On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “Act”) was signed into law. The Act includes both COVID-Related Tax Relief Act of 2020 (“COVIDTRA”) which enhances and expands certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Taxpayer Certainty and Disaster Relief Act of 2020 (“TCDTR”) which contains numerous tax extenders.
Below are a few highlights of the relevant business tax provisions that could impact your company tax situation:
Deductibility of business meals
Section 274(n)(1) of the Internal Revenue Code of 1986 limited the deductibility of business meal expenses to 50% of the cost for food and beverages provided by a restaurant. To stimulate the economy and as a way to help the restaurant industry, the Act temporarily allows businesses to deduct 100% of these business meal expenses paid or incurred between January 1, 2021 and December 31, 2022. Note that other requirements for deductibility, including that the expense be “ordinary” and “necessary” and incurred in carrying on a trade or business, remain intact.
Deductibility of qualified disaster relief contributions
Under the CARES Act and effective only in 2020, corporations may deduct charitable gifts of up to 25% of the corporation’s taxable income. However, the Act modified such limit which now allows corporations to deduct qualified disaster relief contributions of up to 100% of their taxable income. Qualified disaster relief contributions are cash contributions to public charities made for relief efforts in a qualified disaster area. The contributions must be paid during the period beginning January 1, 2020, ending on the date 60 days after the enactment of the Act.
Changes to the Employee Retention Tax Credit (“ERTC”)
The ERTC was first introduced under the CARES Act which provided an eligible employer with a refundable payroll tax credit equal to 50% of certain qualified wages paid to its employees beginning March 13, 2020 through December 31, 2020. The Act extends the ERTC eligibility period by six months (i.e., through July 1, 2021) and introduced several changes to the ERTC which should be applied on a prospective basis only. These changes are outlined below:
|Credit rate||50% of qualified wages||70% of qualified wages|
|Per employee creditable wages limit||$10,000 per year||$10,000 per quarter|
|Large employer threshold||More than 100 employees||More than 500 employees|
|Required decline in gross receipts||50% decline when comparing any quarter in 2020 to the same quarter in 2019||20% decline when comparing any quarter in 2021 to the same quarter in 2019
20% decline when comparing the immediately preceding quarter to the same quarter of 2019.
The Act also contains provision which relates to the interaction between PPP loans and the ERTC. Under the CARES Act, employers were not allowed to claim the credit if they received a PPP loan. The Act changes this rule and allows employers to take advantage of both a PPP loan and the ERTC provided that the ERTC is not claimed on wages included on the business’ PPP loan forgiveness application. This change should be applied retrospectively to the effective date of CARES Act.
Extension of repayment period of certain deferred payroll taxes
In August 2020, IRS issued Notice 2020-65 which allowed the deferral of withholding, deposit, and payment of the employee’s portion of Social Security taxes on certain qualifying wages paid between September 1, 2020 and December 31, 2020, with such deferred taxes to be repaid between January 1, 2021 and April 30, 2021. The Act extends the repayment period through December 31, 2021 while the interest, penalties, and additions to tax will begin to accrue on January 1, 2022, based on any unpaid amounts.
Extension of the Families First Coronavirus Response Act (“FFCRA”) provisions
In March 2020, the FFCRA took effect which required eligible employers to provide paid sick leave and family/medical leave for certain employees between April 1, 2020 and December 31, 2020. In return, the eligible employers were entitled to a tax credit equal to 100% of the paid leave wages required to be paid under the FFCRA. The Act extends the paid sick and family leave tax credits through March 31, 2021 on a voluntary basis.
Extension of the Work Opportunity Tax Credit (“WOTC”)
The WOTC gives a general business credit of up to $9,600 to employers that hire and retain individuals from certain targeted groups have consistently faced significant barriers to employment. Such tax credit was authorized only until December 31, 2020. The Act extends the WOTC through the end of 2025.
For updates on Paycheck Protection Program (“PPP”) round 2, including its related business tax impacts, read here.
While this article only includes notable business tax provisions of the Act, your business may also be impacted by other provisions.
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