Additional 2020 economic impact payments

You’ve probably heard that IRS will be making millions of ”economic impact payments” (also called ”recovery rebates”) in the near future to help people stay afloat during this time of economic uncertainty related to the COVID-19 crisis. These payments are in addition to the $1,200 payments ($2,400 for married couples) issued earlier in 2020. Here’s what you need to know about these additional payments.

Amount of payment. IRS has begun making payments of up to $600 to eligible taxpayers or up to $1,200 to married couples filing joint returns. Parents will get an additional $600 for each dependent child under age 17. Thus, a married couple with two children under 17 will get a $2,400 payment.

Who is eligible. U.S. citizens and residents are eligible for a full payment if their adjusted gross income (AGI) is under $75,000 for singles or marrieds filing separately, $112,500 for heads of household, and $150,000 for married couples filing jointly and surviving spouses. The recipient must not be the dependent of another taxpayer and must have a social security number that authorizes employment in the U.S.

Phaseout based on income. For individuals whose AGI exceeds the above thresholds, the payment amount is phased out at the rate of $5 for each $100 of income. Thus, the payment is completely phased out for single filers with AGI over $87,000 and for joint filers with no children with AGI over $174,000. For a married couple with two children, the payment will be completely phased out if their AGI exceeds $198,000.

Payments are nontaxable. The economic impact payment that you receive won’t be included in your income for tax purposes. It won’t cause you to owe tax or decrease your refund for 2020.

How to get a payment. The vast majority of people won’t have to do anything to get an economic impact payment. IRS will calculate and send the payment automatically to those who are eligible.

If you’ve filed your 2019 tax return, IRS will use the AGI and dependents from that return to calculate the payment amount. The credit won’t be allowed if the return doesn’t include a valid identification number (typically, a social security number) for each individual for whom a credit is sought. Thus, for example, a joint return must include valid identification numbers for both spouses to get the full $1200 credit. A $600 credit is allowed if only one spouse provides a valid identification number, and no credit is allowed if neither spouse does so.

IRS will deposit the payment directly into the bank account reflected on the return. IRS has developed a web-based tool called Get My Payment, www.irs.gov/coronavirus/get-my-payment, for individuals to provide banking information to IRS, so that payments can be received by direct deposit rather than by check sent in the mail. The tool includes the date the payment is scheduled to be issued to the individual.

If you have not yet filed for 2019. The due date for 2019 individual income tax returns was July 15, 2020, or October 15 if an automatic extension of time was requested on Form 4868. Individuals who are required to file a return for 2019 and haven’t done so should file the return as soon as possible. Doing so will help give IRS time to process and make all resulting economic impact payments before January 15, 2021 (the deadline for processing payments).

If you aren’t required to file. If you receive social security, supplemental security income, social security disability income, railroad retirement, or veterans’ compensation and pension benefits, and you aren’t required to file a tax return, you don’t have to file to receive a payment. IRS will generate an automatic payment using information from the Social Security Administration and the Department of Veterans Affairs. The payment will be made by direct deposit or paper check, in the same manner as the recipient’s regular benefits.

If you aren’t required to file a tax return and you don’t receive any of the above payments, you can register to receive an economic impact payment by providing information on IRS’s web-based Non-Filers: Enter Payment Info Here tool, www.irs.gov/coronavirus/non-filers-enter-payment-info.

Non-filers with dependent children; $600 payment. Non-filers who have a dependent child under age 17 must register their dependents on the Non-Filers: Enter Payment Info Here tool to receive the additional payment of $600 per child. Non-filers who receive the economic impact payment before registering a dependent child can still get the additional $600 payment by filing a 2020 income tax return on which the dependent is listed.

Payroll-Related Provisions of the New COVID-19 Law

The Consolidated Appropriations Act, 2021 (the CAA, 2021) was signed into law on December 27, 2020 and is a further legislative response to the coronavirus (COVID-19) pandemic. The more than 5,500 page law contains numerous provisions that relate to payroll. These provisions are primarily found in the following areas of the CAA, 2021: (1) Division N – Additional Coronavirus Response and Relief (ACRR); (2) Division O – Extensions and Technical Corrections (ETC); and (3) Division EE – Taxpayer Certainty and Disaster Tax Relief (TCDTR) Act of 2020.

These areas of the CAA generally extend and expand previous provisions found in the Families First Coronavirus Relief Act (FFCRA) and Coronavirus Aid, Relief and Economic Security (CARES) Act, which were signed into law in March of 2020 .

Extension of Paid Sick and Family Leave Credits

Section 286 of the ACRR extends the refundable tax credits available to employers who provide paid sick and family leave related to the COVID-19 pandemic as enacted in the FFCRA through March 31, 2021, and extends the corresponding employer mandates through the end of March 2021.

Adjustments to provisions for self-employed individuals. Section 287 similarly extends the credits available to self-employed individuals, and allows them to use their reported wages from tax year 2019 instead of tax year 2020 to compute the credit.

Technical adjustments to definitions and taxability for paid sick and family leave. Section 288 aligns the definitions of qualified wages for paid sick and family leave with the IRC and excludes leave payments from employer Social Security employment taxes.

Extension of Certain Deferred Payroll Taxes

On August 8, 2020, President Trump signed a Presidential Memorandum directing Treasury Secretary Mnuchin to permit the postponement of the withholding, deposit, and payment of the employee’s share of Social Security tax (6.2%), as well as the employee’s share of Railroad Retirement Tax Act (RRTA) Tier 1 taxes on wages and compensation paid from September 1, 2020 through December 31, 2020 for employees whose amount of wages or compensation, payable during any biweekly pay period generally is less than $4,000, or the equivalent amount with respect to other pay periods.

