2021 Tax Law Changes – Businesses
Each calendar year provides unique challenges and updates to tax law impacting businesses and individuals. This post will highlight some of the major changes for businesses. If you wish to see tax law changes affecting individuals, you can go here.
Article Highlights
- Paycheck
Protection Program
- Employee
Retention Credit
- Restaurant
Revitalization Fund
- Business Meals
- Payroll Tax
Deferral
- Employer-Provided
Childcare Credit
- Excess Business
Losses
- Executive
Compensation
- Corporate Net
Operating Losses
- Corporate AMT
- Corporate
Charitable Contributions
- Excise Tax on
Repurchase of Corporate Stock
- §1202 Gains
On December 27, 2020, President Trump signed the Consolidated
Appropriations Act, 2021 (CAA) into law. The CAA contained two other
laws:
- COVID-Related
Tax Relief Act of 2020 (COVIDTRA) and
- Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).
Though signed into law in 2020, many of the provisions from the CAA
affect the 2021 tax year, as well.
The American
Rescue Plan Act (ARPA) was signed into law by President Biden on
March 11, 2021. This legislation provides substantial aid to individuals by
expanding the benefits for the Child Tax Credit, Child & Dependent Care
Credit, and Earned Income Tax Credit (discussed in the individual blog post). ARPA
also had significant impact in areas of the Employee Retention Credit, Excess
Business Losses, and the Paycheck Protection Program.
In April 2021, President Biden released a fact sheet for the American
Families Plan and the Made in America Tax Plan that included sweeping reforms
to both individual and business taxation. The latest version of the proposed
legislation, called the Build
Back Better Act (BBBA), was released on November 19, 2021. Most of
the intended reforms favor low-income individuals and target high-income
individuals. The BBBA has not officially been signed into law as of the date of
this writing, with many of its provisions to take effect in tax year 2022 or
later.
President Biden signed into law The
Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021.
The legislation includes important tax-related provisions, though not near as
many as what the BBBA contains. The most notable provisions of the IIJA include
changes to the Employee Retention Credit and cryptocurrency reporting
requirements (to be discussed in the individual blog post).
This post provides an overview of some of the tax provisions in these
legislations that will affect business tax returns in the current tax year
(2021) and future tax years.
Paycheck Protection Program
Background
Perhaps
the most meaningful program to come out of the COVID-19 crisis was the Paycheck
Protection Program (PPP). The program was established in 2020 through the SBA
to provide emergency funding to small businesses impacted by the pandemic.
Businesses that received PPP loans were originally limited to using the
proceeds for payroll costs, rent payments, mortgage interest payments, and
utility payments. However, guidance was released in December 2020 that stated
loan recipients could use the proceeds for other non-payroll expenses,
including operating expenses, costs to repair property damage, costs for
supplies, and expenses for protecting workers.
The SBA provided countless businesses with emergency assistance through two separate rounds of offerings. The first round of PPP loans enacted by the CARES Act were made available through June 30, 2020, but an extension was granted through August 8, 2020 due to unparalleled demand. The first round of PPP initially allocated $349 billion to businesses, but the extension granted an additional $310 billion. The first round of PPP loans were generally made available to employers who had been in business as of February 15, 2020 and employed than 500 employees. Self-employed individuals, independent contractors, and sole proprietors were also eligible for PPP loans as long as they had been in business as of February 15, 2020, under certain conditions.
CAA
2021 brought about the second round of PPP loans. Signed into law on December
27, 2020, the PPP round was given an additional $284.5 billion of funding to be
made available through March 31, 2021. An extension was granted by signing ARPA
into law, wherein an additional $7.25 billion of funding was made available and
the round was extended through May 31, 2021. Generally, the same eligibility
requirements were in place for borrowers who were first-time borrowers
of the PPP. Second-time PPP borrowers had to be employers of fewer than 300
employees, experienced a 25% decline in gross receipts during 2020, and have
already used the full amount of their first PPP loan.
Loan Forgiveness
The PPP is so impactful because the loans were generally forgiven. In essence, the loans were actually grants that enabled businesses to receive cash without seeing any increase in debt obligations. In addition, cancellation of indebtedness is generally income to the debtor, but forgiven PPP loans are specifically excluded from taxable income.
Note
that PPP loan forgiveness eligibility is reduced if (1) the employer reduces
its workforce or (2) the employer reduces salary or wages paid by more than 25%
to an employee with less than $100,000 annualized salary. Generally, businesses
had to spend at least 60% of the loan proceeds on payroll costs within
24 weeks after the loan was made to be eligible for full forgiveness.
