The Consolidated Appropriations Act of 2021 (generally referred to as the “COVID-19 Relief Bill” or the “Act”) became law on December 27, 2020 upon President Trump’s signature. Amongst the over 5,500 page spending bill was some long-awaited but anticipated COVID-19 related stimulus relief and an extension of various key income tax provisions for the 2021 tax year.
Now that the COVID-19 Relief Bill is effective, below we provide an overview of the key provisions that taxpayers can expect:
Individual Tax Relief
Additional 2020 recovery rebates: The Act provides for a second round of
recovery rebate payments. Eligible taxpayers and their children earning up to $75,000 will each receive tax credits of $600 each. The credits are generally paid in advance via a rebate check. Such payments begin to phase out for taxpayers with incomes between $75,000 and $87,000 and become fully phased out for individuals earning more than $87,000.
Enhanced unemployment benefits: The Act provides a $300 weekly
enhancement to benefits for all jobless workers receiving unemployment
benefits. The $300 benefit is like the prior $600 weekly supplement provided by the CARES Act that lapsed in July 2020. This subsidy is available from Dec. 26, 2020 through March 14, 2021. Additionally, self employed individuals and gig workers are offered assistance such as $100 a week and extended benefits under Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation, which pays extra weeks of benefits to individuals who exhausted their state benefits.
Rental Assistance: The Act includes $25 billion to help families pay their rent, and it extends the eviction moratorium now in effect until January 31, 2021.
Expanded charitable contribution deductions: The Act extends the above the line deduction for charitable contributions that was provided by the CARES Act into 2021 and provides an increase from $300 to $600 for married filing jointly taxpayers that take the standard deduction.
Deduction for PPE costs for teachers: Many teacher have had to dip into their own pockets to purchase personal protective equipment (PPE) in order to keep themselves safe from Coronavirus. They can now apply the cost of PPE or other supplies toward their existing educator expense of $250 for federal taxes. The deduction is retroactive to March 12, 2020.
Small Business Tax Relief
Payroll Protection Program (PPP) Loans: The Act provides $284 billion to the U.S. Small Business Administration (“SBA”) for both first– and second-draw PPP forgivable small business loans. The new PPP second draw (PPP2) loans are available to eligible entities that employ less than 301 employees (less that 501 for service employers classified in NAICS Code 72 such as food service & hospitality companies) and who had at least a 25% decline in gross receipts during any quarter in 2020 when compared to the corresponding quarter in 2019. An entity that received the first PPP loan draw is eligible for a second draw if they have fully used the original loan proceeds prior to PPP2 loan being disbursed. Similar to the original loan, the maximum loan amount of PPP2 is the lesser of $2,000,000 or calculated using the average monthly payroll costs for the 1-year period before the loan is made (or 2019 average monthly payroll costs) multiplied by 2.5 (or 3.5 if the borrower is classified in NAICS Code 72). Loans less than $150,000 can be requested by submitting a certification that attests to the eligible entity meets the revenue loss requirements described above. Amounts forgiven is determined to be the lesser of payroll costs divided by 60% or the loan amount and works in the same manner as the original PPP loan.
PPP funded expenses are deductible: Lawmakers resolved the tax deductibility issue for federal income tax returns to align the treatment of PPP loan forgiveness with the original Congressional intent under the CARES Act. This bipartisan-supported provision effectively overrides the IRS guidance that disallowed such deductible expenditures if the underlying payment was made using PPP loan proceeds. As a result, businesses may deduct its business-related expenses regardless of whether PPP loan proceeds are forgiven or expected to be forgiven.
Full deduction for Business Meals: The restaurant industry is hoping to see a boost due to enhanced deductibility temporarily provided for business meals. Prior to the COVID-19 Relief Bill, business meals deductions were limited to 50% of the cost. The Act allows for business meals ordered from a restaurant to be 100% deductible for 2021 and 2022.
Employee Retention Credits are significantly enhanced and extended: In addition to the PPP loan, in 2020 the CARES Act also created the Employee Retention Tax Credit (ERTC) which provides a refundable payroll tax credit to businesses that were either:
1) at least partially shut down under government order or 2) experienced a 50% drop in gross revenue in any quarter in 2020 relative to the same quarter in 2019. 50% is now adjusted to a 20% reduction for 2021.
The COVID-19 Relief Bill expands the ERTC in scope and availability in several ways.
- ERTC timing is extended through June 30, 2021;
- PPP loan borrowers are able to retroactively claim ERTC between March 12, 2020 and December 31, 2020; and
- For the 2021 calculation, it received several beneficial computational changes including:
- For purposes of qualifying for the ERTC because of a drop in quarterly revenue, a business can elect to use the prior quarter and the corresponding 2019 quarter.
Example: if a business experienced a 20 percent or greater drop in the fourth quarter of 2020 compared to the fourth quarter of 2019, but did not for the first quarter of 2021 compared to the first quarter of 2019, the business can elect to qualify for the ERC for the first quarter of 2021. Similarly, if the business experienced a 20 percent or greater drop in revenue between for the first quarter of 2021 compared to the first quarter of 2019, the business not only qualifies for the ERC for the first quarter of 2021 but will be able to elect to qualify for the second quarter of 2021, regardless of the revenue the business receives in the second quarter of 2021.
- Credit percentage increased from 50% to 70%. As such, employers can
receive a credit of $7,000 per employee for paying $10,000 of qualified
wages (prior rule was $5,000).
- Separate $10,000 limits apply in both Q1 and Q2 of 2021. As a result, while the annual maximum ERTC was $5,000 per employee in 2020; for 2021, the maximum credit available is $14,000 (70% of $10,000 for both Q1 and Q2).
- The definition of full time equivalent employees (FTE) has increased for 2021 to 500 FTEs. This is significantly more than the 100 FTE threshold in 2020.
There is also ability for employers with fewer than 500 employees to accelerate receiving the credit. This advance is capped at 70% of the average quarterly wages paid by the employer in 2019 and is required to be subsequently reconciled with the actual credit to which the business is entitled.
Income Tax Extenders
In addition to the various relief provided by the COVID-19 Relief Bill, it includes the extension of a variety of expiring tax provisions. The extenders were primarily divided into permanent, 5-year temporary, and 1-year temporary provisions. There were also some energy-industry related 2-year extensions (excluded from the list below).
Key Permanent Provisions
- Reduction in medical expense deduction floor from 10% to 7.5% of AGI
- Section 179D energy efficient commercial building deduction
- Exclusion of qualified benefits for volunteer firefighters & emergency medical responders
- Repeal of qualified tuition deduction & increased income limitation for the lifetime learning credit
- Reduced excise taxes & simplified record-keeping requirements for beer, wine & distilled spirits
Key Temporary Provisions through 2025
- Look-through rule for related controlled foreign corporations
- New markets tax credits
- Work opportunity tax credits
- Exclusion from gross income for discharge of qualified principal residence indebtedness, though the maximum amount excluded is reduced from $2 million to $750,000
- Employer tax credit for paid family and medical leave
- Exclusion for certain employer payments of student loans
Key Temporary Provisions through 2021
- Treatment of mortgage insurance premiums as qualified residence interest
- Credit for health insurance costs of eligible individuals
- Indian employment credit
- Accelerated depreciation for Indian reservation business property
- Nonbusiness energy property
- Energy efficient homes credit