As first reported in our December 22 Tax Alert, members of Congress came together in the nick of time to pass a $900 billion stimulus bill that includes funding the government for 2021, additional COVID relief and tax extenders all in one massive collection of 5,593 pages of legislation. This Tax Alert is focused on the extension and improvement of many popular business tax credits and incentives. Unlike most other years, Congress broke from its customary tradition of kicking the can down the road with only one-year extensions by making a few more key incentives permanent and extending several others for five years. Unfortunately, some important incentives only received a one-year extension. That means we will be going through this process again a year from now, but Congress will be dealing with a shorter list of expiring credits and incentives. The tax extender provisions are contained in Division EE of the 2021 Consolidated Appropriations Act, which is titled Taxpayer Certainty and Disaster Tax Relief Act of 2020.
The following is a summary of many extensions and improvements to tax credits and incentives that were scheduled to expire at the end of this year, 2020.
Employment credits and incentives
CARES Act employee retention credit
One of the most popular credits from the CARES Act was the Employee Retention Credit (ERC). The ERC was created with the March 27, 2020 enactment of the CARES Act, with the basic purpose of giving employers a refundable tax credit equal to 50% of the qualified wages they pay to employees after March 12, 2020, and before Jan. 1, 2021. The original ERC had a cap at $10,000 per employee (with a $5,000 per employee maximum). There were various restrictions on the original ERC, including but not limited to a mutual exclusion with PPP loans and an exclusion for any wages used in the FFCRA paid leave credits.
The enhanced ERC contains many favorable changes for taxpayers, as follows:
- Increased the amount of credit to 70% of an eligible employee’s eligible wages, this is increased from 50% of eligible wages in the original ERC.
- Expanded the maximum credit per employee to $10,000 for any calendar quarter, which is increased from $10,000 for all quarters in the original ERC.
- Increased the former 100-employee threshold for being treated as a ‘small employer’ to those employers with fewer than 500 employees.
- The period during which an employer can pay and count qualified wages has been extended to June 30, 2021. This is a welcome extension from the previous deadline of Dec. 31, 2020.
- The threshold for establishing a significant decline in gross receipts has been changed to ‘less than 80%’ of the same quarter in the previous calendar year. The original ERC used a ‘less than 50%’ threshold, making the new 80% threshold easier to meet. The enhanced ERC also appears to create the ability to elect the immediately preceding calendar quarter in lieu of the prior year calendar quarter in measuring the decline in gross receipts.
- The SBA and Treasury will provide guidance that would allow Taxpayers an election to essentially exclude wages from consideration in their PPP loans. The mechanics of this are not entirely clear, however the upshot appears to be allowing taxpayers to claim an ERC and utilize a PPP loan provided that the proper election is made to ensure there is no overlap in wages.
The IRS previously released FAQs on the original ERC, which it has updated multiple times since the CARES Act. The FAQs are not official guidance, but have been the best barometer for interpreting what the IRS was thinking about how the general CARES Act rules should be applied in practice. These enhancements to the ERC will no doubt create many additional questions, but the IRS may allow the same general principles put forth in the IRS FAQs to apply to the enhanced ERC, and we should expect updated FAQs to follow.
FFCRA family and sick leave credit
This Act also contained a modest extension of the paid sick and family leave that were created by the Families First Coronavirus Relief Act (FFCRA). The applicable time period has been extended from Dec. 31, 2020 to March 31, 2021.
Work opportunity tax credit
The work opportunity tax credit that was scheduled to expire at the end of 2020, is now extended for five more years and is applicable to wages paid or incurred to a qualified individual who begins work through Dec. 31, 2025.
Empowerment Zone tax incentives
There are many tax incentives for locating a business in one of many empowerment zones located throughout the United States. Two of these incentives have been terminated for tax years beginning after 2020. On the positive side, the areas designated as empowerment zones retain that designation another five years, through Dec. 31, 2025, which extends the application of several other incentives. The benefits that are terminated after 2020 include increased expensing under section 179, and nonrecognition of gain on rollover of empowerment zone investments. The benefits that are retained at least through 2025 for designated zones include tax-exempt enterprise zone facility bonds and the empowerment zone employment credit.,
Paid family and medical leave credit
The section 45S paid family and medical leave credit that was enacted with the Tax Cuts and Jobs Act has been extended for five additional years to apply to paid leave wages paid through Dec. 31, 2025.