Otherwise, partial forgiveness of the loan could occur.
Per
SBA guidance, businesses have 10 months from the end of the covered loan period
to submit a loan forgiveness application. So if your business still has a PPP
loan on its balance sheet, the loan is less than 10 months old, and all loan
proceeds have been used within 24 weeks after the loan was granted, consider
applying for loan forgiveness soon to take advantage of all the tax incentives.
Loan forgiveness applications must be submitted directly to the lender that
provided the loan.
Borrowers
of loans up to $150,000 will submit a streamlined 1-page PPP loan forgiveness
application, known as the PPPLoan Forgiveness Form 3508S. As required by the
Economic Aid Act, the form only requires you to describe the number of
employees you were able to keep on payroll as a result of the loan, estimated
total payroll costs, the total amount of your PPP loan, and the requested
forgiveness amount. You must also attest that you accurately completed
the forgiveness application and complied with the PPP loan requirements.
Borrowers of loans
exceeding $150,000 will submit either the PPP Loan Forgiveness Form 3508 (long
form) or the Form3508EZ. The “EZ” loan
forgiveness application may be submitted by borrowers who can satisfy any of
the following requirements:
- The borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the most recent quarter before the covered loan period, and did not reduce the number or hours of employees between January 1, 2020, and the end of the covered loan period (ignoring reductions related to employees who refused offers of rehire and whose positions could not be filled with similarly qualified workers).
- The borrower did not reduce salary
or wages for any employee by more than 25% during the covered loan period
as compared to the most recent full quarter before the covered loan
period, and was unable to return to the same level of
business activity it was operating at before February 15, 2020, due to
compliance with official requirements related to the maintenance of
standards for sanitation, social distancing, or any other worker or
customer safety requirement related to COVID-19.[TP3]
As
income from PPP loan forgiveness is explicitly excluded from business income,
the forgiven funds result in the recognition of tax-exempt income. Rev Proc
2021-48 was released on November 18, 2021, and instructed taxpayers to
recognize tax-exempt income from the forgiveness of their PPP loan as received
or accrued:
·
As
eligible expenses are paid or accrued;
·
When
PPP loan forgiveness application is filed; or
·
When
PPP loan forgiveness is granted.
The
recognition of tax-exempt income particularly benefits partnerships and S
corporations, as it is a positive adjustment to partner or shareholder basis
that could lower potential capital gains partners and shareholders would
eventually recognize when an eventual sale or liquidation of business interest
occurs. Note that expenses paid for using PPP loan proceeds are tax deductible,
but also reduce partner or shareholder basis as they are treated as any other
typical business expense.
Employee Retention Credit
The Employee Retention Credit (ERC) was created to provide relief to employers that had experienced closures due to the pandemic. Under the CARES Act, employers were eligible to receive a payroll tax credit for wages paid to their employees after March 12, 2020 and before January 1, 2021. CAA 2021 and ARPA then extended the ERC through December 31, 2021.Many employers may have reduced their tax deposits in anticipation of the ERC or retained payroll taxes in anticipation of the fourth quarter ERC in 2021. The IRS issued Notice 2021-65 to clarify that employers with reduced deposits on or before December 20, 2021will not be subject to a failure to deposit penalty if:
- The
employer reduced deposits in anticipation of the ERC, consistent with rules
provided in notice 2021-24;
- The
employer deposits the amounts initially retained in anticipation of the ERC on
or before the relevant due date for wages paid on December 31, 2021; and
- The
employer reports the tax liability resulting from the termination of the
employer’s ERC on the applicable employment tax return or schedule that
includes the period from October 1, 2021 through December 31, 2021.
Additional
clarification was provided in Notice 2021-65 that stated employers who are no
longer eligible for the ERC in fourth quarter 2021 but had already received
advance payments for this quarter will avoid failure to pay penalties if the
amounts are repaid by the due date of their applicable employment tax return
that includes the fourth calendar quarter of 2021.
