Lawmakers finally reached agreement on a new round of stimulus on Dec. 21 that includes a substantial tax title with provisions enhancing the employee retention credit, allowing taxpayers to fully deduct expenses paid for with forgiven Paycheck Protection Plan (PPP) loan proceeds, and extending dozens of valuable expiring tax provisions.
The bill represents a massive year-end compromise after months of frustrating negotiations and combines $1.4 trillion extension of government funding with nearly $1 trillion in new stimulus measures – plus a handful of other legislative priorities for each party. The House and Senate passed the bill in an overwhelmingly bipartisan vote on Dec. 21 and President Donald Trump signed it on Dec. 27.
The tax title itself is a $328 billion combination of stimulus provisions, tax cut extensions and other favorable tax changes sought by both sides. The most significant stimulus provisions would:
- Reverse IRS guidance and allow taxpayers to deduct expenses paid with forgiven PPP loan proceeds
- Extend an enhanced version of the employee retention credit through the first two quarters of 2021
- Retroactively expand the 2020 version of the employee retention credit from the Coronavirus Aid, Relief, and Economic Security (CARES) Act to include PPP loan recipients
- Allow businesses to deduct 100% of meals “provided by a restaurant” in 2021 and 2022
- Extend the sick pay and paid family leave credits enacted by the Families First Coronavirus Relief Act (FFCRA) through 2021 and make them available without the leave requirements
- Provide a $600 charitable deduction for taxpayers who don’t itemize in 2021 (up from $300 in 2020)
- Extend through 2021 the increased taxable income limit on corporate charitable deductions from 10% to 25% and contributions of food inventory from 15% to 25%
- Provide new stimulus checks of $600 per taxpayer and qualifying child
- Provide flexible spending account relief
The bill also includes more than $100 million in extensions and enhancements of expiring tax “extender” provisions. Several of the most popular provisions are made permanent by the bill, including the Section 179D deduction for energy-efficient commercial building property and alcohol excise tax relief enacted in the Tax Cuts and Jobs Act (TCJA). Several other provisions were extended for five years, including:
Grant Thornton Insight: There appears to be significant bipartisan support for making these provisions permanent, but cost remains an issue. Lawmakers indicated that the five-year extension of these provisions through 2025 is meant to intentionally align them with the major expiring portions of the TCJA. These extender provisions could be incorporated into broader negotiations over the TCJA’s expiring provisions if the issue is not addressed before then.
- The work opportunity tax credit (WOTC)
- The new markets tax credit
- The look-through rule for related controlled foreign corporations
- Seven-year cost recovery for motor-sports entertainment complexes
- Special expensing for film, television and live theatrical productions
- Employer tax credit for paid family and medical leave
Most other expiring tax provisions were extended for just one year through the end of 2021, including:
- Alternative fuel credits
- Section 30C alternative fuel vehicle refueling property credit
- Section 25C energy-efficient home improvement tax credit
- Section 25D residential energy property credit
- Section 45L energy-efficient new home credit
- Mine rescue team training credit
- Three-year depreciation for racehorses
The Section 45 production tax credit for wind energy was extended for one year at the current 60% rate for construction that begins in 2021, while the full credit for other property types was also extended one year for construction beginning in 2021. Taxpayers can continue to claim the Section 48 investment tax credit in lieu of the Section 45 credit, and offshore wind energy is eligible for the full Section 48 credit through the end of 2025. The Section 48 credits for solar, fuel cell, fiber optic solar and small wind energy were scheduled to be eligible only for a 22% credit for construction beginning in 2021. That credit rate has been bumped to 26% for 2021 and the 22% rate is now available for construction beginning in 2022, with waste energy recovery property now qualifying. The construction start deadline for the 10% credit available for microturbines, combined heat and power systems and geothermal property has been extended from 2021 to the end of 2023.
Grant Thornton Insight: The provisions that will be extended for just one year appear to have much less support, and could lose momentum without the more popular provisions expiring in 2025 to help spur action. However, any provisions expiring in 2021 will be aligned with two TCJA “sunrise” tax increase provisions that many lawmakers want to address. Beginning in 2022, taxpayers will be required to amortize R&D expenses over five years and include amortization and depreciation in the calculation of adjusted gross income for the limit on interest deductions under Section 163(j). These changes were included in the TCJA because of revenue constraints and are particularly unpopular with Republicans.
The legislation includes a handful of other favorable tax changes that were priorities for various constituencies, including provisions that would:
- Provide a minimum 4% low-income housing tax credit rate
- Allow real property businesses that election out the Section 163(j) deduction limit to depreciate residential real property placed in service before Jan. 1, 2018, over 30 years
- Allow taxpayers to use 2019 earned income for 2020 earned income and child tax credits
- Extend the exclusion from income for employer payments on employee student loans
- Extend the repayment period for individuals who their deferred Social Security taxes until Dec. 31, 2022
- Provide a package of disaster relief tax incentives
The total tax package is large, but the $167 billion in stimulus provisions represents only half of the cost, and several popular stimulus tax proposals were omitted. Many lawmakers have supported creating a tax credit for the costs of employers protecting employees from COVID-19, as well as temporarily expanding WOTC to cover anyone receiving unemployment. There is also bipartisan support for providing state tax relief for taxpayers whose working location changed because of COVID-19 or who work in a state for less than 30 days. It is still possible for these and other tax stimulus measures to be considered in 2021.
