Following several months of negotiations that included Democrats and Republicans setting forth separate legislative proposals, Congress released a bipartisan $2.3 trillion spending package on Monday, December 21st. The extensive package includes a $1.4 trillion omnibus bill that consists of more than $740 billion in defense spending and nearly $665 billion for domestic programs. The legislation also includes a $900 billion COVID-19 relief bill which includes additional unemployment assistance, including an extension of the pandemic unemployment assistance payments, new tax relief provisions, extensions of expiring tax incentives, and an extension of the Paycheck Protection Program.
Late Monday, December 21, 2020, the House of Representatives passed the legislation in two tranches. First, the House passed the $1.4 trillion government spending bill by a vote of 327 – 85. The House then passed the $900 billion COVID-19 relief package by a vote of 359 – 53. Thereafter, the Senate passed the legislation package in a single vote of 92 – 6. Although President Trump initially expressed concerns with the package, he signed the legislation into law on Sunday, December 27, 2020.
This FGMK Tax Alert serves to highlight some of the key tax and small business related components of the COVID-19 relief package. Specifically, Section I provides an overview of additional tax relief set forth in the COVID-Related Tax Relief Act of 2020. Section II identifies key tax incentives that are either made permanent or extended. Finally, Section III summarizes significant provisions set forth in the extension of the Paycheck Protection Program.
Additional Tax Relief
The COVID-Related Tax Relief Act of 2020 constitutes a key element of the $900 billion COVID-19 relief legislation. As noted below, a key provision therein provides for the deductibility of expenses covered by PPP loans. It also provides additional recovery rebates in the form of tax credits and/or advance payments for eligible taxpayers. The following summarizes the key tax provisions included in the legislation.
Tax Incentives Made Permanent or Extended
The legislation contains the Taxpayer Certainty and Disaster Tax Relief Act of 2020 which modifies the termination date of several expiring tax incentives, amends the employee retention tax credit, and includes a provision that allows for the 100 percent deduction of business meal expenditures where such food or beverages are provided by a restaurant and paid or incurred before January 1, 2023.
A. Tax Incentives Extended
The following provides a summary of several popular incentives that are either made permanent or extended under the legislation.
The following tax incentives are made permanent.
The following tax incentives are extended through December 31, 2025.
Also extended through December 31, 2025 is the controlled foreign corporation (“CFC”) look-through rule under Internal Revenue Code Section 954(c)(6)(C). The effect of this provision is to exclude dividends, interest, rents, and royalties from foreign personal holding company income when received from a related party for whom such items would not be Subpart F income or effectively connected income to a United States trade or business.
The Section 25D residential energy-efficient property credit is extended for two years by amending the placed-in-service date to be December 31, 2023, as well as each of the phase-down dates. Qualified biomass fuel property expenditures would also be eligible for the credit.
The following tax incentives are extended through December 31, 2021.
Additionally, several energy production credits under Section 45 and the election to treat qualified facilities as energy property are extended through 2021, as the legislation strikes January 1, 2021 and inserts January 1, 2022. Moreover, the legislation extends the phase out dates for energy incentives under Section 48, including the provision governing solar energy property. The definition of “energy property” under Section 48 is also expanded to include waste energy recovery property which is defined as property that generates electricity solely from heat from buildings or equipment if the primary purpose of such buildings or equipment is not the generation of electricity.
The legislation also allows a taxpayer to utilize 2019 earned income, as opposed to 2020 earned income, for purposes of determining the earned income tax credit and Section 24(d) additional child tax credit.
B. Modification of Employee Retention Credit Provided by the CARES Act
The new legislation extends the payroll tax credit through June 30, 2021. It also makes several modifications to the credit which are effective for calendar quarters beginning after December 31, 2020.
The law makes two important modifications that increase the amount of the potential credit: (1) the credit rate increased from 50 percent to 70 percent; and (2) the per employee qualified wage limitation increased from $10,000 in aggregate to $10,000 for any calendar quarter (qualified wages include allocable health plan expenses). Additionally, it makes two significant changes that could increase eligibility to claim the credit: (1) decreases the required reduction in gross receipts when comparing a calendar quarter to a 2019 calendar quarter from more than 50 percent to more than 20 percent, i.e., employer is eligible where gross receipts are less than 80 percent of the gross receipts for the same calendar quarter in 2019; and (2) modifies the definition of “large employer” by increasing the threshold from 100 employees to 500 employees, thereby increasing the potential credit amount as larger employers may only claim the credit for wages paid to employees who are not performing services for the company.
The law provides that PPP loan recipients may claim the credit for wages that constitute payroll costs for which forgiveness is not obtained. This provision would apply retroactively as if part of the CARES Act.
