In the waning days of 2020, the latest of a series of COVID relief provisions were signed into law. This most recent round of stimulus and tax relief was tied to the Consolidated Appropriation Act. Not only does this bill provide additional economic aid in response to the pandemic, but it also avoids a federal government shutdown. Ultimately, the bill was signed into law on December 27, 2020. Below are some of the bill’s broadest reaching components:

Individuals

Stimulus Payments to Individuals

The CARES Act that passed in the spring of 2020 included a $1,200 stimulus check per individual plus $500 per child. These payments could be phased out if your adjusted gross income was more than $75,000 for single filers or $150,000 for married couples filing jointly. This income phase-out was based on your 2019 tax return (if your 2019 return was filed before the stimulus checks were issued) or your 2018 tax return (if your 2019 return had not been filed yet).

This latest legislation provides for an additional $600 per individual plus $600 per child. Similar to the stimulus amounts at the beginning of the year, these payments are phased out once individuals reach an income level of $75,000 ($150,000 for married filing joint). However, unlike the first round of payments, this second round will be based solely on income reported on your 2019 tax return. Therefore, it’s possible if your income increased from 2018 into 2019 that you may have received a first-round stimulus check (based on your 2018 income) but won’t receive a second-round stimulus check (based on your 2019 income).

INSIGHT: Both rounds of stimulus payments are prepayments of tax credits for the 2020 tax year. Thus, if you don’t receive the full stimulus amounts in your checks from the IRS, you may still be eligible to claim a credit on your 2020 tax return.

Charitable Contributions

The CARES Act made the following changes regarding charitable donations:

  • For individuals who itemize their deductions, the limitation on charitable deductions was increased from 60% up to 100%.
  • For individuals who do not itemize, there is a new above-the-line deduction of up to $300.

The CARES Act only applied these changes to the 2020 tax year. However, the new law extends these measures for 2021 as well.

INSIGHT: Some people may have been rushing to make donations in 2020 to take advantage of these higher thresholds. With the expansion into the 2021 tax year, you may want to re-assess the timing of donations.

Other Pertinent Provisions Impacting Individuals

  • Additional unemployment benefit of $300 per week through March 14, 2021.
  • Unemployment benefits are also extended for self-employed and gig workers.
  • Extended the eviction moratorium through January 31, 2021.
  • Provides federal rental assistance for families impacted by COVID-19.
  • The threshold for medical expenses is permanently set at 7.5% of adjusted gross income beginning in 2021.

Businesses

PPP Version 2.0

The Paycheck Protection Program (PPP) has been a very popular program whereby businesses could apply for a loan through a lending institution, and as long as that business uses the loan proceeds for qualified business expenses, the PPP loan is forgiven.

The new law not only continues but also expands the PPP program. For businesses that did not receive any PPP funds earlier in 2020, the rules are more or less unchanged—these businesses can now seek PPP money and, assuming they meet the rules on spending that money, can have that PPP loan forgiven.

The expansion of the PPP program allows certain businesses that have already received the first round of PPP money to now seek another round of PPP money. This second PPP loan is available for businesses

  • With less than 300 employees, and
  • Can show a decline of gross receipts of at least 25% in a calendar quarter (2020 vs. same quarter in 2019).

The maximum loan amount for this second loan will be 2.5 times the monthly average payroll, not to exceed $2 million. Certain lodging and restaurant businesses may qualify for 3.5 times monthly payroll.

INSIGHT: Businesses that meet the 300 employee headcount threshold should compute their gross receipts by quarter for both 2019 and 2020 to determine whether they can partake of this second PPP loan. It would also be prudent to map out 2020 payroll, rent, and utilities (e.g. qualified expenditures) to determine whether there are enough of these expenditures to achieve full forgiveness for a second PPP loan as well as maximize Employee Retention Credits (discussed below).

PPP Deductibility

After the original PPP legislation was passed, the IRS issued guidance indicating any expenses paid with funds from a forgiven PPP loan would be nondeductible for income tax purposes. That IRS interpretation would have generated a tax liability for many businesses—in essence, taxing the PPP loan itself.

