While we wait to see whether Congress will pass another stimulus bill, we can analyze in more detail the stimulus package Congress passed last year to determine its benefits to small businesses, families and older taxpayers. Small businesses, families and older taxpayers are the constituents most impacted by the virus itself as well as related policy decisions to shut down in-person schooling and restrict indoor traffic.
On December 27, 2020, Congress passed the 5,593-page Consolidated Appropriations Act (the “Act”). Congress used many of the Act’s pages to apportion the federal budget among the various federal agencies.
The Act’s Division N, “Additional Coronavirus Response and Relief,” expanded the Paid Protection Program loans for small businesses, provided additional unemployment assistance to states and individual taxpayer rebates, and extended certain tax benefits provided in the Families First Coronavirus Response Act (FFCRA) & the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March 2020.
The Act’s Division EE, “The Taxpayer Certainty and Disaster Relief Act” (also known as “The Taxpayer Relief Act”), included 170 tax-related provisions. Most encourage the use of renewable energy and low-income housing and empowerment zone development.
Here are some the tax measures of the Consolidated Appropriations Act that are beneficial to small business owners, families and older taxpayers.
Division N – Coronavirus Relief
Payroll Protection Program Loan Expansion
PPP loans are used to cover payroll expenses and other enumerated operating costs (e.g., rent, utilities) that can be forgiven if the borrower meets certain payroll and employment retention criteria. Division N of the Act expands the eligible expenses for PPP loan forgiveness to include (i) payments for any software, cloud computing, and other human resources and accounting needs; (ii) costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance; (iii) certain supplier costs that are essential to the recipient’s operations; and (iv) personal protective equipment and adaptive investments to help a loan recipient comply with federal, state and local health and safety guidelines related to COVID-19.
Division N also adds a “PPP second draw” loan for certain small businesses, with a maximum amount of $2 million. To receive the PPP second draw loan, the business or non-profit organization must employ not more than 300 employees, have used or will use the full amount of their first PPP loan, and demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter.
Deductions for PPP Related Expenses
Division N clarifies that taxpayers are allowed a deduction for Paycheck Protection Program (PPP) loan-related expenses. The IRS and Treasury had issued two rulings prior to the passage of the Act where they concluded that business expenses that would normally be deductible in computing taxable income would not be deductible if the taxpayer uses funds from a forgiven loan to pay such expenses. The Act overturns these rulings.
Division N provides a refundable tax credit equal to $600 per eligible family member. 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.
Deferral of Social Security Taxes
Division N clarifies that any employee Social Security taxes deferred pursuant to the President’s executive order issued in August 2020 can be deferred until December 31, 2021 (rather than April 1, 2021 as provided under the executive order). Any deferred amount must now be withheld from the employee wages and repaid ratably during the twelve-month period between January 1, 2021 and December 31, 2021.
Extension of Credits for Paid Sick and Family Leave
Division N extends through March 31, 2021 payroll tax credits for employers who provide: (i) paid sick leave for an employee quarantined related to possible COVID-19 symptoms (up to 80 hours); and (ii) family leave for childcare related to COVID-19 (up to 10 weeks). Such credits were originally available until December 31, 2020 under the Families First Coronavirus Response Act (FFCRA). As of January 1, 2021, employers are no longer required to provide such paid sick leave to employees for COVID-19 symptoms.
Division EE – the Taxpayer Certainty and Disaster Relief Act (“Taxpayer Relief Act”)
Paid Sick Leave Under FMLA
The Taxpayer Relief Act extends the general business credit for employer wages paid to qualifying employees while they are on family and medical leave through December 31, 2025. The credit had been set to expire on December 31, 2020.
Business Meal Deductions
The Taxpayer Relief Act provides that 100% of expenses for food and beverages provided by a restaurant are deductible if the expense is paid or incurred in 2021 and 2022.
Beer, Wine and Distilled Spirits
The Act makes permanent a temporary reduction in the federal excise tax rate on beer, wine and distilled spirits set to expire after December 31, 2020. The Act also allows beer to be transferred tax-free between bonded facilities, subject to regulations; and increases the threshold alcohol content level for the application of excise tax rates.
Work Opportunity Credits
The Act extends the federal work opportunity credit (for members of targeted groups such as unemployed veterans) for another five years, to apply to wages a business pays to an individual who begins work for the employer on or before December 31, 2025.
Medical Expense Deduction Floor
The Act returns the medical expense deduction floor to 7.5% of adjusted gross income (AGI). The Affordable Care Act raised the threshold to 10% of AGI so that, for 2013 through 2017, individuals under age 65 could claim an itemized deduction for unreimbursed medical expenses only to the extent that those expenses exceeded 10% of AGI, while the threshold remained 7.5% of AGI for individuals age 65 and older. The threshold was scheduled to increase to and remain at 10% for all taxpayers, but Congress temporarily restored the 7.5% threshold for everyone first for 2017 and 2018, then for 2019 and 2020, before making the change permanent in the Taxpayer Relief Act. The change applies to tax years beginning after December 31, 2020.
Charitable Contribution Deduction
The Act extends through 2021 the $300 ($600 for joint return filers) above-the-line charitable contribution deduction for qualified contributions made by non-itemizers. It also extends the temporary charitable contribution limit provided in the CARES Act by enabling individuals to deduct up to 100% of their cash contributions to public charities for 2020 and 2021, up from a previous limit of 60% of their adjusted gross income. Therefore, taxpayers can use cash charitable contributions to reduce their adjusted gross income to zero.
Mortgage Insurance Premiums
The Act extends for one additional year, through December 31, 2021, the treatment of mortgage insurance premiums as deductible qualified residence interest.
Minimum Age for Distributions During Working Retirement
The Act allows certain multi-employer retirement plans primarily covering workers in the building and construction industry to make in-service distributions to participants who have attained age 55 and are not separated from employment, if they were participants in the plan on or before April 30, 2013.
Health Coverage Tax Credit
The Act provides an additional one-year extension for the health coverage tax credit (HCTC) through 2021. The refundable credit equals 72.5% of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance and was previously set to expire December 31, 2020.
The 2020 Consolidated Appropriations Act passed quickly, with limited review from individual congressional representatives. Do contact your congressional representative to understand how much of the proposed $1.9 trillion stimulus package currently being debated in Congress will benefit small businesses, families and older taxpayers. These constituents are in many ways the most impacted by the COVID-19 crisis.
Tax Attorney Sandra O’Neill is a partner with Bowditch & Dewey. Reach her at firstname.lastname@example.org.