skip to main content

December 31, 2020

Stroock Client Alert

By: Michelle M. Jewett, David C. Olstein, Jeffrey D. Uffner, Brian J. Senie, Mitchell Snow, Daniel Martinez, Lauren W. Shandler

In a last-minute pivot from his prior criticism, President Trump signed the Consolidated Appropriations Act, 2021 (the “Act”) into law on December 27, 2020. Spanning 5,593 pages, the $2.3 trillion legislation is largely a government spending bill but also contains approximately $900 billion of relief related to the pandemic and a myriad of provisions unrelated to spending. The Act contains numerous individual, business, payroll, disaster, and energy-related tax provisions, as well as tax extenders. The Act also contains several provisions related to employee benefits, including retirement plan and flexible spending account provisions. Many of the provisions in the Act relate to relief measures to respond to the COVID-19 pandemic, including $600 stimulus payments for individuals, an extension of payroll tax credits, and clarification of the tax treatment of expenses paid with Paycheck Protection Program (“PPP”) loan proceeds.

The following is a high-level summary of certain business-related tax provisions contained in the Act.  Future client alerts will provide additional detail focusing on specific aspects of the legislation.

PPP Provisions in the Act

The Act contains several significant provisions modifying, clarifying and expanding upon the PPP created under the CARES Act of March 2020.  The PPP provided over $500 billion in low-interest loans to small businesses. Under the PPP, the loans required no loan payments for six months and would be fully forgiven if and when used to fund payroll costs or certain other eligible expenses, including mortgage interest, rent and utilities (collectively, “Eligible Expenses”).  The Act authorizes an additional $284 billion of funding for new PPP loans, referred to by many commentators as “PPP2 Loans” to differentiate from the initial PPP loans under the CARES Act (the “Original PPP Loans”).

Deductibility of Expenses.  One major question regarding the Original PPP Loans was whether Eligible Expenses, if otherwise deductible, could nevertheless be deducted by the borrowing taxpayer if the PPP loan was forgiven.  The concern arose since, under the CARES Act, the benefit of any forgiveness of the Original PPP is explicitly excluded from the borrower’s taxable income.  The Treasury Department took the position that such Eligible Expenses could not be deducted, as doing so would provide an unintended “double benefit” to a borrower by allowing it to deduct what was otherwise “tax-exempt income.”  The Internal Revenue Service (“IRS”) followed suit by issuing Notice 2020-32 and Revenue Ruling 2020-27 to support the Treasury Department’s position.  However, many tax practitioners disagreed on the grounds that Congress’s intent appeared to be that taxpayers be given the broadest benefit from the PPP program and be allowed to deduct Eligible Expenses.

The Act expressly affirms this latter position, superseding the IRS guidance by permitting a deduction for otherwise-deductible Eligible Expenses funded with the proceeds of PPP loans. As a result, Eligible Expenses paid with the proceeds of both the Original PPP Loans and the new PPP2 Loans remain deductible notwithstanding the exclusion from income of the loan forgiveness. 

Eligible Borrowers.  The PPP2 Loans under the Act will be available not only to eligible first-time borrowers but also to businesses that previously received a PPP loan, provided that such businesses (i) have 300 or fewer employees, (ii) have used or will use the full amount of their Original PPP Loan, and (iii) can demonstrate a 25% decline in gross revenue in any 2020 quarter as compared to the same quarter in calendar year 2019.  Additionally, borrowers that repaid or returned a portion of their Original PPP Loan may reapply for the maximum amount available to them.

Eligible first-time borrowers for PPP2 Loans include eligible businesses with 500 or fewer employees, sole proprietors, independent contractors, certain self-employed individuals, tax-exempt organizations including churches, and businesses that provide accommodation or food services that have fewer than 300 employees per physical location.

Covered Expenses.  PPP2 Loans permit the same Eligible Expenses as the Original PPP Loans in order to qualify for loan forgiveness: payroll, rent, utilities and certain mortgage interest.  In addition, the Act provides several new types of expenditures that may qualify.  These include (i) expenses for worker protection and modification of facilities to comply with COVID-19 health and safety guidelines, (ii) payments to suppliers of goods or services essential to the business’s current operations, and (iii) certain operating costs including software and cloud computing services.

Borrowers under a PPP2 Loan will be required to spend a minimum of 60% of the proceeds solely on payroll costs over a period of eight (8) to twenty-four (24) weeks after receipt of the loan, which length can be elected by the borrower.  This provides greater flexibility than the provisions of the Original PPP Loans, which required taxpayers to elect a period of either eight (8) weeks or twenty-four (24) weeks, but did not permit anything in between.  Additionally, consistent with the Paycheck Protection Program Flexibility Act of June 2020 and the Treasury Department’s interpretation thereof, partial forgiveness may be available to a taxpayer even if the 60% threshold is not reached, in accordance with the actual percentage spent on payroll costs.

