TAX PROVISION

Many Provisions Will Have a Favorable Impact on Businesses

Tax & Economic Provisions of 2021 Stimulus | January 2021

The Act clarifies that no deduction will be denied for otherwise deductible costs attributable to PPP loans that are ultimately forgiven. This is welcome news to businesses benefitting from the forgiveness provisions of the PPP loans. It also removes uncertainty for tax practitioners who otherwise were faced with many compliance issues, especially when the debt forgiveness occurs in 2021 but the expenses were incurred in 2020.

In addition to the extension of the employee retention tax credit, the Act extended the employer credit for paid family and medical leave through 2025.

• This elective benefit provides employers with a tax credit for wages paid to qualified employees on family or medical leave.
• This credit is a percentage of the underlying wages, beginning at 12.5% if the paid leave is at least 50% of such wages.
• The credit increases as the paid leave as a percentage of normal wages increases but is capped at 25%. An employer may take this credit for up to 12 weeks of paid leave per employee.

The Act also provides an expanded charitable contributions deduction for corporations. Under pre-Act and pre-CARES law, a corporation’s charitable contribution deduction was limited to 10% of adjusted taxable income, with any disallowed contributions eligible for a five-year carryforward. CARES allowed corporations to disregard the 10% limitation for cash contributions made to 50% charitable organizations. Such contributions, however, could not exceed the excess of 25% of a corporation’s adjusted taxable income over all other contributions deducted in 2020.

The Act now allows a corporation to deduct qualified disaster relief contributions up to 100% of adjusted taxable income.

• Qualified disaster relief contributions must be paid during a period beginning January 1, 2020 and ending 60 days after the enactment of the Act.
• The contribution must be made for relief efforts in a federally declared disaster area.
• A corporation is also required to obtain written documentation from the recipient confirming that the contribution will be used for disaster relief.

Both the work opportunity tax credit and the new markets tax credit programs, originally set to expire at the end of 2020, are extended through 2025. The work opportunity tax credit provides employers with an elective tax credit based on first-year wages paid to new hires from 10 targeted groups. The new markets tax credit, which applies to individuals as well, is equal to 39% of capital invested in a qualified community development entity.

A qualified community development entity must loan or invest substantially all of its capital in businesses operating in low-income communities.