Section 274 of the TCDTR extends the repayment period of the deferred employee taxes through December 31, 2021. It also provides that penalties and interest will not begin to accrue on the deferred amounts until January 1, 2022.

Employee Retention Credit Expansion and Extension

Under the CARES Act, the employee retention credit (ERC) provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee.

Section 206 and 207 of the TCDTR extends and expands the following ERC provisions from January 1, 2021 through June 30, 2021: (1) increases the ERC rate from 50% to 70% of qualified wages; (2) expands the eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility; (3) increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter; (4) increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees; (5) allows certain public instrumentalities to claim the credit; (6) removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers; (6) allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year; and (7) provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.

Unemployment Extensions

The FFCRA and CARES Act both contained unemployment-related provisions. Most notably, COVID-19 relief included the addition of $600 per week in pandemic unemployment compensation through July 31, 2020. This was partially extended by an August 8, 2020 Presidential Memorandum that created a “Lost Wages Assistance” program from August 1, 2020 through December 27, 2020. The ACRR extends and expands on several of the unemployment provisions from the FFCRA and CARES Act.

Extension of pandemic unemployment compensation. Section 203 of the ACRR restores the Federal Pandemic Unemployment Compensation (FPUC) supplement to all state and federal unemployment benefits at $300 per week, starting after December 26, 2020 and ending March 14, 2021.

Pandemic Unemployment Assistance. Section 201 of the bill extends Pandemic Unemployment Assistance (PUA) to March 14, 2021 and allows individuals receiving benefits as of March 14, 2021 to continue through April 5, 2021, as long as the individual has not reached the maximum number of weeks. It also increases the number of weeks of benefits an individual may claim from 39 to 50.

Extension of relief to reimbursing employers (i.e., governmental entities and nonprofit organizations. Section 202 extends through March 14, 2021, a provision in the CARES Act which amended the Families First Coronavirus Response Act to provide federal support to cover 50% of the costs of unemployment benefits for employees of state and local governments and non-profit organizations.

Extension of no waiting week for benefits. Section 204 extends through March 14, 2021 the CARES Act provision which reimbursed states for the cost of waiving the “waiting week” for regular unemployment compensation. It sets the reimbursement percentage for weeks ending after December 26, 2020 at 50%.

Extension of short-time compensation. Section 207 extends through March 14, 2021 the CARES Act provision that provided temporary 100% federal financing for short-time compensation (“worksharing”) programs which are established in state law. Section 208 of the bill extends through March 14, 2021 the CARES Act provision that provided a 50% subsidy to nonstatutory, temporary state short-time compensation programs.

Return to work reporting. Section 251 requires states (30 days after enactment) to have methods in place to address situations when claimants of unemployment compensation refuse to return to work or refuse to accept an offer of suitable work without good cause.

Temporary assistance for states with advances. Section 221 extends through March 14, 2021 the accumulation of interest on federal loans states have taken in order to pay state unemployment benefits. The loans allow states with low balances in their unemployment trust funds to delay employer tax increases or other employer surcharges while the economy is struggling.

Paycheck Protection Program Second Draw Loans

The ACRR allows certain small businesses who received a Paycheck Protection Program (PPP) loan ) and experienced a 25% reduction in gross receipts to take a second PPP loan of up to $2 million. These prior PPP borrowers must meet the following conditions to be eligible: (1) employ no more than 300 employees per physical location, (2) have or will use the full amount of their first PPP loan; and (3) show at least a 25% reduction in gross receipts in the first through third quarters of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to use gross receipts from the fourth quarter of 2020.

Eligible entities for the loans include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Loan forgiveness. As with the first PPP loan, the second loan can be 100% forgivable if it is used for payroll costs (with some exceptions) of up to 60% and nonpayroll costs (i.e., rent, mortgage, interest and utilities) of up to 40%.

Application of exemption based on employee availability. The ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for the borrower by reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

Paycheck Protection Program Continuation

Under the CARES Act, a PPP loan is generally 100% forgivable if the loan is used to pay certain payroll and nonpayroll costs. PPP loan forgiveness doesn’t give rise to taxable income and the Internal Revenue Code generally doesn’t allow a taxpayer to deduct expenses that are paid with tax exempt income.

Section 276 of the CAA makes a clarification that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also says that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This is true as well for the second draw PPP loans.

Additional PPP loan expenses. Section 304 provides additional allowable and forgivable uses for PPP funds such as covered: operations expenditures, property damage costs, supplier costs, and worker protection expenditures.

Definition of seasonal employer. Section 315 defines a seasonal employer to be an eligible recipient which: (1) operates for no more than seven months in a year and (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.

News organization eligibility Section 317 makes eligible FCC license holders and newspapers with more than one physical location, as long as the business has no more than 500 employees per physical location or the applicable SBA size standard; and makes eligible section 511 public colleges and universities that have a public broadcasting station if the organization certifies that the loan will support locally-focused or emergency information. It also waives affiliation rules for newspapers, TV and radio broadcasters, and public broadcasters, as long as the organization has no more than 500 employees per physical location or the applicable SBA size standard.

Other Provisions Related to Payroll

Airline worker support extension. Section 4113 of the CARES Act authorizes the Treasury Department to provide payments to passenger air carriers, cargo air carriers, and certain contractors exclusively for the continuation of payments of employee wages, salaries, and benefits, known as the Payroll Support Program (PSP).

The CAA includes an extension of the PSP for a four-month period, from December 1, 2020 through March 31, 2021. The financial assistance for employee wages, salaries and benefits is an aggregate amount of $15 billion for passenger air carriers and $1 billion in aggregate for contractors.