The new law unequivocally states that the PPP loan itself should be tax-exempt income AND the associated expenses should be deductible expenses. Additionally, the law clarifies that no tax attributes (such as net operating losses) need to be reduced by PPP loan forgiveness.

INSIGHT: Some businesses following the earlier IRS guidance, may have overpaid their 2020 estimated taxes assuming they would have large nondeductible expenses associated with forgiven PPP loans. Now that Congress has made those PPP expenses deductible, those businesses will need to revisit their 2020 extension and 2021 estimates. 

Paid Sick Leave and Paid Family Leave

The Families First Coronavirus Response Act introduced mandatory paid sick leave and paid family leave for certain businesses with fewer than 500 employees. Impacted businesses had to offer paid leave to their employees for certain qualified reasons associated with COVID-19. However, those businesses could then claim a payroll tax credit for that paid leave, thus reimbursing employers for the amount of wages paid.

The original time period for this mandatory paid leave program was from April 1, 2020, through December 31, 2020. This new legislation extends the period to March 31, 2021.

INSIGHT: Businesses that fall under the mandatory paid sick or paid family leave program should ensure that their payroll/HR personnel are aware of these programs and are taking the associated payroll tax credits. These credits are also available to self-employed individuals.

Employee Retention Credit

This retention credit originated in the CARES Act and offered qualified employers a tax credit for certain eligible wages paid from March 13, 2020, through December 31, 2020. As originally drafted, if a business obtained a PPP loan, they could not avail themselves of this credit.

The new law expands and extends the employee retention credit, as follows:

Applicable for 3/13/2020 – 12/31/2020 Applicable for 1/1/2021 – 6/30/2021
Businesses that received a PPP loan can also claim an employee retention credit, but not on the same employee wages. Businesses that received a PPP loan can also claim an employee retention credit, but not on the same employee wages.
Tax credit available on 50% of eligible wages paid from March 13, 2020 – December 31, 2020. Tax credit available on 70% of eligible wages paid from January 1, 2021 – June 30, 2021.
Eligible wages capped at $10,000 per employee per year. Eligible wages are capped at $10,000 per employee per quarter.
To qualify, the business has to show either

  1. Operations were fully or partially suspended due to a COVID-19 shutdown order, or
  2. 50% reduction in 2020 gross receipts as compared to the same quarter in 2019.
To qualify, the business has to show either

  1. Operations were fully or partially suspended due to a COVID-19 shutdown order, or
  2. 20% reduction in 2021 gross receipts as compared to the same quarter in 2019.**

**Special rules and elections may apply to this calculation.

For businesses with less than 100 employees that meet one of these two tests, the credit applies to all eligible employee wages.

For larger employers that meet one of these two tests, the credit applies to wages paid to employees who are not working.

For businesses with less than 500 employees that meet one of these two tests, the credit applies to all eligible employee wages.

For larger employers that meet one of these two tests, the credit applies to wages paid to employees who are not working.

No advance payment of credit allowed. Small employers (less than 500 employees) can receive an advance payment of the credit based on 70% of average quarterly wages paid in 2019.

 

INSIGHT: Under the original rules, many businesses may not have qualified for this credit. Based on the vast changes related to the Employee Retention Credit, businesses should closely evaluate whether they may qualify under these new rules. Careful attention will need to be paid towards the interplay of the Employee Retention Credit and PPP loan forgiveness.

Other Pertinent Provisions Impacting Businesses

  • For corporations, the limitation on charitable deduction was increased from 10% up to 25% through 2021.
  • Business meal expenses incurred in the 2021 calendar year and 2022 will be 100% deductible.
  • Certain incentives and credits were extended through 2025 (Work Opportunity Tax Credit, New Markets Tax Credit, and Empowerment Zone incentives).
  • Any advances that businesses received under the Economic Injury Disaster Loan program will no longer reduce any PPP loan forgiveness.

This latest legislation amplifies, extends, and clarifies many existing tax law items from previous bills, which leads many experts to expect further economic stimulus to come to fruition in 2021. These changes in laws while also balancing personal and business stresses of dealing with the pandemic can be overwhelming. If you have further questions regarding the impact of these new laws on your personal or business tax situation, be sure to reach out to a CRI professional with assistance analyzing the impact of these changes.