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Tax Effects of the American Rescue Plan Act

In addition to the $1,400 stimulus payments to many Americans, the American Rescue Plan Act provides many other relief measures, and also some new business tax measures, that should be noted.

CPA Practice advisor

The American Rescue Plan Act of 2021 (ARPA), enacted by President Joe Biden on Thursday, is an approximately $1.9 trillion COVID-19 relief, funding and tax bill that has received a lot of attention for the inclusion of $1,400 direct payments to individuals.

Here is a look at the final version of the tax provisions:

Unemployment Benefits

The act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year. The State of Michigan has recently announced they will follow suit.

Recovery Rebates aka Stimulus Checks

The act creates a new round of economic impact payments to be sent to qualifying individuals. The same as last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. The act creates a new Sec. 6428B that provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent (as defined in Sec. 152) for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.

For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.

The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.

Child Tax Credit

The act expands the Sec. 24 child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.

The act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.

The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.

The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.

Taxpayers in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and their increase tax by the excess of the advance payment amount over the actual credit allowed. But taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.

Earned Income Tax Credit

The act also makes several changes to the Sec. 32 earned income tax credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.

The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.

The credit would be allowed for certain separated spouses.

The threshold for disqualifying investment income would be raised from $2,200 to $10,000.

Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.

Child & Dependent Care Credit

The act makes various changes to the Sec. 21 child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Family & Sick Leave Credits

The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as Secs. 3131 (credit for paid sick leave), 3132 (credit for paid family leave), and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.

The act increases the limit on the credit for paid family leave to $12,000.

The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.

The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.

The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

The credits are expanded to allow 501(c)(1) governmental organizations to take them.

Employee Retention Credit

The act codifies the employee retention credit in new Sec. 3134 and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and it allows eligible employers to claim a credit for paying qualified wages to employees.

Under the act, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.

Premium Tax Credit

The act expands the Sec. 36B premium tax credit for 2021 and 2022 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A). Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.

Student Loans

The act amends Sec. 108(f) to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.

What else does the American Rescue Plan Act do?
  • An extension of the $300 federal unemployment benefit supplement through Sept. 6,
  • $15 billion of additional targeted Economic Injury Disaster Loan (EIDL) grants
  • $28.6 billion to fund a new grant program for certain restaurants,
  • $7 billion of expanded Paycheck Protection Program (PPP) eligibility for certain nonprofit organizations,
  • support for Affordable Care Act coverage,
  • an extension and expansion of paid sick leave and Family and Medical Leave Act leave tax credits through September,
  • an extension of and increase in certain FFCRA (defined below) credits,
  • extends the 15% increase in Supplemental Nutrition Assistance Program benefits through September
  • provides $7.5 billion for Centers for Disease Control and Prevention vaccination distribution,
  • $5.2 billion for Biomedical Advanced Research and Development Authority vaccine procurement;
  • $48.3 billion for testing, contact tracing and personal protective equipment for healthcare workers;
  • $50 billion for the Federal Emergency Management Agency Disaster Relief Fund;
  • $125 billion for K-12 schools; $39.6 billion for colleges and universities;
  • $39 billion for child care programs; $25 billion for emergency rental assistance;
  • $7.6 billion for community health centers; $7 billion to help with broadband for remote learning;
  • $4.5 billion for the Low-Income Home Energy Assistance Program;
  • and $3.8 billion to support state mental health and substance abuse programs.

The ARPA contains several revenue-raising provisions, including

  • an outright repeal of the long-delayed Section 864(f) worldwide interest allocation rules, which otherwise would have applied beginning this year;
  • an expansion of the Section 162(m) compensation deduction limitation to include an additional five of the highest-paid corporate employees, beginning in 2027;
  • increased information reporting for certain third-party settlement organizations regarding payees receiving in excess of $600 annually;
  • and an extension for one year – through 2026 – of the Section 461(l) limitation on excess business losses for noncorporate taxpayers.

The ARPA does not include federally proposed so-called Mobile Workforce provisions or COVID-19-related liability protections, and most believe those proposals are unlikely to be enacted in 2021. The ARPA also contains no restrictions on the Section 461(l) loss limitation suspension for 2018-2020 pursuant to prior COVID-19 relief legislation and also does not prevent net operating losses generated in 2018-2020 from being carried back even if not yet carried back in filed tax returns.

