President Trump signed the Consolidated Appropriations Act (The Act) on Dec. 27, 2020, which contains over $900 billion of additional stimulus funding, new tax benefits, and several tax extensions.
The Act includes a provision that reverses prior Internal Revenue Service (IRS) guidance (see our prior guidance) and now permits taxpayers to fully deduct business expenses paid with loan proceeds from a forgiven Payment Protection Program (PPP) loan. IRS guidance from earlier this year disallowed taxpayers from deducting business expenses paid with proceeds from a PPP loan that is forgiven and that are excludable from taxable gross income. This guidance is based on the reasoning that permitting the forgiven loan to be excluded from taxable income, and also permitting the expenses paid with the excluded loan proceeds to be deductible, resulted in a "double tax benefit."
The Act thus reverses this prior guidance and permits otherwise deductible business expenditures paid with the loan proceeds to be deductible, even if the PPP loan is forgiven and the loan proceeds are excluded from taxable income. The Act provides additional tax benefits and tax extensions, which include, among others, the following:
- Modifies and extends the CARES Act payroll Employee Retention Credit by increasing the amount from 50% to 70% of the eligible wages and expanding it to include $10,000 for any calendar quarter per employee, rather than $10,000 for all quarters. It also expands the credit to apply to small employers with 400-500 employees instead of 100 employees and extends the retention and credit period (during which an employer can pay and count qualified wages) to a period that ends June 30, 2021, rather than Dec. 31, 2020. Finally, it changes the separate "reduction of gross receipts test" so that a company with gross receipts for a 2020 quarter that are less than 80% of the gross receipts for the same quarter in 2019 is an eligible employer (the CARES Act provided that a Company that had a 50% reduction in gross receipts for a 2020 quarter compared to the same quarter in 2019 was an eligible employer).
- Extends the period of the payroll tax credit for employers offering qualified paid and sick family leave to March 31, 2021, instead of Dec. 31, 2020.
- Permits businesses to deduct 100% of business meal and beverage expenses provided by a restaurant that are paid or incurred during the 2021 and 2022 calendar year instead of the 50% deduction otherwise permitted under federal income tax laws.
- Extends the new market tax credit for five years, through 2025.
- Extends several clean energy credit incentives.
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