Tax Legislative Update - Breaking news from Capitol Hill From Grant Thornton's Washington National Tax Office
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Tax Legislative Update
Breaking news from Capitol Hill
From Grant Thornton’s Washington National Tax Office
Dec. 27, 2020
2020-07
New stimulus enhances retention credit, extends tax breaks
Lawmakers finally reached agreement on a new round of stimulus on Dec. 21 that includes a substantial tax title
with provisions enhancing the employee retention credit, allowing taxpayers to fully deduct expenses paid for
with forgiven Paycheck Protection Plan (PPP) loan proceeds, and extending dozens of valuable expiring tax
provisions.
The bill represents a massive year-end compromise after months of frustrating negotiations and combines $1.4
trillion extension of government funding with nearly $1 trillion in new stimulus measures – plus a handful of other
legislative priorities for each party. The House and Senate approved it with overwhelming bipartisan votes on Dec.
21, and President Donald Trump signed it into law on Dec. 27.
The tax title itself is a $328 billion combination of stimulus provisions, tax cut extensions and other favorable tax
changes sought by both sides. The most significant stimulus provisions would:
• Reverse IRS guidance and allow taxpayers to deduct expenses paid with forgiven PPP loan proceeds
• Extend an enhanced version of the employee retention credit through the first two quarters of 2021
• Retroactively expand the 2020 version of the employee retention credit from the Coronavirus Aid, Relief,
and Economic Security (CARES) Act to include PPP loan recipients
• Allow businesses to deduct 100% of meals “provided by a restaurant” in 2021 and 2022
• Extend the sick pay and paid family leave credits enacted by the Families First Coronavirus Relief Act
(FFCRA) through 2021 and make them available without the leave requirements
• Provide a $600 charitable deduction for taxpayers who don’t itemize in 2021 (up from $300 in 2020)
• Extend through 2021 the increased taxable income limit on corporate charitable deductions from 10% to
25% and contributions of food inventory from 15% to 25%
• Provide new stimulus checks of $600 per taxpayer and qualifying child
• Provide flexible spending account relief
The bill also includes more than $100 million in extensions and enhancements of expiring tax “extender” provisions.
Several of the most popular provisions are made permanent by the bill, including the Section 179D deduction for
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltdenergy-efficient commercial building property and alcohol excise tax relief enacted in the Tax Cuts and Jobs Act
(TCJA). Several other provisions were extended for five years, including:
• The work opportunity tax credit (WOTC)
• The new markets tax credit
• The look-through rule for related controlled foreign corporations
• Seven-year cost recovery for motor-sports entertainment complexes
• Special expensing for film, television and live theatrical productions
• Employer tax credit for paid family and medical leave
Grant Thornton Insight: There appears to be significant bipartisan support for making these provisions
permanent, but cost remains an issue. Lawmakers indicated that the five-year extension of these provisions
through 2025 is meant to intentionally align them with the major expiring portions of the TCJA. These extender
provisions could be incorporated into broader negotiations over the TCJA’s expiring provisions if the issue is
not addressed before then.
Most other expiring tax provisions were extended for just one year through the end of 2021, including:
• Alternative fuel credits
• Section 30C alternative fuel vehicle refueling property credit
• Section 25C energy-efficient home improvement tax credit
• Section 25D residential energy property credit
• Section 45L energy-efficient new home credit
• Mine rescue team training credit
• Three-year depreciation for racehorses
The Section 45 production tax credit for wind energy was extended for one year at the current 60% rate for
construction that begins in 2021, while the full credit for other property types was also extended one year for
construction beginning in 2021. Taxpayers can continue to claim the Section 48 investment tax credit in lieu of the
Section 45 credit, and offshore wind energy is eligible for the full Section 48 credit through the end of 2025. The
Section 48 credits for solar, fuel cell, fiber optic solar and small wind energy were scheduled to be eligible only for
a 22% credit for construction beginning in 2021. That credit rate has been bumped to 26% for 2021 and the 22%
rate is now available for construction beginning in 2022, with waste energy recovery property now qualifying. The
construction start deadline for the 10% credit available for microturbines, combined heat and power systems and
geothermal property has been extended from 2021 to the end of 2023.
