A&M Tax Advisor Weekly
Sunday night, after allowing various benefits to lapse, President Trump signed the $2.3 trillion omnibus spending and COVID-19 relief bill (Consolidated Appropriations Act, 2021 (CAA), which includes the COVID-related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The following highlights some of the tax provisions in the CAA.
Deductibility of Expenses Paid with Paycheck Protection Program Loan Proceeds
After the enactment of the CARES Act, many businesses rushed to obtain Paycheck Protection Program (PPP) loans. The PPP loan program experienced a number of hiccups and administrative issues. However, recipients knew that if they complied with certain rules, the loan would be forgiven, and that forgiveness would not give rise to a tax bill. However, the IRS unexpectedly issued guidance disallowing a deduction for any expenses that are paid for using proceeds of a PPP loan that is eventually forgiven, even if the loan forgiveness occurs in a year subsequent to the year the expenses were incurred.
The CAA overrules the IRS’ guidance and provides that expenses that are paid for using forgiven PPP loan money are deductible.
A&M Insight: Taxpayers that have received PPP loans and have made estimated tax payments for 2020 on the basis that they could not deduct the expenses that were paid using the PPP loans should revisit their calculations. It is possible that taxpayers could reduce their next estimated tax payment or be entitled to a refund.
Employment Tax Provisions
The CAA modifies several of the employment tax provisions that were included in the Families First Coronavirus Response Act (FFCRA) and the CARES Act.
Extended FMLA and Sick Leave
As part of the FFCRA, employers with fewer than 500 US employees had to provide Family and Medical Leave Act and paid sick leave related to COVID-19 until December 31, 2020. The FFCRA also provided employers payroll tax credits that partially cover the leave expenses. Under the CAA, employers are allowed, but not required, to provide the FFCRA paid leave through March 31, 2021 and if they do, they will be entitled to the FFCRA payroll tax credits.
Employee Retention Credit Extension and Modification
Under the CARES Act, eligible employers (except those receiving a PPP loan) were entitled to a refundable credit equal to 50% of the qualified wages (up to $10,000) of each employee if their operations were fully or partially suspended due to the impact of COVID-19, or if they suffered significant economic loss due to shutdowns. Qualified wages were limited to those paid after March 12, 2020 and before January 1, 2021 and the amount of qualified wages differs based on the employer’s number of employees.
Under the CAA, eligible employers that received a PPP loan are eligible for the employee retention credit, retroactive to the enactment of the CARES Act. Additionally, the CAA extended the employee retention credit to apply through June 30, 2021, and increased the benefits of the credit for 2021 by:
A&M Insight: Because of the changes to the employee retention credit, taxpayers that have not claimed the credit because they had received a PPP loan can now request a refund of the credit. Additionally, with the various changes made for 2021, employers should re-evaluate the amount of employee retention credit that they will qualify for.
Longer Repayment Period for Employees who Postponed Payment of Payroll Taxes
As a result of the President’s August 8, 2020, Executive Order, which was previously discussed here, certain employers are able to defer the withholding and payment of the employee portion of their Social Security taxes on wages and compensation paid between September 1 and December 31, 2020. Employees who benefit from this grace period were originally obligated to have the postponed taxes withheld “ratably” from wages and compensation paid between January 1 and April 30, 2021. However, the CAA extends the due date for these taxes from April 30 to December 31, 2021, and as a result, employers must withhold “ratably” from wages and compensation paid between January 1 and December 31, 2021.
Temporary Rule Preventing Partial Qualified Plan Termination
The CAA extends through March 31, 2021, the period during which the population covered by qualified plans may fall below 80% of the previously covered workforce without triggering a partial plan termination.
Energy Tax Provisions
The CAA makes significant changes to the energy tax credits, including those for wind, solar, and carbon capture. For onshore and offshore wind projects, the CAA extends the current 60% production tax credit (PTC) by another year, giving new projects that begin construction in 2020, and enter service on time, a PTC of 1.5 cents per kilowatt-hour for 10 years. The CAA also gives offshore wind projects the option of electing into the full 30% investment tax credit (ITC) so long as they begin construction by 2025. The CAA extends the solar ITC at the current rate of 26% for two years, delaying the phasedown to the 22% rate until 2023 and delaying the reversion to the permanent 10% rate until 2024. Lastly, the CAA gives carbon-capture projects an additional two years to begin construction, and now allows tax credits for projects that begin by 2025.
A&M Insight: Considering the significant changes the CAA makes to a number of energy tax credits, taxpayers should revisit their planning to determine whether they may benefit from accelerating certain investments to better leverage time-limited tax incentives, while taking into account that the CCA does not impact the IRS’ continuity requirements, which generally require a project to be placed into service within four years of beginning construction.
Other Tax Provisions…