Dear Clients and Friends:
On December 27, 2020, the President signed into law a new bill that includes $900 billion in new COVID-19 relief funding (the “Bill”) intended to provide much-needed economic relief to individuals and businesses impacted by the COVID-19 pandemic. Title III of this Bill, titled the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Act”), makes a number of changes to the income tax laws. This Client Alert provides a general summary of some of the income tax provisions of the Act. This information is not legal advice and may not be suitable for all client situations. As always, if you would like specific legal assistance with respect to income tax or any other matters, please do not hesitate to contact your HH&K attorney.
Changes to the Employee Retention Tax (ERT) Credit.
Under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that was passed in March, 2020, any employer that was operating in 2020 and that experienced a full or partial suspension of business due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 was entitled to a refundable payroll tax credit equal to 50% of certain “qualified wages” (including certain health plan expenses) paid to its employees beginning March 13, 2020 through December 31, 2020. Employers are eligible for the credit in any quarter in which it has a reduction of gross receipts greater than 50% as compared to the same quarter in 2019. The employer will continue to be eligible for the credit in subsequent quarters if it has a reduction in gross receipts of more than 80% as compared to the same quarter in 2019. Under the CARES Act, the amount of the credit was equal to 50% of the qualifying wages of the employer with a cap of $10,000 per employee for all quarters, for a maximum of credit of $5,000 per employee in 2020. In addition, before the Act, this credit was not available to any employer that was a borrower under the Paycheck Protection Program (“PPP”). The credit is reduced by any credits received for sick leave and family leave under the Families First Coronavirus Relief Act (“FFCRA”).
The Act makes several changes to the ERT credit and extends its availability through July 1, 2021. The changes are effective for calendar quarters beginning after December 31, 2020 unless noted.
Increase in ERT Credit and Cap on ERT Credit.
The Act increases the amount of the credit to 70% of the qualifying wages of the employer with a cap of $10,000 per employee per quarter, for a maximum of credit of $7,000 per employee for the first two quarters of 2021.
PPP borrowers Eligible for ERT Credit.
The Act provides that an employer receiving a PPP loan may also receive the ERT credit. To prevent abuse, an employer receiving both the ERT and a PPP loan must either (a) exclude “qualified wages” that allowed the employer to claim ERT credits from “payroll costs” for purposes of determining its loan forgiveness under the PPP (which reduces the amount of PPP loan forgiveness), or (b) exclude “qualified wages” that qualified for PPP loan forgiveness from “payroll costs” eligible for the ERT credit (which reduces the employee retention tax credit). In other words, any wages for which the employer collects an ERT credit are not forgivable costs under the PPP program (and vice versa).
The Act provides that the elimination of the exclusion of PPP borrowers is to be treated as if it was part of the original CARES Act. Accordingly, this revision applies to all PPP borrowers, even those that have already applied for and/or received PPP loan forgiveness. Further guidance is expected as to how exactly this will be implemented.
Changes to Eligibility Requirements.
Beginning January 1, 2021, an employer qualifies for the ERT credit for the period that begins in a calendar quarter in which gross receipts are less than 80% (rather than 50%) of gross receipts for the same calendar quarter of 2019 and ending on the last day of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019.
The Act allows employers to elect to apply this test in 2021 based on gross receipts from the immediately preceding calendar quarter to determine their eligibility for the credit. In other words, an employer who cannot meet this test in the first quarter of 2021 may elect to compare gross receipts in the 4th quarter of 2020 to the 4th quarter of 2019 and if there is a decline of at least 20% between the two, the 1st quarter of 2021 will be an eligible quarter. We expect future guidance from the Internal Revenue Service (IRS) on how an employer makes the election for the remaining quarters of 2021.
Employers who were not in existence in 2019 may still qualify for the ERT in 2021 based on a comparison to 2020 gross receipts.
Changes to Large Employer Restrictions.
Under the CARES Act, companies with more than 100 employees may only claim the ERT credit for employees on the payroll who were not working due to the pandemic, while companies with less than 100 may claim the credit for all employee wages. The Act increased the 100 employee threshold to 500 employees so that in 2021 companies with more than 500 employees may only claim the ERT credit for employees on the payroll who were not working due to the pandemic, while companies with less than 500 may claim the credit for all employee wages.
Tax-exempt organizations and governmental entities.
Federal, state or local governments (and their agencies) were not originally eligible for the ERT credit, though other tax-exempt entities were eligible. Beginning January 1, 2021 federal credit unions, public colleges and universities, and public medical and healthcare providers that otherwise meet the requirements for the credit may claim it.
For purposes of determining a tax-exempt organization’s eligibility for the ERT credit, “gross receipts” means the amounts the organization receives during its annual accounting period from all sources without subtracting any costs or expenses. The Act provides that this change is to be treated as if it was part of the original CARES Act.
Health plan expenses.
The Act modifies the definition of “qualified wages” for purposes of the ERT credit to include health plan expenses, including in cases where an employer furloughs employees but continues to provide health benefits to them. The Act provides that this change is to be treated as if it was part of the original CARES Act.
Other Income Tax Changes.
Extension of Paid Sick and Family Leave Tax Credits.
The FFCRA provided an “eligible employer” with refundable payroll tax credits to cover wages paid to employees while they take time off between April 1, 2020 and December 31, 2020 under the federal emergency paid sick program and the expanded family medical leave program established by the FFCRA (“FFCRA Leave”). (Please see our prior Client Alert describing FFCRA Leave here. The Act extends these tax credits through March 31, 2021 on a voluntary basis. This means that employers are not required to provide FFCRA Leave between January 1, 2021 and March 31, 2021, but they may be eligible for the tax credits for wages paid with respect to the leave if they do so.