Grant Thornton Insight: The provisions that will be extended for just one year appear to have much less
support, and could lose momentum without the more popular provisions expiring in 2025 to help spur action.
However, any provisions expiring in 2021 will be aligned with two TCJA “sunrise” tax increase provisions that
many lawmakers want to address. Beginning in 2022, taxpayers will be required to amortize R&D expenses
over five years and include amortization and depreciation in the calculation of adjusted gross income for the
limit on interest deductions under Section 163(j). These changes were included in the TCJA because of revenue
constraints and are particularly unpopular with Republicans.
The legislation includes a handful of other favorable tax changes that were priorities for various constituencies,
including provisions that would:
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd• Provide a minimum 4% low-income housing tax credit rate
• Allow real property businesses that elect out the Section 163(j) deduction limit to depreciate residential
real property placed in service before Jan. 1, 2018 over 30 years
• Allow taxpayers to use 2019 earned income for 2020 earned income and child tax credits
• Extend the exclusion from income for employer payments on employee student loans
• Extend the repayment period for individuals who their deferred Social Security taxes until Dec. 31, 2022
• Provide a package of disaster relief tax incentives
The total tax package is large, but the $167 billion in stimulus provisions represents only half of the cost, and
several popular stimulus tax proposals were omitted. Many lawmakers have supported creating a tax credit for
the costs of employers protecting employees from COVID-19, as well as temporarily expanding WOTC to cover
anyone receiving unemployment. There is also bipartisan support for providing state tax relief for taxpayers
whose working location changed because of COVID-19 or who work in a state for less than 30 days. It is still
possible for these and other tax stimulus measures to be considered in 2021.
President-elect Joe Biden has referred to this package as merely a “down payment,” and both parties have major
priorities that remain unfinished. Democrats are still pushing for state aid, while Republicans want business
liability protections. A deal on these issues remains elusive, but is likely to be considered again early next year.
Any broader agreement on stimulus could provide be a vehicle for additional tax changes.
Even without more stimulus, the current tax provisions will offer substantial incentives, liquidity and relief for many
businesses. The enhanced employee retention credit, in particular, could offer large refunds. The following
provides more details on some of the most significant provisions and includes a full table on the tax cut
extensions.
Employee retention credit
The CARES Act originally created a 50% credit for paying up to $10,000 in wages per employee for a business
that was fully or partially suspended due to a government order or that saw a greater than 50% reduction in
gross receipts for the first quarter, beginning in calendar 2020 compared to the same quarter in the prior year.
The new legislation both retroactively improves the prior version of the credit and creates a more generous new
version for the first two quarters of 2021. For the prior version, PPP loan recipients will be retroactively eligible
based any wages not paid with forgiven PPP loan proceeds. The legislation also clarifies the determination of
gross receipts for tax-exempts.
Grant Thornton Insight: This generous change will offer immediate refunds for many PPP loan recipients who
were not previously eligible but can now make retroactive claims based on 2020 wages. For employers with
under 100 full-time equivalent employees, any wages not covered by the PPP loan will be eligible if paid while
their business was subject to a shutdown or stay-at-home order or if paid in a quarter meeting the gross
receipts test. Employers over the 100-employee threshold will be able to claim the credit for wage or
healthcare costs paid to employees who were not working or providing full services.
The new employee retention credit will be a 70% credit against up to $10,000 in wages per employee per quarter
for the first two quarters of 2021, for a maximum total credit of $14,000 per employee. The gross receipts
qualification threshold will be reduced from a 50% drop in gross receipts from the same quarter in the prior year
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltdto 20%. In addition, the employee threshold for determining wage qualification is increased so that all wages of
employers with 500 or fewer full-time equivalent employees will qualify. Over this threshold, only wages and
healthcare costs paid to employees not providing services or full services.
Grant Thornton Insight: IRS guidance has been fairly generous in allowing employers to claim the credit for
wages paid to employees who are working but not providing full services. Employers can use any reasonable
method to determine amounts paid to salaried employees for time not worked, although mere reductions in
productivity do not qualify.