Portions of the ARPA are supplemental in certain respects to the Dec. 27, 2020, Consolidated Appropriations Act, 2021 (CAA); the March 27, 2020, Coronavirus Aid, Relief, and Economic Security (CARES) Act; the March 18, 2020, Families First Coronavirus Response Act (FFCRA); and the March 6, 2020, Coronavirus Preparedness and Response Supplemental Appropriations Act.

I. Details of Certain Corporate Tax Provisions

A. Repeal of IRC Section 864(f) Worldwide Interest Allocation Rules IRC Section 864(f), enacted in 2004 with a delayed effective date, would have allowed taxpayers to elect to allocate and apportion interest expense on a worldwide basis. The provision has been repeatedly delayed by legislation but was finally scheduled to be effective in 2021. The ARPA permanently repeals the provision. The repeal is scored as raising $22 billion to help lower the cost of the ARPA.

B. Increase in Number of Employees Subject to IRC Section 162(m)’s Limitation on Deductions of Executive Compensation IRC Section 162(m) generally prohibits tax deductions by publicly traded corporations for so-called covered employees to the extent annual compensation of those employees exceeds $1 million. Section 162(m) generally applies to the CEO, the CFO and the three next-highest-compensated individuals. For tax years beginning in 2027, the ARPA requires corporations to also include the five next-highest-compensated individuals, so that the total number of covered individuals will be at least 10. Once an individual is subject to Section 162(m) under pre-ARPA law, the individual continues to be covered by Section 162(m) even if not among the five highest-compensated employees. With respect to the five next-highest-compensated individuals, the ARPA does not provide for continuing coverage by Section 162)(m) if they later fall outside the ARPA-expanded group. The expansion of Section 162(m) is scored as raising $6 billion to help lower the cost of the ARPA.

II. Details of Certain Tax and Related Provisions Relevant to Noncorporate Businesses and Individuals

A. Extension of IRC Section 461(l)’s Limitation on Excess Business Losses of Noncorporate Taxpayers IRC Section 162(l) generally disallows use of noncorporate losses in excess of $250,000 ($500,000 for joint filers). The CARES Act removed the Section 461(l) limitation for tax years 2018-2020. The ARPA pushes out the current expiration of Section 461(l) from 2026 to 2027. The ARPA does not remove or change CARES Act provisions relating to Section 461(l).

B. Recovery Rebate PaymentsThe ARPA provides for additional recovery rebates of up to $1,400 for most individual U.S. residents. The rebates begin to phase out for individuals with earnings in excess of $75,000 ($150,000 for joint filers), with rebates being unavailable to individuals with earnings in excess of $80,000 ($160,000 for joint filers). The rebate, which will be delivered via direct deposit when possible, is not taxable income; it is an advance payment of a refundable tax credit on the taxpayer’s 2021 federal income tax return.

III. Additional Infrastructure Spending and Very Significant Tax Changes Are Forthcoming

With passage of the ARPA, the focus in Washington, D.C., now shifts to a second budget reconciliation bill – Biden administration tax changes, expected to be joined with infrastructure spending. The tax changes are expected to be substantial and far-reaching and to include corporate, individual and capital gains tax rate increases; international tax changes; and estate and gift tax changes.

President Biden’s fiscal year 2022 budget is expected to be released in mid- to late April, at which point the House and then the Senate will craft and approve a budget resolution to serve as the vehicle for the next reconciliation process. Most expect committee action to begin in the next few months, with ultimate enactment in the fall. Only 51 votes are needed to pass budget reconciliation legislation in the Senate.

The effective dates of the newly enacted provisions generally are expected to be Jan. 1, 2022, but certain provisions may have proposed effective dates tied to committee action or the date of enactment (for example, capital gains tax rate increases may be proposed to apply to sales occurring after the date of committee action in early October or the date of enactment of the legislation later in the fall). The effective dates of certain provisions may be phased in over time, and certain provisions may be enacted on a temporary basis to help keep the scored cost of the legislation within acceptable parameters.

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Is My Stimulus Payment Taxable?