The Act does not provide a new allotment of FFCRA Leave, so that an employer may only claim the credit for leave taken by employees who had not used all of their FFCRA leave by December 31, 2020. Employers whose FMLA policies “reset” each year may be able to provide the expanded FMLA leave in 2021 to employees who have already taken some leave; please contact your HH&K attorney to discuss.
Employers who plan to continue to offer the leave should notify their employees of the decision.
Temporary Allowance of 100% Deduction for Business Meals.
The Act allows a deduction of 100% of business meal expenses during 2021 and 2022, subject to the usual requirements for deductibility under the Internal Revenue Code of 1986, as amended.
Increased Above-the-Line Charitable Contribution Deduction.
The Act allows taxpayers that do not itemize deductions to take an “above-the-line” deduction for charitable contributions of up to $300 ($600 for joint filers) made to certain section 501(c)(3) public charities. It also increases the penalties on taxpayers who overstate their charitable contribution deductions from 20% to 50%.
Deferral of Employee-Side Payroll Tax.
Employers who deferred payment of the employee portion of certain payroll taxes for any employee with pre-tax wages or compensation during any biweekly pay period that were less than $4,000 during the period between September 1, 2020 and December 31, 2020 were initially required to withhold and pay the deferred payroll taxes from wages or compensation paid between January 1, 2021 and April 30, 2021. The Act extends the withholding and repayment period to December 31, 2021.
Employee Benefits Changes.
Flexible Spending Accounts (FSAs).
The Act also makes a number of changes to the Internal Revenue Code Section 125 rules in light of the effects of the COVID-19 pandemic on these plans:
2020 Plan Year Carryovers:
For both medical and dependent care FSA plans whose plan years end in 2020, Participants may be permitted to carryover the account balances at the end of the 2020 plan year to the plan year that ends in 2021.
2021 Plan Year Carryovers:
For both medical and dependent care FSA plans whose plan years end in 2021, Participants may be permitted to carryover the account balances at the end of the 2021 plan year to the plan year that ends in 2022.
Temporary Extension of Grace Period:
For both medical and dependent care FSA plans that have adopted the 2 ½ month grace period, those grace periods may be extended up to 12 months following the end of the plan year for the 2020 and 2021 plan years.
Post-Termination Reimbursements from a Medical FSA:
Employees whose participation in a medical FSA plan ends in 2020 or 2021 may receive reimbursement (to the extent that there is a balance in the medical FSA at the time they cease participating) for expenses incurred through the end of the plan year of termination of participation and any grace period (including the expanded grace periods described above). Terminated participants who qualify for COBRA may continue to make contributions to the medical FSA in accordance with the COBRA rules.
Special Rules for Dependent Care FSAs for Children Who Turned Age 13 during the COVID-19 pandemic:
Current law limits reimbursement of qualified dependent care expenses to children who have not yet turned 13. Employees who contributed to a dependent care FSA for children who turned 13 during 2020 may not have been able to use those funds for childcare expenses as many care providers were closed. The Act permits employees to use 2020 dependent care balances in 2021 to provide care to these children until they turn 14.
Change in FSA Elections:
The CARES Act allowed participants in both medical and dependent care FSAs to prospectively change their contribution amount during 2020 even if they did not incur a change in status (which is usually required before participants can change their FSA contribution elections). The Act continues this option for the 2021 plan year. Employers still retain the discretion to set conditions for employees to make such contribution election changes.
All of these changes are optional and employers are free to adopt all, some or none of them. If you are considering adopting any of these changes, you should contact your service provider to be sure that they have the ability to adopt a particular change and coordinate its implementation. FSA plans must be amended to incorporate these changes by December 31, 2021 retroactively to January 1, 2020. Employers who adopt any of these changes should notify their employees of the decision.
Student Loan Assistance
The CARES Act permitted employers to make nontaxable payments to employees as student loan repayment assistance under an educational assistance program that meets the requirements of Internal Revenue Code Section 127, but only if the payments are made by December 31, 2020. The Act extends this deadline to December 31, 2025. The maximum benefit that may be provided to an employee under a Code Section 127 educational assistance plan is $5,250 per year and includes tuition, fee and book benefits in addition to the new student loan repayment benefit.
Tax Impacts of Federal COVID-19 Relief Programs
As described in our Client Alerts issued earlier this week regarding the changes made to the Economic Injury Disaster Loan (EIDL) program and the changes made to/expansion of the Paycheck Protection Program (PPP) (available here) and the establishment of the Grants for Shuttered Venues (available here), forgiven PPP loans, Shuttered Venue Operator (SVO) Grants and EIDL Advances all have the double tax benefit of (1) not being taxable income; and (2) not affecting deductibility of expenses.
Contact Your HH&K Attorney for Legal Guidance
This information is not legal advice and may not be suitable for all client situations. This Client Alert provides general information regarding the Act and does not outline all of the important considerations related thereto.
This Client Alert is not a substitute for legal guidance regarding program details and how those may be applicable to your business. As always, if we can be of assistance during this difficult time, please do not hesitate to contact your HH&K attorney.
For a printable version of this Client Alert, click here.
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Thomas A. Conlon Partner 80 Exchange Street Binghamton, NY 13901 Phone: (607) 231-6744 Email: tconlon@hhk.com |
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Ryan M. Mead |
Copyright © 2021 by Hinman, Howard & Kattell LLP. This Client Alert is provided as a general information service to clients and friends of Hinman, Howard & Kattell, LLP. It should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states.