Tax Provisions of the Coronavirus Response and Relief Supplemental Appropriations Act, 2021
Just in time for Christmas, Congress has put the finishing touches on a year-end legislative package that funds the federal government through the end of fiscal year 2021 and provides additional COVID-19 response and relief. Here are some of the most important tax provisions for farmers in the Coronavirus Response and Relief Supplemental Appropriations Act, 2021.
The rules for qualifying are pretty much the same as last time (click here) except that instead of $1,200, taxpayers will receive $600. Remember, these payments are an advance tax credit on a taxpayer’s 2020 tax return.
Earned Income Credit and Child Tax Credit
Because many taxpayers were not employed in 2020, and unemployment compensation is not earned income, the bill allows these individuals 2019 earned income to be utilized in order to optimize the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) and additional CTC.
Paycheck Protection Program (PPP)
PPP expenses are now deductible. This was expected until the IRS released Notice 2020-32 several weeks back. Regardless of when a taxpayer receives PPP forgiveness, those expenses will now be permitted to be deducted from income.
Example: Taxpayer received a PPP loan of $50,000 on April 1, 2020, which she spent entirely on the farm payroll, an eligible expense that will ultimately lead to full PPP forgiveness. As of 12/31/2020, taxpayer has not applied for PPP forgiveness. Taxpayer books a $50,000 loan on the balance sheet and deducts the $50,000 of payroll expenses.
In 2021, Taxpayer A will receive PPP forgiveness, which will not be included in taxable income.
For partnerships and S-Corporations, the tax-free loan forgiveness will be treated similar to other tax-exempt income for certain adjustments to basis.
Observation: Given that the expenses paid with PPP proceeds can be deducted from income and will lower a taxpayer’s income, taxpayers still have time to reevaluate year-end planning strategies. They may not need to spend as much on prepaid expenses (if they can find the inventory!) or purchase a capital asset to manage their tax liability. Similarly, this type of year-end spending may not be ideal or needed if taxpayers use slower depreciation methods. Dairy farmers can view an article here to further dive into over planning, particularly with the favorable capital gains treatment of cow sales.
Additional Eligible PPP expenses
PPP has new eligible expenses permittable for the 40% that does not need to be used on payroll in order to achieve full forgiveness:
- Covered Operations Expenditures – Includes software costs, cloud computing, HR and operational related expenses.
- Covered Property Damage Costs – Includes costs to remedy damage caused by looting that weren’t otherwise covered by insurance.
- Covered Supplier Costs - Includes costs to a supplier pursuant to contracts (a) in effect at any time before the covered period with respect to the applicable covered loan or (b) with respect to perishable goods, in effect before or at any time during the covered period, with respect to the applicable covered loan.
- Covered Worker Protection Expenditures – Includes equipment used to comply with federal health and safety protocols related to COVID-19.
PPP Covered Periods
Previously, taxpayers had an option to use either 8 or 24 weeks for their covered period. Taxpayers can now choose a covered period (i.e. 8 weeks) between 8 and 24 weeks after the loan was disbursed.
Streamlined PPP Forgiveness
For loans not more than $150,000, the bill provides for a simplified one-page process in order to have the loan forgiven.
PPP Round 2 “Second Draw”
Taxpayers will be eligible to receive a second PPP loan, up to $2 million, but only if the following criteria are met:
- They employ 300 employees or fewer;
- There is at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 compared to those quarters in 2019. (There are special rules for businesses that can use Q4 for those whose applications are submitted after 1/1/2021);
- Used or will use full amount of first PPP.
Seasonal employers are able to calculate the maximum loan based on any 12-week period beginning February 15, 2019 through February 15, 2020.
Similar to the first round, borrowers will receive a loan up to 2.5X average monthly payroll costs in the year prior to the loan or the calendar year. However, hard hit industries such as food services, may receive up to 3.5X average monthly payroll costs. Also, the same 60/40 allocation between payroll and other eligible costs (i.e. covered mortgages, rents, utilities and the costs above) will apply. There are also restrictions on the forgiveness amount if borrowers reduce salary or headcount.
While the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 was signed by the President and does provide for additional PPP funds under certain conditions, SBA has yet to provide any specific guidance and has not resumed accepting any applications. Farm Credit East is monitoring the situation and will provide an update to the website once SBA guidance is released, which will likely be after January 1, 2021.
PPP Loan Calculation for Sole Proprietors or other farms without employees
Farmers operating as sole proprietor, independent contractor or eligible self-employed individual with no employees, may be able to go back and receive a higher PPP loan if the following criteria are met:
- Reports farm income or expenses on Schedule F
- Was in business February 15, 2020
- With no employees – they may be able to receive the lesser of:
- The gross income in 2019 reported on schedule F (up to $100,000) divided by 12 and multiplied by 2.5; (reduced by the outstanding amount of the previous loan that the borrower intends to refinance under the covered loan, not including any amount of advance under the loan that is not required to be repaid). OR
- $2 million
In other words, the maximum loan for these farmers would now be $20,833.
Seasonal Employers Defined
Seasonal employers are defined to be those who (a) operate for no more than seven months in a year or (b) earned no more than 1/3 of their receipts in any six months in the prior year.