As millions of people have received stimulus checks over the past year and start to spend their money, some wonder: Is my stimulus payment taxable?

The short answer: No.

In the somewhat longer words of the IRS: “No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.”

Not Your Average Tax Credit

The stimulus payment — or as the IRS calls it, the economic impact payment — is technically a tax credit for 2020. But this isn’t widely understood. Some people assume that the IRS will add the amount to your income, generating a bigger tax bill, or reduce your future tax refund when you file your tax return next year. Neither is the case, but this requires some explaining.

In the taxes, a tax deduction is a good thing. It reduces your income, which reduces the amount of tax you owe. If you had $50,000 in income and had a $5,000 tax deduction, your deduction would reduce your taxable income by $5,000. If you were in the 12% tax bracket, you’d reduce your taxes owed by $600 (12% of $5,000).

While a tax deduction is good, a tax credit is very good. A tax credit reduces your tax bill dollar for dollar. If you owe $1,500 in federal income taxes and you get a $1,000 tax credit, your tax bill sinks to $500.

A refundable tax credit is a thing of wonder. An ordinary tax credit can reduce your tax bill to zero, but it can’t turn a tax bill into a tax refund. Refundable tax credits can. For example, if you owed $1,000 in taxes but had a refundable tax credit of $1,200, you’d get a $200 tax refund check from the IRS.

Because you’re getting what amounts to a refundable tax credit now in the form of a stimulus payment, rather than waiting to get the money from the credit in 2021 when you actually file your 2020 tax return, you’re in effect getting an advanced refundable tax credit.

Recover Missed Stimulus Payments on 2020 Tax Returns

If, for some reason, you didn’t get any stimulus payment last year, but you’re owed one, you can get it this year when you file your 2020 tax return by claiming the Recovery Rebate Credit. If you don’t get the full amount that you were entitled to in 2020 or 2021 — you could also get that from your 2020 tax return.

What if it turns out that your stimulus payment was more than you were actually allowed? For example, suppose the IRS based your stimulus payment on your 2018 or 2019 tax return, when your income was lower, but your income is much higher for 2020? “If someone has income in 2020 that is higher than the tax return to calculate the advance rebate, they will not have to pay the credit back,” says Garrett Watson, senior tax policy analyst for the Tax Foundation, an independent, nonprofit tax policy organization. “In other words, any adjustments to a taxpayer’s rebate on 2020 tax returns will be in the taxpayer’s favor.”

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Michigan Small Business Survival Grant Program

The Michigan Small Business Survival Grant will award grants up to $20,000 to eligible businesses that been closed, or up to $15,000 to eligible businesses that have been partially closed or are otherwise open.
Grant funds can be used for eligible expenses including working capital to support payroll expenses, rent or mortgage payments, utility expenses and costs related to reopening a business.

Eligibility Requirements

In order to be eligible for funding under the Program, small businesses must be a for-profit or non-profit company and meet all criteria below. Furthermore, each local EDO may have additional eligibility criteria. Please use the table below to find your local EDO and review any additional eligibility criteria prior to applying.

  • Had 1 to 100 employees (including full-time, part-time and owner/employees) on a world-wide basis on November 17, 2020.
  • Is in an industry that demonstrates it is affected by the Order.
  • Needs working capital to support payroll expenses, rent, mortgage payments, utility expenses, or other similar expenses.
  • Demonstrates an income loss as a result of the Order as determined by the EDO in which an eligible business is located.
  • Is not a live music and entertainment venue that is eligible for funds under Section 401 of Public Act 257 of 2020: Michigan Stages Survival Grant Program.

Industries Affected by the Order

Eligible businesses disproportionately impacted by COVID-19 and the ‘Gatherings and Mask Order’ will largely fall into one of the categories below. However, businesses in other industries may be considered if they can demonstrate they meet the eligibility, at the discretion of the EDO, particularly if they were impacted by the Gatherings and Mask Order.