Indian employment credit
The Indian employment credit has been extended for one year, through Dec. 31, 2021.
Employee retention credit for qualified disasters
The employee retention credit for qualified disasters is extended to tax year 2020 and adds clarifications and rules regarding the interactions between the disaster credit and the CARES Act. The credit is generally 40% of an eligible employee’s wages up to $6,000 (with a maximum of $2,400 per eligible employee).
Qualified wages for the purposes of the Federal disaster employee retention credit are generally wages (as defined under section 51(c)(1)) paid to the eligible employee: beginning any time on or after the employer’s business became inoperable, and ending the earlier of 1) the date the business resumed significant operations, or 2) 150 days after the last day of the incident period of the qualified disaster.
The changes in this Act include a specific exclusion for wages used in an employee retention credit claim under section 2301 of the CARES Act. The Act also appears to alter the limitation of the FFCRA paid leave credits to consider the tax liability after reducing any employee retention credits for qualified disasters. This section also contains a similar election to that of the enhanced ERC discussed above to improve the interaction with PPP loans.
Energy and environmental credits and incentives
Section 179D energy efficient commercial building deduction
The energy efficient building deduction under section 179D has been made permanent and will not expire. In addition, the deduction amount will be indexed to inflation for tax years beginning after 2020. Finally, the ASHRAE 90.1 standards used as a baseline to measure energy efficiency improvement have been updated from the 2007 standards to now reference the standards from no later than two years before the date that construction of the property begins.
Carbon oxide sequestration credit
The section 45Q credit for carbon oxide sequestration is amended to extend the begun construction by date for qualified facilities to before Jan. 1, 2026, previously before Jan. 1, 2024. The remaining requirements for the facilities remain the same.
Renewable electricity production tax credit and energy investment tax credit
The Act extends the credit allowed under section 45 for one year for electricity produced from certain renewable resources. The renewable resources allowable for the credit and extended to include facilities for which construction begins before Jan. 1, 2022 are: Wind facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities. Correspondingly, the provision allowing for the election to treat qualified facilities as energy property under section 48 is amended to extend the begun construction deadline to before Jan. 1, 2022. The phase-out for credits attributable to wind facilities under section 45 has also been extended to include facilities for which construction begins before Jan. 1, 2022.
Section 48 is further amended to extend the credit and phase-out for property with which construction has begun before Jan. 1, 2024 for the following: energy property described as equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool; equipment which uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight but only with respect to property; equipment which uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure; qualified fuel cell property; qualified microturbine property; combined heat and power system property; and qualified small wind energy property. Phase-outs for solar property has been extended for property whose construction began before Jan. 1, 2024 to 26% for property which began construction before Jan. 1, 2023 and 22% for property which began construction after Dec. 31, 2022 and before Jan. 1, 2024. For energy property described as equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat under section 48(a)(3)(A)(i), if the construction begins before Jan. 1, 2024, and is not placed in service by Jan. 1, 2026, the credit is phased out to 10%. The phase-out for fiber-optic solar, qualified fuel cell and qualified small wind energy property is likewise extended for property whose construction began before Jan. 1, 2024 to 26% for property which began construction before Jan. 1, 2023 and 22% for property which began construction after Dec. 31, 2022 and before Jan. 1, 2024, and 0% for any property not placed in service by Jan. 1, 2026.
Section 48 is further amended to add an additional class of property eligible for credit. Beginning Jan. 1, 2021, a 30% credit for waste energy recovery property is available. Waste energy recovery property is defined as property that generates electricity solely from the heat from buildings or equipment but only if the primary purpose of the building or equipment is not the generation of electricity and if the property does not have a capacity in excess of 50 megawatts. The phase out for the waste energy recovery property for construction that begins before Jan. 1, 2024 starts at 26% for property which begins construction before Jan. 1, 2023 and 22% for property which begins construction after Dec. 31, 2022 and before Jan. 1, 2024, and 0% for any property not placed in service by Jan. 1, 2026.
Additionally, section 48 is amended to allow the election to treat qualified offshore wind facilities as qualified investment credit facilities under section 48(a)(5) if placed in service before Jan. 1, 2026.
Second generation biofuel producer credit
The section 40 second-generation biofuel production credit is extended for one year, through Dec. 31, 2021.