C. New Qualified Disaster Employee Retention Credit
The tax law provides a new income tax credit (exception: payroll credit for certain tax exempt organizations) for an eligible employer with a trade or business in a qualified disaster zone and which is inoperable during a defined incident period as a result of damage sustained by reason of such qualified disaster. Importantly, the legislation clarifies that a qualified disaster area would not include an area declared as a “qualified disaster area” solely by reason of COVID-19. An eligible employer is defined as an active trade or business in a qualified disaster zone during a qualified disaster incident period and is inoperable during such period. The incentive allows an eligible employer to claim a credit of 40 percent of up to $6,000 of an employee’s wage, i.e., maximum credit of $2,400 per qualified employee. Qualified wages include those paid to employees who are not performing services during such period and employees moved to a different work location during such period.
The provision asserts that a PPP loan recipient may qualify wages for the credit to extent that forgiveness is not obtained for such wages.
D. Deduction of Business Meals
Typically, Section 274(n) limits the deduction of expenses paid or incurred for business meals to 50 percent. The legislation adds a new provision to the tax code that allows such expenses to be expensed 100 percent if the food and beverages are provided by a restaurant and such expenses are paid or incurred after December 31, 2020 and before January 1, 2023. Thereafter, such expenses would be subject to the general 50 percent limitation. The goal of the provision is to encourage additional patronage of restaurants which have experienced significant economic hardship due to the COVID-19 pandemic.
E. Residential Rental Property Depreciable Life
Taxpayers that elect to be treated as electing real property trades or businesses in order to avoid the interest deduction limitation under Section 163(j) must depreciate qualified improvement property, nonresidential real property, and residential rental property over an extended period of time under the Alternative Depreciation System (“ADS”). The Tax Cuts and Jobs Act of 2017 reduced the ADS depreciable life for residential rental property from 40 years to 30 years for property placed in service after December 31, 2017. The new legislation provides that residential rental property placed in service before January 1, 2018 may also be depreciated over 30 years under the ADS if the property is held by an electing real property trade or business and was not subject to the ADS before January 1, 2018. This modification will create more near-term tax depreciation for those real estate taxpayers who elect out of the interest deduction limitation.
F. Charitable Deductions
The CARES Act provided a new “above-the-line” deduction for the 2020 tax year of $300 for cash contributions to charitable organizations for taxpayers who do not itemize. The new COVID-19 relief legislation provides an “above-the-line” $300 deduction for a tax year beginning in 2021 for such cash contributions to charitable organizations and doubles the deduction to $600 for taxpayers filing jointly. However, the new law also increases the Section 6662 penalty from 20 percent to 50 percent of the underpayment for taxpayers who overstate the deduction.
Additionally, the legislation amends Section 2205 of the CARES Act to extend the increased charitable deduction limits (individual limit increased from 60 percent to 100 percent of charitable base; corporate entity limit increased from 10 percent to 25 percent of taxable income) through December 31, 2021. The charitable contribution of food inventory deduction limitation (increased from 15 percent of taxable income to 25 percent of taxable income) is also extended through December 31, 2021.
G. Health and Dependent Care Flexible Spending Arrangements
The new legislation clarifies that an employer plan that includes a health flexible spending arrangement or a dependent care flexible spending arrangement will not fail to be treated as a cafeteria plan for purposes of Internal Revenue Code merely because it allows participants to carry forward unused 2020 benefits into the 2021 plan year or 2021 benefits into the 2022 plan year. A plan may also provide for a 12-month grace period with respect to unused benefits or contributions. As a result, while the carryforward of a 2020 benefit into a 2021 plan year could not be carried forward into the 2022 plan year, a plan could allow the benefit to be used for up to 12 months after the end of the 2020 plan year (same rule applies for 2021 plan year carryforward into 2022 plan year).
Extension of the Paycheck Protection Program
The legislation includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act which modifies and expands the PPP by establishing new expenses that qualify for forgiveness, as well as providing the opportunity for some borrowers to obtain a second PPP loan. With respect to the latter element, the law establishes narrower requirements for borrowers to qualify for a second PPP loan. The following summarizes the key elements of the legislation’s modification and expansion of the popular Small Business Administration loan program established by the CARES Act.
A. Additional Forgivable Expenses
The legislation creates the following additional items of expenses for which a PPP loan may be used and forgiveness sought. The law clarifies that these expenditures are treated as if originally included in the CARES Act, and thus apply to all borrowers who have not yet received forgiveness, i.e., not applicable to borrowers who received forgiveness from the SBA prior to the effective date of the new law.
The legislation also amends the definition of “payroll costs” to clarify that an employer’s payment of group health care benefits includes group life, disability, vision, and dental insurance. Prior to the legislation, SBA guidance had clarified that the payroll costs include dental, vision, and health benefits. The law’s amendment of the CARES Act provision expands the definition to include group life and disability insurance payments with a retroactive effective date as if originally included in the CARES Act.