See
below for summary of ERC details per the IRS:
|
|
CARES Act of March 2020 |
Relief Act of 2021 |
American Rescue Plan Act of 2021 |
|
Period for qualified wages paid |
March 13, 2020 - December 31, 2020 |
Extended: January 1, 2021 - June 30, 2021 |
Extended: July 1, 2021 - December 31, 2021 |
|
Eligible employer |
Any employer operating a trade, business, or a tax-exempt
organization, but not governments, their agencies, and instrumentalities |
Expanded to include certain governmental employers that are: |
No changes |
|
Employment tax offset |
Employer's portion of Social Security tax |
No change |
Changed to employer's portion of Medicare tax |
|
Eligibility requirements |
Employer must experience: |
Amended decline in gross receipts to be defined as quarter where
gross receipts are less than 80% of the same quarter in 2019. |
Amended to make the credit available to "recovery startup
businesses," employers who otherwise do not meet eligibility criteria
(full or partial suspension or decline in gross receipts). |
|
Percent of qualified wages eligible for credit |
--50% of qualified wages ($10,000 per employee for the year
including certain health care expenses). |
--Increased maximum to 70% ($10,000 per employee per calendar
quarter including certain health care expenses) for qualified wages paid
between January 1 and June 30, 2021. |
--Maximums unchanged. |
|
Credit maximums |
Maximum credit of $5,000 per employee in 2020 |
Increased the maximum per employee to $7,000 per employee per
quarter in 2021 |
--Maintained quarterly maximum defined in Relief Act ($7,000 per
employee per calendar quarter, resulting in a total of $28,000 per employee
in 2021). |
Restaurant Revitalization Fund
RRF
defined eligible restaurants for receiving relief to include traditional
restaurants, food stands, food trucks, food carts, caterers, saloons, inns,
taverns, bars, lounges, brewpubs, tasting rooms, or other places where the
patrons assemble for the primary purpose of being served food or drink. Businesses
that had applied for or received a Shuttered Venue Operators grant were
ineligible for RRF relief.
RRF
grants were especially attractive to restaurants because recipients did not
have to include the funds received in gross income. Due to seemingly unlimited
demand for the RRF grants, the SBA closed the program on July 2, 2021.Congress
may replenish the RRF through future legislation, but no guarantees have been
made as of the date of this writing.
Business Meals
Under
Sec 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, for tax
years 2021 and 2022, taxpayers will be able to deduct 100% of business meal
expenses where the food or beverages are provided by a restaurant, given:
- The expense is
an ordinary and necessary expense paid or incurred during the taxable year
in carrying on any trade or business.
- The expense is
not lavish or extravagant under the circumstances.
- The taxpayer, or
an employee of the taxpayer, is present at the furnishing of the food or
beverages.
- The food and
beverages are provided to a current or potential business customer,
client, consultant, or similar business contact. Final regulation
1.274-12(b)(3) defines “business associate” as a “person with whom the
taxpayer could reasonably expect to engage or deal in the active conduct
of the taxpayer's trade or business such as the taxpayer's customer,
client, supplier, employee, agent, partner, or professional adviser,
whether established or prospective.”
The
CARES Act allowed employers and self-employed individuals to defer paying the
employer share of their employees’ payroll taxes payable to the federal
government. Payroll taxes that were deferred included employer portion of FICA
taxes, half of SECA tax liability, and the employer and employee portion of
Railroad Retirement taxes.
The
deferral period began March 27, 2020 and ended on December 31, 2020. The
deferred payments must be paid over the following two years, with half due
December 31, 2021 and the other half due by December 31, 2022.
Employer-Provided Childcare Credit
Current
law allows employers to claim a tax credit of up to 25% of qualified childcare
expenditures plus 10% of qualified childcare resource and referral
expenditures, not to exceed a maximum annual credit of $150,000.
For
purposes of the credit, qualified childcare expenditures include costs of
constructing, acquiring, expanding, or rehabilitating property used as a
childcare facility or any costs incurred in operating the facility. The
childcare facilities must be made available to all employees. If qualified
childcare is the primary trade or business of the taxpayer, at least 30% of
enrollees must be dependents of the employees.
The
BBBA aims to make the following changes to the credit:
- Increase the credit rate for qualified childcare expenditures from 25% to 50%;
- Increase the overall annual credit limitation from $150,000 to $500,000; and
- Limit the amount of qualified childcare resource and referral expenditures to $1.5 million per year.
If
enacted, the BBBA would apply these changes beginning in tax year 2022.
Excess Business Losses
Under
current legislation from the CARES Act and ARPA, an Excess Business Loss (EBL)
of a taxpayer other than a corporation is disallowed for taxable years
beginning after December 31, 2017 and before January 1, 2027. An EBL is the
aggregate of deductions in excess of aggregate income from a trade or business,
and it is applied after passive and at-risk loss limitations. In essence, it
limits the amount of losses an individual taxpayer can claim on their return in
a given tax year based on their AGI. For tax year 2021, single filers are limited to
$262,000 trade or business losses in a tax year, while joint filers are limited
to $524,000.
