 fiscal year.

The tax changes in the Act fall into several buckets – extensions to CARES Act and other
pandemic provisions, disaster tax relief, extensions for various expiring tax benefits and miscellaneous other changes to existing tax law.

As of right now, the President has indicated that he will not sign the Act as passed by the House and Senate.  The following discussion assumes the bill is signed and becomes law in its current form.  We will update this article as warranted.  

CARES Act and other pandemic provisions

Employee Retention Credit

• The most significant change are the enhancements to the Employee Retention Credit (“ERC”):
  • Designed to help businesses retain employees – even those not providing services
  • Fully refundable credit
  • Initially set to expire December 31, 2020, the credit is now available for wages paid through June 30, 2021
  • Credit eligibility is expanded for wages paid between January 1, 2021 and June 30, 2021:
    • Previously there was a 100 employee threshold:
      • Business with 100 or fewer employees whose operations were fully or partially suspended due to a shutdown order or because gross receipts declined by 50% quarter over quarter could include all wages
      • For companies with 100 or more employees, qualified wages included only those employees not providing services because operations were fully or partially suspended due to a shutdown order or because gross receipts declined by 50% quarter over quarter
    • New thresholds and rules:
      • Business with 500 or fewer employees can include all wages
        • NOTE: Your business still must either have been fully or partially suspended due to a shutdown order or suffered a gross receipts decline
      • The required year-over-year gross receipts decline is reduced from 50% to 20%
      • It appears as if disruptions in supply chain may be considered a partial suspension of operations
      • New safe harbor allows employers to use prior quarter gross receipts to determine eligibility
      • Special rules for employers not in business for all or part of 2019
      • Can now include bonuses paid to essential workers
      • Group health plan expenses are considered qualified wages even if now other wages are paid
      • Up to $7,000 per quarter per full time equivalent employee
        • Credit rate is increased from 50% to 70% of qualified wages up to $10,000
        • The $10,000 per employee creditable wage limit is now PER QUARTER not per annum
  • CoordinationwithPaycheck Protection Program (“PPP”)
    • Under the CARES Act, PPP loan borrowers were not permitted to take the ERC
    • The Act now allows employers to taketheERC with respect to any wages NOT paid forwithPPP loan proceeds
      • This is retroactive to the passage of the CARES Act meaning eligible employers may be entitled to refunds for payroll taxes already deposited in 2020

NOTE: Given the lack of guidance as to how to determine which wages are deemed to be paid with PPP Loan proceeds and which aren’t, borrowers who are considering claiming the ERC for quarters which include the Covered Period of their PPP Loan may wish to defer applying for forgiveness until there is greater clarity.

• Coordination with other provisions
  • Wages used to determinetheERC may not be taken into account as wages for:
    • R&D credit
    • Family and Medical Leave credit
    • Work Opportunity credit
    • Empowerment Zone Employment credit

Other CARES Act provisions which were extended include:

• The employer credit for paid family and medical leave
• The exclusion for employer payments of principal or interest on any qualified education loan incurred by an employee
• The charitable deduction for non-itemizers is extended for 2021. The maximum amount is $600 for married couples filing a joint return, $300 for singles and married filing separate.
• The increased limit on charitable contribution deductions for corporations and individuals who itemize deductions is extended for one year.

NOTE: In a nod to the hazards certain professionals face in trying to work during the pandemic, the Act directs the Treasury Department to issue guidance allowing teachers to include the cost of personal protective equipment as an eligible expense for the educator expense deduction retroactive to March, 12, 2020.

Disaster tax relief

• The Act extends the ability to use retirement funds for disaster mitigation to 60 days after the date of enactment.
• Corporations may make qualified disaster relief contributions of up to 100% of their taxable income.
• Individuals who have a net disaster loss may increase their standard deduction by the amount of the net disaster loss.

Extensions of various expiring tax benefits

Before the Act, there were 33 temporary tax provisions set to expire at midnight, December 31, 2020. Many of these have been cliffhangers every year or every other year. Now, some have been made permanent while others were granted a five year extension. The following are some of the more significant provisions affected:

• The deduction for energy efficient buildings (Code Section 179D) has been made permanent and will be adjusted for inflation beginning in 2021.
• The various special excise tax rates for small brewers and distillers are now permanent.
• The itemized deduction floor for medical expenses is now permanently 7.5% of adjusted gross income. It was temporarily 10%.
• The following tax credits and provisions were given five-year extensions:
  • The New Markets Tax Credit
  • The Work Opportunity Credit
  • The gross income exclusion for discharge of indebtedness on a personal residence
  • The treatment of qualified mortgage insurance premiums as qualified residence interest
• The 26% rate for the renewable energy investment tax credit was extended two years for properties that begin construction by the end of 2022
  • The residential energy-efficient property credit was also extended for two years
    • Biomass fuel property expenditures are now eligible
• The treatment of qualified mortgage insurance premiums as qualified residence interest was extended for one year
  
  • Among the other credits and provisions extended for one year are:
    
    • Energy efficient homes credit
    • Three year recovery period for race horses
    • Credit for qualified fuel cell motor vehicles

Miscellaneous other changes to existing tax law

Low Income Housing Tax Credits

After years of lobbying, the Act now establishes a floor of 4% for certain Low Income Housing Tax Credits (“LIHTC”). Specifically, credits for the acquisition of projects for rehabilitation or projects financed with certain tax–exempt bonds will not be reduced below 4% even if prevailing interest rates would dictate a lower rate. (It should be noted that Congress established a floor for the 9% credit for new construction or substantial rehabilitation credits in 2015.)

This provision is effective for LIHTCs allocated after December 31, 2020 or, in the case of bond-financed properties, for bonds issued after that date. It is not clear if it may apply to other properties whose allocations straddle year-end. This is yet another area which will require Internal Revenue Service guidance.

Business Meals

The 50% limitation of deduction of business meals is suspended for expenses paid or incurred in 2021 and 2022. This covers not only food and beverage expenses provided by a restaurant but includes carry-out or delivery meals.

Residential Rental Property depreciation

In order to avoid the business interest expense deduction limitation, some owners of rental property are eligible to elect to be treated as real property trades or businesses. To be eligible, such owners must elect to depreciate certain classes of property over longer useful lives under the Alternative Depreciation System (“ADS”). The 2017 tax reform shortened the ADS life of residential rental property from 40 to 30 years but only for property placed in service after December 31, 2017.

The Act now permits all such property to have an ADS life of 30 years including property placed in service before January 1, 2018. Moreover, the change is retroactive to tax years beginning after December 31, 2017, meaning electing real property trades or businesses will have to decide whether to file amended returns or apply for changes in accounting methods to take advantage of this provision. Further guidance from the Internal Revenue Service will be necessary

We will continue to update you as new guidance is released. In January, Friedman will be hosting a webinar to cover the Act and its impact on SMBs. In the In the meantime, please contact your Friedman LLP advisor with any questions.