Remember the Consolidated Appropriations Act (CAA)? It was signed into law on December 27, 2020, providing relief to individuals and businesses affected by the COVID-19 pandemic. In addition to reducing 2020 tax bills, the act provides several tax benefits for 2021, so be sure to keep it in mind as the year rolls along. Here are some highlights that contractors should know about.
PPP loans expanded
The CAA permitted eligible small businesses that received forgivable Paycheck Protection Program (PPP) loans last year to apply for a “second draw” loan by March 31, 2021. This date was later extended to May 31, 2021. The act also opened the program to first-time PPP applicants, who could apply for loans by that same date. The federal government announced the availability of even more PPP funding for forgivable loans to eligible businesses under the American Rescue Plan Act (ARPA), signed into law in March.
The CAA expanded the ways borrowers may use PPP loan proceeds without jeopardizing their eligibility for loan forgiveness. Under previous law, to qualify for loan forgiveness, at least 60% of PPP loan funds had to go toward payroll expenses, while the remaining 40% could be used for mortgage, rent or utilities. Now, borrowers may also use that 40% for:
- “Covered operations expenditures,” such as software or cloud computing services,
- “Covered property damage costs” — that is, unreimbursed costs related to vandalism or looting in connection with public disturbances in 2020,
- “Covered supplier costs” for goods that are essential to operations and meet certain requirements, and
- “Covered worker protection expenditures” — that is, costs incurred to comply with health guidelines, such as expenses for personal protective equipment, physical barriers or air filtration systems.
Furthermore, the CAA clarified that payroll costs, for purposes of meeting the PPP’s 60% requirement, includes employer-provided group life, dental, vision or disability insurance. In addition, the act gave borrowers the flexibility to choose a “covered period” of any length between eight and 24 weeks. (This is the period during which PPP funds must be spent to qualify for forgiveness.) And it streamlined the forgiveness application process for businesses that borrow less than $150,000.
Employment credit enhanced
The CAA enhanced the employee retention credit created by last year’s CARES Act. This fully refundable credit is designed to encourage businesses affected by the pandemic to retain employees on their payrolls. The act eliminated the CARES Act’s ban on the credit for companies that received PPP loans. So, loan recipients are eligible, provided the credit isn’t claimed for wages paid with proceeds of a forgiven loan.
Under the CAA, the employee retention credit is equal to 70% of up to $10,000 in qualified wages per quarter, compared to 50% of up to $10,000 per year under previous law. That means your maximum credit for the first two quarters of 2021 is $7,000 per eligible employee per quarter. In 2020, the maximum credit was $5,000 per eligible employee for the year.
Qualified wages are those paid while your operations are fully or partially suspended by a COVID-19-related government order or during a quarter in which your gross receipts have declined by at least 20% (previously, 50%) compared to the same quarter in 2019.
The employee retention credit is available to companies of all sizes, but smaller businesses have a significant advantage: They’re permitted to claim it for qualified wages regardless of whether the recipients continue to work. Larger companies, on the other hand, may claim the credit only for wages paid to employees who aren’t working.
Last year, this advantage was available to businesses with 100 or fewer employees, but the CAA increased the threshold to 500 employees for 2021. In other words, all businesses with 500 or fewer employees may claim the credit for qualifying wages, regardless of whether employees continue working.
The ARPA retained the CAA’s enhancements to the employee retention credit and extended its availability to eligible employers through December 31, 2021. This includes “recovery startup businesses” — companies that launched after February 15, 2020, with average annual gross receipts of $1 million or less.
Other items of note
The CAA extended the work opportunity tax credit through 2025, so consider taking advantage of its benefits if you hire new workers. The credit can offset up to $2,400 in taxes per new hire from specified disadvantaged groups, including certain welfare recipients, disabled workers and ex-felons. Higher amounts may be available for eligible veterans. Keep in mind that, to qualify, you must follow certain procedures before extending a job offer.
In addition, the act extended tax incentives for certain work performed in economically disadvantaged “empowerment zones” through 2025. Eligible employers may claim a 20% tax credit on up to $15,000 in wages paid to employees who work and reside within an empowerment zone.
Expenses paid with PPP proceeds are deductible
When Congress authorized Paycheck Protection Program (PPP) loans in last year’s CARES Act, it gave borrowers an extra gift by allowing them to exclude the amount of PPP loan forgiveness from their gross income for tax purposes. Unfortunately, in a ruling later in 2020, the IRS undid this tax benefit by prohibiting borrowers from writing off otherwise deductible expenses paid with forgiven PPP loan proceeds.
To clarify its original intent, Congress provided in the Consolidated Appropriations Act that otherwise deductible expenses remain deductible regardless of whether the PPP loan used to pay those expenses is forgiven.
Tax breaks available
The CAA and ARPA provide a variety of intriguing tax- and financial-planning opportunities for construction companies. Contact us or work closely with your tax advisors to ensure you receive all the tax breaks to which you’re entitled.