Simplified Application for Loans of $150,000 or Less. The Act also includes provisions to ease certain administrative burdens for borrowers.  Most notably, the Act provides for a simplified application for PPP loan forgiveness where the loan does not exceed $150,000.  The borrower must merely sign and submit a certification to the lender, not exceeding one page in length, that includes the total amount of the loan, a description of the number of employees that borrower was able to retain as a result of the loan, and the estimated total amount of the loan spent on payroll costs.  The Act requires the U.S. Small Business Administration (“SBA”) to produce a simplified application form within 24 days of the Act’s enactment.  To permit auditing and prevent fraud, borrowers are required to retain employment records for four years and other business records for three years.

Economic Injury Disaster Loans (“EIDL”) Advances.  The $10,000 EIDL advance provided by the SBA will no longer (as under prior law) reduce the amount of PPP loan forgiveness.

Modifications to the Employee Retention Tax Credit (“ERTC”)

Under the CARES Act, certain qualified employers adversely affected by COVID-19 were eligible for the ERTC, which is a refundable payroll tax credit for up to 50% of qualified wages paid from March 13, 2020 through December 31, 2020, provided that the employer is engaged in a trade or business in 2020 and (i) the wages are paid  while operation of that trade or business is fully or partially suspended due to a governmental order related to COVID-19 (the “suspension test”) or (ii) the employer suffered a decline of 50% or more in gross receipts when comparing the 2020 quarter to the same quarter in 2019 (the “gross receipts test”). The ERTC was available with respect to the first $10,000 of qualified wages, including health benefits, paid to an eligible employee annually.

The Act modifies the ERTC previously enacted under the CARES Act by, among other things, reducing the limitations on the amount of the credit available to be claimed per employee by increasing the cap on qualified wages from $5,000 to $28,000, increasing the large employer limitation from 100 to 500 employees, adjusting the gross receipts test to allow a greater number of employers to qualify by reducing the percentage decline from 50% to 20%, allowing certain governmental employers to claim the credit, and extending the period through which the credit can be claimed for wages paid to June 30, 2021. These changes are effective for all calendar quarters beginning after December 31, 2020.

The Act also contains provisions clarifying the interaction between the PPP loan program and the ERTC. Previously, employers who received a PPP loan were ineligible for the ERTC. The Act provides that employers who receive a PPP loan may still qualify for the ERTC with respect to wages that are not paid for with PPP loan proceeds. This modification to the ERTC is effective retroactive to the date the CARES Act was enacted.

Other Stimulus-Related Tax Provisions

Deferral of Employee Portion of Payroll Tax.  On August 8, 2020, President Trump issued a memorandum permitting employers to defer payment of the employee portion of certain payroll taxes for any employee with pre-tax wages or compensation during any biweekly pay period that was less than $4,000 during the period between September 1, 2020 and December 31, 2020.  The memorandum required the employers to withhold and pay the deferred payroll taxes from wages or compensation paid between January 1, 2021 and April 30, 2021.  The Act extends the repayment period to December 31, 2021.

Extension of Credits for Paid Sick and Family Leave.  The Act does not extend requirements for employers to provide emergency paid sick leave or emergency paid family and medical leave under the Families First Coronavirus Response Act (“FFCRA”) beyond the original December 31, 2020 expiration date. However, Congress extended employers’ ability to utilize the FFCRA tax credit until March 31, 2021 if employers voluntarily continue to provide FFCRA paid leave benefits to their employees.

Temporary 100% Deduction for Business Meals.  The Tax Cuts and Jobs Act of 2017 (the “TCJA”) limited the deductibility of business meal expenses to 50% of the cost for food and beverages provided by a restaurant.  The Act permits businesses to deduct 100% of these business meals expenses during 2021 and 2022.

Technical Correction of 30-Year Cost Recovery Period for Residential Rental Property.  A “real property trade or business” may elect out of the limitation on the deductibility of business interest imposed by S­­­­­­­­ection 163(j) of the Internal Revenue Code of 1986, as amended (the “Code”), but if it makes this election, it must use the longer cost recovery periods under the alternative depreciation system (“ADS”).  When the TCJA was enacted, the ADS cost recovery period for residential rental property was reduced from 40 to 30 years.  However, due to a drafting error, this reduction in the cost recovery period for residential rental property applied only to buildings placed into service or acquired in 2018 or later with the result that a real property trade or business with a residential rental property at the end of 2017 that elected out of the limitation on the deductibility of business interest would be required to use the 40-year cost recovery period.  The Act retroactively corrects the error so that the 30-year cost recovery period is available for all residential rental property, regardless of when it was placed into service.

