Congress passed the Consolidated Appropriations Act, 2021, clarifying PPP deductibility and providing tax savings opportunities. As of the morning of December 23, 2020, President Trump has not signed the bill.
Key insights
- The Consolidated Appropriations Act, 2021 is a comprehensive government spending bill for the 2021 fiscal year.
- The package includes $900 billion in pandemic-related stimulus and relief for businesses, nonprofits, and individuals.
- You may be able to take advantage of a number of tax savings opportunities.
On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, the omnibus spending bill for the fiscal year that began October 1. The bipartisan bill, which is over 5,000 pages long, is the fifth phase of legislation aimed at fighting the COVID-19 pandemic and mitigating the related economic harm for families, workers, and businesses.
Need help navigating COVID-19 relief opportunities?
As of the morning of December 23, 2020, President Trump had not signed the bill and was urging Congress to increase the amount of the stimulus checks.
Included in the massive bill is a nearly $900 billion relief package that includes stimulus checks for qualifying recipients, additional funding for small businesses, enhanced unemployment benefits, and several provisions (some permanent) on “tax extenders.”
Read on to learn about some of the key business and individual tax provisions and how you can take advantage of available savings.
Business provisions
Paycheck Protection Program (PPP)
The legislation includes a second round of PPP loans, generally available to businesses with up to 300 employees that have sustained a 25% reduction of gross receipts in one or more quarters in 2020 compared to the comparable quarter for 2019. Some businesses are excluded and there are special provisions for live venues, independent movie theaters, and cultural institutions.
Many of the terms of the new program are consistent with the original program. However, the new program expands the list of costs eligible for PPP loan forgiveness to include certain covered operations expenditures, property damages, supplier costs, and personal protection equipment (PPE).
Congress also clarified that expenses associated with the PPP loan forgiveness are fully deductible. The IRS had previously taken the position that expenses associated with PPP loan forgiveness are not deductible, so the change provides welcome relief. The CARES Act already provided that the forgiveness of the PPP loan is excluded from taxable income.
For additional insights on the PPP provisions, see Congress Reauthorizes PPP and Provides Some Needed Tax Relief.
Employee retention credit
The CARES Act added a refundable payroll tax credit equal to 50% of certain compensation paid from March 13, 2020 to December 31, 2020. The employee retention credit was available only to businesses whose operations were suspended or whose gross receipts declined by more than 50% compared to the same quarter during the prior year. Under the CARES Act, the credit was limited to the first $10,000 of compensation paid to a particular worker each year.
The employee retention credit is significantly enhanced under the year-end bill. Specifically, the credit is:
- Computed for wages paid up to $10,000 per quarter (as opposed to “per year”).
- Based on 70% of qualified wages (up from 50%).
- Available to employers whose gross receipts decline by 20% (rather than 50%).
- Extended for wages paid through June 30, 2021 (rather than December 31, 2020).
PPP borrowers are not prohibited from claiming this credit on wages not paid for with forgiven PPP loan proceeds.
Payroll taxes
The IRS allowed employees to defer paying their share of Social Security tax on applicable wages paid from September 1, 2020 through December 31, 2020. Any Social Security tax deferred for the period was to be repaid via additional withholding from January 1, 2021 through April 30, 2021. The new bill allows the deferred tax to be repaid throughout 2021 (rather requiring repayment in the first four months of the year).
Business meals
Under current law, business meals are only 50% deductible. For 2021 and 2022, all businesses, regardless of size or industry, will be permitted a 100% deduction for business-related meals provided by a restaurant. However, there is no change to the limit on entertainment expenses, which are non-deductible after December 31, 2017.
Credits for paid sick and family leave
The refundable payroll tax credits for paid sick and family leave (enacted earlier in the year in the Families First Coronavirus Response Act) are extended through March 31, 2021.
Tax extenders
There is a group of tax provisions (commonly referred to as “tax extenders”) that Congress has a pattern of extending for one or two years at a time. Some of the typical tax extenders, such as the work opportunity tax credit, were extended through 2025 as part of the new bill. Other provisions have become permanent and thus will be removed entirely from the extender list. These provisions include the Section 179D energy efficient commercial buildings deduction and certain provisions related to beer, wine, and distilled spirits, among others.
Individual provisions
Stimulus checks
Another round of economic impact payments will be paid, this time up to $600 per individual plus $600 per qualifying child (age 16 and younger who are dependents) or potentially higher amounts (such as $2,000 for single individuals or $4,000 for a couple) if Congress modifies the package in response to President Trump’s request.
Similar to the first round of checks, the benefit phases out for individuals with adjusted gross income (AGI) between $75,000 and $99,000; $150,000 and $198,000 for married couples. Anyone alive for a day in 2020 can qualify.
Enhanced unemployment benefits
There will be an additional $300 per week unemployment benefit (beyond state-provided benefits) available through March 14, 2021. The enhanced benefit which expired earlier in the year was $600 per week.
Charitable contributions
The CARES Act allowed individuals to deduct cash contributions made to qualified charities during 2020 without regard to the normal income limits. It also allowed non-itemizers to claim an above-the-line deduction for up to $300 of cash donations. The new law extends both of these provisions for donations made through 2021 and increases the amount of above-the-line deduction available to married couples to $600 (from $300).
Educator expenses
Eligible educators can deduct up to $250 in qualified expenses. The list of qualified expenses was expanded to include PPE, disinfectant, and other supplies used for the prevention of the spread of COVID-19.
Tax extenders
Most tax extenders that affect individuals will be further extended. Some of the provisions—such as the principal residence debt exclusion up to $750,000 and the exclusion for employer payments on employee student loans — were extended through 2025. Other provisions were made permanent, including the lower 7.5% threshold for medical expenses and the “above-the-line” tuition and fees deduction.
How we can help
Work with your advisor to consider whether you are eligible for the second round of PPP, the expanded employee retention tax credit, and/or the paid sick leave credit. And, talk about the effect modifications to the deductibility of costs related to a forgiven PPP loan and other changes may have on your year-end tax plan.
CLA is here to help you take advantage of available tax savings to improve your cash flow situation and help your business make the most of the opportunities that may arise as we emerge from the pandemic.