The most recent stimulus package, the Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, is a massive 5,593-page legislative achievement. It includes a $900 billion emergency relief package intended to assist individuals and businesses during the ongoing coronavirus pandemic and economic crisis.
The most important provisions that affect individuals and businesses are highlighted below.
$600 Stimulus Check
The bill provides for a “base” credit of $600 per eligible individual. An eligible individual includes the taxpayer (and spouse, in the case of a joint return) as well as any children under age 17 for whom a child tax credit may be claimed. The base credit of $600 begins to phase out by $5 for every $100 of 2019 adjusted gross income that exceeds the following thresholds:
- Single filer: $75,000
- Joint filer: $150,000
- Head of Household filer: $112,500
Return of the Paycheck Protection Program
The stimulus package reopens the original Paycheck Protection Program (PPP). It makes revisions to the PPP rules that are applicable to both the original and new PPP version. It also provides much-needed clarification on several key items.
For instance, the CARES Act stated that PPP loans that are ultimately forgiven do not constitute taxable income. However, in Notice 2020-22 followed by Rev. Rul. 2020-27, the IRS said business expenses paid with forgiven PPP loans are not deductible for income tax purposes. The new law states that expenses paid with either round one or second draw loans (defined below) are deductible.
The new law also provides four new categories of expenses that can be paid with PPP loans. They are:
- Covered operations expenditures – payment for any software, cloud computing and other human resources and accounting needs;
- Covered property damage costs – related to property damage and vandalism or looting due to public disturbances during 2020 not covered by insurance;
- Covered supplier costs – expenditures pursuant to a contract for goods in effect prior to the PPP loan covered period that are essential to the current operations of the entity when made; and
- Covered worker protection expenditures – expenditures for personal protection and other equipment needed to help a borrower comply with federal health and safety guidelines related to the COVID-19 pandemic during the period starting March 1, 2020, and ending on the date on which COVID-19 no longer qualifies for federal emergency status.
PPP funds spent on any of the four new categories of expenses will be eligible for forgiveness. However, these four new categories are subject to the limitation on non-payroll expenses i.e., not more than 40% of the forgiven amount of a PPP loan can be attributable to non-payroll expenses.
Also, under the new law, all borrowers can select the PPP “covered period.” The “covered period” of a PPP loan is the period of time during which expenses that are incurred, or for which payments are made, can be used in the calculation of determining how much of the PPP loan may be forgiven. The CARES Act originally set the covered period at eight weeks. Subsequently, the Paycheck Protection Program Flexibility Act of 2020 set the covered period at 24 weeks for loans funded on or after June 5, 2020. Loans funded before June 5, 2020 could choose either an eight-week or 24-week covered period. Now all PPP borrowers (original or second draw) will have the option of choosing either an eight-week or 24-week covered period.
Other PPP Changes
The new law provides for a simple one-page forgiveness application for loans up to $150,000. Borrowers must still follow all the PPP rules, but are not required to submit any proof of following the rules when they apply for loan forgiveness. In fact, the Act prohibits lenders from requesting substantiation.
Borrowers who returned round-one loans can reapply for the maximum allowable loan amount.
The Act also provides that additional insurance benefits qualify as payroll. Amounts paid for group life insurance, group dental insurance and group disability insurance can now count as payroll. However, remember that at least 60% of the loan must be attributable to payroll to qualify for forgiveness.
Second Draw Loan Requirements
Second draw loans are for those who have already received and spent proceeds of loans under the original PPP. The window to apply for a second draw PPP loan is from January 13, 2021, to March 31, 2021. Generally, the second draw requirements are the same as the original PPP loans. However, the criteria to receive a loan are different.
The new law limits second draw loans to businesses that have no more than 300 employees (reduced from 500 employees under the CARES Act) except for accommodation (hotel) and foodservice businesses, which are subject to an exception. The business must have experienced a reduction in revenue of more than 25% in any quarter in 2020 compared to the same quarter in 2019. Except for accommodation and foodservice businesses, a loan under both round-one and the second draw is limited to 2.5 times the average monthly payroll costs. Accommodation and foodservice business loans are limited to 3.5 times the average monthly payroll costs. The maximum amount of a second draw loan is $2 million, down from the $10 million maximum under round one.
Employee Retention Credit Extended and Improved
The Act extends the availability of the employee retention tax credit though June 30, 2021. Some changes are retroactive for 2020 while other changes are prospective for 2021 only.
The Act eliminates the rule that prohibited businesses that received a PPP loan from also taking the employee retention credit. Now businesses can take advantage of both a PPP loan and the employee retention credit. However, the same wages cannot be used to qualify for both the credit and for loan forgiveness.
Healthcare expenses are eligible to be treated as wages even if the employee is not receiving other wages (e.g., they are furloughed). This is retroactive to 2020.
For 2021 only, the amount of wages, per employee, that are eligible for the credit is $10,000 per quarter, up from $10,000 for the entire year of 2020. The amount of the credit for 2021 has increased from 50% for 2020 to 70% for 2021. In other words, a qualifying business can receive a credit up to $7,000 (70% x $10,000) per employee, per quarter.
