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Summary of Tax Provisions in Consolidated Appropriations Act

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On December 27, 2020, President Trump signed into legislation the Consolidated Appropriations Act, 2021 (the “Act”).  The Act enhances and expands sure provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748).  This weblog publish summarizes the tax provisions of the Act.

Bills Associated to PPP Mortgage Forgiveness Are Deductible. The CARES Act included a mortgage forgiveness program below the Small Enterprise Administration’s Paycheck Safety Program (the “PPP”).  A PPP mortgage could also be forgiven if its proceeds are used for “payroll prices” or sure different bills.  Below the CARES Act, the forgiveness of a PPP mortgage doesn’t give rise to taxable cancellation of indebted revenue, or a lack of tax attributes.  Nonetheless, the IRS held that bills that gave rise to PPP mortgage forgiveness weren’t deductible.[1]  The Act reverses this rule and permits taxpayers whose PPP loans are forgiven to deduct the bills referring to their loans to the extent they might in any other case qualify as strange and essential enterprise bills.[2]  This rule applies retroactively to the efficient date of the CARES Act in order that bills paid utilizing funds from PPP loans beforehand issued below the CARES Act are deductible, no matter when the mortgage was forgiven.

Adjustments to the Worker Retention Tax Credit score. The CARES Act supplied an eligible employer with a refundable payroll tax credit score equal to 50% of sure “certified wages” (together with sure well being plan bills) paid to its workers starting March 13, 2020 via December 31, 2020 if the employer is engaged in a commerce or enterprise in 2020 and the wages are paid (i) whereas operation of that commerce or enterprise is totally or partially suspended on account of a governmental order associated to COVID-19 (the “suspension take a look at”) or (ii) through the interval starting within the first quarter by which gross receipts for that commerce or enterprise are lower than 50% of gross receipts for a similar calendar quarter of 2019 and ending on the finish of the primary subsequent quarter by which gross receipts are greater than 80% for a similar calendar quarter of 2019 (the “gross receipts take a look at”).  The worker retention tax credit score can be utilized to offset all federal payroll taxes, together with federal withholding tax, and the employer’s and worker’s share of social safety tax and Medicare, however not the federal unemployment tax (“FUTA”).

The Act makes a number of modifications to the worker retention tax credit score.  The modifications are efficient for calendar quarters starting after December 31, 2020 besides as in any other case indicated under. This chart summarizes the modifications; they’re defined additional under.

  CARES Act Consolidated Appropriations Act
Limitations on credit score 50% of certified wages; $5,000 annual cap 70% of certified wages; $28,000 annual cap
Eligibility of PPP debtors Not eligible Eligible (with election to exclude certified wages from both payroll prices for PPP functions or from calculation of credit score)*
Massive employer threshold for extra limitations 100 full-time workers 500 full-time workers
Governmental organizations Not eligible Sure governmental instrumentalities are eligible
Availability By means of December 31, 2020 By means of July 1, 2021

* Applies retroactively to efficient date of CARES Act

Credit score elevated to 70% of certified wages; cap on credit score elevated to $28,000. The CARES Act supplied for a refundable payroll tax credit score of fifty% of sure “certified wages”, capped at $5,000/worker (50% of as much as $10,000 of certified wages for all calendar quarters).  The Act will increase the credit score cap from $5,000 for the yr to $7,000 (70% of $10,000) for any calendar quarter.[3]  Accordingly, the Act will enhance the utmost quantity of credit score obtainable in 2021 for every worker from $5,000 to $28,000.

PPP debtors might obtain the tax credit score. The CARES Act denied the worker retention tax credit score to any employer that receives a mortgage below PPP, and outlined the time period “employer” expansively, doubtlessly inflicting buying companies with worker retention tax credit to lose or recapture these tax credit in the event that they acquired a goal firm that had obtained a PPP mortgage.[4]  The Act permits an employer that receives a PPP mortgage to obtain the worker retention tax credit score.  Nonetheless, to forestall any double-dipping, an employer should both exclude “certified wages” that allowed the employer to say worker retention tax credit from “payroll prices” for functions of figuring out its mortgage forgiveness below the PPP (in order to cut back the quantity of mortgage forgiveness), or exclude “certified wages” that certified for PPP mortgage forgiveness from “payroll prices” (in order to cut back the worker retention tax credit score).[5]  This variation applies retroactively to the efficient date of the CARES Act.[6]