Net Operating Losses (NOLs) for Farmers
As a refresher, farmers were permitted to make an election to be eligible for a 2-year carry back for NOLs prior to the Coronavirus Assistance Relief and Economic Security (CARES) Act. The CARES Act changed the NOL to a 5-year carryback for taxpayers. The latest bill provides farmers the options of what carryback period (2 or 5) or carryforward they want to use.
Observation: NOLs have become a compliance challenge since many states have separate rules to compute them. Farmers who previously waived an election to carry back an NOL may remove the waiver. Taxpayers should discuss the best way to utilize any NOLs with your tax advisor and determine how to go about the elections.
Economic Injury Disaster Loans (EIDL)
In May, EIDL loans were opened to agriculture when Congress approved the second round of funding for PPP loans, making them eligible to receive up to $10,000 as a grant ($1,000 per employee). The interaction between EIDL and PPP was such that the forgiveness in PPP loans had to be reduced by the $10,000 EIDL. This bill repeals that provision. In other words, the PPP forgiveness is no longer reduced by amount of the EIDL grant. Also, the EIDL grants are no longer considered taxable income. The bill also directs taxpayers to be made whole if they already negatively factored the grants into their situation.
Employee Retention Credit (ERC)
The CARES Act created the ERC in order to provide businesses with tax credits if certain criteria were met. The current bill provides the following relief:
- The bill extended the ERC through July 1, 2021
- The credit amount is increased from 50% to 70% of qualified wages
- Qualified wages are increased to $10,000 per quarter
- The gross receipts decline has been reduced from 50% to 20% when analyzing quarter of quarter tests
- An increase from 100 to 500 employees when determining the qualified wage base
Under the CARES Act, employers were not eligible to obtain both a PPP loan and the ERC. This is no longer the case, although the wages are still not permitted to be double dipped, meaning that a credit can’t be claimed for wages paid for with PPP funds.
Employee Payroll Tax Deferral Extended
In the summer, President Trump signed an executive order to allow employers to defer withholding of employees’ share of Social Security taxes for September through December 2020. This executive order permitted employers to increase withholding and pay the deferred amounts between January and April 2021. The repayment period has been extended through December 31, 2021, with penalties on the deferred unpaid amounts occurring after January 1, 2022.
Paid Sick Leave and Family Leave Credit Extensions
The Families First Coronavirus Response Act required certain employers to pay up to 10 weeks of qualified family leave when an adult couldn’t work because a child was without school or care, and up to two weeks of sick leave for a variety of COVID-19 related reasons. In turn, the employer would receive a fully refundable dollar-for-dollar payroll tax credit equal to the wages paid. The bill extends the credit provisions from December 31, 2020 through March 31, 2021.
Benefits for Volunteer Firefighters and Emergency Medical First Responders
Beginning in 2020, volunteer fighter fighters and emergency medical responders are able to exclude from income certain state and local tax benefits and qualified payments received in exchange for their volunteer service. The benefit is limited to $50 multiplied by the months volunteering. This provision was set to expire at the end of 2020, but that timeframe has been extended.
Below is a non-exhaustive list of other noteworthy items:
- Eligible Educator expenses – PPE and supplies used to mitigate the spread of COVID-19 are considered eligible expenses, retroactive to March 12.
- Unreimbursed Medical Expenses - On the list to expire in 2021 was the medical deduction above 7.5% of taxable income. This was set to revert to 10% but will stay set to 7.5% for years after 2020.
- Employer Student Loan Payments - The CARES Act provided for employers to contribute up to $5,250 toward an employee’s student loan without having that employee recognize the contribution as income. This provision has been extended through 2025.
- Emergency Financial Aid Grants – Students receiving qualified emergency financial aid grants will not be required to include those amounts into gross income.
- Beer Wine and Distilled Spirits – The bill includes several items relating to alcohol, such as reduced rates for excise taxes and certain types of domestic production.
- Racehorse Depreciation - The ability of owners of certain racehorses to utilize a 3-year depreciable life has been extended.
- Work Opportunity Tax Credit (WOTC) - The WOTC has been extended through 2025.
- Qualified Tuition and Fees Deduction - After 2020, the deduction for qualified tuition and fees will expire. However, the Lifetime Learning Credit income limitations will increase.
- Gross Income Exclusion from the Discharge of Qualified Principal Indebtedness – The bill reduces the amount eligible to $750,000 for married taxpayers ($375,000 single) after 2020.
- Extension of Energy Provisions – The bill provides, through 2021, an extension of several energy related credits, such as for nonbusiness energy property and new qualified fuel cell motor vehicles.
- Meals Deduction – The meals deduction, for 2021 and 2022, would be back up to 100%.
- Charitable Contributions – The $300 charitable deduction for nonitemizers has been extended to 2021 and the amount increased to $600 (for married taxpayers filing jointly).
- Flexible Spending Accounts (FSA) – Unused amounts in health and dependent care FSAs may be rolled over.
As you can see, there is a lot to unpack in the latest bill. Over the coming days and weeks, Farm Credit East will continue to make resources available in order for producers to be able to make the best decisions for their individual circumstances.
View a summary of provisions here.