PPP deductions
The bill reverses IRS guidance and allows taxpayers to fully deduct any expenses regardless of whether the
expense was paid using forgiven PPP loan proceeds. The loan and the loan forgiveness will remain excluded from
income. Although there was discussion of limiting this fix during negotiations, the final legislative text provides full
relief. Taxpayers do not need to decrease any deduction or basis because of using forgiven PPP loan receipts.
The legislation also provides that taxpayers do not need to include income or reduce deductions for any of the
following:
• Treasury Program Management Authority payments under Section 1109(d)(2)(D) of the CARES Act
• Economic Injury Loan Disaster grants
• Loan payments under Section 1112(c) of the CARES Act
• Grants under Section 324 of the Economic Aid to Hard Hit Small Businesses, Non-profits and Venues Act
Grant Thornton Insight: For calendar-year taxpayers, the PPP deduction fix will allow full deductions to be
claimed on the 2020 return, and estimated tax payments should be planned accordingly. Fiscal-year
taxpayers who may have already filed and reduced deductions based on IRS guidance will be able to amend
their return for a potential refund.
Residential real estate depreciation
The bill provides that real property trades or businesses electing out of the Section 163(j) limit on interest
deductions will have a 30-year recovery period for residential real property placed in service before Jan. 1, 2018.
Grant Thornton Insight: The change is made retroactive to the enactment of the TCJA so taxpayers in the
real estate industry may have the option of amending returns for refunds based on the change or taking the
benefit with an accounting method change on a future return.
Meals deduction
The bill allows businesses to fully deduct meals “provided by a restaurant” 2021 and 2022.
Grant Thornton Insight: The TCJA originally removed an exception that had previously allowed certain meals
to qualify for a 100% deduction instead of a 50% deduction. However, this new change does not seek to
restore the 100% deduction for that narrow category of meals, which were generally for certain employer
provided facilities or employee meals for the convenience of the employer. Instead this change appears to
broadly allow any meal that otherwise would be subject to the 50% limit to be fully deductible as long as it is
“provided by a restaurant,” though there is no further definition of that term in the legislation.
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International LtdDisaster relief
The bill includes a set of disaster relief tax provisions for presidential disaster areas declared from on or after Dec.
28, 2019, through 60 days after the date of enactment. The provisions include:
• An exception from the 10% retirement plan early withdrawal penalty for disaster relief distributions
• A 40% credit for wages paid to employees while the business was shuttered
• Allowing disaster-related casualty deductions above-the-line
• Providing additional low-income housing tax credit allocations
Extenders
Lawmakers took small steps toward reforming the extender process by making some provisions permanent and
extending many more for five years. They also allowed two to expire. However, this process is still going to
challenge lawmakers again at the end of 2021 with many more provisions extended just one year.
Provision Stimulus bill
Individual tax provisions
Above-the-line deduction for qualified tuition • Allows to expire in exchange for hiring income phaseout limits for lifetime
learning credit
Deduction for mortgage insurance premiums • Extends through 2021
Exclusion for principal residence debt forgiveness • Extends through 2025 but reduces cap from $1 million to $750,000
income
Reduction in medical expense deduction floor • Makes permanent
Exclusion from income for first responder benefits • Makes permanent
General business tax provisions
New markets tax credit • Extends through 2025 with a $5 billion yearly allocation
Employer tax credit for paid family and medical • Extends through 2025
leave
Work opportunity tax credit • Extends through 2025
Related controlled foreign corporation look- • Extends through 2025
through rule
Credit for health insurance costs of eligible • Extends through 2021
individuals
Industry targeted benefits
Reduction of excise taxes for beer, wine and • Makes permanent with administrative changes and anti-abuse rules
distilled spirits
Indian employment tax credit • Extends through 2021
Railroad track maintenance tax credit • Extends at 50% rate through 2022 and then makes permanent at a
reduced rate of 40%
Mine rescue team training credit • Extends through 2021
Three-year depreciation for racehorses • Extends through 2021
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International LtdProvision Stimulus bill
Seven-year cost recovery for motor-sports • Extends through 2025
entertainment complexes
Special expensing for film, television and live • Extends through 2025
