On December 21, 2020, the House and Senate passed a massive Consolidated Appropriations Bill that included the COVID-related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (collectively, the "Act"). President Trump signed the Act into law yesterday, December 27, 2020. The Act provides over $900 billion of additional relief to individuals and businesses affected by the ongoing COVID-19 pandemic. This client alert will focus on the following critical changes made by the Act: (i) borrowers may now deduct expenses paid with Paycheck Protection Program (PPP) loans that are eligible for forgiveness; (ii) the expansion of the employee retention credit (ERC), including the ability to claim the ERC and receive a PPP loan; (iii) new rules providing that business meals are fully deductible in 2021 and 2022; (iv) an extension of the repayment period for the deferred employee portion of certain social security taxes; and (v) a new round of $600 economic impact payments that will be made to individuals and families.
NOTE: A vote will occur later today to increase the economic impact payments to $2,000 per taxpayer.
Expenditures Paid with PPP Loan Proceeds Are Deductible
In a critical clarification, the Act provides that employers may claim deductions for expenses paid with the proceeds of a PPP loan. It remains the case that no income is recognized by the borrower on the forgiveness of a PPP loan. In addition, no tax attribute will be reduced and no basis increase will be denied as a result of the exclusion of income. This clarification is effective as of the date of the enactment of the original PPP loan provisions in the CARES Act. Thus, this treatment applies to all PPP loans, including those previously made during 2020, as well as to the second round of PPP loans provided for in the Act.
The importance of this clarification cannot be overstated. On November 18, 2020, the IRS released Rev. Rul. 2020-27, stating that a borrower who received a PPP loan may not deduct 2020 expenses funded by the loan proceeds if, at the end of the 2020 tax year, the borrower reasonably expects that the loan will be forgiven. This left employers who had not yet applied for forgiveness of their PPP loans scrambling to determine how much additional estimated tax they might owe for 2020 (and trying to find the money to pay the additional estimated tax). Taxpayers should immediately reevaluate their estimated tax obligations to see whether the amount they owe is reduced as a result of this change.
Taxpayers Who Receive a PPP Loan May Still Claim the ERC and Other Changes to the Employee Retention Credit Rules
The Act made several changes to expand the ERC, most notably, that taxpayers may now claim the ERC and receive a PPP loan. However, any qualified wages taken into account in determining the ERC will not be considered payroll costs that are eligible for PPP loan forgiveness. Borrowers with payroll costs that exceeded their loan amount should now be able to claim the ERC for those excess wages. The ERC is also extended to apply to wages paid before July 1, 2021. This extension should also help taxpayers who received a PPP loan claim the ERC.
The ERC was expanded in several other ways. The amount of the credit increased from 50% of qualified wages to 70% of qualified wages. Qualified wages were increased from $10,000 in total per employee to $10,000 per quarter per employee. These changes increase the amount of the credit from $5,000 total to $7,000 per quarter that the employer is eligible for the ERC. Prior to the Act, if an employer has more than 100 employees, the credit is available only for wages paid to employees who are not providing services because the employer's operations are fully or partially suspended due to a governmental order, or because the employer has experienced a significant decline in gross receipts. This threshold was increased to 500 employees, meaning that employers with 500 or fewer employees may claim the ERC for qualified wages paid to all employees. Additionally, employers are eligible for the ERC if they experience a 20% decline in quarter-over-quarter gross receipts as opposed to the 50% decline that was previously required. Employers may also elect to determine their gross receipts based on the prior quarter.
Business Meals Fully Deductible in 2021 and 2022
The 50% limitation on certain business meal deductions is suspended for 2021 and 2022. Thus, expenses incurred in 2021 or 2022 for food and beverages provided by a restaurant should be fully deductible, provided the other requirements of Code Section 274 are satisfied. This provision is not expressly limited to in-restaurant dining. Thus, it seems that all business meals provided by restaurants, including catering, delivery, and takeout, should be fully deductible. If, however, this provision is interpreted to apply only in the case of in-restaurant dining, the current governmental restrictions imposed on restaurants will limit the usefulness of the increased deduction.
New PPP Loan Funding & Second Draft PPP Loans
The Act provides new funding for lenders to make additional PPP loans. Taxpayers who did not previously receive a PPP loan should contact their bank to apply for a PPP loan. In addition, the Act creates a new program under which certain taxpayers that previously received a PPP loan may qualify for a second PPP loan up to $2,000,000. The Act also expands the types of qualifying expenditures that can be paid with PPP loan proceeds.
Extension of Deferral of Employee Portion of Social Security Tax
The Act provides employers with additional time to withhold and defer social security taxes. A Presidential Memorandum issued on August 8, 2020, permitted employers to defer their obligation to withhold and pay the employee portion of social security taxes on wages paid between September 1, 2020 and December 31, 2020. Originally, employers were required to recover the deferred taxes by withholding additional amounts from employee's wages and compensation paid between January 1, 2021, and April 30, 2021. The Act extends the repayment period through December 31, 2021. As a result, penalties and interest on deferred amounts will not begin to accrue until January 1, 2022. Employers who took advantage of this program and who were planning to withhold additional amounts from employee paychecks in January may wish to consider delaying or reducing the additional amounts withheld in light of the additional time to make repayment under the Act. For additional information on the Presidential Memorandum, please see our prior client alert here.
Second Round of Economic Impact Payments
The Act provides for individuals and families to receive a second round of economic impact payments (also referred to as recovery rebates). The Act provides a refundable tax-credit in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married persons filing jointly), plus $600 for each qualifying child if the individual had adjusted gross income of $75,000 or less in 2019 ($150,000 for married persons filing jointly). Note, a vote will occur later today to increase the refundable tax-credit to $2,000 per taxpayer. The credit phases out at a rate of $5 per $100 of additional income in excess of these thresholds. Treasury would issue advance payments based on the adjusted gross income shown on 2019 tax returns and Treasury Secretary Mnuchin has indicated that checks could start going out as early as next week. The Act also expands the persons who qualify.
An explanation of all of the tax changes made in the Act is beyond the scope of this client alert. A few of the key additional changes include the following:
- The $300 above-the-line deduction for individuals who do not itemize their deductions in 2020 also applies for 2021. The amount of this deduction is increased to $600 for joint filers in 2021.
- Individuals who itemize their deductions may offset up to 100% of their adjusted gross income in 2020 and 2021 through charitable contributions made in cash.
- The refundable payroll tax credits for paid sick and family leave enacted in the Families First Coronavirus Response Act are extended through March 31, 2021. In addition, self-employed individuals can use their 2019 rather than their 2020 income to determine their credit for paid sick and family leave.
- The temporary excise tax cuts applicable to beer, wine and distilled spirits, which were implemented under the Tax Cuts and Jobs Act (TCJA) and were set to expire in 2020, were made permanent.
- Farmers who elected to carry NOLs back two years prior to the time the CARES Act extended the carryback period to five years can continue to use the two-year carryback period. Farmers who previously waived the carryback election can revoke that waiver.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.