There is nothing quite like a deadline to motivate action and the Consolidated Appropriations Act, 2021 (the Act) is certainly no exception. The Act, which is the largest bill ever passed by Congress at over 5,500 pages, contains over $900 billion of additional stimulus funding, and provides for several key tax extenders and other tax changes. The bill, passed shortly after midnight Eastern Time on Dec. 22, 2020, is expected to be signed into law by President Trump shortly.
More in-depth analyses will follow on certain provisions, but below are summaries of some key tax provisions in the legislation.
Direct payments to individuals
The Act authorizes direct payments to individuals, calling it an advance tax credit, similar to the CARES Act, but in an amount of $600 per individual taxpayer ($1,200 for married filing jointly) and $600 per qualifying child.
The advance tax credit is phased out based on the 2019 adjusted gross income (AGI) beginning at an AGI of $150,000 in the case of a joint return, $112,500 in the case of head of household and $75,000 for all other taxpayers. The phase out will be 5% of AGI in excess of the thresholds, so a taxpayer filing a joint return with no dependents will be completely phased out at an AGI of $174,000.
The new provision imposes a requirement that all taxpayers and dependents must disclose a valid social security or taxpayer identification number. In the case of a joint return where only one spouse discloses a social security number that individual will be eligible for the $600 payment. Married members of the armed services are only required to provide one valid Social Security Number to receive two $600 payments. The Act also retroactively applies this provision to the CARES Act stimulus payments permitting households mixed status households. Taxpayers or dependents who were deceased before Jan. 1, 2020 will not be eligible for the benefit.
Rebates will be issued as rapidly as possible, and the expectation is that payments will be made during the first few weeks of January, but not later than Sept. 30, 2021. Similar to the previous payments, a notice will be sent by mail to the taxpayer’s last known address. The notice will include the method the payment was made and a phone number for the appropriate point of contact at the IRS to report any missing payments.
Certain charitable contributions deductible by non-itemizers
The provision extends, through 2021, the $300 charitable contribution deduction for qualified contributions made by non-itemizers. In addition, the deduction is $600 if claimed on a joint return.
Modification of limitations on charitable contributions
The provision extends the enhanced deduction limitations in placed for 2020 for qualified contributions made in calendar year 2021 by individuals who itemize and corporations. Individuals may deduct qualified contributions up to 100% of their 2021 AGI with any excess contributions carried forward for up to five years and subject to a limitation of 60% of AGI. Corporations may deduct qualified contributions up to 25% of their 2021 taxable income. Donations of food inventory, typically subject to a 15% limit, will remain at 25% for 2021.
Emergency financial aid grants
The provision clarifies that emergency financial aid grants (e.g., HEERF grants) made after March 26, 2020, do not constitute taxable income to the recipient students. Furthermore, the provision “holds students harmless for purposes of determining eligibility for the American Opportunity and Lifetime Learning tax credits.” However, this provision does not apply to payments conditioned on the performance of services, teaching or research.
Tax treatment of Paycheck Protection Program (PPP), Shuttered Venue Operator Grants, Targeted EIDL Advances, SBA 7(a) Debt Relief
The provision allows for full deductibility of expenses paid with forgiven PPP funds, providing PPP borrowers relief from what appears to have been an unintended consequence in the CARES Act. Also provided is tax relief for the SBA 7(a) debt relief program and emergency EIDL grants. Under the debt relief program, the SBA made payments on behalf of certain borrowers and now these payments are exempt from gross income with expenses remaining (?) deductible. The Act provides similar treatment for emergency EIDL grants.
The Act also provides $15 billion for grants for shuttered venue operators and exempts the grant from gross income, while allowing deductions for expenses paid with the grant.
The Paycheck Protection Program receives more funding with $284 billion to allow for continued access for first-time borrowers and provides a second-draw program for the hardest-hit borrowers. The provision expands PPP eligibility to FCC license holders and newspapers with more than one physical location if they otherwise meet the applicable employee threshold. In addition, the provision clarifies that public colleges and universities (described in section 511(a)(2)(B) of the Code) are eligible if they certify the funds will support locally focused or emergency information.
The provision expands PPP eligibility to certain organizations described in section 501(c)(6) and ‘destination market organizations’ that meet the following criteria: (1) does not receive more than 15% of its receipts from lobbying; (2) does not conduct lobbying activities in excess of 15% of its total activities; (3) did not exceed $1 million in lobbying expenses during its most recently completed tax year that ended prior to Feb. 15, 2020; and (4) has 300 or fewer employees.
The provision specifically provides that professional sports leagues and organizations with the purpose of promotion or participating in a political campaign are ineligible.
Employee retention credit
The provision modifies and extends the CARES Act employee retention credit. Specifically, the employee retention credit is:
- Increased from 50% to 70% of eligible wages,
- Expanded to include $10,000 for any calendar quarter per employee rather than $10,000 for all quarters,
- Simplified for ‘small employers’ with 500 employees instead of 100 employees, and
- Extended to an Employee Retention Credit period (during which an employer can pay and count qualified wages) that ends June 30, 2021 rather than Dec. 31, 2020.
