On Monday, December 21, 2020, the United States House of Representatives and the United States Senate passed the Emergency Coronavirus Relief Act, which is expected to be signed into law by President Trump. Here is a summary of the major tax-related provisions of the $900 billion bill:
- Deductibility of expenses paid with proceeds of a Paycheck Protection Program (PPP) loan: Under the new law, taxpayers will now be able to deduct expenses paid with the forgiven proceeds of a PPP loan on their respective tax return. When Congress authorized the PPP under the CARES Act, they specially excluded forgiveness of a PPP loan from the definition of taxable income. This bill reverses the Internal Revenue Service position that no tax deduction would be allowed for expenses paid with this tax-free income. Without this change, many taxpayers could have faced large tax bills due to the expected forgiveness of their PPP loan.
- Direct Economic Impact Payments: Another round of “stimulus checks” will be sent out to those making under $75,000 per year ($150,000 for married couples). Each eligible individual will be entitled to a payment of $600, as opposed to $1,200 in the prior round of payments. In addition, those with children would be entitled to a payment of $600 per dependent child. While it is not currently clear, indications are that payments will be based on a taxpayer’s 2019 tax return. The payments are structured as “advanced tax credits” and any difference between the amount received and the amount a taxpayer is entitled to will be “trued up” on their 2020 personal tax return. Secretary of the Treasury Steven Mnuchin has indicated that payments could go out as soon as next week.
- Example: A married couple, who makes under $150,000 per year, had their first child in 2020. Since they could not claim their new child as a dependent on their 2019 tax return, they should receive a payment of $1,200. However, they should be entitled to a $1,800 payment. Once the couple files their 2020 individual tax return, they will claim their new dependent and be eligible to receive a $600 refundable credit on their 2020 tax return to make up this difference.
- Extension of the Employee Retention Tax Credit: The Employee Retention Tax Credit was originally enacted as part of the CARES Act and is a refundable tax credit against an employer’s share of FICA taxes. It was designed to reward those companies who kept employees on the payroll. The bill extends the period of time the credit can be claimed.
- 100% deduction for business meal expenses: The bill allows companies to fully deduct the costs of certain business meals. Historically, businesses have only been able to deduct 50% of those costs.
More details will be shared as further clarification is provided. Please contact your GBQ tax representative should you have any questions or if you would like to discuss the above information in more detail.
Article written by:
Rob Roll, CPA
Manager, Tax & Business Advisory Services