Consolidated Appropriations Act Contains Many Tax Considerations

February 17, 2021

By: Michael B. Kaufman

The Consolidated Appropriations Act, 2021 (the “Act”) was recently enacted and contains a number of important tax provisions.

Paycheck Protection Program

The Act clarifies that expenses paid for with forgiven Paycheck Protection Program (“PPP”) loans are deductible for federal income tax purposes.  This overrides prior guidance issued by the IRS in 2020 in Notice 2020-32 and Revenue Ruling 2020-27 that such expenses would not be deductible.  As mentioned in a previous alert, forgiven PPP loans will be forgiven to the extent the debtor has qualifying payroll, rent, mortgage interest or utility expenses, and loan amounts under the PPP that are forgiven will not be included in gross income as cancellation of indebtedness income.    

In addition, the Act expanded qualifying expenses for forgiven PPP loans to include covered operations expenditures (including expenses for software that facilitates business operations), covered supplier costs (including expenses paid for essential goods pursuant to certain contracts or orders), covered worker protection costs (including expenses for items purchased to comply with COVID-19 requirements) and covered property damage costs (including property damage or vandalism related to public disturbances that were not covered by insurance).  

Employee Retention Credit (“ERC”)

Under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) passed in March 2020, a taxpayer that received a PPP loan could not also claim the ERC provided for in the CARES Act.  The Act provides that taxpayers may claim both the ERC and the PPP loan so long as they do not receive a benefit under each program for the same expenses.  Under the CARES Act taxpayers were entitled to a 50% credit of qualified wages of up to $10,000 (a $5,000 credit) for wages paid from March 13, 2020 through December 31, 2020.  The Act increases the ERC to 70% of qualified wages of up to $20,000 paid between January 1, 2021 and June 30, 2021, resulting in potential credit of $14,000 per employee.  The ERC is limited to $10,000 of wages per quarter so taxpayers may claim an ERC of up to $7,000 for the first two quarters of 2021.  This should allow taxpayers to claim an ERC for qualified wages that are not covered by a forgiven PPP loan.

Deductions for Business Meals

The Act provides that taxpayers may deduct 100% of the cost of food and beverages related to business meals that are provided by a restaurant for tax years 2021 and 2022.  This is an increase from the allowable deduction of 50% of the cost in 2020.

Work Opportunity Tax Credit

The Act extended the Work Opportunity Tax Credit through December 31, 2025.  The Work Opportunity Tax Credit allows taxpayers a credit for hiring certain employees and was set to expire on December 31, 2020.

For more information on how COVID-19 may impact your tax, business or estate planning, contact the author at mkaufman@mosessinger.com or another Moses & Singer attorney.