Immigration extension.  The CAA also includes a provision regarding the H-2B visa program, which permits employers to temporarily hire non-immigrants to perform non-agricultural labor or services in the United States . The increase may not be more than the highest number of H-2B non-immigrants who participated in the H-2B returning worker program in any fiscal year in which returning workers were exempt from such numerical limitation.

Minimum age for distributions during working retirement. Section 208 of the TCDTR discusses the minimum age for distributions during working retirement. Specifically, it reduces the age from 59 and one-half to 55 for certain employees in the building and construction industry in the case of a multi-employer plan described in Code Sec. 4203(b)(1)(B)(i) of the Employee Retirement Income Security Act of 1974.

Payroll-Related Tax Extenders

Work Opportunity Tax Credit. Section 113 of the TCDTR extends the work opportunity tax credit through 2025. The amendment applies to individuals who begin work for their employer after December 31, 2020.

Employer tax credit for paid family and medical leave. Section 119 of the TCDTR extends the credit allowing eligible employers to claim a general business credit on their 2018 and 2019 income tax returns based on wages paid to qualifying employees while they are on family and medical leave through 2025, applying to wages paid in tax years beginning after December 31, 2020.

Exclusion for certain employer payments of student loans. Section 120 of the TCDTR extends the up to $5,250 exclusion from employee income for educational assistance provided for under an employer’s qualified educational assistance program through 2025.

Indian employment credit. Section 135 of the TCDTR extends the credit on the first $20,000 of qualified wages and qualified employee health insurance costs paid to or incurred by the employer with respect to each qualified employee who works on an Indian reservation by one year, through December 31, 2021, applicable to tax years beginning after December 31, 2020.

Temporary allowance of full deduction for business meals. Section 210 of the TCDTR amends Code Sec. 274(n)(2) to allow for full deduction of expenses for food and beverages paid or incurred to a restaurant after December 31, 2020 and prior to January 1, 2023. The credit was limited to 50% from December 31, 2017 through December 31, 2025.

PPP Round #2

At the end of 2020, Congress passed, and President Trump signed, a new law that provides for additional relief related to the coronavirus (COVID-19) pandemic. This law, the Consolidated Appropriations Act, 2021 (CAA, 2021), includes a second draw of Paycheck Protection Program (PPP) loans (PPP Second Draw Loans). It also allows businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans.

Background. In March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act authorizes the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the COVID-19 pandemic and to cover certain other expenses. The Paycheck Protection Program Flexibility (PPPF) Act made substantial changes to the PPP, including decreasing the percentage that loan proceeds must be used on payroll costs from 75% to 60%, thereby increasing the percentage that may be used for nonpayroll costs such as rent, mortgage interest and utilities from 25% to 40%. Additionally, the PPPF Act permits borrowers to defer payments of principal, interest, and fees to 10 months after the last day of the covered period (the earlier of 24 weeks or December 31, 2020). The application period closed on August 8, 2020. The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders on October 2, 2020.

Paycheck Protection Program Second Draw Loans. The CAA, 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP Second Draw Loan of up to $2 million.

Eligible entities. Prior PPP borrowers must meet the following conditions to be eligible for the PPP Second Draw Loans:

  • Employ no more than 300 employees per physical location;
  • Have used or will use the full amount of their first PPP loan; and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.

Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Non-profits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.

Loan forgiveness. Like the first PPP loan, the PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income.

Application of exemption based on employee availability. The CAA, 2021 extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

Deductibility of expenses paid by PPP loans. The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. IRS took the position that these expenses were nondeductible. The CAA, 2021 provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.

Please contact our office with any further questions you might have on PPP loan forgiveness.

Additional 2020 economic impact payments

You’ve probably heard that the IRS will be making millions of ”economic impact payments” (also called ”recovery rebates”) in the near future to help people stay afloat during this time of economic uncertainty related to the COVID-19 crisis. These payments are in addition to the $1,200 payments ($2,400 for married couples) issued earlier in 2020. Here’s what you need to know about these additional payments.

Amount of payment. IRS has begun making payments of up to $600 to eligible taxpayers or up to $1,200 to married couples filing joint returns. Parents will get an additional $600 for each dependent child under age 17. Thus, a married couple with two children under 17 will get a $2,400 payment.

Who is eligible. U.S. citizens and residents are eligible for a full payment if their adjusted gross income (AGI) is under $75,000 for singles or marrieds filing separately, $112,500 for heads of household, and $150,000 for married couples filing jointly and surviving spouses. The recipient must not be the dependent of another taxpayer and must have a social security number that authorizes employment in the U.S.

Phaseout based on income. For individuals whose AGI exceeds the above thresholds, the payment amount is phased out at the rate of $5 for each $100 of income. Thus, the payment is completely phased out for single filers with AGI over $87,000 and for joint filers with no children with AGI over $174,000. For a married couple with two children, the payment will be completely phased out if their AGI exceeds $198,000.

Payments are nontaxable. The economic impact payment that you receive won’t be included in your income for tax purposes. It won’t cause you to owe tax or decrease your refund for 2020.

How to get a payment. The vast majority of people won’t have to do anything to get an economic impact payment. IRS will calculate and send the payment automatically to those who are eligible.

If you’ve filed your 2019 tax return, IRS will use the AGI and dependents from that return to calculate the payment amount. The credit won’t be allowed if the return doesn’t include a valid identification number (typically, a social security number) for each individual for whom a credit is sought. Thus, for example, a joint return must include valid identification numbers for both spouses to get the full $1200 credit. A $600 credit is allowed if only one spouse provides a valid identification number, and no credit is allowed if neither spouse does so.

IRS will deposit the payment directly into the bank account reflected on the return. IRS has developed a web-based tool called Get My Payment, www.irs.gov/coronavirus/get-my-payment, for individuals to provide banking information to IRS, so that payments can be received by direct deposit rather than by check sent in the mail. The tool includes the date the payment is scheduled to be issued to the individual.

