Highlights of the 2021 Consolidated Appropriations Act
The last year has been challenging, and it appears the challenges will continue into 2021, at least for a while. Over the past 11 months, Congress has passed several stimulus bills to help the struggling economy. The most recent bill, the 2021 Consolidated Appropriations Act (CAA), contained many new stimulus provisions and revised, modified, and extended other provisions that were passed as part of earlier bills. The focus of this article is to provide explanations of significant CAA provisions.
Since the Paycheck Protection Program (PPP) was included as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), organizations have questioned the ability to deduct expenses paid with PPP funds, and after IRS Notice 2020-32 was issued, these expenses were considered nondeductible. This has been a highly debated topic, and it was resolved for a final time by the CAA. Section 276 of the COVID-Related Tax Relief Act of 2020, a sub-bill of the CAA, made expenses paid with proceeds received from a PPP loan deductible for federal income tax purposes. When Congress passed the PPP as part of the CARES Act, it specifically made the forgiveness of the PPP loan tax-exempt. The issuance of Notice 2020-32 effectively made the PPP loan forgiveness taxable even though that wasn’t viewed to be Congress’ intent. In addition to making the expenses deductible, the provision allows the tax-exempt income related to PPP loan forgiveness to increase the basis of a pass-through entity (LLCs, partnerships, and S corporations) owner’s units or stock in the entity. The big question that’s still unanswered is the timing of the increase in basis. There are any number of specific times when the basis increase could be made. The timing could significantly affect the overall tax of the owner of the units or stock. Currently, we don’t know how this will be resolved, but we’re expecting the IRS to come out with guidance that will address this issue.
The CAA also extended the original PPP. Businesses that didn’t take advantage of the first round of PPP (or returned all or a portion of their loan or borrowed less than the maximum that could have been borrowed) can apply through March 31, 2021, for a PPP first draw loan (PPP 1). In addition, the CAA provided for a second draw PPP loan (PPP 2). The rules and process to apply for and receive a PPP 2 loan are similar to those followed for the PPP 1. There are a few differences, however.
First, to qualify for a PPP 2 loan, a business must show a 25 percent drop in gross receipts during any one quarter of 2020 as compared to the same calendar quarter of 2019. Gross receipts are determined using the method of accounting the business uses for income tax purposes and generally are gross receipts that would be reported on the business’s income tax return. A qualification that changed for PPP 2 loans from the PPP 1 loan requirement was the employee threshold. The employee threshold for PPP 2 loans is 300 or fewer employees, while the PPP 1 employee threshold was 500 employees. The employee limitation is based on either calendar-year 2020 or 2019 average headcount per pay date. Headcount includes all full-time, part-time, and temporary employees. It’s also important to note that on the PPP 2 application form, the borrower is required to certify that prior to the disbursement of the PPP 2 loan proceeds, it has spent or will spend the full amount of the PPP 1 loan on qualified expenses. The amount of the PPP 2 loan is 2.5 times (3.5 times for NAICS code 72 businesses, generally hospitality businesses) average monthly payroll for either calendar-year 2019 or 2020.
The Employee Retention Credit (ERC) also was significantly modified by the CAA. The ERC, a refundable tax credit against certain employment taxes, was established by the CARES Act. Here are several significant changes made to the ERC by the CAA:
- PPP loan recipients are now eligible to claim the credit in 2020 and 2021 to the extent those organizations meet ERC qualifications. The credit is only eligible for qualified wages not included in the PPP loan forgiveness calculation. Under prior law, PPP loan recipients weren’t eligible to claim the credit.
- The credit period was extended to wages paid before July 1, 2021.
- The maximum refundable credit amount for 2021 increased from 50 percent to 70 percent of qualifying wages for each employee. In addition, the maximum qualifying wage in 2021 for each employee increased from $10,000 per year to $10,000 per quarter.
- For 2021 credits, the required decline in gross receipts was reduced from at least 50 percent to at least 20 percent.
- For 2021, the 100-employee threshold is increased to 500 employees.
- Under the CARES Act, federal, state, and local governmental employers or agencies and instrumentalities thereof weren’t eligible for the credit. For credits in 2021, the CAA expands the eligibility to include public colleges or universities, organizations whose principal purpose or function is providing medical or hospital care, and organizations described in Internal Revenue Code (IRC) §501(c)(1) and exempt from tax under IRC §501(a).
To discuss the above provisions and other programs in the CAA that may be of benefit to your organization, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.