Individual Tax Provisions

Cash Payments.  The primary feature of the Act, and the feature that delayed its passage for nearly a week, is the provision for cash payments to eligible individuals. Democrats, Republicans and the president each had their own idea of the magnitude of the payment. In fact, supplemental assistance that would increase the amount of the payment is still being negotiated at the time of this client alert’s publication. The Act provides an advance refundable tax credit to “eligible individuals” in an amount equal to the sum of $600 ($1,200 for joint filers), plus $600 for each qualifying child. The term “eligible individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent and estates or trusts. The cash payment from the CARES Act had provided $600 per adult, but only $500 per child under age 17. This payment is gradually phased out for individuals with adjusted gross incomes between $75,000 and $87,000 (between $150,000 and $174,000 for joint returns).  The benefit of the credit applies to the 2020 tax year and is technically based on the taxpayer’s adjusted gross income in 2020.  However, to accelerate the timing of the payment, the Act provides an advanced funding procedure under which the Treasury Department will issue the refund based on the taxpayer’s 2019 adjusted gross income and Social Security information available at the time of the refund issuance. The Act provides that payments must generally be made on or prior to January 15, 2021.

A taxpayer who receives an advance payment exceeding the amount of his or her eligible credit will not be required to refund the excess amount to the government. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the taxpayer’s advance payment, the taxpayer will receive the difference as a refundable tax credit.

Higher Charitable Contribution Limits. The CARES Act granted a $300 above-the-line deduction for charitable contributions in 2020. This benefit applied to individuals who could not otherwise deduct their charitable contributions because their standard deduction was higher than the sum of their itemized deductions. The Act extends the above rule through 2021, allowing individual cash contributions of up to $300 (and now allowing $600 for married filers) to be deducted above-the-line for cash contributions to qualified charitable organizations. The Act also extends the temporary increases in the charitable deduction limitations provided by the CARES Act to 2021.

Energy Extenders

The Act contains a number of provisions that are favorable to the renewable energy industry, including extensions of a number of energy-related tax credits. In addition, the Act provides for the expansion and enhancement of research and development programs related to renewable energy, energy efficiency, energy storage, and carbon capture, and adds certain other provisions to reduce carbon emissions.

Renewable Energy Tax Credits.  Before the Act was passed, the Production Tax Credit (“PTC”) and the investment tax credit in lieu of the PTC for wind and certain other renewable energy technologies was due to expire for projects with respect to which construction commenced after the end of 2020.  Under the Act, the PTC is extended for an extra year for qualified wind facilities at the 2020 reduced rate (which, under the existing phase-out has been reduced to 40%) as long as construction begins before 2022.

Similarly, the Investment Tax Credit (“ITC”), which is applicable to solar and certain other renewable energy projects, was scheduled to be reduced to 22% for projects started in 2021 and permanently reduced to 10% of the cost of construction for commercial and utility projects started after 2021.  Under the Act, the phaseout of ITC is extended.  The ITC phaseout percentages for solar projects are adjusted to (i) 26% for projects that begin construction in 2021 and 2022, (ii) 22% for projects that begin construction in 2023, and (iii) 10% for projects that begin construction after December 31, 2023.  For fiber-optic solar, qualified fuel cell, qualified small wind energy property and qualified energy recovery property, the latter of which is a new category added by the Act, a similar phase-out schedule applies, but no ITC is allowed for projects that begin construction after December 31, 2023, or that are placed in service after January 1, 2026. 

The Act also extends the ability to elect to use the ITC for qualified offshore wind facilities that begin construction before 2026. Moreover, offshore wind facilities that begin construction during 2017 to 2025 are not subject to the onshore-wind facilities phase-out rates and are eligible for the full credit amount. As a result, the ITC for offshore wind projects remains at the original 30%.

Notably, the Act did not provide a tax credit for stand-alone energy storage facilities in spite of significant efforts by the renewable energy industry to advocate for its inclusion.

Tax Credit for Carbon Capture. The deadline for beginning construction on carbon capture facilities in order to claim tax credits has been extended by two years from January 1, 2024 to January 1, 2026.

Extension of Carbon Oxide Sequestration Credit.  The Act extends the beginning of the construction date for certain qualified facilities for two years, through 2025, for a credit to sequester qualified carbon oxide disposed of by the taxpayer in secure geological storage.

Residential Energy Efficient Property (“REEP”) Credit.  The REEP credit is available to individual taxpayers for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property.  The Act adds certain qualified biomass fuel property expenditures to this list.  Under the Act, the phaseout of the credit is extended for two years.  The phaseout percentages are adjusted to 26% for property placed into service in 2021 and 2022, then down to 22% in 2023.  The REEP credit will not apply to property placed in service after December 31, 2023.