If you have not yet filed for 2019. The due date for 2019 individual income tax returns was July 15, 2020, or October 15 if an automatic extension of time was requested on Form 4868. Individuals who are required to file a return for 2019 and haven’t done so should file the return as soon as possible. Doing so will help give IRS time to process and make all resulting economic impact payments before January 15, 2021 (the deadline for processing payments).

If you aren’t required to file. If you receive social security, supplemental security income, social security disability income, railroad retirement, or veterans’ compensation and pension benefits, and you aren’t required to file a tax return, you don’t have to file to receive a payment. IRS will generate an automatic payment using information from the Social Security Administration and the Department of Veterans Affairs. The payment will be made by direct deposit or paper check, in the same manner as the recipient’s regular benefits.

If you aren’t required to file a tax return and you don’t receive any of the above payments, you can register to receive an economic impact payment by providing information on IRS’s web-based Non-Filers: Enter Payment Info Here tool, www.irs.gov/coronavirus/non-filers-enter-payment-info.

Non-filers with dependent children; $600 payment. Non-filers who have a dependent child under age 17 must register their dependents on the Non-Filers: Enter Payment Info Here tool to receive the additional payment of $600 per child. Non-filers who receive the economic impact payment before registering a dependent child can still get the additional $600 payment by filing a 2020 income tax return on which the dependent is listed.

2020 COVID Relief Bill Provisions Affecting Businesses

Tax provisions made permanent (without other changes). The TCDTR makes permanent without other changes (1) the railroad track maintenance credit and (2) the exclusion of the aging period in determining the mandatory interest capitalization period in producing beer, wine or distilled spirits.

Tax provisions extended (without other changes). The TCDTR extends the following tax credits without other changes: (1) the new markets tax credit, (2) the work opportunity credit, (3) the employer credit for paid family and medical leave that was provided by the 2017 Tax Cuts and Jobs Act (2017 TCJA), (4) the carbon sequestration credit, (5) the business energy credit (the ‘‘Code Sec. 48 credit’’) both as regards termination dates and phase-downs of credit amounts, (6) the credit for electricity produced from renewable resources (the ‘‘Code Sec. 45 credit’’) and the election to claim the Code Sec. 48 credit instead for certain facilities (but the phase-down of the amount of the Code Sec. 45 credit for wind facilities isn’t deferred), (7) the Indian employment credit, (8) the mine rescue team training credit, (9) the American Samoa development credit, (10) the second generation biofuel producer credit, (11) the qualified fuel cell motor vehicle credit as applied to businesses, (12) the alternative fuel refueling property credit as applied to businesses, (13) the two-wheeled plug-in electric vehicle credit as applied to businesses, (14) the credit for production from Indian coal facilities, and (15) the energy efficient homes credit.

Additional provisions extended by the TCDTR without other changes are the following: (1) the exclusion from employee income of certain employer payments of student loans, (2) the 3-year recovery period for certain racehorses, (3) favorable cost recovery rules for business property on Indian reservations, (4) the 7-year recovery period for motor sports entertainment complexes, (5) expensing for film, television and live theatrical productions, (6) empowerment zone tax incentives except for the increased section 179 expensing for qualifying property and the deferral of capital gain for dispositions of qualifying assets, and (7) the exclusion from being personal holding company income for certain payments or accruals of dividends, interest, rents, and royalties from a related person that is a controlled foreign corporation.

Energy provisions. The TCDTR makes changes to energy provisions in addition to making them permanent or extending them.

The TCDTR adds ‘‘waste energy recovery property’’ to the types of property that qualify for the Code Sec. 48 credit (above). And the credit rate assigned is 30%. ‘‘Waste energy recovery property’’ is property (1) the construction of which begins before 2024, (2) that has a capacity of no more than 50 megawatts, and (3) generates electricity solely from heat from buildings or equipment if the primary purpose of that building or equipment isn’t the generation of electricity. But it doesn’t include property eligible for the Code Sec. 48 credit for cogeneration property unless the taxpayer doesn’t take the Code Sec. 48 credit for that property.

For wind facilities that are ‘‘qualified offshore wind facilities,’’ the TCDTR relaxes the rules under which wind facilities that are eligible for the Code Sec. 45 credit can, by election (see above), be eligible instead for the Code Sec. 48 credit.

The TCDTR makes permanent the energy efficient commercial buildings deduction. Additionally, the TCDTR indexes for inflation the per-square-foot dollar caps on the full and partial versions of the deduction. And the TCDTR provides that to the extent that deductibility depends on specified recognized energy efficient standards, the referred-to standards will be standards issued within two years of construction (rather than the standards bearing now-stale dates that applied under pre- TCDTR law).

Clarifications of tax consequences of PPP loan forgiveness. The COVIDTRA clarifies that the non-taxable treatment of Payroll Protection Program (PPP) loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the COVIDTRA clarifies that taxpayers whose PPP loans or other obligations are forgiven as described above, are allowed deductions for otherwise deductible expenses paid with the proceeds and that the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.

Waiver of information reporting for PPP loan forgiveness. The COVIDTRA allows IRS to waive information reporting requirements for any amount excluded from income under the exclusion- from-income rule for forgiveness of PPP loans or other specified obligations. Note: IRS had already waived information returns and payee statements for loans that, before enactment of the COVIDTRA, were guaranteed by the Small Business Administration under section 7(a)(36) of the Small Business Act.

Extensions and modifications of earlier payroll tax relief. The TCDTR extends the CARES Act credit, allowed against the employer portion of the Social Security (OASDI) payroll tax or of the Railroad Retirement tax, for qualified wages paid to employees during the COVID-19 crisis. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit rate is increased from 50% to 70% of qualified wages. and qualified wages are increased from $10,000 for the year to $10,000 per quarter. Many other rules are also relaxed. And the TCDTR makes some retroactive clarifications and technical improvements to the credit as initially enacted.

