Business Tax Provisions of the Corona Virus Relief Package

COVID-19 Business Update
Tax Group

Consolidated Appropriations Act, 2021, H.R. 133, includes multiple important business tax provisions. Below are some of the key tax changes applicable to businesses:

Deductibility of PPP-funded expenses

The bill clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

In addition to the clarification about the deductibility of expenses paid with PPP funds, the bill clarifies that gross income does not include forgiveness of certain loans, emergency Economic Injury Disaster Loan grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section and that tax basis and other attributes will not be reduced as a result of the exclusion of those amounts from gross income.

CARES Act extensions and pandemic provisions

Money purchase pension plans: The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans. The bill adds money purchase pension plans to the retirement plans qualifying for these temporary rules. The provision applies retroactively as if included in Section 2202 of the CARES Act.

Payroll tax credits: The bill extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, P.L. 116-127, through the end of March 2021. It also modifies the payroll tax credits so that they apply as if the corresponding employer mandates were extended through March 31, 2021. The bill also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.

Employee retention tax credit modifications: The bill extends the CARES Act employee retention tax credit (ERTC) through June 30, 2021. It also expands the ERTC and contains technical corrections. The expansions of the credit include:

• An increase in the credit rate from 50% to 70% of qualified wages;
• An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
• A reduction in the required year-over-year gross receipts decline from 50% to 20%;
• A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
• A provision to allow certain governmental employers to claim the credit;
• An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
• Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit.

The bill also (retroactive to the effective date of the CARES Act):

• Provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds;
• Clarifies the determination of gross receipts for certain tax-exempt organizations; and
• Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.

Deferral of employees’ portion of payroll tax: In August, President Trump issued a memorandum allowing employers to defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201 for any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000. It applies to payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. Under the memorandum, employers are required to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January. 1, 2021, and April 30, 2021. The bill extends the repayment period through December 31, 2021

Miscellaneous tax provisions

Temporary allowance of full deduction for business meals: The bill temporarily allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant. This provision is effective for expenses incurred after December 31, 2020, and expires at the end of 2022.

Depreciation of certain residential rental property over 30-year period: The bill provides that the recovery period applicable to residential rental property placed in service before January 1, 2018, and held by an electing real property trade or business is 30 years.

Minimum age for distributions during working retirement: The bill modifies Sec. 401(a) to allow certain qualified pensions to make distributions to workers who are 59½ or older and who are still working. For certain construction and building trades workers, the age is lowered to 55.

Temporary rule preventing partial plan termination: The bill provides that qualified plans will not be treated as having a partial termination under Sec. 411(d)(3) during any plan year that includes the period March 13, 2020, through March 31, 2021, as long as the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number covered on March 13, 2020.

Modification of limitations on charitable contributions: This bill extends for one year (through 2021) the increased limit from the CARES Act on deductible charitable contributions for corporations and taxpayers who itemize.

Temporary special rules for health and dependent care flexible spending arrangements: The bill allows taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. This provision also permits employers to allow employees to make a 2021 midyear prospective change in contribution amounts.

Disaster tax relief

The bill provides disaster tax relief for individuals and businesses in presidentially declared disaster areas for major disasters (other than COVID-19) declared after Dec. 31, 2019, through 60 days after the date of enactment.

Use of retirement funds for disaster mitigation: The bill allows residents of qualified disaster areas (as defined in the bill) to take a qualified distribution of up to $100,000 from a retirement plan or individual retirement account (IRA) without penalty. Amounts withdrawn are included in income over three years or may be recontributed to the plan.

Employee retention credit for disaster zones: The bill allows a tax credit of 40% of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone (as defined in the bill). The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.

Qualified disaster relief contributions: The bill modifies the CARES Act’s modification of the charitable contribution limits for 2020 to allow corporations to make qualified disaster relief contributions of up to 100% of their taxable income.

Five-year extensions

The bill provides five-year extensions to the following provisions:

• Sec. 45D new markets tax credit.
• Sec. 45S employer credit for paid family and medical leave.
• Sec. 51 work opportunity credit.
• Sec. 108(a)(1)(E) gross income exclusion for discharge of indebtedness on a principal residence.
• Sec. 127(c)(1)(B) exclusion for certain employer payments of student loans.
• Sec. 168(e)(3)(C)(ii) seven-year recovery period for motorsports entertainment complexes.
• Sec. 181 special expensing rules for certain film, television, and live theatrical productions.
• Sec. 954(c)(6) lookthrough treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.
• Sec. 1391(d) empowerment zone designation.
• Sec. 4611 Oil Spill Liability Trust Fund financing rate.
• The Sec. 1397A increased expensing under Sec. 179 and Sec. 1397B nonrecognition of gain on rollover of empowerment zone investments are both terminated for property placed in service in tax years beginning after Dec. 31, 2020.
• The Sec. 1394 empowerment zone tax-exempt bonds and Sec. 1396 empowerment zone employment credit, which expire Dec. 31, 2020, were not extended.

Two-year extensions

The bill provides a two-year extension to the following provisions:

• Sec. 25D residential energy-efficient property credit (the bill also makes qualified biomass fuel property expenditures eligible for the credit).
• Sec. 45Q carbon oxide sequestration credit (through 2025).
• Sec. 48 energy investment tax credit for solar and residential energy-efficient property.

One-year extensions

The Act provides one-year extensions to the following provisions:

• Sec. 25C 10% credit for qualified nonbusiness energy property.
• Sec. 30B credit for qualified fuel cell motor vehicles.
• Sec. 30C 30% credit for the cost of alternative (nonhydrogen) fuel vehicle refueling property.
• Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.
• Sec. 35 health coverage tax credit.
• Sec. 40(b)(6) credit for each gallon of qualified second-generation biofuel produced.
• Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.
• Sec. 45(d) credit for electricity produced from certain renewable resources.
• Sec. 45A Indian employment credit.
• Sec. 45L energy-efficient homes credit.
• Sec. 45N mine rescue team training credit.
• Sec. 163(h) treatment of qualified mortgage insurance premiums as qualified residence interest.
• Sec. 168(e)(3)(A) three-year recovery period for racehorses two years old or younger.
• Sec. 168(j)(9) accelerated depreciation for business property on Indian reservations.
• Sec. 4121 Black Lung Disability Trust Fund increase in excise tax on coal.
• Sec. 6426(c) excise tax credits for alternative fuels and Sec. 6427(e) outlay payments for alternative fuels.
• The American Samoa economic development credit (P.L. 109-432, as amended by P.L. 111-312).

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.