Trade or business activities for purposes of the EBL include Schedule C, some Schedule E, Schedule F, and pass-through activities (i.e. Partnership and S corporation gain or loss).
Executive Compensation
ARPA has made sweeping changes to executive compensation requirements for corporate officers. Prior to its enactment, executive compensation was limited to $1 million for the CEO, CFO, and three next highest compensated officers of publicly traded companies. These five covered employees are permanently considered covered employees subject to the $1 million compensation cap.ARPA
expands this requirement to the next five highest compensated
officers of the company in addition to the aforementioned five
permanently covered officers, to be determined annually. This
places a greater tracking and recordkeeping requirement on large corporations,
but to give companies enough time to plan for the change, this provision will
not take effect until tax year 2027.
Corporate Net Operating Losses
Many
businesses experienced substantial net
operating losses (NOLs) due to the COVID-19. In response, the CARES
Act allowed businesses with NOLs generated after December 31, 2017 and before
January 1, 2021 to be carried back to each of the five tax years preceding the
tax year of such loss. The CARES Act also removed the 80% taxable income
limitation for years that these 2018, 2019, and 2020 NOLs were carried back to,
instead allowing the NOL carryback to 100% offset taxable income. Any unused
NOLs after carrying back to the previous five tax years would then carryforward
indefinitely and once more have the 80% taxable income limitation applied.
Carrying
NOLs back to pre-2018 income provides unique benefits to corporations to take
advantage of pre-Tax Cuts and Jobs Act (TCJA) higher tax rates. Prior to the
enactment of TCJA’s flat 21% corporate income tax rate in 2018, the corporate
tax rate structure was graduated and got as high as 35% for some corporations. This
creates opportunities for larger corporations to recoup on significant tax
liabilities in prior years. Corporations should be wary that carrying back NOLs
to previous years where certain credits or deductions were taken could
materially affect later tax years. For instance, §179 election to expense
depreciable assets may have been taken in a prior year, but an NOL deduction
may change whether §179 would be claimed in that particular tax year.
Under
current legislation, NOLs generated after December 31, 2020 do not have an
option to carry back, but they may be carried forward indefinitely. In
addition, these NOLs will have the 80% taxable income limitation applied. See
below for summarization of NOL carryforward and carryback rules.
Corporate AMT
The
BBBA originally aimed to adjust the flat 21% corporate income tax rate and implement
a graduated income tax structure (similar to pre-TCJA tax rate structure in
place for corporations). The latest proposed legislation under BBBA instead
targets large corporations through the imposition of a 15% Alternative Minimum
Tax (AMT). The AMT would apply to certain corporations (other than S
corporations, Regulated Investment Companies, or Real Estate Investment Trusts)
with three-year average annual adjusted financial statement income above $1
billion. In its current format, the bill would apply such AMT to corporations beginning
in 2023.
Corporate Charitable Contributions
Prior
to COVID-19, corporate charitable contributions could not exceed 10% of taxable
income prior to the contribution or any dividends received deduction. The CARES
Act temporarily increased the 10% corporate limit to 25% for 2020. CAA 2021
extended this 25% corporate limitation through 2021.
Excise Tax on Repurchase of Corporate Stock
The
BBBA seeks to impose a 1% excise tax on publicly traded US corporations on the
value of stock that is repurchased by the corporation during a taxable year.
“Repurchases” include redemptions under §317(b). Repurchases subject to the
excise tax would be reduced by the value of any new stock issuances to the
public and employees. The following would be excluded from excise tax
imposition:
- Tax-free
reorganizations under §368(a);
- Aggregate
annual repurchases below $1 million;
- Repurchases
treated as stock dividends;
- Repurchases
contributed to ESOPs or similar plans;
- Repurchases
by dealers in securities; and
- Repurchases
by Regulated Investment Companies or Real Estate Investment Trusts.
The
proposed legislation currently takes effect for tax year 2022 and beyond.
§1202 Gains
If enacted, this legislation would apply to sales and exchanges taking place on or after September 13, 2021.
That Wasn't So Bad Right?
As you can see there is no shortage of new law for businesses this year, but as always we are on top of it so you don't have to be! If you have any questions about the information discussed here just drop us a line.
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