The COVIDTRA extends (1) the credits provided by the Families First Coronavirus Response Act (FFCRA) against the employer portion of OASDI and Railroad Retirement taxes for qualifying sick and family paid leave and (2) the equivalent FFCRA-provided credits for the self-employed against the self-employment tax. Under the extension of the employer credits, wages taken into account are those paid before April 1, 2021 (instead of January 1, 2021). Under the extension of the credits for the self employed, the days taken into account are those before April 1, 2021 (instead of January 1, 2021).

The COVIDTRA also makes retroactive clarifications of (1) the FFCRA paid leave credits that were extended as discussed above, (2) the exclusion of qualifying paid leave in calculating the employer portion of Railroad Retirement taxes and (3) and the increase in the amount of the FFRCA paid leave credits against the employer portion of Railroad Retirement taxes by the amount of the Medicare payroll taxes on qualifying paid leave. Additionally, the COVIDTRA directs IRS to extend the Presidentially ordered deferral of the employee’s share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to $4,000 every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four-month period ending on April 30, 2021).

Employee benefits and deferred compensation. The TCDTR provides that expenses for business-related food and beverages provided by a restaurant are fully deductible if they are paid or incurred in calendar years 2021 or 2022, instead of being subject to the 50% limit that generally applies to business meals. The TCDTR temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code).

With a view to layoffs in the current economic climate, the TCDTR relaxes rules that would otherwise cause a partial qualified retirement plan termination if the number of active participants decreases.

Because of market volatility during the COVID-19 pandemic, the COVIDTRA relaxes, if certain conditions are met, the funding standards that, if met, allow a defined benefit pension plan to transfer funds to a retiree health benefits account or retiree life insurance account within the plan. The CARES Act’s relaxed rules for ‘‘coronavirus-related distributions’’ are retroactively amended by the COVIDTRA to additionally provide that a coronavirus-related distribution that is a during-employment withdrawal from a money purchase pension plan meets the distribution requirements of Code Sec. 401(a).

And under a provision of narrow applicability, the TCDTR lowers to 55 years, from the usually applicable 59½ years, the age at which certain employees in the building or construction trades can, though still employed, receive pension plan payments under certain multiple employer plans without affecting the status of trusts that are part of the pension plans as qualified trusts.

Residential real estate depreciation. For tax years beginning after December 31, 2017, the TCDTR assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 (when the 2017 TCJA first applied the more-favorable 30-year period) if the property (1) is held by a real property trade or business electing out of the limitation on business interest deductions and (2) before January 1, 2018 wasn’t subject to the ADS.

Farmers’ net operating losses. The COVIDTRA allows farmers who had in place a two-year net operating loss carryback before the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. It also allows farmers who before the CARES Act waived the carryback of a net operating loss, to revoke the waiver.

Low-income housing credit. The TCDTR provides a 4% per year credit floor for buildings that aren’t eligible for the 9% per-year credit floor. (Both floors are alternatives to the calculation under which the per-year credit is generally a percentage, prescribed by IRS, that is intended to result in a credit that, in the aggregate over the 10-year credit period, has a present value of 70% of the qualified basis for certain new buildings and 30% of the qualified basis for certain other buildings.)

Life insurance. The TCDTR changes the interest rate assumptions that determine whether a contract meets the cash value and premium caps for qualifying as a life insurance contract. The change is to designated floating rates from the respective 4% and 6% rates fixed by prior law.

Disaster relief. The TCDTR includes several provisions targeted at ‘‘qualified disaster areas,’’ some of which affect individuals and some which affect businesses as described below. ‘‘Qualified disaster areas’’ are areas for which a major disaster was Presidentially declared during the period beginning on January 1, 2020 and ending February 25, 2021. The incidence period of the disaster must begin after December 27, 2019 but not after December 27, 2020. Excluded are areas for which a major disaster was declared only because of COVID-19.

The relief includes relief for retirement funds that consists of the following: (1) waiver of the 10% early withdrawal penalty for up to $100,000 of certain withdrawals by individuals living in a qualified disaster area and that have suffered economic loss because of the disaster (qualified individuals), (2) a right to re-contribute to a plan distributions that were intended for home purchase but not used because of a qualified disaster, and (3) relaxed plan loan rules for qualified individuals. Changes to plan amendment rules facilitate the relief.

The relief also provides to employers in the harder-hit parts of a qualified disaster area an up-to-$ 2,400-per-employee employee retention credit, subject to coordination with certain other employer tax credits. Generally, tax-exempt organizations can take it as a credit against FICA taxes.

Corporations are provided with relaxed charitable deduction rules for qualified-disaster-related contributions, and individuals are provided with relaxed loss allowance rules for qualified-disaster-related casualties.

The low-income housing credit is modified to allow, subject to various limitations, increases in the state-wide credit ceilings to the extent allocations are made to harder-hit parts of qualified disaster areas.

Excise taxes. The TCDTR makes various excise tax changes for beer, wine and distilled spirits. The TCDTR also provides that the temporary increase in the Black Lung Disability Trust Fund tax won’t apply to coal sales after 2021 (instead of after 2020). And the end of the liability imposed because of the Oil Spill Liability Trust Fund Rate is deferred until after 2025. Additionally, the alternative fuels credit against the diesel and special motor fuels tax is extended.