Useful modifications to the gross receipts take a look at. Below the CARES Act, an employer certified for the worker retention tax credit score below the gross receipts take a look at for the interval starting with the primary calendar quarter for which gross receipts for the employer’s commerce or enterprise had been lower than 50% of gross receipts for a similar calendar quarter of 2019 and ending on the finish of the primary subsequent quarter by which gross receipts had been greater than 80% for a similar calendar quarter of 2019.  Below the Act, in 2021, an employer qualifies for the interval starting in a calendar quarter by which the employer’s gross receipts are lower than 80% (as an alternative of fifty%) of gross receipts for a similar calendar quarter of 2019 and ending on the finish of the primary subsequent quarter by which gross receipts are greater than 80% for a similar calendar quarter of 2019.[7]  Moreover, employers might elect to use the gross receipts take a look at based mostly on gross receipts from the prior calendar quarter to find out their eligibility for the credit score.[8]  The Act additionally makes the credit score obtainable in 2021 to employers that weren’t in existence in 2019 by allowing them to apply the gross receipts take a look at based mostly on 2020 gross receipts.[9]

Massive employer threshold. For an employer with greater than 100 full-time workers, the CARES Act imposed an extra restriction: the worker retention tax credit score is on the market solely with respect to wages paid to an worker who just isn’t offering companies on account of circumstances described in (i) the suspension take a look at or (ii) the gross receipts take a look at.  The Act will increase the brink for this rule in 2021 to 500 full-time workers (in order that employers with between 101 and 500 full-time workers would now not be topic to this restriction).[10]

Tax-exempt organizations and governmental entities. The Act offers that, for functions of the worker retention tax credit score, the time period “gross receipts” of a bit 501(c) tax-exempt group means the quantities the group receives throughout its annual accounting interval from all sources with out subtracting any prices or bills.[11]  This variation applies retroactively to the efficient date of the CARES Act.[12]

Below the CARES Act, federal, state or native authorities (and their companies) weren’t eligible for the credit score. The Act permits federal credit score unions, public schools and universities, and public medical and healthcare suppliers to obtain the worker retention tax credit score in the event that they in any other case fulfill the necessities for the credit score.[13]  For functions of figuring out eligibility, public schools and universities, and public medical and healthcare suppliers are handled as being engaged in a commerce or enterprise.

Well being plan bills. The Act contains well being plan bills within the definition of “certified wages” for functions of the worker retention tax credit score, together with in instances the place an employer furloughs workers however continues to present well being advantages to them.[14]  This variation applies retroactively to the efficient date of the CARES Act.[15]

Credit score obtainable via July 1, 2021. The Act extends the provision of the worker retention tax credit score via July 1, 2021.[16]

Restoration Rebates.  The Act offers for a second spherical of restoration rebates[17] which can be obtainable as direct funds to people.[18]  Nonetheless, the rebate is diminished from $1,200 to $600 per particular person.  Further rebates can be found for qualifying youngsters (however not grownup dependents), and there’s no cap on family dimension.  As with the primary spherical of rebates, eligibility relies on 2019 adjusted gross revenue, and the rebate begins to section out at $75,000 for particular person filers, $112,500 for heads of households, and $150,000 for joint filers with a whole section out at $87,000 for particular person filers (with no qualifying youngsters) and $174,000 for joint filers (with no qualifying youngsters).

Extension of Paid Sick and Household Depart Tax Credit. The Families First Coronavirus Response Act (H.R. 6201) (the “FFCRA”) offers an “eligible employer”[19] with refundable payroll tax credit to cowl wages paid to workers whereas they take time without work below new paid sick and household go away packages between April 1, 2020 and December 31, 2020.[20]  The Act extends the paid sick and household go away tax credit via March 31, 2021 on a voluntary foundation.  Employers are usually not required to offer FFCRA go away between January 1, 2021 and March 31, 2021, but when they accomplish that, they’re eligible for the tax credit for wages paid with respect to the go away.[21]

Momentary 100% Deduction for Enterprise Meals. The Tax Cuts and Jobs Act of 2017 (the “TCJA”) restricted the deductibility of enterprise meal bills to 50% of the fee for meals and drinks supplied by a restaurant.  The Act permits companies to deduct 100% of those enterprise meals bills throughout 2021 and 2022.

