Tax Adjustments for Companies within the Consolidated Appropriations Act of 2021
Paycheck Protection Program Loans
Help for hard hit businesses.
The Economic Aid to Affected Small Businesses, Nonprofits, and Venues Act, which was incorporated into the CAA, includes two changes to the Paycheck Protection Program (PPP). The CAA includes $ 284 billion in new PPP loans that are tax-free. The definition of the costs that are eligible for forgiveness has been expanded to include covered operating costs (e.g. software, cloud computing, personnel and accounting requirements), covered property damage costs related to unrest in 2020 that are not covered by insurance covered supplier costs (e.g. expenses arising from a contract, purchase order or purchase order that were valid before the loan was taken out for goods that were essential to the recipient’s operations at the time of the expenses), and covered the expenses of employees, including personal expenses Protective equipment (PPE). The period covered, in which the cost of forgiveness is taken into account, can end between 8 and 24 weeks after the loan was taken out, at the option of the borrower.
Second drawing loan.
The CAA plans “Second Draw Loans”, a new round of PPP loans for smaller and hardest hit companies. The maximum loan amount is $ 2 million and the maximum number of employees is 300. The company must demonstrate a 25% reduction in gross income from the year-ago quarter and determine that the original PPP funds have been or will be used in full. Stores that were closed in the first, second, or third quarter of 2019 can use the fourth quarter for sales test purposes. If the store closed in 2019 but was active until February 15, 2020, the first quarter of 2020 can be compared to the second or third quarter of 2020 for this test. Special credit limits apply to seasonal businesses. Companies that received a loan under the first PPP below $ 150,000 can use a simplified application for a second draw loan. There are also changes to the lending rules, with the filing of IRS Form 3508-EZ relaxing the required documentation.
Lending and Expense Deductions.
The CAA makes it clear that companies can deduct their expenses as usual, even if they are issuing PPP loans. In particular, the law states that “no deduction may be withheld or reduced, no tax attribute may be reduced and no increase in the base due to exclusion from gross income may be denied”. This counteracts decisions by the IRS that payroll, rent, and other expenses that were covered by PPP loans made would not be deductible.
Other financial aid programs
Changes to the SBA EIDL loan rules.
The CAA provided $ 20 billion for the Economic Injury and Disaster Loan (EIDL) program for businesses in low-income communities. It also removes the requirement that PPP borrowers must subtract the US Small Business Administration (SBA) EIDL advance from the amount of lending. EIDL grants can be granted until December 31, 2021. The upfront payment of USD 10,000 for EIDL is in the nature of a grant. The CAA confirms that this is tax-free. This treatment applies retrospectively to grants awarded after March 26, 2020.
COVID-enforced shutdowns.
The CAA included some direct assistance to live entertainment venues, independent cinemas, talent reps, and museums (Section 324). These are grants from the SBA to “closed venue operators” that have to be closed due to government shutdowns. The grants can be used for labor costs, rent, utilities and PPE. These grants are tax-free income, while expenses paid with the funds are deductible, insofar as otherwise permitted.
Tax deductions
Business lunch.
The CAA increases the IRC Section 274 (m) deduction limit for business lunches to 100% of the cost (the limit in effect prior to the 1986 Tax Reform Act) instead of the usual 50% limit. This change applies to expenses incurred in 2021 and 2022, but only applies to meals in restaurants (not defined by law). The CAA hasn’t changed the deductibility of entertainment expenses that are still not deductible.
Agriculture NOLs.
Farms with net operating losses (NOL) can flexibly handle these deductions. If they chose the two-year carryback for NOLs under the Tax Cuts and Jobs Act of 2017 (TCJA), they can maintain that carryback despite the creation of the Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES) of a five-year carry-back; If you waive the two-year redemption, you can revoke it.
Donation.
The breaks for charitable donations created by the CARES Act have been extended. C companies can deduct cash deposits up to 25% of taxable income. The deduction for donations of food stocks is 25% instead of 15%. Both breaks have an extension of one year.
