Congress has resolved one of the most problematic tax provisions resulting from the IRS’s interpretation of the CAREs Act Paycheck Protection Program (PPP)—the disallowance of tax deductions for expenses paid with forgiven PPP funds. Those deductions have been reinstated by the COVID-related Tax Relief Act of 2020, part of a huge 5500+ page bill that also would fund the government for the next fiscal year. As we went to press, Congress had passed the bill, but the President had not signed it yet, although he is expected to do so.
With deductions reinstated, payroll, mortgage interest, rent, utilities etc., will be deductible even if they are attributable to forgiven PPP funds. The legislation also adds other categories of expenses that can be forgiven under the PPP program, including property damage, supplier costs and investments in facility modifications and personal protective equipment for a business to operate safely.
More PPP Loans
Title III of the legislation institutes a second round of forgivable PPP loans for businesses with 300 or fewer employees that sustained a 25% revenue loss in any quarter of 2020 when compared to a similar quarter in 2019. The loan amount is limited to $2 million for second-time borrowers. Almost $300 billion has been set aside to fund these second-draw loans.
The bill also makes eligible for PPP funds small 501(c)(6) organizations that are not lobbying organizations and that have 150 employees or fewer, such as local chambers of commerce, economic development organizations, and tourism offices.
Although there is no blanket forgiveness, the legislation simplifies the loan forgiveness application and process for borrowers with PPP loans of $150,000 or less.
Theatres, Museums, Transportation, and Other SBA Programs
SBA loan funding is available to independent live venue operators affected by COVID-19 stay-at-home orders, including eligible independent movie theatres and museums.
Other funding is provided for the airline industry and airport concessionaires, the bus industry, ferries, public transit systems and Amtrak.
The stimulus bill also provides more funding and special relief for recipients of loans under other SBA programs, including microloans, 7(a) small loans, and Economic Injury Disaster Loans.
Numerous other tax and non-tax provisions of interest are included in the bill. Here are the highlights.
Business Meal Deductions
The bill extends the 100% deduction for business meals to 2021 and 2022.
Enhanced Employee Retention Credit
The bill extends the employee retention credit through July 1, 2021 and increases the amount of the credit from 50% to 70% of wages paid up to $10,000 for any quarter. The bill also allows businesses with a PPP loan to claim the credit.
Employer-side Social Security Payroll Tax Credits
The bill extends through March 31, 2021 the employer-side of social security payroll tax credits.
Charitable Deductions for Individuals and Corporations
The bill extends through 2021 the $300 above-the-line deduction for charitable contributions by individuals, with $600 allowed for joint filers. The bill also extends the increased limitations on charitable deductions for individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation is suspended and for corporations, the 10% limitation is increased to 25% of taxable income.
Child Tax Credit Based on 2019 Income
A bill provision would allow taxpayers to use 2019 income to determine a taxpayer’s child tax credit eligibility for the 2020 tax year.
Flexible Savings Accounts
Balances in Flexible Savings Accounts (FSA) can be rolled from the 2020 tax year into 2021, and 2021 balances can be rolled into 2022.
Longer Payback Period for Deferred Employee Payroll Taxes
The bill extends from April 30, 2021 until December 31, 2021 the payback period for any employee payroll taxes that were deferred in 2020 under the authority of the President’s August executive order. (See earlier coverage.)
Educator Expense Tax Deductions
The bill clarifies that personal protective equipment and disinfectants qualify for the $250 above-the-line deduction for educator expenses, for expenses incurred after March 12, 2020.
$600 Recovery Payments
The stimulus package includes a hard-fought provision to give $600 “recovery rebates” in the form of advance tax credits to taxpayers and to their dependents with incomes under certain thresholds. That means a married couple with two dependents would get $2,400. (In the CAREs Act, dependent children only got $500.) The income limitations are similar to those in the CAREs Act, with stimulus checks beginning to decrease for adjusted gross incomes above $75,000 per individual or $150,000 per couple based on their 2019 tax filing. However, if a taxpayer has less income in 2020 than 2019, the taxpayer can claim more of the credit on their 2020 tax return. The payments would be completely disallowed with incomes exceeding $87,000 for single filers and $174,000 for joint filers with no dependents.
Over 30 provisions that expire at the end of 2020 have been either permanently extended, extended for 5 years, or extended for one year. Some of the key extensions include:
- Medical expense deduction. The floor on the deduction is reduced from 10% of AGI to 7.5% of AGI. This means that taxpayers will be able to take a higher deduction for medical expenses.
- Energy efficient commercial buildings deduction.
- Tuition deduction transitions to lifetime learning credit with a higher income limit.
- Beer, wine, and spirit excise taxes. Lower 2018 rates made permanent.
- Look-though rule for related controlled foreign corporations.
- New markets tax credit.
- Work opportunity credit.
- Exclusion from income of discharged mortgage debt.
- Seven-year depreciation for motorsports entertainment complexes.
- Election to expense film, TV, and live theater production costs.
- Empowerment zone tax incentives.
- Exclusion for some employer payments of student loans.
- Employer credit for family and medical leave.
One- or Two-Year Extensions
- Deduction for mortgage insurance premiums.
- Credit for electricity produced from renewable resources.
- Three-year depreciation of race horses.
- Credit for fuel cell motor vehicles.
- Plug-in electric vehicle credit.
- Credit for nonbusiness energy property.
- Credit for new energy-efficient home construction.
- Credits for fiber-optic solar lighting systems, geothermal heat pumps, small wind energy and combined heat and power properties and the credit for fuel cell and micro-turbine plant property.
- Credit for the cost of alternative fuel vehicle refueling property.
- Credit for each gallon of second-generation biofuel produced and credits for biodiesel and renewable diesel producers.
- Wind energy credit for offshore wind facilities.
Non-Tax Provisions of Interest
Congress did not agree on COVID liability protection for businesses, although Speaker McConnell had insisted earlier that it be included. Even without federal liability protection, however, a number of states have enacted their own version of a COVID liability shield for businesses and health care facilities and providers.
The bill also includes an extension of federal unemployment compensation payments at an additional $300 per week (instead of $600 in the CAREs Act) for eleven weeks, through March 14, 2021.
Student loan payments were not extended by the new legislation and will become due after January 31, 2021.
Finally, the CDC eviction moratorium is extended through January 31, 2021.
This bill offers a variety of relief for taxpayers negatively impacted by the pandemic. If you have questions about how the tax changes folded into this bill impact your tax situation, please reach out to a Frazier & Deeter tax professional.