The $900 billion COVID Relief Package, passed by Congress on December 21, 2020 and headed to President Trump’s desk for signature, contains a number of tax provisions to assist individuals and businesses, in addition to authorizing funding for second rounds of individual stimulus payments and PPP loans. Notably, the package includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act) which extends and expands the Employee Retention Credit (ERC) enacted by the CARES Act. The Act also provides for the full expensing of business meals in 2021 and 2022 and extends to 2021 two charitable giving incentives from the CARES Act.
Employee Retention Credit under the CARES Act
The CARES Act provides for a refundable payroll tax credit for 50% of qualified wages paid to employees during the COVID-19 pandemic. This credit is available to any employer, including non-profits, whose operations are fully or partially suspended due to a pandemic related shutdown order from a government authority, or whose gross receipts for any quarter in 2020 decline by more than 50% when compared to the same quarter in the previous year.
For businesses with more than 100 employees, qualified wages only include those paid to employees during the period when they are not providing services to the employer. Businesses with 100 or fewer employees affected by the pandemic in one of the two ways described above can include all wages paid to employees from March 13, 2020 through December 31, 2020. The amount of qualified wages is limited to $10,000 per employee for the entire year, meaning that the credit is limited to $5,000 per employee.
Updates to the Employee Retention Credit
The Act extends the ERC through June 30, 2021 and expands several aspects of the credit for wages paid during the first two quarters of 2021:
- The credit percentage is increased from 50% to 70% of qualified wages;
- Qualified wages are increased from $10,000 in total per employee to $10,000 per quarter per employee;
- The threshold for the change in treatment of qualified wages described above is increased from 100 employees to 500 employees;
- An employer is eligible for the credit for a quarter in which there has been at least a 20% decrease in quarter-over-quarter gross receipts, rather than the 50% decrease as initially required by the CARES Act, and a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility, and
- Rules are provided to allow new employers who were not in business for all or part of 2019 to be able to claim the credit.
Employee Retention Credit and Paycheck Protection Program
Under the CARES Act, the ERC and the Paycheck Protection Program (PPP) are mutually exclusive provisions, with employers being required to choose which benefit to utilize. The Act provides that employers who receive PPP loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds. Since this taxpayer-friendly change is retroactive to the enactment of the CARES Act, affected taxpayers should explore whether there is an opportunity to secure credits for the 2020 tax year.
Full Business Meals Deduction Permitted in 2021 and 2022
Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel, and the deduction is generally limited to 50% of the otherwise allowable amount. Under the Act, the 50% limit will not apply to expenses for food or beverages “provided by a restaurant” that are paid or incurred in 2021 and 2022. Note that the other requirements for deductibility under the Internal Revenue Code and Treasury regulations have not changed and still need to be met – the expense cannot be “lavish or extravagant under the circumstances”, and the taxpayer or an employee of the taxpayer must be present at the furnishing of the food or beverages.
Extension of the CARES Act’s Changes to Charitable Contributions to 2021
Under previous law, charitable donations were deductible only as itemized deductions, meaning that they provided no tax benefit to individuals who use the standard deduction. For 2020, the CARES Act permits taxpayers who do not itemize their personal deductions to claim up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. The Act extends this benefit for non-itemizers to 2021 and increases and maximum amount that may be deducted to $600 for married couples filing jointly. Single taxpayers and married couples filing separately are still limited to $300. Qualified charitable organizations include pubic charities, excluding certain supporting organizations and donor advised funds.
Individuals who itemize are allowed a deduction for cash contributions to public charities up to 60% of adjusted gross income. The CARES Act suspends this limitation for the 2020 tax year, and therefore for 2020 an individual may elect to deduct such contributions up to the amount of their adjusted gross income, thereby reducing taxable income to zero. Donations need to be made in cash to public charities, excluding certain supporting organizations and donor advised funds. The income limitations on gifts to private foundations and gifts of appreciated stock remain the same. The Act extends this provision to 2021.
We will continue to monitor developments related to COVID relief and communicate any significant changes that will impact our clients. For further questions regarding these provisions, please contact your BT advisor by calling 770.396.2200.