2020 COVID Relief Bill Provisions Affecting Individual Taxpayers

RECOVERY REBATE/ECONOMIC IMPACT PAYMENT

Direct-to-taxpayer recovery rebate. The Act provides for a refundable recovery rebate credit for 2020 that will paid in advance to eligible individuals, often automatically, early in 2021. (Code Sec. 6428A, as added by COVIDTRA Sec. 272) These payments are in addition to the direct payments/rebates provided for in earlier Federal legislation, the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136, 3/27/2020), which were called Economic Impact Payments (EIP).

The amount of the rebate is $600 per eligible family member—$600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. Thus, a married couple with two qualifying children will receive $2,400, unless a phase-out applies. The credit is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their EIPs by providing information through the nonfiler portal on IRS’s website will also receive these additional payments.

Nonresident aliens, persons who qualify as another person’s dependent, and estates or trusts don’t qualify for the rebate. Taxpayers without a Social Security number are likewise ineligible, but if only one spouse on a joint return has a Social Security number, that spouse is eligible for a $600 payment. Children must also have a Social Security number to qualify for the $600-per-child payments.

Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer’s 2020 return exceeds the amount of the advance payment, taxpayers receive the difference as a refundable tax credit.

Advance payments of the rebates are generally not subject to offset for past due federal or state debts, and they are protected from bank garnishment or levy by private creditors or debt collectors.

Pro-taxpayer changes to CARES Act Economic Impact Payment rules. As noted above, the CARES Act provided EIPs.

The Act makes the following changes to the CARES Act EIP:

  • Provides that the $150,000 limit on adjusted gross income before the credit amount starts to phase out, which, under the CARES Act, applied to joint returns, also applies to surviving spouses. (Code Sec, 6428(c)(1), as amended by Act Sec. 273(a)) This change may allow taxpayers who qualify to use the surviving-spouse filing status to claim a larger EIP on their 2020 returns.
  • Makes the requirement to provide IRS with the taxpayer’s identification number identical to the same requirement under the new rebate, described above under “Direct-to-taxpayer recovery rebate.” (Code Sec. 6428(g), as amended by COVIDTRA Sec. 273(a))

DEDUCTIONS

$250 educator expense deduction applies to PPE, other COVID-related supplies. The Act provides that eligible educators (i.e., kindergarten-through-grade-12 teachers, instructors, etc.) can claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were bought after March 12, 2020. IRS is directed to issue guidance to that effect by Feb. 28, 2021. (COVIDTRA Sec. 275; Code Sec. 62(a)(2)(D)(ii))

7.5%-of-AGI “floor” on medical expense deductions is made permanent. The Act makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was to have increased to 10% of adjusted gross income after 2020.

The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years. (Code Sec. 213(a), as amended by Act Sec. 101)

Mortgage insurance premium deduction is extended by one year. The Act extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer’s adjusted gross income. (Code Sec. 163(h)(3)(E)(iv)(I), as amended by Act Sec. 133)

Above-the-line charitable contribution deduction is extended through 2021; increased penalty for abuse. For 2020, individuals who don’t itemize deductions can take up to a $300 above-the-line deduction for cash contributions to “qualified charitable organizations.” The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers). (Code Sec. 170(p), as added by Act Sec. 212(a)) Taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%). (Code Sec. 6662(l), as added by Act Sec. 212(b))

Extension through 2021 of allowance of charitable contributions up to 100% of an individual’s adjusted gross income. In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income. (The usual limit is 60% of adjusted gross income.) The Act extends this rule through 2021. (Code Sec. 170(b)(1)(G), as amended by Act Sec. 213)

EXCLUSIONS FROM INCOME

Exclusion for benefits provided to volunteer firefighters and emergency medical responders made permanent. Emergency workers who are members of a “qualified volunteer emergency response organization” can exclude from gross income certain state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020, but the Act made it permanent. (Code Sec. 139B, as amended by Act Sec. 103)

Exclusion for discharge of qualified mortgage debt is extended, but limits on amount of excludable discharge are lowered. Usually, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. But under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of discharge-of-debt income if “qualified principal residence debt” is discharged. The Act extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately). (Code Sec. 108(a)(1)(E), as amended by Act Sec. 114(a))

Extension of exclusion for certain employer payments of student loans.  Qualifying educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136, 3/27/2020) added to the types of payments that are eligible for this exclusion, “eligible student loan repayments” made after Mar. 27, 2020, and before Jan. 1, 2021. These payments, which are subject to the overall $5,250 per employee limit for all educational payments, are payments of principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. The Act extends the exclusion for eligible student loan repayments through the end of 2025. (Code Sec. 127(c)(1)(B), amended by Act Sec. 120)

TAX CREDITS

Individuals may elect to base 2020 refundable child tax credit (CTC) and earned income credit (EIC) on 2019 earned income. If an individual’s child tax credit (CTC) exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer’s taxable “earned income” for the tax year as exceeds $2,500. And the earned income credit (EIC) equals a percentage of the taxpayer’s “earned income.” For both of these credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. But for determining the refundable CTC and the EIC for 2020, the Act allows taxpayers to elect to substitute the earned income for the preceding tax year, if that amount is greater than the taxpayer’s earned income for 2020. (Act Sec. 211(a))

Health coverage tax credit (HCTC) for health insurance costs of certain eligible individuals is extended by one year. A refundable credit (known as the health coverage tax credit or “HCTC”) is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals (i.e., individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pension Benefit Guaranty Corporation). The HCTC was due to expire at the end of 2020, but the Act extended it through 2021. (Code Sec. 35(b)(1)(B), amended by Act Sec. 134)

New Markets tax credit extended. The New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities. This credit was due to expire at the end of 2020, but the Act extended it through the end of 2025. Carryovers of the credit were extended, as well. (Code Sec. 45D(f)(1)(H), amended by Act Sec. 112(a))

