Significant Tax Provisions of COVID-19 Relief Legislation
On December 27, 2020, President Trump signed the Coronavirus relief and government funding bill into law.
Included in this bill are many tax provisions under the titles of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the COVID-related Tax Relief Act of 2020. This client alert summarizes some of the more significant tax provisions related to businesses.
Clarification of Tax Treatment of PPP Loans
- While the CARES Act excluded the forgiveness of PPP loans from taxable income, it did not specifically address whether the expenses paid with forgiven loan proceeds should be deductible by the borrower. In published guidance, Treasury and the IRS took the position that such expenses should not be deductible by the borrower, a position that was widely criticized by many. The bill reverses this position by providing that, effective for all tax years ending after March 27, 2020, taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. Further, an owner of an S corporation or partnership will not be denied a basis step-up in their stock/partnership interest for any tax-exempt income from a forgiven PPP loan.
Extension and Enhancement of Employee Retention Credit
- Under the CARES Act, the Employee Retention Credit (ERC) provides a refundable payroll tax credit for 50% of qualified wages up to $10,000 per employee paid by eligible employers after March 12, 2020 and before January 1, 2021. The credit is available to employers whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meeting. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
- The bill extends the availability of this credit through June 30, 2021 and enhances the credit by increasing the credit rate from 50% to 70% of qualified wages, expanding the wage base to $10,000 per employee per quarter (as opposed to per year), and expanding eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility. The bill also expands ERC eligibility to colleges, universities and certain governmental entities with a principal purpose of providing medical and hospital care
- The bill also provides that employers who receive a PPP loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds. Specifically, the bill removes the language from the CARES Act that prevented an employer from receiving the ERC if it also receives a PPP loan and removes the language that provides for recapture of the credit if such credit is allowed to a taxpayer that receives a PPP loan during a subsequent quarter.
- For employers engaged in M&A transactions, it is now clear that an acquiring employer’s eligibility to claim the ERC is not impacted or affected if it purchases the equity interests or assets and liabilities of an entity with a PPP loan, so long as the ERC is claimed for wages that are not paid with forgiven PPP proceeds.
- Further guidance will be needed so that an employer knows how to appropriately track which payroll costs are qualified wages taken into account for ERC purposes and which are payroll expenses covered by a PPP loan.
Extension of Certain Deferred Payroll Taxes
- IRS Notice 2020-65 permits the postponement of the withholding, deposit and payment of an employee’s share of Social Security tax (6.2%) on taxable wages paid from the period beginning September 1, 2020 and ending December 31, 2020. Under this provision, employers would be required to increase withholding and pay the deferred amounts between January 1, 2021 and April 31, 2021, after which, penalties and interest on deferred unpaid tax liability would begin to accrue.
- The bill extends the repayment period of the deferred employee taxes through December 31, 2021. It also provides that penalties and interest will not begin to accrue on the deferred amounts until January 1, 2022.
- Although this change allows employers to spread out the collection of the deferred employee taxes from employees through 2021, the bill leaves unanswered what employers should do if an employee is terminated or quits before paying back the deferred amounts. Employers remain responsible for paying the withheld taxes in full by December 31, 2021, or they risk being subject to penalties and interest, regardless of the employee’s status.
Business Meal Deduction
- For 2021 and 2022, taxpayers may deduct the full cost of business meals provided by a restaurant instead of 50%.
Depreciation of Certain Residential Rental Property over 30-year Period
- Certain real estate businesses may elect out of the business interest deduction limitations of IRC Section 163(j). If such election is made, the electing taxpayer must, for tax years beginning after December 31, 2017, treat the elected-for nonresidential real property, qualified improvement property and residential rental property as subject to the alternative depreciation system ( ADS). The ADS recovery period for residential rental property is 30 years for property placed in service after December 31, 2017.
- The bill assigns the 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 if the property is held by an electing real property trade or business and, before January 1, 2018, was not subject to the ADS.
Enhanced Charitable Deductions
- For 2020, individuals who do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations (deduction limits of $300 also applies to married filers).
- The bill extends this deduction through 2021 and increases the limit to $600 for married couples.
Author Sarah Herman is an associate in the tax department at Klehr Harrison.