New Law's Tax Provisions That Affect Businesses (1/12/2021)

The Consolidated Appropriations Act, 2021 (the CAA, 2021), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic. The CAA, 2021 includes--along with spending and other non-tax provisions and tax provisions primarily affecting individuals--the numerous business tax provisions briefly summarized below. The provisions are found in two of the several acts included in the CAA, 2021, specifically, (1) the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the TCDTR) and (2) the COVID-related Tax Relief Act of 2020 (the COVIDTRA).

Clarifications of Tax Consequences of PPP Loan Forgiveness and Other Forgiven Obligations

The COVIDTRA clarifies that the non-taxable treatment of Payroll Protection Program (PPP) loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations, such as Economic Injury Disaster Loans (EIDL) grants, existing Small Business Administration (SBA) 7(a) payment relief, and grants for shuttered venue operators. Also, the COVIDTRA clarifies that taxpayers whose PPP loans or other obligations are forgiven as described above, are allowed deductions for otherwise deductible expenses paid with the proceeds and that the tax basis and other attributes of the borrower's assets won't be reduced as a result of the forgiveness.

Waiver of Information Reporting for PPP Loan Forgiveness

The COVIDTRA allows IRS to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations.

Other PPP Provisions

Other PPP provisions included in the CAA, 2021, include:

  • •Simplified PPP forgiveness process for loans of $150,000 or less. The SBA must establish this form by January 20, 2021. No complex figures or computations will be required.
  • PPP second draw loans will be available with more restrictive eligibility requirements. The SBA has ten days to issue guidance on the second draw process.
  • Repeal of EIDL advance deduction from PPP loan forgiveness.
  • First time PPP borrower eligibility has been extended to include 501(c)(6) and destination marketing organizations, certain news organizations, and housing cooperatives. • Additional eligible expenses are allowed for PPP forgiveness, but the 60/40 split between payroll and non-payroll is still maintained for first and second round draws.
  • Borrowers can choose a Covered Period that is between 8 to 24 weeks.
  • Clarifies that a business or organization that was not in operation on February 15, 2020 shall not be eligibile for an initial PPP loan and a second draw PPP loan.
  • Prohibits eligible entities that receive a grant under the Shuttered Venue Operator Grants from obtaining a PPP loan.
  • Increased ability for PPP borrowers to request an increase in first round PPP loan amount due to updated regulations.
  • Calculation of maximum loan amount for farmers and ranchers under PPP allows use of gross income instead of net income based on either 2019 or 2020.

Grants for Shuttered Venue Operators

Refer to Summary section 324 regarding the SBA making grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues.

Extension of the Debt Relief Program for SBA Loans

Refer to Summary section 325 regarding extending the payment of principal and interest on small business loans guaranteed by the SBA under the 7(a), 504, and microloan programs, established under the CARES act.

Extensions and Modifications of Earlier Payroll Tax Relief

The TCDTR extends and expands the Employee Retention Credit (ERC) under the CARES Act through June 30, 2021 and it also contains technical corrections. The expansions of the credit for calendar quarters beginning after December 31, 2020, include:

  • An increase in the credit rate from 50% to 70% of qualified wages;
  • An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
  • A reduction in the required year-over-year gross receipts decline from 50% to 20%;
  • A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility; and
  • An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base.

The bill also (retroactive to the effective date of the CARES Act):

  • Provides that employers who receive PPP loans may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds;
  • Clarifies the determination of gross receipts for certain tax-exempt organizations; and
  • Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.

The COVIDTRA extends the Families First Coronavirus Response Act (FFCRA) payroll tax credits through March 31, 2021, but the FFCRA paid leave mandates were not extended and expire on December 31, 2020. This means FFCRA is no longer mandated for the first quarter 2021, but an employer can voluntarily provide FFCRA benefits for that quarter. If the employer provides FFCRA, then the employer is eligible to take the tax credit for the leave. If an employer chooses to continue FFCRA in 2021 and take the tax credits, the same daily limits and employee eligibility requirements continue to apply as if FFCRA was extended to March 31, 2021. FFCRA sick or family paid leave taken before December 31, 2020 will still count against the total tax credit that can be claimed per employee by March 31, 2021.