  • Food service establishments (such as restaurants and bars, coffee, bakeries, catering, breweries, distilleries, wineries, tea shops, banquet facilities and other food and beverage service providers)
  • Retail (such as boutiques, bookstores, hardware, anything being sold that is not food)
  • Exercise facilities (such as gyms, studios, pool facilities, ice skating rinks, organized sports)
  • Entertainment venues or live event venues that are not eligible for the Michigan Stages Survival Grant as defined under Section 401 of Public Act 257 of 2020
  • Recreational Facilities and places of public amusement (such as bowling alleys, arcades, bingo halls)
  • Nonprofits (such as library, museum, churches, religious centers, advocacy organizations)
  • Personal care services (such as hair, nail, tanning, massage, spa)
  • Schools
  • Childcare and Camps
  • Transportation (such as limo services)
  • Other (applicant must specify in the application)

Program Overview

Grant funding is distributed to the 15 local or nonprofit economic development organizations listed in the table below. Each local EDO will review submitted applications from businesses located in their area and provide grants to eligible small businesses that need working capital to support payroll expenses, rent, mortgage payments, utility expenses, or other similar expenses.

EDOs will be responsible for accepting, reviewing and approving applications, and ultimately, awarding and disbursing grant funds to the selected businesses. You can view a list of EDO contacts here.

Timeline

  • January 19, 2021: application window opens at 9:00 a.m. EST
  • January 22, 2021: application window closes at 12:00 p.m. EST
  • Week of January 25, 2021: EDOs carry out grant selection process
  • January 29 – February 28, 2021: Funds disbursed
  • If any funds are not disbursed by the EDOs by February 28, 2021, funds will be returned to the MSF for reallocation to one or more EDOs for disbursement to eligible businesses by April 30, 2021

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Highlights of the New Covid Stimulus Law

Stimulus checks are just part of it.

Also: more unemployment, PPP, EIDL loans, Employee Retention Credit, EIC, CTC, Eviction moratorium, and more.

Tax Practice Advisor

The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 is a $900B relief package provides relief through multiple measures and expands many of the provisions already put into place under the CARES Act. Below are some of the higher-impact items and more important elements of each provision.

Additional Round of Stimulus Payments

  • Direct Payments
    • $600 per eligible family member
    • $1,200 for married filing joint returns
    • $600 per dependent child under 17 years’ old
  • Credit phase-out starting at $75,000 of modified adjusted gross income for single individuals, $112,500 for head of household and $150,000 for married filing joint.
  • Advance payments are based on information on 2019 tax returns.
  • Taxpayers without a social security number are not eligible.
  • If the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, the taxpayer will receive the difference as a refundable tax credit. Taxpayers who receive an advance payment that exceeds the credit do not need to repay the amount.

Unemployment Insurance

  • Additional $300 per week for all workers receiving unemployment benefits, from December 26, 2020 to March 14, 2021.
  • Extends and phases out PUA, a temporary federal program covering self-employed and gig workers, to March 14 (after which no new applicants) through April 5, 2021.
  • Provides additional weeks for those who would otherwise exhaust benefits by extending PUA from 39 to 50 weeks — with all benefits ending April 5, 2021.
  • The bill also provides an extra benefit of $100 per week for certain workers who have both wage and self-employment income but whose base UI benefit calculation doesn’t take their self-employment into account.

Paycheck Protection Program Loans

  • Businesses are now allowed to deduct expenses associated with their forgiven PPP loans.
  • The new law provides $284.45 billion to reopen and strengthen PPP for first and second time borrowers and reauthorizes the program through March 31, 2021.
  • Develops a process for a small business to receive a second PPP if the small business has less than 300 employees and can demonstrate a revenue reduction of 25 percent.
  • Creates a simplified PPP loan forgiveness application for loans under $150,000 whereby the borrower signs and submits a one-page certification that requires the borrower to list the loan amount, the number of employees retained, and the estimated total amount of the loan spent on payroll costs.
  • Expands the list of eligible expenses to include covered operations (software, cloud computing and other human resources and accounting needs), PPE, covered supplier costs and damage costs due to public disturbances.
  • Repeals the CARES Act provision that requires borrowers to deduct their EIDL Advance from their PPP loan forgiveness amount.

Economic Injury Disaster Loan (EIDL) Advance Program

  • The new law provides $25 billion to restart and extend the EIDL Advance Grant for small businesses in low income communities.
  • Creates a process for existing EIDL Advance grantees that received less than $10,000 to reapply for the difference between what they received and the maximum EIDL Advance Grant of $10,000.

