Key Tax Provisions of $1.9 Trillion COVID-19 Aid Package
Key Takeaways for Businesses & Their Owners
Deductibility of Excess Business Losses: The 2017 Tax Cuts and Jobs Act (the TCJA) limited non-corporate taxpayers’ ability to deduct excess business losses—the excess of the aggregate business gross deductions over aggregate business gross income—to $250,000 per year (or $500,000 for joint filers), with unused excess business losses carried forward as net operating losses. Under The Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress delayed the limitation until 2021 such that the limitation would apply for tax years 2021-2025. Now, the Rescue Act has extended the limitation by one year such that the limitation will apply for tax years 2021-2026.
Repeal of Worldwide Interest Expense Apportionment Election: Congress enacted Section 864(f) of the Internal Revenue Code of 1986, as amended (the Code) in 2004. Section 864(f) permits taxpayers to elect to apportion interest expense on a worldwide basis, which may have implications for foreign tax credit calculations. Although section 864(f) was enacted in 2004, its effective date has been delayed several times, and it was scheduled to go into effect beginning with the 2021 tax year. The Rescue Act repealed section 864(f), which may affect how multi-national groups approach financing transactions and intercompany arrangements on a going-forward basis.
Compensation of Employees of Publicly Held Corporations: Under current law, a publicly held corporation’s compensation deduction is limited to $1 million per year for compensation paid to any “covered employee,” which includes the corporation’s principal executive officer, principal financial officer, the three other highest-paid employees, and anyone who qualified under one of those categories for tax years after December 31, 2016. The Rescue Act broadens the definition of “covered employee” to include the eight other highest-paid employees, rather than the three other highest-paid employees, for tax years after December 31, 2026. With this additional cap on a corporation’s compensation deduction, publicly held corporations may see a larger tax bill.
Expansion of Loans & Grants
Tax Treatment of Targeted Economic Injury Disaster Loan Advances: Congress made “targeted economic injury disaster relief loan advances” (Targeted EIDL) available as part of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act passed on December 27, 2020, to provide additional funds to small businesses in low-income communities. The Rescue Act provides additional guidance on the income tax treatment of Targeted EIDL. Specifically, the Rescue Act provides that such advances will not be included in gross income. Further, grants received by partnerships and S corporations will be treated as tax-exempt income for purposes of Sections 705 and 1366 of the Code, which will increase the partners' and shareholders’ bases in their business interests.
Restaurant Revitalization Fund: The Rescue Act creates the Restaurant Revitalization Fund for eligible small business restaurants, food trucks, taverns, and similar businesses. Similar to Targeted EIDL, grant amounts will not be included in gross income. As with partnerships and S corporations receiving Targeted EIDL, such grants will be treated as tax-exempt income for purposes of Sections 705 and 1366 of the Code. Please see our separate comprehensive client alert regarding the Restaurant Revitalization Fund (published March 10, 2021).
Changes Affecting Employees
COBRA Premium Subsidy: Eligible individuals may receive a 100-percent subsidy for COBRA premiums paid between April 1, 2021, and September 30, 2021. Employers will be allowed a quarterly tax credit against Medicare payroll tax equal to the premium amounts not paid by these eligible individuals. If the credit amount exceeds the quarterly Medicare payroll tax, the excess will be treated as an overpayment. Any such amounts are not considered forgivable “payroll costs” for purposes of the Paycheck Protection Program (PPP) loan.
Employer-Provided Dependent Care Assistance: Generally, an eligible employee’s gross income does not include amounts paid by an employer for dependent care assistance provided to the employee under a qualified program up to $5,000. For 2021, the Rescue Act increased the exclusion to $10,500.
Employee Retention Tax Credit: The Employee Retention Tax Credit (ERTC) would have expired on June 30, 2021, but was extended under the Rescue Act through December 31, 2021. The Rescue Act further expands the credit in the case of a “severely financially distressed employer” (i.e., an employer that experienced a gross receipts reduction of more than 90 percent as compared to the same quarter in 2019). Such an employer may treat all wages paid to employees as qualified wages, regardless of the number of full-time employees (similar to how a small employer is treated under the pre-Rescue Act version of the ERTC). Additionally, startup businesses established after February 15, 2020, with annual gross receipts of up to $1 million and that otherwise do not meet the ERTC eligibility tests are now eligible for the ERTC.
Key Takeaways for Individuals
Unemployment Benefits: For 2020, taxpayers earning less than $150,000 can exclude from taxable income the first $10,200 of unemployment compensation. The $150,000 limit applies to jointly filed, head of household, and single returns, but in the case of a joint return, the $10,200 exclusion applies separately to each spouse for a total exclusion of $20,400.
Individual Recovery Rebate: The Rescue Act includes a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021. Advance payments of the credit will be sent to individuals as economic impact payment checks.
Child Tax Credit: The Rescue Act temporarily expands the Child Tax Credit from $2,000 to $3,000 for children ages 6 to 17 (previously ages 6 to 16) and sets the credit at $3,600 for children under 6 years old. The amount of the credit is phased out for individuals earning over $75,000 and couples earning over $150,000 per year. Further, the Rescue Act makes the Child Tax Credit fully refundable.
Child and Dependent Care Tax Credit: The Rescue Act makes the Child and Dependent Care Credit refundable and increases the dollar limit to $8,000 (from $3,000) for one dependent and $16,000 (from $6,000) for two or more dependents.
Earned Income Tax Credit: The Rescue Act increases the benefit provided by the Earned Income Tax Credit for those without children. The Earned Income Tax Credit may now be claimed by those 19 years of age and older, which was previously available to those between the ages of 25 and 64. Further, the Rescue Act increases the credit and the phase-out percentages for eligible taxpayers without children.
Student Loan Forgiveness: Certain student loans discharged between December 31, 2020, and January 1, 2026, will be tax-free rather than treated as taxable income. In the near term, this may affect borrowers who are on income-driven repayment plans who have elected to repay their loans over a 20-year or 25-year period but who have a remaining balance at the end of the repayment term. Prior to the Rescue Act, the remaining balance would have been forgiven and taxed at the borrower’s normal income tax rate.
The global pandemic caused by the COVID-19 virus has left many businesses and individuals on financially shaky ground. To discuss how the provisions described above may affect your business, please contact the tax professionals of Arent Fox LLP.