On December 27, 2020, the COVID-related Tax Relief Act of 2020 (“COVIDTRA”) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTR”), both part of the Consolidated Appropriations Act, 2021 (“CAA”), were signed into law. These bills are part of a package that includes measures aimed at combating the COVID-19 health care and economic crisis. Among other things, the CAA modifies and expands certain programs and relief set forth in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
Below is a general summary of certain tax provisions of the CAA.
Rebates. The CARES Act provided for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments. COVIDTRA contains a new program, which it refers to as “additional 2020 recovery rebates.” The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income. The credit is available on the taxpayer’s 2020 return.
Employee Retention Credit Expansion and Extension. The CARES Act provided a refundable payroll tax credit (the “ERC”) for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee. The ERC may be claimed for wages paid after March 12, 2020, and before January 1, 2021. Eligible employers include private-sector businesses and tax-exempt organizations whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. 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.
Retroactively effective March 12, 2020, TCDTR: (1) provides clarification for the determination of gross receipts for certain tax exempt organization; (2) reaffirms prior IRS guidance that group health plan expenses can be considered qualified wages even when no wages are paid to an employee; and (3) provides that employers who receive a paycheck protection program (“PPP”) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP loan proceeds.
Beginning on January 1, 2021 and through June 30, 2021, TCDTR further extends and expands the following CARES Act provisions with respect to the ERC: (i) increases the ERC rate from 50% to 70% of qualified wages; (ii) expands eligibility for the ERC 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; (iii) increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter; (iv) increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees; (v) allows certain public instrumentalities to claim the credit; (vi) removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers; (vii) allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year; (viii) provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit; and (ix) provides for a small business public awareness campaign regarding availability of the credit to be conducted by the Secretary of the Treasury in coordination with the Administrator of the Small Business Administration.
Disaster Relief Employee Tax Credit. TCDTR provides a tax credit for 40% of wages (up to $6,000 per employee) paid by a disaster-affected employer to a qualified employee. The credit applies to wages paid without regard to whether services associated with those wages were performed. Certain tax-exempt entities are provided the option to claim the credit against payroll taxes.
Extension of Paid Sick and Family Leave Credits. Effective April 1, 2020 through Dec. 31, 2020, the Families First Coronavirus Response Act (“FFCRA”) requires certain employers to provide paid leave to workers who are unable to work or telework due to circumstances related to COVID-19. FFCRA offsets the costs of providing this paid leave, up to certain amounts, with refundable tax credits against employment taxes for qualified leave wages. The CAA extends the refundable tax credits available to employers who provide paid sick and family leave related to the COVID-19 pandemic as enacted in the FFCRA through March 31, 2021. Employers are not mandated to provide paid sick or paid family leave COVID-19 related leave in 2021, however, employers who opt to do so may claim the tax credit through March 31, 2021. The CAA similarly extends the credits available to self-employed individuals, and allows them to use their reported wages from tax year 2019 instead of tax year 2020 to compute the credit. The above listed provisions of the CAA are effective as if they were included in the original FFCRA legislation.
Extension of Certain Deferred Payroll Taxes. On August 8, 2020, President Trump signed a Presidential Memorandum directing the Treasury Department to permit the postponement of the withholding, deposit, and payment of the employee’s share of Social Security tax (6.2%), as well as the employee’s share of Railroad Retirement Tax Act Tier 1 taxes on wages and compensation paid from September 1, 2020 through December 31, 2020 for employees whose amount of wages or compensation, payable during any biweekly pay period generally is less than $4,000, or the equivalent amount with respect to other pay periods. Amounts were to be deferred without any penalties, interest, or additional amount to the tax. The IRS issued Notice 2020-65 to provide further guidance to employers on the withholding and remittance of the taxes involved in that order, postponing the withholding and remittance of the taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Penalties, interest, and additional amounts would begin to incur on May 1, 2021. The CAA 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.
Low-Income Housing Tax Credit. TCDTR provides for a 4% federal low-income housing tax credit rate floor for buildings placed in service after December 31, 2020 that are financed by tax-exempt bonds issued after December 31, 2020 and for acquisition expenditures relating to buildings that receive an allocation of low-income housing tax credits after December 31, 2020 and are placed in service after December 31, 2020. In addition, TCDTR raised the federal low-income housing tax credit ceiling for Puerto Rico and the eleven states that qualified for FEMA assistance disaster assistance in 2020 and, for buildings allocated credits under this additional credit ceiling, allows a one-year extension of the 10% test and placed in service deadlines.
Business Meal Deduction. Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel. The deduction is generally limited to 50% of the otherwise allowable amount, subject to certain exceptions. Under TCDTR, the 50% limit won’t apply to expenses for food or beverages provided by a restaurant that are paid or incurred after December 31, 2020, and before January 1, 2023.
Charitable Contributions by Corporations. In general, a corporation’s deduction for charitable contributions can’t exceed 10% of its taxable income, computed with certain modifications. If a corporation’s charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for the five succeeding years, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income.
The CARES Act provided that “qualified contributions” (generally, certain cash or check contributions made during 2020 to a 50% charity) are disregarded in applying the 10% limit on charitable contributions of corporations and the rules on carryovers of excess contributions. Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% of the corporation’s taxable income (as computed for these purposes) over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year. If the aggregate amount of qualified contributions exceeds the limitation in the previous paragraph, the excess is taken into account under the carryover rule, subject to its limitations.
The TCDTR establishes a new category of “qualified disaster relief contributions,” for which corporations are allowed a deduction up to 100% of taxable income. A “qualified disaster relief contribution” is defined as any qualified contribution if the contribution is paid during the period beginning on January 1, 2020, and ending on the date that is 60 days after the date of the enactment of the TCDTR, and is made for relief efforts in one or more qualified disaster areas. In addition, the taxpayer must obtain a contemporaneous written acknowledgment from the donee organization that the contribution was or will be used for those disaster relief efforts and must also elect to have these special rules apply to the contribution.
Exclusion for Certain Employer Payments of Student Loans. Under section 127 of the tax code, educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, is excluded from an employee’s income. The CARES Act added to the educational payments excluded from an employee gross income, “eligible student loan repayments” made after March 27, 2020, and before January 1, 2021. These payments are subject to the overall $5,250 per employee limit for all educational payments. The TCDTR extends the exclusion for loan repayments through 2025.
Emergency Financial Aid Grants. COVIDTRA excludes certain CARES Act emergency financial aid grants, i.e., “qualified emergency financial aid grants,” from the gross income of college and university students. This exclusion does not apply to that portion of any amount received which represents payment for teaching, research, or other services required as a condition for receiving the qualified emergency financial aid grant. This provision applies to qualified emergency financial aid grants made after March 26, 2020.
Disclaimer. This client alert is for informational purposes and is not legal advice. The COVID-19 crisis has created a very fluid situation, in which changes to the law or related guidance can occur on a daily basis. Please contact your legal advisor for assistance before acting in relation to the subject of this client alert.