theatrical productions
Energy tax provisions
Section 179D deduction for energy-efficient • Makes permanent and updates efficiency standards
commercial building property
Incentives for biodiesel and renewable diesel • No change as these provisions are already available through 2022
Second-generation biofuel producer credit • Extends through 2021
Alternative fuel and alternative fuel mixture credit • Extends through 2021
Section 30B fuel cell vehicle • Extends through 2021
Section 30C alternative fuel vehicle refueling • Extends through 2021
property credit
Section 30D plug-in electrical vehicle credit • Credit for plug-in motorcycles is extended for 2021
• General plug-in vehicle credit, which phases out by manufacturer once
200,000 vehicles are sold, is unchanged
Section 45 Production Tax Credit • One-year extension for general wind property, available at 60% credit
value for construction beginning in 2021 (same as 2020)
• Offshore wind facilities made eligible for full credit for construction
beginning through the end of 2025
• All other property types are extended at a 100% rate for construction
beginning through the end of 2021
• Election to claim the Section 48 credit remains available for all property
Section 48 Investment Tax Credit • Extends the 26% credit rate for fuel cell, fiber optic solar, small wind
energy, and solar property for construction beginning by the end of 2022
and provides a 22% credit for construction beginning in 2023 (credit rate
was previously scheduled to be 22% for 2021 and expire thereafter)
• Adds waste energy recovery property to the 26% and 22% category
• Extends the 10% credit, which is available for microturbines, combined
heat and power, and geothermal energy property for construction
beginning before 2024 (had been scheduled to expire after 2021)
Section 25C energy-efficient home improvement • Extends through 2021
tax credit
Section 25D residential energy property credit • Extends credit at 26% rate for 2021 and at 22% rate for 2022 and 2023
(was previously scheduled to be 22% rate in 2021 and expire thereafter)
• Adds biomass fuel heating property
Credit for production of Indian coal • Extends through 2021
Section 45L energy-efficient new home credit • Extends through 2021
Section 45Q carbon oxide sequestration credit • Extenders through 2025
Special allowance for second generation biofuel • Not extended with intent to allow expiration at the end of 2020
plant property
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International LtdProvision Stimulus bill
Special rule for qualified electric utility • Not extended with intent to allow expiration at the end of 2020
dispositions to implement FERC or state
restructuring policy
Oil spill liability trust fund rate • Extends for 2025
Black lung disability trust fund excise tax • Extends through 2021
Section 45J advanced nuclear power production • No change, as Treasury can already allocate up to 6,000-megawatt
credit capacity of unused credit after the initial expiration of the credit on Dec.
31, 2020
Incentives for specific locations
Accelerated depreciation for Indian reservation • Extends through 2021
business property
Empowerment zone tax incentives • Extends most through 2025, but terminates special Section 179 expensing
and capital gains deferral
Increased limit on rum excise tax cover for Puerto • No change as this remains in effect through 2021 with cover-amount
Rico and the Virgin Islands based on $13.25 per proof gallon, regardless of actual tax collected
American Samoa economic development credits • Extends through 2021
Next steps
Several of the provisions will offer substantial incentives, liquidity, and relief. The enhanced employee retention
credit, in particular, could offer large retroactive refunds to PPP loan recipients for 2020 wages, and will offer
generous refunds for many employers based on 2021 wages. Taxpayers should analyze the bill’s provisions for
how they could affect tax and business planning.
For more information contact:
Dustin Stamper Omair Taher
Managing Director Manager
Washington National Tax Office Washington National Tax Office
Grant Thornton LLP Grant Thornton LLP
T +1 202 861 4144 T +1 202 861 4143
E dustin.stamper@us.gt.com E omair.taher@us.gt.com
To learn more visit gt.com/tax
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice
directed at the particular facts and circumstances of any person. If you are interested in the topics presented
herein, we encourage you to contact us or an independent tax professional to discuss their potential application
to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from
disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be
considered to contain written tax advice, any written advice contained in, forwarded with or attached to this
© 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltdcontent is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended. © 2020 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd
You can also read