Energy Efficient Commercial Buildings Deduction.  The Act makes permanent a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of qualified commercial buildings.  The Act indexes to inflation the amount of the $1.80-per-square-foot deduction limitation.

Other Energy Tax Credits.  The Act extends for one year the second generation biofuel producer credit, the qualified fuel cell refueling property credit, the two-wheeled plus-in electric vehicle credit, the alternative fuel refueling property credit, the energy-efficient homes credit, the nonbusiness energy property credit, excise tax credits relating to renewable fuels, and a production credit for Indian coal facilities.

Other Tax Extenders

In addition to energy tax credits, there are many tax provisions that have fixed termination dates.  The Act has extended some of these tax provisions, which cover a variety of topics and timeframes.

Reduction in Medical Expense Deduction Floor.  The Act makes permanent the ability for individuals to claim an itemized deduction for unreimbursed medical expenses that exceed 7.5% of adjusted gross income.  The deduction was set to expire in 2021.

Look-Thru Rule for Related Controlled Foreign Corporations.  The Act extends the look-thru rule of related controlled foreign corporations from the end of 2020 to the end of 2025.  The look-thru rule does not treat the dividends, interest, rent and royalties received or accrued from a controlled foreign corporation that is a related person as foreign personal holding company income, subject to certain qualifications.

Oil Spill Liability Trust Fund Rate.  The Act extends an excise tax of $0.09 per barrel of certain crude oil and petroleum products that enter into the United States through 2025.  The funds are deposited into the Oil Spill Liability Trust Fund.

Employer Credit for Paid Family and Medical Leave.  The Act extends the elective general business credit to eligible employers for certain wages regarding family and medical leave paid to qualifying employees through 2025.

Additional 5-Year Extensions.  The Act extends the new markets tax credit, the work opportunity credit, the gross income exclusion for discharge of indebtedness on a personal residence, and the treatment of qualified mortgage insurance premiums as qualified residence interest through 2025.

Employee Benefits Provisions

The Act contains several employee benefits provisions, only a few of which relate to the COVID-19 pandemic.

Partial Plan Terminations. The Act provides temporary relief from provisions of the Code which require that participant benefits fully vest upon the partial termination of a retirement plan.  Under the Act, a plan will not be treated as having partially terminated during any plan year that includes the period beginning on March 13, 2020 and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020.

Disaster-Related Distribution and Loan Rules.  The Act provides for special retirement plan and IRA distribution rules (similar to those provided under the CARES Act) for distributions made to individuals residing in qualified disaster areas, which are generally areas that are declared to be disaster areas for reasons unrelated to COVID-19 during the period commencing on January 1, 2020 and ending on the date which is 60 days after the Act’s date of enactment.  The rules apply to distributions to individuals who have sustained an economic loss as a result of the disaster, provided such distributions are made within the period commencing on the date the disaster occurred and ending on the date immediately prior to the date that is 180 days after the Act’s date of enactment.

In-Service Distributions.  The Act lowers the age for permitted in-service distributions from pension plans from 59½ to 55 for certain individuals employed in the building and construction industry.

Application of CARES Act to Money Purchase Pension Plan Distributions.  The Act amends the CARES Act to clarify that COVID-related distributions from money purchase pension plans that constitute in-service withdrawals will be treated as satisfying the distribution rules under Section 401(a) of the Code.  Under the CARES Act, such distributions were permitted during the period commencing on or after January 1, 2020 and ending before December 31, 2020.

Flexible Spending Accounts.  The Act permits employers with cafeteria plans that include a health flexible spending arrangement or dependent care flexible spending arrangements to make certain amendments to their plans, including amendments to (i) allow participants to carry over unused benefits or contributions remaining in the flexible spending arrangements from plan years ending in 2020 to plan years ending in 2021 (or from plan years ending in 2021 to plan years ending in 2022), (ii) for plan years ending in 2020 or 2021, extend the grace period with  respect to unused benefits or contributions remaining in  flexible spending arrangements to 12 months after the end of such plan year, (iii) allow participants who cease participation in the plan during the 2020 or 2021 calendar years to continue to receive reimbursements for unused benefits or contributions remaining in the flexible spending arrangements through the end of the plan year (including any applicable grace period), and (iv) allow participating employees to make an election to modify prospectively the amount of their contributions to the flexible spending arrangements, subject to applicable dollar limitations.  Any such amendment must be adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective.     

______________________________

For More Information:

Michelle M. Jewett

David C. Olstein

Jeffrey D. Uffner

Brian J. Senie

Mitchell Snow

Daniel Martinez

Lauren W. Shandler

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.