The provision also changes the separate ‘reduction of gross receipts’ test (one of the two ways of qualifying as an eligible employer). Under the CARES Act, a company that had 50% reduction in gross receipts for a 2020 quarter compared to the same quarter in 2019 is an eligible employer. Under the provision, a company that has gross receipts for a 2020 quarter that are less than 80% of the gross receipts for the same quarter in 2019 is an eligible employer.
In addition, wages that are not forgiven via a PPP loan can be used as qualified wages for ERC purposes.
Tax credit for employers offering qualified paid sick and family leave
The provision extends the tax credit relating to qualified paid sick and family leave under the Families First Coronavirus Response Act to March 31, 2021 instead of Dec. 31, 2020.
Alcohol excise taxes
The Act makes permanent the Craft Beverage Modernization and Tax Reform provisions of the Tax Cuts and Jobs Act (TCJA).
- In general, the rate of tax on beer is $16 per barrel for the first 6 million barrels of beer and $18 per barrel for additional beer produced or imported.
- For domestic producers of beer producing not more than 2 million barrels of beer, the tax rate is $3.50 per barrel for the first 60,000 barrels of beer and then increases to $16 per barrel for additional gallons.
- The tax rate on distilled spirits is now permanently $2.70 per proof gallon on the first 100,000 proof gallons, $13.34 per proof gallon on the next 22,130,000 proof gallons, and $13.50 on any subsequent proof gallons.
- The credit for wine is now permanently set at $1.00 per wine gallon on the first 30,000 gallons of wine, plus $.90 for the next 100,000 wine gallons, and $.535 on the next 620,000 wine gallons.
- Beginning Jan. 1, 2023, refunds must be claimed by importers who have received an assignment from a foreign producer, rather than being able to immediately obtain a reduced rate of tax on entry. Claims can be made as often as quarterly.
- Reduced rates of tax are not allowed for illegally produced or smuggled alcohol.
Meals and Entertainment
The provision temporarily amends section 274(n)(2) to allow a full business deduction for certain business meals. Under the temporary change, the cost of food or beverages provided by a restaurant, and paid or incurred during the 2021 and 2022 calendar years, will be 100% deductible, provided that the amounts would otherwise be deductible under the section. Section 274(n)(2) generally limits business deductions to 50% of food and beverage costs (with certain exceptions enumerated in sections 274(n)(2)).
Certain residential rental property
For an electing real property trade or business, the 30-year ADS recovery period for residential real property applies to property placed in service before Jan. 1, 2018, if the ADS did not previously apply to such property. This provision provides for a retroactive change to TCJA and applies to taxable years beginning after Dec. 31, 2017.
Clean energy and environmental tax credits and incentives
Several important clean energy credits and incentives are being extended and modified, including:
- The section 179D energy efficient commercial building deduction is extended permanently, will be inflation indexed and will use updated energy efficiency standards.
- The section 45Q carbon oxide sequestration credit is extended for two years, through 2025.
- The section 45 renewable electricity production tax credit for wind farms and other renewables is extended for one year, through 2021.
- The section 48 energy investment credit for solar and other renewables is extended by lengthening the phase-out period and applying higher credit rates than the existing phase-out schedule. Waste energy recovery property is also added as a new category of qualified property.
- The section 45L energy efficient homes credit is extended for one year, through 2021.
- Excise tax credits and subsidy payments for alternative fuels are extended one year, through 2021.
- The section 25D residential energy-efficient property credit is extended at the full rate for two years, through 2022 and then is phased down in 2023. Biomass fuel property is also added as eligible for this credit.
- The section 40 second-generation biofuel credit is extended one year, through 2021.
Other extensions of expired tax provisions
Several other important tax credits, incentive and other provisions are being extended, including:
- The section 45G railroad track maintenance credit is extended is being made permanent and the credit rate is reduced from 50% to 40% for tax years beginning after 2022.
- Look-thru rules for related controlled foreign corporations are extended for five years, through 2025.
- The New Markets Tax Credit is extended for five years, through 2025.
- The Work Opportunity Tax Credit is extended five years, through 2025.
- Empowerment Zone tax incentives are extended for five years, through 2025.
- The section 45S paid family and medical leave credit is extended for five years, through 2025.
- The Indian employment credit is extended for one year, through 2021.
- The oil spill liability trust fund excise tax imposed on crude oil and imported petroleum products is extended five years, through 2025.
- The black lung disability trust fund excise tax imposed on coal is extended one year, through 2021.
Other Employee Benefit provisions
- The Act extends the section 127 rule permitting tax-free employer-provided payments for certain student loan payments in the CARES Act for another five years. Employers can pay up to a total of $5,250 on an employee’s qualified education loan (incurred by the employee for the education of that employee) tax-free for years before Jan. 1, 2026. The Act does not loosen the section 127 requirements that must be satisfied.
- The Act provides additional flexibility for health and dependent care flexible spending arrangements (FSAs) for 2021 and 2022, including being able to continue to use amounts not used up by the end of each of these years. FSAs thus will have extended grace periods. Additionally, employees can be allowed to make mid-year changes to their FSA elections. The provision also includes specific new rules allowing an extended use period for terminated employees or dependents who reached the maximum age during the pandemic.
- In addition, the Act includes some disaster-related provisions for 2020 disasters apart from COVID-19 such as access to retirement funds, the employee retention credit for qualified disasters, and additional allocations for the low-income housing credit.