B. Covered Period End Date
Since the Paycheck Protection Flexibility Act extended the covered period to 24 weeks, the SBA had provided a binary choice as to covered period length for borrowers who obtained a loan prior to June 5, 2020: 8 or 24 weeks (all other borrowers’ covered period was 24 weeks). While a borrower could submit an application for forgiveness prior to the end of the 24-week covered period once all expenses were spent, the borrower’s covered period remained 24-weeks, i.e., still had to account for full-time equivalent reductions through the 24-week period even after submitting the forgiveness application.
The law amends the definition of a borrower’s covered period. While the beginning of the covered period remains the date of the loan distribution, a borrower may select an end date of the covered period that occurs during the period of 8-weeks after the loan origination date and the end of the 24-week period. This would alleviate concerns for borrowers who complied with all aspects of the program and properly spent all loan proceeds, applied for forgiveness, but may have faced headcount reduction issues following the application submission, where time remained during the covered period.
C. Simplified Forgiveness Application
The law provides for a simplified loan forgiveness application for borrowers whose loans do not exceed $150,000. The SBA will have 24 days from the date of the law’s enactment to establish a new one-page form. Borrowers will have to provide a description of the number of employees the borrower was able to retain because of the loan, the estimated amount of the loan spent on payroll costs, and the total loan value. Borrowers will have to retain applicable employment records for a 4-year period following submission of the form and other respective documentation for a 3-year period following application submission.
D. Interplay with EIDL Advance
Section 1110(e)(6) of the CARES Act provided that an advance amount received under Section 7(b)(2) of the Small Business Act, referred to as an Economic Injury Disaster Loan (“EIDL”) Advance, shall be reduced from the loan forgiveness amount for payroll costs made under Section 7(a) of the Small Business Act. As a result, many borrowers who received such an advance and otherwise qualified for full forgiveness of a PPP loan were to be left with a loan with the PPP lender in the amount of such EIDL Advance.
Section 333(c) of the new legislation repeals Section 1110(e)(6) of the CARES Act. In doing so, the law provides that the intent of Congress was that borrowers of loans made under Section 7(b)(2) of the Small Business Act in response to COVID-19 during the covered period should be made whole, without regard to whether borrowers are eligible for forgiveness with respect to such loans. The law directs the SBA to issue rules within 15 days of the passage of the law to ensure equal treatment of all covered entities that may have completed the loan forgiveness process prior to law’s passage and repeal of Section 1110(e)(6) of the CARES Act.
E. Second Draw Loans
The legislation provides an opportunity for a second loan, referred to as a second draw loan, for some borrowers and modifies the end date of PPP loan program from August 8, 2020 to March 31, 2021. The maximum loan for an eligible entity is $2,000,000. While the $2,000,000 limit applies to all eligible entities, entities with an NAICS code 72 may reach that cap quicker as the calculated limit for such entities is the lesser of $2,000,000 or 3.5 times the average monthly total payroll costs for the prior one-year period or calendar year 2019 (the computation uses 2.5 rather than 3.5 for all other eligible entities).
However, the second draw is limited to an eligible entity that employs no more than 300 employees (a decrease from 500 for the first draw under the CARES Act) and that had gross receipts during the first, second, or third quarter in 2020 that demonstrate a 25 percent or more reduction in gross receipts as compared to the same calendar quarter in 2019. If an applicant applies after January 1, 2021, then the same test applies for the fourth quarter of 2020 as compared to the fourth quarter of 2019. While an eligible entity must have been in operation on February 15, 2020, the law does provide for modified comparison of quarters for those eligible entities that were not in operation for all or a part of 2019. For a business entity with an NAICS code beginning with 72 and more than one physical location, the business concern may qualify if the business concern employs no more than 300 employees per physical location and meets the more than 25 percent gross receipt reduction test.
Those not eligible for a second draw include a business concern described in Section 120.110 of title 13, Code of Federal Regulations (other than a business concern described in subsection (a) or (k) of such section) and an entity engaged in political or lobbying activities. Notably, the legislation also denies a second draw to entities or business concerns where an entity having more than 20 percent economic interest in the potential borrower is established under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong or even if such entity has significant operations in those locales. Ineligibility can also result from a person who is a resident of the People’s Republic of China serving as a member of the board of directors of the business concern.
As a note, the new legislation also provides a new grant program for shuttered venue operators. The maximum amount of such grant is $10,000,000. Eligible recipients of such grants would not be eligible for a second draw PPP loan.
F. Lenders’ Protection
The law contains a provision that updates Section 7A of the Small Business Act that holds harmless lenders who may rely on any certification or documentation submitted by an applicant for an initial or second draw PPP loan. Moreover, the law sets forth that no enforcement action may be taken against a lender and such lender will not be subject to penalties relating to origination or forgiveness of a loan where the lender acts in good faith and in compliance with federal, state, and local statutory or regulatory requirements.
FGMK will continue to monitor the legislative landscape and its potential impact on our clients. Please reach out to your FGMK representative if you have any questions or would like to discuss.
We wish you and your families a happy holiday season!
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