What Additional Tax Provisions Are Buried Within The Consolidated Appropriations Act of 2021?
The new coronavirus relief package, the Consolidated Appropriations Act (CAA) of 2021, contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits.
Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. These checks are already being distributed.
To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that were set to expire at the end of 2020 were extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired July 31, 2020.
With regard to the Paycheck Protection Program (PPP), the bill earmarks an additional $284 billion for a new round of forgivable small-business loans under the PPP and contains a number of important changes. For example, the legislation expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
Click here to learn more about the PPP Provisions outlined in this legislation.
The bill also allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters, and cultural institutions, with $12 billion allocated to help businesses in low-income and minority communities. Additionally, it extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits, and incentives that are set to expire on December 31, 2020.
Are You Taking Advantage Of These Important Tax Credits?
The bill extends and expands the Employment Retention Credit (ERC) and the paid leave credit under the Families First Coronavirus Response Act (FFCRA). Read on for additional insight.
Employment Retention Credit
The ERC, introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a refundable tax credit equal to 50 percent of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50 percent of its gross receipts for the same quarter in 2019.
The bill makes the following changes to the ERC, which will apply from Jan. 1 to June 30, 2021:
- The credit rate is increased from 50 percent to 70 percent of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
- The gross receipts eligibility threshold for employers is reduced from a 50 percent decline to a 20 percent decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
- The credit is available to certain government instrumentalities.
- The bill clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
- New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
- Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, the bill strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
This bill makes three retroactive changes that are effective as if they were included in the original CARES Act. Employers that received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. The bill also clarifies how tax-exempt organizations determine “gross receipts” and that group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee.
Families First Coronavirus Response Credit
The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021, on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from Jan. 1 to March 31, 2021, may take a federal tax credit for providing such leave. Some clarifications have been made for self-employed individuals as if they were included in the FFCRA.
Pension Plan Provisions
This legislation includes two provisions that would make changes to certain rules for employer-sponsored pension plans.
Election to terminate the transfer period for qualified transfers from the pension plan for covering future retiree costs
Section 420 of the Internal Revenue Code permits “qualified future transfers,” under which up to 10 years of retiree health and living costs may be transferred from a company’s pension plan to a retiree health benefits account and/or a retiree life insurance account within the pension plan. These transfers must meet a number of requirements: the plan must be 120 percent funded at the outset, it must be 120 percent funded throughout the transfer period, all unused amounts must be transferred back, and the plan is subject to maintenance of effort requirement.
Applying the current-law requirements during the market volatility related to the coronavirus pandemic has caused plans that have been historically far over 120 percent funded to fall below 120 percent and face a requirement to immediately restore these large market losses in order to get back to 120 percent funded.
This provision would allow employers to make a one-time election during 2020 and 2021 to end any existing transfer period for any taxable year beginning after the date of the election, provided the maintenance of effort continues to apply as if the transfer period were not shortened, the employer ensures the plan stays at least 100 percent funded throughout the original transfer period, the plan has funding targets for the first five years after the original transfer period, and all amounts left in the retiree benefits account at the end of the shortened transfer period must be returned to the pension plan (without application of an excise tax to such amounts).
Temporary rule preventing partial plan termination
Generally, an IRS assessment of plan termination is triggered whenever workforce turnover exceeds 20 percent. The legislation would defer assessments until March 2021, to give companies time to restore at least 80 percent of their workforce and avoid termination.
The provision would apply during any plan year which includes the period beginning March 13, 2020, and ending March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.
Other Tax Provisions In The CAA
The bill includes changes to some provisions in the Internal Revenue Code:
- Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017.
- Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10 percent to 7.5 percent so that more expenses may be deducted.
- Business meal deduction: Businesses may deduct 100 percent of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50 percent of those expenses).
- Early retirement account distributions and plan loans: The legislation clarifies that the CARES Act’s rules permitting penalty-free early retirement plan withdrawals and higher limits on loans from qualified plans apply to money purchase pension plans in addition to defined contribution plans and IRAs. This provision is effective as if it was enacted in the CARES Act.
- Temporary special rules for health and dependent care flexible spending arrangements: Taxpayers can roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. It also permits employers to allow employees to make a 2021 mid-year prospective change in contribution amounts.
- Low-income housing tax credit: Provides a minimum 4 percent Low-Income Housing Tax Credit (LIHTC) rate or floor for certain projects acquired for rehabilitation or for projects funded using tax-exempt bonds.
- TCJA depreciation fix: The legislation allows businesses that elect out of the section 163(j) limitation on business interest deductibility (real property trades or businesses) to utilize the 30-year alternative depreciation system (ADS) on residential rental property placed in service before 2018.
- Life insurance contracts: The bill changes fixed interest rates utilized in determining whether whole life insurance policies qualify as life insurance contracts under the tax code by tying the rates to periodically updated benchmark interest rates.
- Five-year extensions: The bill provides for a five-year extension of the following tax provisions that were scheduled to sunset Dec. 31, 2020:
- The look-through rule for certain payments from related controlled foreign corporations in IRC Section 954(c)(6), which was extended to apply to taxable years of foreign corporations beginning before Jan. 1, 2026, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end
- New Markets Tax Credit
- Work Opportunity Tax Credit
- Health Coverage Tax Credit
- Carbon Oxide Sequestration Credit
- Employer credit for paid family and medical leave
- Empowerment zone tax incentives
- Exclusion from gross income of discharge of qualified principal residence indebtedness
- A seven-year recovery period for motorsports entertainment complexes
- Expensing rules for certain productions
- Oil spill liability trust fund rate
- An incentive for certain employer payments of student loans (notably, the bill does not include other student loan relief so that borrowers will need to resume payments on such loans and interest will begin to accrue).
- One year extensions: Most provisions receiving one more year are in the renewable energy and energy efficiency space, including incentives for:
- Alternative fuel and alternative fuel mixtures
- Second-generation biofuels
- Nonbusiness energy property
- Two-wheeled electric plug-in vehicles
- Fuel cell vehicles
- Construction of new energy-efficient homes
- Alternative fuel vehicle refueling property
- Renewable electricity production
- Permanent changes: The bill makes several tax provisions permanent that were scheduled to expire in the future. In addition to the medical expense deduction threshold mentioned above:
- The deduction of the costs of energy-efficient commercial building property (now subject to inflation adjustments)
- The gross income deduction provided to volunteer firefighters and emergency medical responders for state and local tax benefits and certain qualified payments
- The transition from a deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning credit
- The railroad track maintenance credit
- Certain provisions, refunds, and reduced rates related to beer, wine, and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S.
For additional information or clarification, you can check out the detailed summary of the bill here, or you can reach out to your Rea advisor directly. Otherwise, you may email firstname.lastname@example.org or click on the button below, and we will put you in touch with a Rea tax professional in your area.