On December 27, 2020, the President signed into law the Consolidated Appropriation Act, 2021 (the "Act"). The Act contains numerous individual, business, payroll, disaster, and energy-related tax provisions, as well as tax extenders and various Covid-related tax reliefs (COVIDTRA).
Highlights of the Act
I: Business Provisions:
COVIDTRA clarifies that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. (Note: Expenses paid with PPP loan proceeds remain non-deductible for California).
- Business meals for food or beverages provided by a restaurant that are paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023 will be 100% deductible.
The "Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act" provides $300 billion reauthorization of the PPP (PPP2). The eligibility of PPP2 is detailed in "Breaking Down the PPP2 Provisions" section below.
- A simplified forgiveness application process for loans of $150,000 or less. The SBA is in the process of creating a one-page simple forgiveness application.
- PPP borrowers are not required to deduct the amount of EIDL advance from their PPP forgiveness amount.
II: Individual Provisions:
- Provides economic impact payments of $600 for individuals and $1,200 for married couples with modified adjusted gross income up to $75,000 and $150,000 per year respectively, as well as a $600 payment per qualifying child dependent.
- Extends Federal unemployment benefits of $300 per week supplement from December 26 until March 14, 2021. Extends Pandemic Unemployment Assistance (PUA) to self-employed and others in nontraditional employment with the maximum number of eligible weeks increased to 50 weeks.
- $250 above-the-line educator expense deduction applies to PPE, disinfectant and other supplies used for the prevention of the spread of COVID-19. It applies to expenses paid or incurred after March 12, 2020.
- Individuals (Single or Married filing jointly) who do not normally itemize deductions may take up to $300 above-the-line deduction for charitable contributions on the 2020 tax return. This deduction extends through 2021 and also increases married filers' deduction limit to $600 for 2021.
- The act extends through 2021 the 100% adjusted gross income threshold for itemized qualifying cash contributions.
Allows additional flexibility and carryover on unused amounts remaining in health and dependent care flexible spending arrangements (FSA). This provision allows employers to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of such plan year for unused benefits and contributions to health flexible spending and dependent care flexible spending arrangements. In addition, an employer may allow an employee who ceases to participate in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which the employee's participation ceased, including any extended grace period.
III: Tax Extender Highlights under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR):
- The 7.5% threshold for itemized medical expense deduction floor is made permanent.
A $1.80 deduction per square foot for construction on qualified property is made permanent. This covers energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.
- The 26% credit for applicable residential energy efficient property (REEP) is extended until January 1, 2023 for expenditures spent on qualified solar electric property, qualified solar water heating property, etc.
- Employer credit for Paid Family and Medical Leave is extended through 2025, applying to wages paid in tax years beginning after December 31, 2020.
- The expanded employee retention credit program is extended through June 30, 2021.
IV: Breaking Down the PPP2 Provisions:
PPP2 loans will be available to first-time qualified borrowers and, for the first time, to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 or fewer employees.
- Have used or will use the full amount of their first PPP loan.
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
PPP2 will also permit first-time borrowers from the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.
The bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
PPP2 loan terms:
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following costs potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Supplier costs that are essential to the recipient’s operations at the time the expenditure was made.
- Covered operating costs such as software and cloud computing services and other human resources and accounting needs.
- Property damage costs due to public disturbances that occurred during 2020 that were not covered by insurance.
To be eligible for full loan forgiveness, PPP2 borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either 8 or 24 weeks — the same parameters PPP1 had when it stopped accepting applications in August.
PPP2 borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum.
PPP2 borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.
Annual interest rate on unforgiven portion of the loan is 1%.