President-elect Joe Biden has referred to this package as merely a “down payment,” and both parties have major priorities that remain unfinished. Democrats are still pushing for state aid, while Republicans want business liability protections. A deal on these issues remains elusive, but is likely to be considered again early next year. Any broader agreement on stimulus could provide be a vehicle for additional tax changes.
Even without more stimulus, the current tax provisions will offer substantial incentives, liquidity and relief for many businesses. The enhanced employee retention credit, in particular, could offer large refunds. The following provides more details on some of the most significant provisions and includes a full table on the tax cut extensions.
Employee retention credit
The CARES Act originally created a 50% credit for paying up to $10,000 in wages per employee for a business that was fully or partially suspended due to a government order or that saw a greater than 50% reduction in gross receipts for the first quarter, beginning in calendar 2020 compared to the same quarter in the prior year.
The new legislation both retroactively improves the prior version of the credit and creates a more generous new version for the first two quarters of 2021. For the prior version, PPP loan recipients will be retroactively eligible based any wages not paid with forgiven PPP loan proceeds. The legislation also clarifies the determination of gross receipts for tax-exempts.
Grant Thornton Insight: This generous change will offer immediate refunds for many PPP loan recipients who were not previously eligible but can now make retroactive claims based on 2020 wages. For employers with under 100 full-time equivalent employees, any wages not covered by the PPP loan will be eligible if paid while their business was subject to a shutdown or stay-at-home order or if paid in a quarter meeting the gross receipts test. Employers over the 100-employee threshold will be able to claim the credit for wage or healthcare costs paid to employees who were not working or providing full services.
The new employee retention credit will be a 70% credit against up to $10,000 in wages per employee per quarter for the first two quarters of 2021, for a maximum total credit of $14,000 per employee. The gross receipts qualification threshold will be reduced from a 50% drop in gross receipts from the same quarter in the prior year to 20%. In addition, the employee threshold for determining wage qualification is increased so that all wages of employers with 500 or fewer full-time equivalent employees will qualify. Over this threshold, only wages and healthcare costs paid to employees not providing services or full services.
Grant Thornton Insight: IRS guidance has been fairly generous in allowing employers to claim the credit for wages paid to employees who are working but not providing full services. Employers can use any reasonable method to determine amounts paid to salaried employees for time not worked, although mere reductions in productivity do not qualify.
The bill reverses IRS guidance and allows taxpayers to fully deduct any expenses regardless of whether the expense was paid using forgiven PPP loan proceeds. The loan and the loan forgiveness will remain excluded from income. Although there was discussion of limiting this fix during negotiations, the final legislative text provides full relief. Taxpayers do not need to decrease any deduction or basis because of using forgiven PPP loan receipts.
The legislation also provides that taxpayers do not need to include income or reduce deductions for any of the following:
Grant Thornton Insight: For calendar-year taxpayers, the PPP deduction fix will allow full deductions to be claimed on the 2020 return, and estimated tax payments should be planned accordingly. Fiscal-year taxpayers who may have already filed and reduced deductions based on IRS guidance will be able to amend their return for a potential refund.
Residential real estate depreciation
- Treasury Program Management Authority payments under Section 1109(d)(2)(D) of the CARES Act
- Economic Injury Loan Disaster grants
- Loan payments under Section 1112(c) of the CARES Act
- Grants under Section 324 of the Economic Aid to Hard Hit Small Businesses, Non-profits and Venues Act
The bill provides that real property trades or businesses electing out of the Section 163(j) limit on interest deductions will have a 30-year recovery period for residential real property placed in service before Jan. 1, 2018.
Grant Thornton Insight: The change is made retroactive to the enactment of the TCJA so taxpayers in the real estate industry may have the option of amending returns for refunds based on the change or taking the benefit with an accounting method change on a future return.
The bill allows businesses to fully deduct meals “provided by a restaurant” 2021 and 2022.
Grant Thornton Insight: The TCJA originally removed an exception that had previously allowed certain meals to qualify for a 100% deduction instead of a 50% deduction. However, this new change does not seek to restore the 100% deduction for that narrow category of meals, which were generally for certain employer provided facilities or employee meals for the convenience of the employer. Instead this change appears to broadly allow any meal that otherwise would be subject to the 50% limit to be fully deductible as long as it is “provided by a restaurant,” though there is no further definition of that term in the legislation.
The bill includes a set of disaster relief tax provisions for presidential disaster areas declared from on or after Dec. 28, 2019, through 60 days after the date of enactment. The provisions include:
- An exception from the 10% retirement plan early withdrawal penalty for disaster relief distributions
- A 40% credit for wages paid to employees while the business was shuttered
- Allowing disaster-related casualty deductions above-the-line
- Providing additional low-income housing tax credit allocations
Lawmakers took small steps toward reforming the extender process by making some provisions permanent and extending many more for five years. They also allowed two to expire. However, this process is still going to challenge lawmakers again at the end of 2021 with many more provisions extended just one year.
Several of the provisions will offer substantial incentives, liquidity, and relief. The enhanced employee retention credit, in particular, could offer large retroactive refunds to PPP loan recipients for 2020 wages, and will offer generous refunds for many employers based on 2021 wages. Taxpayers should analyze the bill’s provisions for how they could affect tax and business planning.
For more information, contact:
Washington National Tax Office
Grant Thornton LLP
+1 202 861 4144
Washington National Tax Office
Grant Thornton LLP
+1 202 861 4143
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