Taxes in Your Practice: Pandemic tax developments for 2021

Scott E. Vincent

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City. 

This article highlights several key provisions in this legislation, particularly relating to tax matters. Please note this is not a comprehensive list, and implementation of these provisions and further relief measures are likely to modify these topics. Please also note the Act extended a variety of tax provisions either permanently or for several years, but the details of all the “tax extenders” are not covered here.

Business Provisions

• Tax Treatment of PPP Loans: The CARES Act provided that amounts forgiven under the Paycheck Protection Program (PPP) would be excluded from gross income, even though forgiveness of indebtedness is normally taxable. Somewhat undermining the benefit of the PPP forgiveness, the IRS announced in Notice 2020-32 that no deduction would be allowed for an otherwise deductible expense if payment of the expense resulted in forgiveness of a CARES Act PPP loan, and the income associated with the forgiveness is excluded from gross income by the CARES Act. The Act reconfirms that gross income does not include forgiveness of a PPP loan, overrides the IRS position, and allows deduction of business expenses paid with proceeds of a PPP loan that is forgiven. The Act also provides that forgiveness of a PPP loan will not reduce tax basis or other tax attributes of taxpayer assets.
   
• Paycheck Protection Program – Second Draw:  The Act creates a second round of loans for the Paycheck Protection Program (as originally defined in the CARES Act). Some modifications, key provisions, and considerations for the PPP Second Draw are noted here:
  • The Act allows a maximum loan of $2 million for businesses with 300 or fewer employees that used or will use their full original PPP loan and that can demonstrate a reduction of at least 25% in gross receipts in a quarter of 2020 relative to the same quarter in 2019.
     
  • The available loan amount for each borrower (capped at $2 million) is annualized payroll costs for either the one-year period prior to the loan or the calendar year, divided by 12, then multiplied by 2.5. Accommodation and food services industries may receive up to 3.5 times average monthly payroll costs. Certain farmers may also use their 2019 gross income from Schedule F if it results in a larger loan. For smaller loans of $150,000 or less, the business can provide a simplified certification attesting to the revenue loss requirements.
     
  • Generally, the PPP loan can be fully forgiven if the funds are used for payroll costs; interest on mortgages; rent and utilities; and certain operations expenditures, property damage costs, supplier costs, and worker protection expenditures during the covered period. The required allocation of at least 60% payroll costs (versus non-payroll costs) continues to apply, as does the rule reducing the loan amount forgiven for borrowers reducing their number of employees or employee salaries by more than 25%.
     
  • Churches, religious organizations, and news organizations (FCC license holders and certain newspapers) may be eligible for PPP Second Draw loans.
     
  • All eligible entities are banned from using PPP proceeds for lobbying activities and expenditures, as well as expenditures relating to enactment of legislation, appropriations, or regulations.
     
• Employment Tax Payments:  Prior relief allowed employers to defer payment of employment taxes for periods Sept. 1, 2020, through Dec. 31, 2020. The Act allows employers to further defer payment for these taxes to Dec. 31, 2021.
   
• Employee Retention Tax Credit (ERTC):  The Act extends and expands the CARES Act ERTC with several changes, including increasing the per-employee credit from $10,000 per year to $10,000 per quarter, increasing the credit rate from 50% to 70% of qualified wages, expanding eligibility of employees and employers, and making technical corrections.
   
• Credits for Paid Sick and Family Leave:  The Act extends the credits for paid sick and family leave in the Families First Act through March 31, 2021. The Act also allows an election to use prior year net earnings from self-employment rather than current year earnings in calculating the credit for the self-employed.
   
• Business Meals:  The Act allows a full deduction (no 50% limitation) for business meal and beverage expenses provided by a restaurant in 2021 and 2022.

Individual Provisions

• Direct Payments:  The Act includes individual refundable tax credits of $600 per taxpayer, with an additional $600 per qualifying child. Eligibility for the payments begins to phase out for adjusted gross income over $150,000 for joint returns; $112,500 for heads of household; and $75,000 for single filers. The U.S. Department of Treasury may issue advance payments based on 2019 tax returns, and the direct payments are also available for those not required to file a return. Taxpayers receiving an excess payment based on their 2020 tax return are not required to repay the payment, and taxpayers eligible for additional credit based on their 2020 tax return will receive an additional refundable tax credit.
   
• Unemployment Benefits:  The Act provides an additional 11 weeks of unemployment assistance, including $300 per week emergency benefits, extension of prior pandemic assistance, and protection from benefit overpayment collection.
   
• Medical Expense Threshold:  The itemized deduction threshold for medical expense deductions is permanently reduced from 10% to 7.5%.
   
• Tax Credits:  Taxpayers may use 2019 income to calculate the additional child tax credit and the earned income tax credit. The income threshold is also increased for use of the Lifetime Learning Credit.
   
• Flexible Spending Accounts:  Carryover and grace period policies from prior relief are expanded for employees with unused balances in health and dependent care flexible spending accounts.
   
• PPE for Educators:  The Act directs the IRS to issue guidance or regulations confirming that personal protective equipment and supplies used for COVID-19 prevention qualify for the educator expense deduction.
   
• Financial Aid Grants:  The Act excludes from gross income certain emergency financial aid grants for college and university students under the CARES Act and holds students harmless for purposes of determining eligibility for both Opportunity and Lifetime Learning tax credits.
   
• Charitable Deductions:  The Act allows up to a $300 ($600 for joint return) charitable deduction for 2021, even if a taxpayer does not itemize deductions. The increase in the deduction for donations of food inventory from 15% to 25% under the CARES Act is also extended through 2021.

Conclusion

The combination of pandemic and political strain on our nation and economy has resulted in a variety of legislative, executive, and administrative efforts to provide relief. As we enter 2021, the changes in administration and Congress set the stage for even more significant relief efforts this year. We also need to carefully monitor governmental actions interpreting all the legislation that is already in place, such as the implementation of the PPP Second Round and the PPP forgiveness process.