Congress approved and the President signed the next round of COVID-19 relief, which is reflected in the 2021 Consolidated Appropriations Act (the Act). The Act includes another round of COVID-19 stimulus funding and additional relief for taxpayers affected by the COVID-19 pandemic. Here are some of the tax-related highlights:
Paycheck Protection Program – The Act contains several provisions related to the Paycheck Protection Program (PPP), including a second round of PPP loans for eligible borrowers.
Deductibility of Expenses Paid with PPP Loan Proceeds– The Treasury and the IRS have taken the position that expenses paid with forgiven PPP loan proceeds are not deductible. This was contrary to the original intent of lawmakers. The new tax Act fixes this and specifically provides that expenses paid with PPP loan proceeds are 100 percent deductible. This applies to all PPP loans, even if the loans were already forgiven at the date this legislation is enacted. The legislation also provides that owners of pass-through entities receive a basis step-up in their stock/partnership interest for any tax-exempt income from a forgiven PPP loan, which will ensure that there is not a catch-up in subsequent years when the owners leave the business.
Four additional categories were added for nonpayroll costs eligible for use of the PPP loan proceeds including: covered operations expenditures, covered property damage, covered supplier costs, and covered worker protection equipment. There is still an overall limitation on the forgiveness requiring that 60 percent of the loan must be used for payroll costs.
Simplified Forgiveness Application for Loans of $150,000 and Less – For any loan up to $150,000, the amount will be forgiven if the borrower submits a one-page form listing the loan amount, the number of employees retained, and the amount of the loan spent on payroll.
EIDL Advance Reduction to Forgiveness Amount – Repealed – Under current law, a borrower was required to reduce the amount of the PPP loan otherwise forgiven by any Economic Injury Disaster Loan (EIDL) advance received. The new Act repeals this provision.
PPP Second Draw Loans – The second round of loans target hard-hit businesses that employ 300 or fewer employees. The business must demonstrate at least a 25% reduction in revenues in at least one quarter in 2020 when compared to a previous quarter, and also show that the original PPP loan has been spent as allowed.
The forgiveness of the second draw loans follows the rules set for the first round of loans.
Grants for Shuttered Venue Operators – The bill sets aside $15 billion to provide grants to shuttered live event venues, independent theaters, and museums that have experienced revenue losses due to the pandemic.
Temporary Business Meal Deductions – Currently, taxpayers generally may deduct only 50 percent of client-related business meals. The Act includes a provision for 100 percent deductibility of business meals for 2021 and 2022, but only for meals purchased at a restaurant. This does NOT include entertainment costs, and this provision is not retroactive to the 2020 tax year.
Other Tax Provisions – In addition to the provisions above, the Act includes the extension of several tax provisions that previously expired or were set to expire on December 31, 2020. These provisions include:
- 7.5% threshold for out-of-pocket medical costs
- Energy-efficient commercial building deduction
- Reduced excise tax rate on beer, wine, and distillers
- New Markets Tax Credit
- Employer payroll tax credit for paid family and medical leave
- Exclusion from employee income for certain employer payments of student loans
- The charitable deduction of $300 for Individual taxpayers who do not itemize is extended to the 2021 tax year, and joint filers may deduct up to $600 in 2021
- Suspension of limitations on qualifying charitable contributions through 2021
- Extension of various energy-related tax credits (through December 31, 2021)
- Enhancements to the low-income housing tax credit
- Depreciation of certain residential rental property over a 30-year period for taxpayers who made the real property trade or business election for purposes of the interest expense limitation under Internal Revenue Code §163(j)
Other Stimulus Provisions
The Act also includes additional funding and assistance to taxpayers including:
- Direct payments– A second round of Economic Impact Payments of $600 for individuals making up to $75,000 per year and $1,200 for MFJ making up $150,000 per year, as well as a $600 payment for each dependent child. This means a family of four could receive $2,400 in direct payments.
- Unemployment insurance – The federal unemployment insurance benefits provided by the CARES Act, which expired in July, are renewed to provide an additional $300 per week for all workers receiving unemployment benefits through March 14, 2021.
The professionals at BSB closely follow the latest developments to provide the most up-to-date information available. Every situation is different, but we are here to help.
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