Additionally, the COVIDTRA directs the IRS to extend the presidentially ordered deferral of the employee's share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to $4,000 every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four-month period ending on April 30, 2021).

Employee Benefits and Deferred Compensation

The TCDTR provides that expenses for business-related food and beverages provided by a restaurant are fully deductible if they are paid or incurred in calendar years 2021 or 2022, instead of being subject to the 50% limit that generally applies to business meals.

The TCDTR temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code).

With a view to layoffs in the current economic climate, the TCDTR relaxes rules that would otherwise cause a partial qualified retirement plan termination if the number of active participants decreases.

Because of market volatility during the COVID-19 pandemic, the COVIDTRA relaxes, if certain conditions are met, the funding standards that, if met, allow a defined benefit pension plan to transfer funds to a retiree health benefits account or retiree life insurance account within the plan. The CARES Act's relaxed rules for ''coronavirus-related distributions'' are retroactively amended by the COVIDTRA to additionally provide that a coronavirus-related distribution that is a during-employment withdrawal from a money purchase pension plan meets the distribution requirements of Code Sec. 401(a).

Under a provision of narrow applicability, the TCDTR lowers to 55 years, from the usually applicable 59½ years, the age at which certain employees in the building or construction trades can, though still employed, receive pension plan payments under certain multiple employer plans without affecting the status of trusts that are part of the pension plans as qualified trusts.

Residential Real Estate Depreciation

For tax years beginning after December 31, 2017, the TCDTR assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 (when the 2017 TCJA first applied the more-favorable 30-year period) if the property (1) is held by a real property trade or business electing out of the limitation on business interest deductions and (2) before January 1, 2018 wasn't subject to the ADS.

Farmers' Net Operating Losses

The COVIDTRA allows farmers who had in place a two-year net operating loss carryback before the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. It also allows farmers who before the CARES Act waived the carryback of a net operating loss, to revoke the waiver.

Low-Income Housing Credit

The TCDTR provides a 4% per year credit floor for buildings that aren't eligible for the 9% per-year credit floor. (Both floors are alternatives to the calculation under which the per-year credit is generally a percentage, prescribed by IRS, that is intended to result in a credit that, in the aggregate over the 10-year credit period, has a present value of 70% of the qualified basis for certain new buildings and 30% of the qualified basis for certain other buildings.)

Life Insurance

The TCDTR changes the interest rate assumptions that determine whether a contract meets the cash value and premium caps for qualifying as a life insurance contract. The change is to designated floating rates from the respective 4% and 6% rates fixed by prior law.

Disaster Relief

The TCDTR includes several provisions targeted at ''qualified disaster areas,'' some of which affect individuals and some which affect businesses as described below. ''Qualified disaster areas'' are areas for which a major disaster was presidentially declared during the period beginning on January 1, 2020 and ending February 25, 2021. The incidence period of the disaster must begin after December 27, 2019 but not after December 27, 2020. Excluded are areas for which a major disaster was declared only because of COVID-19.

The relief includes relief for retirement funds that consists of the following: (1) waiver of the 10% early withdrawal penalty for up to $100,000 of certain withdrawals by individuals living in a qualified disaster area and that have suffered economic loss because of the disaster (qualified individuals), (2) a right to re-contribute to a plan distributions that were intended for home purchase but not used because of a qualified disaster, and (3) relaxed plan loan rules for qualified individuals. Changes to plan amendment rules facilitate the relief.

The relief also provides to employers in the harder-hit parts of a qualified disaster area an up-to-$ 2,400-per-employee employee retention credit, subject to coordination with certain other employer tax credits. Generally, tax-exempt organizations can take it as a credit against FICA taxes.

Corporations are provided with relaxed charitable deduction rules for qualified-disaster-related contributions, and individuals are provided with relaxed loss allowance rules for qualified-disaster-related casualties.

The low-income housing credit is modified to allow, subject to various limitations, increases in the state-wide credit ceilings to the extent allocations are made to harder-hit parts of qualified disaster areas.

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