Elevated Above-the-Line Charitable Contribution Deduction. The Act permits taxpayers that don’t itemize deductions to take an “above-the-line” deduction for charitable contributions of as much as $300 ($600 for joint filers) made to sure part 501(c)(3) public charities.[22]  The Act additionally offers that taxpayers that overstate the deduction might be topic to elevated penalties (from 20% to 50%).[23]

Corrected 30-Yr Price Restoration Interval for Residential Rental Property. A “actual property commerce or enterprise” might elect out of the limitation on the deductibility of enterprise curiosity imposed by part 163(j) of the Code that was enacted as a part of the TCJA.[24]  If an actual property commerce or enterprise makes this election, it’s required to make use of the longer price restoration intervals below the choice depreciation system (“ADS”).  When the TCJA was enacted, the ADS price restoration interval for residential rental property was diminished from 40 to 30 years.  Nonetheless, on account of a drafting error, this discount in the fee restoration interval for residential rental properties utilized solely to buildings positioned into service or acquired in 2018 or later with the consequence that an actual property commerce or enterprise with a residential rental property on the finish of 2017 that elected out of the limitation on the deductibility of enterprise curiosity can be required to make use of the 40-year price restoration interval.  The Act retroactively corrects the error in order that the 30-year price restoration interval is on the market for all residential rental property no matter when it was positioned into service.[25]

Extension of Look By means of Rule for Associated Managed International Companies (“CFCs”)[26]Part 954(c)(6) of the Inside Income Code (the “Code”) offers that dividends, curiosity, rents, and royalties obtained or accrued by a CFC from a associated CFC won’t be handled as “international private holding firm revenue” presently includible within the revenue of a United States shareholder[27] below the subpart F regime as long as the supply of such fee just isn’t itself subpart F revenue or revenue that’s successfully related with a U.S. commerce or enterprise.  This rule was scheduled to sundown on December 31, 2020, however the Act extends its software to taxable years of CFCs starting earlier than January 1, 2026 and to taxable years of United States shareholders with or inside which such taxable years of CFCs finish.

Deferral of Worker-Facet Payroll Tax. On August 8, 2020, President Trump issued a memorandum allowing employers to defer fee of the worker portion of sure payroll taxes (i.e., Previous-Age, Survivors, and Incapacity Insurance coverage tax below Part 3101(a) and Railroad Retirement Act Tier 1 tax below Part 3201(a)) for any worker with pre-tax wages or compensation throughout any biweekly pay interval that had been lower than $4,000 through the interval between September 1, 2020 and December 31, 2020.  The memorandum required the employers to withhold and pay the deferred payroll taxes from wages or compensation paid between January 1, 2021 and April 30, 2021.  The Act extends the reimbursement interval to December 31, 2021.[28]

[1] Discover 2020-32.

[2] Part 276.

[3] Part 207(b)-(c).

[4] The IRS beforehand posted FAQs offering that an acquisition of the inventory or belongings of an organization that obtained a PPP mortgage usually wouldn’t trigger the acquirer to jeopardize its worker retention tax credit, however this steering couldn’t be relied upon by taxpayers.  For extra on this challenge, please see our blog post on the IRS FAQs.

[5] Sections 206(c).

[6] Part 206(g).

[7] Part 207(d)(1).

[8] Part 207(d)(2).

[9] Part 207(d)(1).

[10] Part 207.

[11] Part 206(a).

[12] Part 206(g).

[13] Part 206(d).

[14] Part 206(b).

[15] Part 206(g).

[16] Part 207(a).

[17] For extra info on the primary spherical of restoration rebates below the CARES Act, please see our weblog publish on the CARES Act.

[18] Part 272.

[19] Eligible employer usually means a non-public employer or nonprofit group with fewer than 500 workers that’s required to offer paid sick and household go away below the brand new paid go away packages established by the FFCRA below the Emergency Paid Sick Depart Act and the Emergency Household and Medical Depart Growth Act.

[20] For extra details about these tax credit, please see our blog post on the FFCRA.

[21] Part 286.

[22] Part 212(a).

[23] Part 212(b).

[24] Part 163(j)(7). An actual property commerce or enterprise contains any actual property growth, redevelopment, building, reconstruction, acquisition, conversion, rental, operation, administration, leasing, or brokerage commerce or enterprise.  Part 469(c)(7)(C) of the Code.

[25] Part 202.

[26] A international company is a CFC if greater than 50% of the full mixed voting energy of all courses of inventory entitled to vote or the full worth of the inventory of the company is owned immediately, not directly, or constructively by “United States shareholders” on any day through the taxable yr of the international company.  Part 957(a) of the Code.

[27] A United States shareholder is a U.S. person who owns 10% or extra of the full mixed voting energy or worth of a CFC.  Part 951(b) of the Code.

[28] Part 274.


© 2020 Proskauer Rose LLP.
Nationwide Regulation Assessment, Quantity X, Quantity 364

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