As the COVID-19 pandemic continues to impact businesses everywhere, there are numerous provisions included in the Consolidated Appropriations Act, 2021 (CAA) that can provide much-needed relief. Even though PPP Round Two has received considerable attention, these other deductions and provisions are also available:
Expenses paid for with PPP Loan proceeds
Earlier in 2020, the IRS had issued guidance indicating their position that the expenses paid for with PPP Loan proceeds would not be deductible due to their relationship to tax-exempt income (the PPP Loan forgiveness). After several months of disagreement with this approach, the CAA clarified Congressional intent that expenses paid for with PPP Loan proceeds would be treated as tax-deductible expenses. However, keep in mind that a number of states do not follow the federal tax treatment, so this needs to be carefully reviewed.
Employee Retention Credit
To encourage businesses to maintain their workforces, the CARES Act created the Employee Retention Credit, a refundable credit against payroll tax for employers whose:
Employers that averaged more than 100 full-time employees in 2019 could receive the credit only for wages paid to an employee that was not providing services. Those with 100 or fewer employees received the credit regardless of whether they were open for business.
The credit equaled 50% of up to $10,000 in compensation, including health care benefits, paid to an eligible employee from March 13, 2020, through December 31, 2020. The CAA extends the credit for eligible employers that continue to pay wages during COVID-19 closures or who reduced revenue through June 30, 2021.
Notably, as of January 1, 2021, the CAA increases the credit from 50% of qualified wages to 70%. It also expands eligibility by reducing the requisite year-over-year gross receipt reduction from greater than 50% to greater than 20% and raises the limit on per-employee creditable wages from $10,000 for the year to $10,000 per quarter.
In addition, the threshold for a business to be deemed a “large employer” — and thus subject to a tighter standard when determining the qualified wage base — is lifted from 100 to 500 employees.
The CAA includes some retroactive clarifications and technical improvements regarding the original credit, as well. For example, it provides that employers who received PPP Loans still qualify for the credit for wages not paid with forgiven PPP funds. Keep in mind that a business still needs to qualify under the original rules (full or partial government ordered shutdown or greater than 50% drop in gross receipts). Since the same wages cannot be used both for the employee retention credit and PPP Loan forgiveness, any benefit from the credit may be limited.
Business meals deduction
For 2021 and 2022, you can deduct 100% (up from 50%) for food and beverages as long as they are “provided by a restaurant.” The IRS will likely issue guidance on the deduction, particularly the meaning of the term “provided by a restaurant.”
Deferred payroll taxes
Businesses were given the option to withhold their employees’ share of Social Security taxes from September 1, 2020, through December 31, 2020. Those that did were originally directed to increase the withholding and pay the deferred amounts on a prorated basis from wages and compensation paid between January 1, 2021, and April 30, 2021.
Under the CAA, such employers now have all of 2021 to withhold and pay the deferred taxes.
The CAA extends, through 2021, the CARES Act provision that increases the limitation on corporations’ cash charitable contributions from 10% of taxable income to 25%. Any excess corporate cash contributions will be carried forward to subsequent tax years. The limitation on deductions for donations of food inventory, which the CARES Act increased to 25% for 2020, is similarly extended through 2021.
Non-COVID-19 disaster relief
The CAA also acknowledges the recent disasters not related to the pandemic (for example, wildfires). Among other things, it provides a tax credit of up to $2,400 (40% of up to $6,000 of wages) per employee, to employers in qualified disaster zones.
The credit applies to wages paid, regardless of whether services were actually performed in exchange for those wages. The CAA also modifies the CARES Act to allow corporations to make qualified disaster relief contributions of up to 100% of their 2020 taxable income.
The tax code allows “qualified future transfers” of up to 10 years of retiree health and life costs from a company’s pension plan to a retiree’s health benefits or life insurance account within the plan. These transfers must meet certain requirements (for example, the plan must be 120% funded) that pandemic-related market volatility has made too difficult to meet in some cases.
In response, the CAA allows employers to make a one-time election on or before December 31, 2021, to end any existing transfer period for any taxable year beginning after the election in certain circumstances.
The law also includes a partial termination safe harbor for retirement plans in light of 2020’s pandemic-related workforce fluctuations. Plans will not be treated as having a partial termination (which would trigger 100% vesting for affected participants) if the number of active participants on March 31, 2021, is at least 80% of the number covered by the plan on March 13, 2020. The safe harbor applies to plan years that include the period beginning on March 13, 2020, and ending on March 31, 2021.
The CAA incorporates several “extenders” of tax breaks. For example, it extends both the New Markets Tax Credit and the Work Opportunity Tax Credit through 2025. The employer credit for paid family and medical leave is extended through 2025 for wages paid in tax years after 2020.
The law extends through 2025 the period for which an empowerment zone designation is in effect. But the enhanced expensing rules and nonrecognition of gain on rollover of empowerment zone investments are terminated for property placed in service in tax years beginning after December 31, 2020. Empowerment zone tax-exempt bonds and employment credits also were not extended beyond December 31, 2020.
Finally, the CAA permanently extended the Section 179D deduction for energy efficient commercial buildings. This deduction has been used extensively by designers of government owned buildings to obtain tax deductions of up to $1.80 per square foot for energy efficient designs. For taxable years beginning after 2020, the deduction is now indexed for inflation.
For more information about the Consolidated Appropriations Act and how it impacts businesses, please contact your DGC client service team or Stephen Minson, CPA, MST at 781-937-5120 / firstname.lastname@example.org or Joel Rothenberg, CPA, JD, LLM at 781-937-5135 / email@example.com. You can also visit DGC's coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new resources to help you deal with the financial impact of the coronavirus on you and your business.