December 27, President Trump signed the $900 billion COVID-19 relief bill into law, passed by Congress on December 21. The legislation, called the Consolidated Appropriations Act, 2021, provides over $300 billion in aid for small businesses, adds $300 to extended weekly unemployment benefits, and reopens the Paycheck Protection Program with some important changes, among other provisions. Here are some of the business tax changes and extenders in the new stimulus package.
Business Tax Changes in the New Stimulus Package
Extension of Credits for Paid Sick and Family Leave
The provision extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, through the end of March 2021. It also modifies the tax credits so that they apply as if the corresponding employer mandates were extended through the end of March 2021. This provision is effective as if included in the Families First Coronavirus Response Act.
Repayment of Payroll Tax
Employers who are deferring their workers’ payroll taxes under the President’s executive action issued in August 2020 now have until the end of 2021 to increase their employee’s withholding to pay back the taxes owed. Penalties and interest on deferred unpaid tax liability will not begin to accrue until 1/1/202. Originally, the employee’s deferred Social Security amount had to be repaid by 4/1/2021.
Expansion of the Employee Retention Credit
The Consolidated Appropriations Act also extends and expands the Employee Retention Credit (ERC) under the CARES Act and the paid leave credits under the Families First Coronavirus Response Act (FFCRA).
Eligible businesses may now take advantage of the Employee Retention Credit through July 1, 2021. However, the ERC has been expanded and modified for the calendar quarter beginning after 12/31/2020 as follows:
- The Employee Retention Credit is expanded from a 50% refundable tax credit to 70%
- Increases limit on employee wages from $10,000 per year to $10,000 per quarter
- So instead of a $5,000 credit per employee per year, it will be a credit of up to $7,000 per employee per quarter
- To be eligible for the expanded ERC in 2021, an employer must show that gross receipts for such calendar quarter are less than 80% of the gross receipts for the same calendar quarter in 2019 or it experienced a full or partial suspension of operations during the quarter due to a governmental order.
- The definition of a large employer for purposes of the ERC is modified to mean more than 500 employees (currently, the threshold is 100 employees)
Minimum Low-Income Housing Tax Credit Rate
Section 42 provides an annual low-income housing credit that is a percentage prescribed by IRS intended to result in a credit, in the aggregate over the 10-year credit period, of a present value of 70% of the qualified basis for certain new buildings and 30% of the qualified basis for certain other buildings.
There is a 9% per year floor on credit for new buildings that are not federally subsidized. The new legislation provides a 4% per year credit floor for buildings that are not eligible for the 9% credit floor that applies to buildings placed in service after 12/31/2020 that:
- Receive an allocation of housing credit dollar amount after 12/31/2020
- If any portion of the building is financed with certain tax-exempt obligations, the obligation is issued after 12/31/2020
A low-income housing credit (LIHTC) is allowed annually over a 10-year credit period beginning with the tax year a qualified building is placed in service or, under an irrevocable election, the next tax year.
There is a limit on the total amount of credits available for buildings not financed with tax-exempt bonds subject to certain state volume limitations. Under Pre-Act law, each state is permitted to annually allocate low-income housing credits with a ceiling amount (the state housing credit ceiling), for the calendar year 2020, equal to the greater of:
- $2.8125 multiplied by the state population
The new law provides that, for purposes of the LIHTC, the state housing credit ceiling for any state for each of calendar years 2021 and 2022 will be increased by the aggregate housing credit dollar amount allocated by the state housing credit agencies of that state for that calendar year to buildings in any qualified disaster zone in that state.
30-Year Depreciation of Certain Residential Rental Property
The Tax Cuts and Jobs Act (TCJA) allowed real property trade or businesses to elect out of Section 163(j) business interest deduction limitations. In return, however, the electing taxpayer had to, for tax years ending after 12/31/2017, treat the elected-for nonresidential real property, qualified improvement property, and residential rental property as subject to the alternative depreciation system (ADS). Also, the TCJA changed the ADS recovery period for residential rental property from 40 years to 30 years for property placed in service after 12/31/17.
The new law provides that for tax years beginning after 12/31/2017, the Consolidated Appropriations Act assigns a 30-year alternative depreciation system depreciation period to residential rental property even though it was placed in service before 1/1/2018 if the property is held by an electing real property trade or business and, before 1/1/2018, was not subject to the alternative depreciation system.
Business Meal Deduction
The 50% limit on the business meal deductions is suspended for meals provided by restaurants in 2021 and 2022. Business meals in restaurants, including any carryout or delivery meals, will be 100% deductible for 2021 and 2022.
Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners, and professional advisors with whom you deal with (or could engage with) in your business.
Therefore, to be deductible:
- The food and beverages can’t be lavish or extravagant under the circumstances
- You or one of your employees must be present when the food or beverages are served
If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.
Tax Extenders for Businesses in the New Stimulus Package
Deduction for Energy Efficient Commercial Buildings (Section 179D Deduction)
Under pre-TCDTR (Taxpayer Certainty and Disaster Tax Relief Act of 2020) law, for property placed into service before 1/1/2021, taxpayers could claim a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. This includes a $1.80 deduction per square foot for construction on qualified property.
A partial deduction per square foot is allowed if certain subsystems meet energy standards, but the entire building does not, including the interior lighting systems, heating, cooling, ventilation and hot water systems, and the building envelope.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 made this deduction permanent and added an inflation adjustment for tax years beginning after 2020.
Changes to the Work Opportunity Tax Credit
Employers may use an elective general business tax credit if they hire individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit (WOTC) program.
Prior to the TCDTR, the WOTC, which is based on qualified first-year wages paid to the hire, applied to hires before 1/1/2021. The TCDTR extended the Work Opportunity Credit through 2025.
Employer Payments of Student Loans
Section 127 provided that educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, was excluded from the employee’s income. The CARES Act added to the educational payments excluded from an employee gross income, “eligible student loan repayments,” made after 3/27/2020 and before 1/1/2021. These payments are subject to the overall $5,250 per employee limit for all educational payments.
Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principal or interest on any qualified higher education loan for the education of the employee, but not of a spouse or dependent.
Contact Us for More Information
These are just a few of the business tax changes in the new stimulus package, and they’ll have a major impact on your organization’s tax planning. If you need assistance or have questions or concerns, we’re here to help. Please email [email protected] or call 443-320-4101.