Nonbusiness energy property credit
The section 25C credits for nonbusiness energy property is extended for property placed in service by Dec. 31, 2021.
Alternative fuel refueling property credit
The section 30C credit for qualifying alternative fuel vehicle refueling property is extended for property placed in service by Dec. 31, 2021.
New energy efficient home credit
The energy efficient home credit under section 45L has been extended for one year and is applicable to homes acquired through Dec. 31, 2021.
Residential energy efficient property credit
The section 25D credits for residential energy efficient property is expanded and extended for property placed in service through Dec. 31, 2023. The phase out of these credits has also been adjusted for property placed in service from Jan. 1, 2020 through Dec. 31, 2022, with a rate at 26%, and for property placed in service from Jan. 1, 2023 through Dec. 31, 2023, with a rate at 22%.
A new category of energy efficient property is added to the credit for property placed in service after Dec. 31, 2020. The new section 25D(a)(6) will allow for a credit for qualified biomass fuel property expenditures, defined as expenditures relating to property that uses the burning of biomass fuel to heat a residence or to heat water for use in such residence if it has a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel). Biomass fuel is defined as any plant-derived fuel available on a renewable or recurring basis.
Excise tax credits and other provisions
Alcohol excise taxes
The Act makes permanent the reduced rates of tax and credits imposed on beer, wine and distilled spirits. RSM will be publishing a separate alert to provide more details on these provisions.
Alternative fuel excise tax credits and subsidy payments
The excise tax credits for alternative fuel used or sold for use as fuel in a motor vehicle and for alternative fuel mixtures produced are extended for one year, through Dec. 31, 2021. Further, the outlay payment for the alternative fuel credit is also extended through Dec. 31, 2021.
Oil spill liability trust fund excise tax
The Act extends the excise tax imposed on crude oil received at U.S. refineries and on petroleum products entered into the U.S. for consumption, use or warehousing. The rate of tax is $0.09 cents per barrel and is now set to expire Dec. 31, 2025.
Black lung disability trust fund excise tax
The Act extends the excise tax imposed on coal from mines located in the U.S. and sold by the producer. The tax funds the Black Lung Disability Trust Fund and is now set to expire Dec. 31, 2021.
Other credits, incentives and provisions
Railroad track maintenance credit
The railroad track maintenance credit under has been made permanent. The credit rate remains 50% for tax years beginning before 2023 but is reduced to 40% for tax years beginning in 2023 and thereafter.
Look-thru rule for related CFCs
The popular look-thru rule applicable to determining foreign personal holding company income with respect to related controlled foreign corporations is extended for five years, so that it is applicable to tax years beginning before Jan. 1, 2026.
New markets tax credit
The new markets tax credit allocation limitation of $5 Action for 2020 has been extended through calendar year 2025. In addition, any unused allocation limitation may now be carried forward an additional five years, through 2030.
Seven-year recovery period for motorsports entertainment complexes
The seven-year recovery period for motorsports entertainment complexes, which includes race tracks, ancillary facilities, land improvements, support facilities and other appurtenances, has been extended for five years to cover property placed in service through Dec. 31, 2025.
Expensing of film, television and theatre productions
The ability to elect to expense the cost of certain qualified film, television and live theatre productions has been extended for five years to cover productions commencing through Dec 31, 2025.
Depreciation of certain residential rental property over 30 years
For an electing real property trade or business, the 30-year ADS recovery period for residential real property applies to property placed in service before Jan. 1, 2018, if the ADS did not previously apply to such property. This provision provides for a retroactive change to TCJA and applies to taxable years beginning after Dec. 31, 2017.
Business meals deduction
The provision temporarily amends section 274(n)(2) to allow a full business deduction for certain business meals. Under the temporary change, the cost of food or beverages provided by a restaurant, and paid or incurred during the 2021 and 2022 calendar years, will be 100% deductible, provided that the amounts would otherwise be deductible under the section. Section 274(n)(2) generally limits business deductions to 50% of food and beverage costs (with certain exceptions enumerated in sections 274(n)(2)).
Most of these extensions and other changes are taxpayer favorable, while a few of them are not. We expect that a number of these changes will result in additional guidance from the IRS in the coming months, so stay tuned for more Tax Alerts as this guidance becomes available.