Energy-efficient commercial buildings.
The deduction for energy efficient commercial buildings up to $ 1.80 per square foot has been made permanent (IRC Section 179D). The amount of $ 1.80 per square foot will be adjusted for inflation after 2020.
Tax credits
Employee Loyalty Credit.
The new law expands and extends the employee loyalty credit for companies that keep employees on their payroll. The extension runs until June 30, 2021. The credit is now 70% instead of 50%. Credit applies to qualified wages per employee up to $ 10,000 per quarter instead of $ 10,000 per year. The decrease in the required gross income compared to the previous year is only 20% instead of 50%. Most importantly, the loan can also be claimed for those who receive PPP loans for wages. However, wages that are part of the issuance of PPP loans are not eligible for employee loyalty credit. The credit can be requested by employers who did not pass for the entire year 2019.
Sickness and family leave credits.
The CAA extended paid sick leave and paid family leave for companies with up to 500 employees who are required to offer these benefits, but only until March 31, 2021. Payments are funded through tax credits.
Tax credits for the self-employed.
The self-employed can apply for income tax credits that are the same as those for employers. Self-employed persons can use the previous year’s net income to determine the average daily self-employment income for the purposes of credits for paid sick leave and paid family leave. This previous year rule is as effective as if it was originally included in the Families First Coronavirus Response Act of 2020 (FFCRA), so it can be used for the 2020 return.
Extension by five years.
The CAA extends IRC Section 51 Job Opportunity Credit for hiring specific target audiences for five years. The IRC Section 45S Family Paid Vacation and Medical Leave Credit (an income tax credit for employers who do not have to take paid vacation but do) will be extended to 2025, as will the IRC Section 45D New Markets credit.
The breaks for charitable donations created by the CARES Act have been extended.
Extension by one year.
The Indian Employment Loan under IRC Section 45A and the Energy Efficient House Construction Loan under IRC Section 45L are only renewed for one year.
Low income home loans.
The low-income home loan under IRC Section 42 has been expanded. From 2021, there will be a lower interest rate limit of 4% for the calculation of loans in connection with acquisitions and developments financed by real estate bonds.
Energy loans.
Some energy-related tax credits have also been extended, e.g. B. the credit for refueling vehicles with alternative fuels and the credit for building energy-efficient houses.
Employee benefit plans
Medical and dependent care FSAs.
The CAA enables Medical Flexible Spending Accounts (FSAs) and FSAs for dependent care to allow employees to extend any unused amounts. This includes rollover from 2020 to 2021 and from 2021 to 2022. Employees will be able to change elections for FSAs in 2021 just like they did in 2020 at mid-year.
Student Loan Repayments.
Employers repaying student loans under an educational aid program can be extended for five years (IRC section 127). As a result, payments up to $ 5,250 between 2021 and 2025 under such plans are tax-free for employees and deductible for employers.
If the number of insured employees is reduced in qualifying pension plans, there is usually a partial dismissal with certain consequences (e.g. full exercise of benefits). The CAA provides that partial termination under IRC Section 411 (d) (3) will not occur if the number of active participants in the plan on March 31, 2021 is at least 80% of the number covered on March 13, 2020.
There’s more to come
These business-related changes mean the IRS will need to revise some 2020 return instructions and provide more guidance. In addition, the new congress could create further tax breaks or restrict existing ones in the coming year.
Sidney Kess, JD, LLM, CPA, is a consultant to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of the Editorial Advisory Board of the CPA Journal.
Joseph Buble, CPA, is a partner.
James Grimaldi, JD, CPA, is a partner, also with Citrin Cooperman & Co., LLP. Reprinted with permission from New York Law Journal © 2021 ALM Media Properties, LLC. All rights reserved. Any further reproduction without permission is not permitted. Contact 877-257-3382.
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