Under the new law, the definition of a small business is 500 employees, up from 100 employees. Small businesses are eligible to include any wages paid to employees whereas large employers are only eligible to include such wages if their employees are being paid to stay home and not work. The CARES Act initially required employers to have experienced a reduction in 2020 in year-over-year quarterly revenues of 50% to qualify for the credit. The Act reduces the threshold for 2021 to 20%. However, the Act allows businesses to elect to compare revenues to the immediately preceding quarter instead of the year-over-year comparison if that is more favorable.
The Act provides for an additional $300 per week of unemployment benefits through March 14, 2021. This amount is in addition to the amount available at the state level.
Charitable Contribution Deduction
The CARES Act provided for a $300 above the line individual income tax charitable deduction. That provision is extended for 2021 — $300 for singles, $600 for joint returns. The deduction is only available if the taxpayer does not itemize deductions. The percentage of AGI limitations that apply to itemized charitable donations do not apply to the $300 above-the-line deduction. However, the contribution must be paid to a public charity defined in Internal Revenue Code Section 170(b)(1)(A). That means that a contribution made to a donor advised fund, supporting organization or a private non-operating foundation does not qualify.
In addition to the above, the Act extends through 2021 the provision of the CARES Act that suspends the percentage of AGI limitation for contributions of cash. Like the $300 above-the-line deduction, contributions must be made to a public charity defined in Section 170(b)(1)(A). Thus, donations to donor advised funds, supporting organizations and private non-operating foundations do not qualify. Unlike the CARES Act provision, the new law allows donors to “stack” 2021 charitable contributions to reach 100% of the AGI limitation. Any contribution in excess of 100% of the AGI limitation may be carried over for five years subject to 60% of the AGI limit.
However, to qualify for 100% of the AGI limitation for cash contributions, the taxpayer must elect to have this provision apply. Absent an election, 60% of the AGI limitation applies for cash gifts.
Deadline to Repay Deferred Payroll Tax Extended to December 31, 2021
President Donald Trump signed an executive order on August 8, 2020, that allows employees to defer their share of Social Security taxes. The objective was to temporarily increase the employee’s cash flow. Subsequently, the IRS issued Notice 2020-65, which gave employers the option to suspend the withholding and payment of employee Social Security taxes from September 1, 2020, through December 31, 2020. Notice 2020-65 required employees to pay the deferred Social Security taxes ratably from January 1, 2021, through April 30, 2021. Payment of deferred taxes not timely paid would bear interest and penalties. For those who would opt in, the Act requires repayments to be made ratably from January 1, 2021, through December 31, 2021.
Medical Expense Deduction Floor Reduced
The Act permanently sets the hurdle rate for the medical expense deduction at 7.5% of adjusted gross income. It was scheduled to increase to 10% of adjusted gross income in 2021.
Improved Lifetime Learning Credit Replaces Tuition Deduction
2020 is the last year for an above-the-line deduction for tuition and related expenses. Replacing the tuition deduction is an improved lifetime learning credit with a higher income phase-out range. For 2021, the Lifetime Learning Credit phase-out range is increased and will be the same as the phase-out range for the American Opportunity Tax Credit. Thus, the phase-out range for both credits will be $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. Previously, the Lifetime Learning Credit phase-out range was $59,000 to $69,000 for single filers and $118,000 to $138,000 for joint filers.
100% Deduction for Meals for 2021 and 2022
The Act allows a 100% deduction for meals in 2021 and 2022, but not retroactive to 2020. The deduction is allowed only to the extent the expense is incurred “for food or beverages provided by a restaurant.” This raises the question of whether the deduction is only allowed for in-restaurant dining. Takeout should qualify as the food is “provided” by the restaurant. However, what about private caterers or meals provided at private events? What is deductible under this provision will need some clarification from the IRS.
Income Eligible for Earned Income Tax Credit and Child Care Credit
The Act allows 2019 income to be used for eligibility for the 2020 earned income tax credit and additional child tax credit. Both credits require an individual have earned income. The Act allows credit to be based on 2019 income as taxpayers may have less earned income in 2020 than in 2019.
Provision for Student Loans
By way of background, an employer can provide up to $5,250 of annual tax-free education assistance that is used to pay the principal or interest on an employee’s student loan. The payments can be made directly to the lender or they can be made to the employee who uses the money to pay down the loan. The employer’s payment is not taxable income to the employee. The exclusion for employer payments of student loans is extended through 2025.
Discharge of Qualified Personal Residence Debt
The Act extends the exclusion for discharge of debt on a primary residence through 2025. Beginning in 2021, the maximum amount of debt that can be discharged is $750,000 for joint filers and $375,000 for single filers, reduced from $2 million and $1 million respectively under the prior law.
Mortgage Insurance Premiums
The Act extends the deduction for mortgage insurance premiums through 2021 subject to income phase-outs.
Flexible Spending Accounts – Dependent Care and Healthcare Funds
The Act permits employers to allow employees to carryover any unused 2020 balances into 2021 and any unused 2021 balances into 2022.
The Consolidated Appropriations Act of 2021 is the result of many months of negotiations between Democrats and Republicans. While the Act provides some needed relief for individuals as well as businesses, more relief is expected under the Biden administration. As always, the professionals at BNY Mellon Wealth Management stand ready to assist you with any questions you may have about the Act or any of your wealth planning needs.