Nonbusiness energy property credit extended by one year. A credit is available for purchases of “nonbusiness energy property”—i.e., qualifying energy improvements to a taxpayer’s main home. The Act extends this credit, which was due to expire at the end of 2020, through 2021. (Code Sec. 25C(g)(2), amended by Act Sec. 141)

Qualified fuel cell motor vehicle credit extended by one year. The credit for purchases of new qualified fuel cell motor vehicles, which was due to expire at the end of 2020, was extended by the Act through the end of 2021. (Code Sec. 30B(k)(1), as amended by Act Sec. 142)

2-wheeled plug-in electric vehicle credit extended by one year. The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the Act. (Code Sec. 30D(g)(3)(E)(ii), amended by Act Sec. 144)

Residential energy-efficient property (REEP) credit extended by two years, bio-mass fuel property expenditures included. Individual taxpayers are allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. The REEP credit was due to expire at the end of 2021, with a phase-down of the credit operating during 2020 and 2021. The Act extends the phase-down period of the credit by two years—through the end of 2023; the REEP credit won’t apply after 2023. (Code Sec. 25D(h), as amended by Act Sec. 148(a))

The Act also adds qualified biomass fuel property expenditures to the list of expenditures qualifying for the credit, effective beginning in 2021. (Code Sec. 25D(a), as amended by Act Sec. 148(b)).

DISASTER-RELATED CHANGES IN RETIREMENT PLAN RULES

10% early withdrawal penalty does not apply to qualified disaster distributions from retirement plans. A 10% early withdrawal penalty generally applies to, among other things, a distribution from employer retirement plan to an employee who is under the age of 59½. The Act provides that the 10% early withdrawal penalty doesn’t apply to any “qualified disaster distribution” from an eligible retirement plan. The aggregate amount of distributions received by an individual that may be treated as qualified disaster distributions for any tax year may not exceed the excess (if any) of $100,000, over the aggregate amounts treated as qualified disaster distributions received by that individual for all prior tax years. (TCDTR Sec. 302(a))

Increased limit for plan loans made because of a qualified disaster. Generally, a loan from a retirement plan to a retirement plan participant cannot exceed $50,000. Plan loans over this amount are considered taxable distributions to the participant. The Act increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets various other requirements. (TCDTR Sec. 302(c)(3))

Deductibility of Business Meals Provided by Restaurants in 2021 and 2022

You’ve probably heard that the recent stimulus legislation included a provision that removes the 50% limit on deducting business meals provided by restaurants in 2021 and 2022 and makes those meals fully deductible. Here are the details.

In general, the ordinary and necessary food and beverage expenses of operating your business are deductible. However, the deduction is limited to 50% of the otherwise allowable expense.

The new legislation adds an exception to the 50% limit for expenses for food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant makes it clear that the new rule isn’t limited to meals eaten on the restaurant’s premises. Takeout and delivery meals provided by a restaurant are also fully deductible.

It’s important to note that, other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for deducting business meals. All the other existing requirements continue to apply. Thus, to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances.
  • You or one of your employees must be present when the food or beverages are served.
  • The food or beverages must be provided to you or to a “business associate.” This is defined as a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business.

If food or beverages are provided at an entertainment activity, either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice, or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

IRS Provides Safe Harbor for Deducting Expenses if PPP Loan is Not Forgiven

In a Revenue Procedure, the IRS has provided a safe harbor allowing a taxpayer to claim a deduction in 2020 for certain otherwise deductible eligible expenses if the taxpayer received a Paycheck Protection Program (PPP) loan which (1) at the end of the taxpayer’s 2020 tax year the taxpayer expects to be forgiven in a tax year after the 2020 tax year, and, (2) in a post-2020 tax year, the taxpayer’s request for forgiveness of the loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the loan.

Background. Sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP) as a loan program administered by the U.S. Small Business Administration (SBA) that was designed to assist businesses adversely impacted by the COVID-19 emergency to pay payroll costs and other eligible expenses. Under the PPP, the SBA is permitted to guarantee the full principal amount of a covered loan, defined by Act Sec. 1102(a)(2) as a loan made under the PPP during the covered period; a covered loan may be forgiven under Act Sec. 1106.  The covered period is the period beginning on February 15, 2020, and ending on December 31, 2020.

An individual or entity that is eligible to receive a covered loan (eligible recipient) can receive forgiveness of the full principal amount of the covered loan up to an amount equal to the following costs incurred and payments made during the covered period: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, and (4) any covered utility payment (eligible expenses). (Act Sec. 1106(b))

Under Act Sec. 1106(i), for purposes of the Code, “any amount which (but for [Act Sec. 1106(i)]) would be includible in gross income of the eligible recipient by reason of forgiveness described in [Act Sec. 1106](b) shall be excluded from gross income.” Act Sec. 1106(i) excludes the amount from gross income regardless of whether the amount would be (1) income from the discharge of indebtedness under Code Sec. 61(a)(11), or (2) otherwise includible in gross income under Code Sec. 61.

Rev Rul 2020-27, 2020-50, holds that a taxpayer computing taxable income on the basis of a calendar tax year may not deduct eligible expenses in its 2020 tax year if, at the end of the 2020 tax year, the taxpayer has a reasonable expectation of reimbursement in the form of covered loan forgiveness on the basis of the eligible expenses it paid or accrued during the covered period.

Safe harbor rules. Rev Proc 2020-51, 2020-50 provides two safe harbors to claim deductions for eligible expenses in the 2020 tax year for which no deduction would otherwise be permitted because at the end of the 2020 tax year the taxpayer reasonably expects to receive forgiveness of the covered loan based on those eligible expenses (non-deducted eligible expenses).

