On December 21, 2020, Congress passed the Consolidated Appropriations Act 2021 (the “Act”), a massive tax, funding and spending bill that contains a nearly $900 billion coronavirus aid package. The emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals, and provide funding for COVID-19 testing and the administration of vaccines. The more than 5,500-page bill was signed into law by President Trump on December 27.
The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. According to Treasury Secretary Mnuchin, these checks could be distributed before the end of 2020. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300-weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020.
The Act earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains a number of important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
The Act allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities.
The Act also extends a number of tax deductions, credits and incentives that were set to expire on December 31, 2020.
This Client Alert highlights the main tax provisions (other than the PPP included) in the Act.
Employment Retention Credit and Families First Coronavirus Response Credit
The Act extends and expands the Employment Retention Credit (ERC) and the paid leave credit under the Families First Coronavirus Response Act (FFCRA).
The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
The Act includes the following changes to the ERC and extends the covered period through June 30, 2021:
- The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
- The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
- The credit is available to certain government instrumentalities.
- The Act clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages, even when no wages are paid to the employee.
- The Department of the Treasury and the Small Business Administration will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan.
The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021 on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from January 1 to March 31, 2021 may take a federal tax credit for providing such leave.
Other Tax Provisions in the CAA
The Act includes changes to some tax code provisions including:
- Charitable Donation Deduction
The CARES Act revised the charitable donation deduction rules to encourage donations. Taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations and the percentage of income limitations were increased for 2020. These provisions were extended through 2021.
- Medical Expense Deduction
The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5%, so that more expenses may be deducted.
- Business Meal Deduction
Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction is currently limited to 50% of those expenses).
The Act provides for a five-year extension of many tax provisions that were scheduled to sunset on December 31, 2020, including the New Markets Tax Credit and Work Opportunity Tax Credit, among others.
- Excise Tax
Certain provisions, refunds and reduced rates related to beer, wine and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S.
The Act contains many beneficial changes and extensions for individuals and businesses. Further guidance will be issued with regard to the PPP, and we will share the additional details as new developments occur.