Extension of the Employee Retention Credit (ETRC)

  • Beginning on January 1, 2021 and through June 30, 2021, the provision:
    • Increases the payroll tax credit rate from 50 percent to 70 percent of qualified wages.
    • Expands 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.
    • Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter.
    • Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees.
  • Employers who receive Paycheck Protection Program (PPP) loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds.

Special lookback for Earned Income Credit and Child Tax Credit

  • Special temporary rule allowing lower-income individuals to use their earned income from tax year 2019 to determine the Earned Income Tax Credit and the refundable portion of the Child Tax Credit (i.e., the Additional Child Tax Credit) in the 2020 tax year.

Eviction Moratorium and Rental Assistance

  • The bill extends the moratorium on evictions under the CARES Act, designed to protect renters from eviction, until January 31, 2021.
  • Families struggling to pay rent or with past due rent will be able to get assistance with paying past due rent, future rent payments, as well as utility bills.

Miscellaneous Provisions

  • A 100% deduction for business meal food and beverage expenses provided by a restaurant that are paid or incurred in 2021 and 2022. Currently, the deduction is available for only 50% of such expenses.
  • Extends the non-itemizer charitable deduction for 2021 and increases the maximum amount that may be deducted to $600 for married couples filing a joint return (while non-married filers or married filers who file separately are limited to $300).
  • For 2020 and 2021, the percentage limit rules for individuals making cash charitable contributions do not apply. (i.e. you don’t need to apply the 60% AGI limitation)
  • Further flexibility for taxpayers to rollover unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. Permits employers to allow employees to make a 2021 mid-year prospective change in contribution amounts.
  • College students and parents with federal student loans will receive an additional extension on student loan payments, and will not be required to make payments on Federal Student loans until April 1, 2021. This includes both principal and interest payments.
  • Contractors who were temporarily unable to work due to facility closures and other restrictions will be able to receive reimbursement for paid leave from federal agencies.

Extender Provisions

  • The 7.5% adjusted gross income limit (instead of 10%) pertaining to the medical expense deduction has been made permanent.
  • The higher learning tuition deduction is made permanent by increasing the phase-out limits in the permanent lifetime learning credit.
  • The exclusion from gross income of discharge of qualified principal residence debt has been extended through 2025 (was due to expire at the end of 2020). The maximum acquisition debt limits are reduced from $2 million to $750,000 (from $1 million to $375,000 for married filing separate returns).
  • The treatment of mortgage insurance premiums as qualified residence interest has been extended for one year through 2021 (was due to expire at the end of 2020).
  • The nonbusiness energy property credit for qualified energy improvements to a principal residence has been extended for one year through 2021 (was due to expire at the end of 2020).

In conclusion, this $900B relief package delivers a second round of economic stimulus, expands on CARES Act provisions, and provides additional relief through multiple different measures.

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IRS Reminds Taxpayers of Special $300 Charity Deduction without Itemizing

The CARES Act includes several temporary tax changes helping charities, including the special $300 deduction designed especially for people who choose to take the standard deduction, rather than itemizing their deductions.

The Internal Revenue Service says there is a new tax provision for taxpayers that will allow more people to easily deduct up to $300 in donations to qualifying charities this year. Following special tax law changes made earlier this year, cash donations of up to $300 made before Dec. 31, 2020, are now deductible when people file their taxes in 2021.

“Our nation’s charities are struggling to help those suffering from COVID-19, and many deserving organizations can use all the help they can get,” said IRS Commissioner Chuck Rettig. “The IRS reminds people there’s a new provision that allows for up to $300 in cash donations to qualifying organizations to be deducted from income. We encourage people to explore this option to help deserving tax-exempt organizations – and the people and causes they serve.”

The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted last spring, includes several temporary tax changes helping charities, including the special $300 deduction designed especially for people who choose to take the standard deduction, rather than itemizing their deductions.

Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers.

Under this new change, individual taxpayers can claim an “above-the-line” deduction of up to $300 for cash donations made to charity during 2020. This means the deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations.

Before making a donation, the IRS reminds people they can check the special Tax Exempt Organization Search tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.

