Tax and Non-Tax Provisions for Businesses in Response to COVID-19
The Consolidated Appropriations Act, 2021 (the CAA, 2021), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic. The CAA, 2021 includes numerous provisions that may benefit your business. We have provided a summary of the tax and non-tax provisions below. Each business situation is unique and you should speak with your tax advisor before making any decisions on these or other tax provisions.
Tax Provisions Made Permanent and Extended
Tax provisions made permanent
The Taxpayer Certainty and Disaster Tax relief Act of 2020 (TCDTR) makes permanent without other changes (1) the railroad track maintenance credit and (2) the exclusion of the aging period in determining the mandatory interest capitalization period in producing beer, wine or distilled spirits.
Tax provisions extended (abbreviated list)
The TCDTR extends the following tax credits without other changes:
- The employer credit for paid family and medical leave that was provided by the Tax Cuts and Jobs Act (TCJA),
- The business energy credit (the ‘‘Code Sec. 48 credit’’) both as regards termination dates and phase-downs of credit amounts,
- The credit for electricity produced from renewable resources (the ‘‘Code Sec. 45 credit’’) and the election to claim the Code Sec. 48 credit instead for certain facilities (but the phase-down of the amount of the Code Sec. 45 credit for wind facilities isn’t deferred),
- The exclusion from employee income of certain employer payments of student loans,
- The new markets tax credit,
- The work opportunity credit,
- The energy efficient homes credit.
- Empowerment zone tax incentives except for the increased section 179 expensing for qualifying property and the deferral of capital gain for dispositions of qualifying assets, and
Paycheck Protection Program Loan Forgiveness
Clarifications of tax consequences of PPP loan forgiveness
COVIDTRA clarifies that the non-taxable treatment of Payroll Protection Program (PPP) loan forgiveness that was provided by the CARES Act also applies to certain other forgiven obligations. Also, COVIDTRA clarifies that taxpayers whose PPP loans or other obligations are forgiven as described above, are allowed deductions for otherwise deductible expenses paid with the proceeds and that the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
Waiver of information reporting for PPP loan forgiveness
COVIDTRA allows the IRS to waive information reporting requirements for any amount excluded from income under the exclusion- from-income rule for forgiveness of PPP loans or other specified obligations. Note: IRS had already waived information returns and payee statements for loans that, before enactment of the COVIDTRA, were guaranteed by the Small Business Administration under section 7(a)(36) of the Small Business Act.
Extensions and modifications of earlier payroll tax relief
The TCDTR extends the CARES Act credit, allowed against the employer portion of the Social Security (OASDI) payroll tax or of the Railroad Retirement tax, for qualified wages paid to employees during the COVID-19 crisis. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit rate is increased from 50 percent to 70 percent of qualified wages, and qualified wages are increased from 10,000 dollars for the year to 10,000 dollars per quarter. Many other rules are also relaxed. And the TCDTR makes some retroactive clarifications and technical improvements to the credit as initially enacted.
The COVIDTRA extends (1) the credits provided by the Families First Coronavirus Response Act (FFCRA) against the employer portion of OASDI and Railroad Retirement taxes for qualifying sick and family paid leave and (2) the equivalent FFCRA-provided credits for the self-employed against the self-employment tax. Under the extension of the employer credits, wages taken into account are those paid before April 1, 2021 (instead of January 1, 2021). Under the extension of the credits for the self-employed, the days taken into account are those before April 1, 2021 (instead of January 1, 2021).
The COVIDTRA also makes retroactive clarifications of (1) the FFCRA paid leave credits that were extended as discussed above, (2) the exclusion of qualifying paid leave in calculating the employer portion of Railroad Retirement taxes and (3) and the increase in the amount of the FFRCA paid leave credits against the employer portion of Railroad Retirement taxes by the amount of the Medicare payroll taxes on qualifying paid leave. Additionally, the COVIDTRA directs IRS to extend the Presidentially ordered deferral of the employee’s share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to 4,000 dollars every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four-month period ending on April 30, 2021).
Employee benefits and deferred compensation
The TCDTR provides that expenses for business-related food and beverages provided by a restaurant are fully deductible if they are paid or incurred in calendar years 2021 or 2022, instead of being subject to the 50 percent limit that generally applies to business meals. The TCDTR temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code).
The TCDTR includes several provisions targeted at ‘‘qualified disaster areas,’’ some of which affect individuals and some which affect businesses as described below. ‘‘Qualified disaster areas’’ are areas for which a major disaster was Presidentially declared during the period beginning on January 1, 2020, and ending February 25, 2021. The incidence period of the disaster must begin after December 27, 2019, but not after December 27, 2020. Excluded are areas for which a major disaster was declared only because of COVID-19.
The relief includes relief for retirement funds that consists of the following: (1) waiver of the 10% early withdrawal penalty for up to $100,000 of certain withdrawals by individuals living in a qualified disaster area and that have suffered economic loss because of the disaster (qualified individuals), (2) a right to re-contribute to a plan distributions that were intended for home purchase but not used because of a qualified disaster, and (3) relaxed plan loan rules for qualified individuals. Changes to plan amendment rules facilitate the relief.
The relief also provides to employers in the harder-hit parts of a qualified disaster area an employee retention credit (up-to 2,400 dollars-per-employee), subject to coordination with certain other employer tax credits. Generally, tax-exempt organizations can take it as a credit against FICA taxes.
Corporations are provided with relaxed charitable deduction rules for qualified-disaster-related contributions, and individuals are provided with relaxed loss allowance rules for qualified-disaster-related casualties.
Residential real estate depreciation
For tax years beginning after December 31, 2017, the TCDTR assigns a 30-year Alternative Depreciation System (ADS) depreciation period to residential rental property even though it was placed in service before January 1, 2018 (when the 2017 TCJA first applied the more-favorable 30-year period) if the property (1) is held by a real property trade or business electing out of the limitation on business interest deductions and (2) before January 1, 2018, was not subject to the ADS.
The TCDTR makes various excise tax changes for beer, wine and distilled spirits.
The TCDTR makes changes to energy provisions in addition to making them permanent or extending them.
The TCDTR adds ‘‘waste energy recovery property’’ to the types of property that qualify for the Code Sec. 48 credit (above). And the credit rate assigned is 30 percent.
The TCDTR makes permanent the energy efficient commercial buildings deduction. Additionally, the TCDTR indexes for inflation the per-square-foot dollar caps on the full and partial versions of the deduction.
Low-income housing credit
The TCDTR provides a 4% per year credit floor for buildings that aren’t eligible for the 9 percent per-year credit floor. (Both floors are alternatives to the calculation under which the per-year credit is generally a percentage, prescribed by IRS, that is intended to result in a credit that, in the aggregate over the 10-year credit period, has a present value of 70 percent of the qualified basis for certain new buildings and 30 percent of the qualified basis for certain other buildings.)
We will continue to share our insights on the finalized tax provisions in the coming months. Questions on these or other tax provisions for your business? Please contact your tax advisor or Keiter representative or Email | Phone: 804.747.0000. We are here to help.
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