Safe harbor for deductions to be claimed in 2020 tax year. An eligible taxpayer (described below) who satisfies the safe harbor requirements (described below) may deduct non-deducted eligible expenses on the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 tax year, or amended return or Administrative Adjustment Request under Code Sec. 6227 for the 2020 tax year, as applicable.

Safe harbor for deductions to be claimed in subsequent tax year. An eligible taxpayer who satisfies the safe harbor requirements, may deduct non-deducted eligible expenses on the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for a subsequent tax year (i.e., a tax year after the 2020 tax year). Eligible taxpayers may, but do not need to, use this safe harbor to deduct non-deducted eligible expenses in a subsequent tax year because those taxpayers may deduct the non-deducted eligible expenses in the year that the loan forgiveness is denied under general tax principles, assuming that the taxpayer does not elect to the use the safe harbor above.

Safe harbor requirements. A taxpayer applying one of the safe harbor procedures may not deduct an amount of non-deducted eligible expenses in excess of the principal amount of the taxpayer’s covered loan for which forgiveness was denied or will no longer be sought.

A taxpayer may not apply the safe harbor procedures to deduct any amount of non-deducted eligible expenses unless the taxpayer attaches a statement to the return on which the taxpayer deducts non-deducted eligible expenses. The statement must be titled “Revenue Procedure 2020-51 Statement.” The Revenue Procedure provides details of what must be included in the statement.

Eligible taxpayer. A taxpayer is eligible to apply either of the safe harbors if the taxpayer meets either of the following two requirements.

A taxpayer meets the first requirement if:

(1) The taxpayer paid or incurred eligible expenses in the 2020 tax year for which no deduction is permitted because at the end of the 2020 tax year the taxpayer reasonably expects to receive forgiveness of the covered loan based on those eligible expenses;

(2) The taxpayer submitted before the end of the 2020 tax year, or as of the end of the 2020 tax year intends to submit in a subsequent tax year, an application for covered loan forgiveness to the lender; and

(3) In a subsequent tax year, the lender notifies the taxpayer that forgiveness of all or part of the covered loan is denied.

A taxpayer meets the second requirement if:

(1) The taxpayer meets the requirements of (1) and (2) above; and

(2) In a subsequent tax year, the taxpayer irrevocably decides not to seek forgiveness for some or all of the covered loan. For example, a taxpayer that determines that it will not qualify for covered loan forgiveness and withdraws the application submitted to the lender as described in Rev Proc 2020-51, Sec. 3.01.

Additional limitations. Nothing in the Revenue Procedure precludes the IRS from examining other issues relating to the claimed deductions for non-deducted eligible expenses, including the amount of the deduction and whether the taxpayer has substantiated the deduction claim. It also does not preclude the IRS from requesting additional information or documentation verifying any amounts described in the statement described in Rev Proc 2020-51, Sec. 4.04.

Effective date. The Revenue Procedure is effective for tax years beginning or ending in 2020.

Final Form 941-X Instructions Detail COVID-19 Changes

The IRS has issued the final instructions for the revised Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. The instructions detail changes to the form to account for the COVID-19 tax relief.

Background. Form 941, Employer’s Quarterly Federal Tax Return, is used by employers to report, on a quarterly basis: a) federal income tax, social security tax, Medicare tax and Additional Medicare tax withheld from employee compensation; and b) the employer’s share of social security and Medicare taxes.

Form 941-X is used by employers to correct errors on a previously filed Form 941.

In response to the COVID-19 health emergency, the Families First Coronavirus Response Act (FFCRA) and Coronavirus, Aid, Relief and Economic Security Act (CARES Act) were signed into law. These bills provide credits for paid sick leave and expanded family and medical leave, the employee retention credit, and a deferral of certain employment taxes. The IRS then revised Form 941 to include line items for reporting the COVID-19 tax credits and the employment tax deferral. The IRS has also issued a new draft version of Form 941-X that reflects the changes made to the latest version of Form 941.

Form 941-X instructions. The IRS has now issued final instructions for the draft version of Form 941-X.

The instructions note that employers can now use Form 941-X to report corrections to the following items reported on Form 941:

  • Amounts for the credit for qualified sick and family leave wages.
  • Amounts for the employee retention credit.
  • The deferred amount of the employer share of social security tax.

New Draft Form 941-X Adds Lines for COVID-19 Tax Credits

The IRS has issued a new draft of Form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund). The new draft adds 14 new lines that are based on lines that were added to the recently-issued Form 941 (Employer’s Quarterly Federal Tax Return), to reflect credits that were enacted earlier this year to provide COVID-19 relief.

Background. Form 941 is used by employers to report, on a quarterly basis: a) federal income tax, social security tax, Medicare tax and Additional Medicare tax withheld from employee compensation; and b) the employer’s share of social security and Medicare taxes.

Form 941-X is used by employers to correct errors on a previously filed Form 941.

In response to the COVID-19 health emergency, the Families First Coronavirus Response Act (FFCRA) and Coronavirus, Aid, Relief and Economic Security Act (CARES Act) were signed into law. These bills provide paid sick leave and expanded family and medical leave, the employee retention credit, and a deferral of certain employment taxes.

The IRS then revised Form 941 to include line items for reporting these COVID-19 tax credits. This newly revised Form 941 must be used by employers beginning with the second quarter of 2020.

New Form 941-X. The IRS has now issued a new draft version of Form 941-X that reflects the changes made to the latest version of Form 941. It adds 14 new lines to Part 3 of the form, which is entitled “Enter the corrections for this quarter…” For example, new line 9 is for Qualified sick leave wages (which corresponds to Form 941, Line 5(a)(ii)), and new line 28 is for Qualified health plan expenses allocable to qualified sick leave wages (which corresponds to Form 941, line 19).

The IRS has not yet issued a draft version of the Form 941-X instructions.