Cash donations include those made by check, credit card or debit card. They don’t include securities, household items or other property. Though cash contributions to most charitable organizations qualify, some do not. Check Publication 526, Charitable Contributions, and the TEOS for more information.

Though cash contributions to most charitable organizations qualify, those made to supporting organizations and donor-advised funds do not.
The IRS reminds everyone giving to charity to be sure to keep good records. By law, special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining a receipt or acknowledgement letter from the charity, before filing a return, and retaining a cancelled check or credit card receipt. For details on these recordkeeping rules, see Publication 526, available on IRS.gov.

In addition, the CARES Act includes other temporary provisions designed to help charities. These include higher charitable contribution limits for corporations, individuals who itemize their deductions and businesses that give food inventory to food banks and other eligible charities. For more information about these and other Coronavirus-related tax relief provisions, visit IRS.gov/Coronavirus.

SBA Update for PPP Loans
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SBA Update for PPP Loans

Loan Forgiveness

Recipients of Paycheck Protection Program (PPP) loans of $50,000 or less will be able to apply for forgiveness using a simplified application that was released by Treasury and the U.S. Small Business Administration (SBA).

A new interim final rule (IFR) provides new guidance concerning forgiveness and loan review processes for PPP loans of $50,000 or less.

Under the IFR, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on:

  • Reductions in full-time-equivalent (FTE) employees; and
  • Reduction in employee salary or wages.

The new application form, SBA Form 3508S, can be used by PPP borrowers applying for forgiveness on PPP loans with a total loan amount of $50,000 or less, unless those borrowers together with their affiliates received loans totaling $2 million or more. 

Of the 5.2 million PPP loans approved by the SBA, about 3.57 million were for $50,000 or less, according the IFR. Those loans accounted for about $62 billion of the $525 billion in PPP loans. About 1.71 million PPP loans of $50,000 or less were made to businesses that reported having zero employees or one employee.

The IFR streamlines the forgiveness process for PPP borrowers of $50,000 or less because they will not be required to perform potentially complicated FTE or salary reduction calculations. Borrowers of $50,000 or less still will have to make some certifications and provide documentation to the lender for payroll and non-payroll costs.

Lender Responsibilities

For PPP loans of all sizes, the IFR also contains guidance on lender responsibilities with respect to the review of borrower documentation of eligible costs for forgiveness in excess of a borrower’s PPP loan amount.

According to the IFR, when a borrower submits Form 3508S or the lender’s equivalent form, the lender will be required to:

  • Confirm receipt of the borrower certifications contained in the form; and
  • Confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the form.

The borrower is responsible for providing an accurate calculation of the loan forgiveness amount. The borrower will attest to the accuracy of the reported information and calculations on the loan forgiveness application. Lenders are permitted to rely on borrower representations, according to the IFR.

In addition, the IFR addresses what a lender should do if a borrower submits documentation of eligible costs that exceed the borrower’s PPP loan amount. According to the IFR, the amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.

Whether a borrower submits SBA Form 3508, 3508EZ, or 3508S, or a lender’s equivalent form, the lender is required to confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs. If applicable, the lender also is required to confirm the borrower’s calculations on the loan forgiveness application, up to the amount required to reach the requested forgiveness amount.

Deferral Period Clarified

The US Small Business Administration released guidance last week clarifying that lenders must recognize the previously established extended deferral period for payments on the principal, interest, and fees on all Paycheck Protection Program (PPP) loans, even if the executed promissory note indicates only a six-month deferral.

The guidance means that lenders must immediately comply with the extended deferral period and notify borrowers of the change.

The Paycheck Protection Flexibility Act of 2020, P.L. 116-142, extended the deferral period for loan payments to either (1) the date that SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.

Before the Flexibility Act became law June 5, the deferral period could end after six months. And while the Flexibility Act extended the deferral period, it did not specify whether lenders and borrowers had to modify promissory notes used for PPP loans to reflect the extended deferral period.

Because the first PPP loans were awarded in April, some PPP borrowers had recently received notices from lenders that payments on their PPP loans were due. The new guidance, found in question No. 52 in the SBA’s frequently asked questions document for the PPP, clarifies that the deferral period extension automatically applies to all loans, with no requirement from the SBA of a formal modification of the promissory note.

This is not intended as legal advice; for more information, please contact your lender.