On December 27, 2020, President Trump signed the Consolidated Appropriations Act of 2021 (CAA) into law. In addition to funding government operations, the CAA provides new COVID-19 relief and extends many expiring tax provisions.
Some of the CAA changes present additional planning opportunities of interest to banks and bankers.
Here’s what you need to know about post-election tax planning strategies for your bank.
Top 2020 Bank Tax Planning Strategies to Consider
Control of the U.S. Senate May Affect Tax Planning Strategies
With the results of the run-off elections in Georgia, the Senate will be split 50-50 between Republicans and Democrats. Since the vice president serves as president of the Senate, Republicans will continue to control the Senate until Kamala Harris is sworn in as vice president on January 20. At that time, Democrats will take control of the Senate.
Having control of both chambers of Congress, the Biden Administration is expected to pursue additional COVID-19 relief legislation as well as Biden’s campaign tax proposals, including increases to the tax rates on corporations and high-income individuals and phase-out of the 20% deduction for Qualified Business Income that benefits many S corporation bank shareholders.
However, Democrats’ ability to enact significant tax changes will be constrained somewhat by 1) a narrow majority in the House of Representatives (222 Democrats to 211Republicans by last count), 2) control of the Senate that depends on the vote of every Democrat and Independent party Senator plus the vice president and 3) Senate rules that require some Republican support for votes requiring more than a simple majority.
Relief Measures that Will Affect Banks
Highlights of the CAA’s COVID-19 relief provisions potentially affecting banks, their owners and customers include:
Stimulus Checks: The IRS is in the process of making direct deposits and issuing checks in the amount of $600 per person ($1,200 for married couples and $600 for each dependent under the age of 17). The amount phases out at a 5% rate for individuals making over $75,000 per year or married couples making over $150,000 per year.
As with the first round of economic stimulus payments, banks will play a key role in handling the influx of deposits, ensuring they are deposited efficiently and fielding questions from customers. On January 4, the IRS issued IR-2021-01 urging people seeking information on their stimulus payments to visit the IRS.gov website rather than calling the IRS, financial institutions or tax software providers. The IRS release provides guidance on eligibility matters, how to check payment status, how to claim unreceived or incorrect payments, and what to do if an individual has changes to their bank account or mailing information.
PPP Round 2: A second round of PPP loans will be made available for businesses with 300 or fewer employees that have sustained a 25% reduction in gross revenue in any quarter of 2020 compared to the same quarter in 2019. Additional expenses qualify for determining the portion of PPP loans that can be forgiven. New guidelines are established for determining the maximum loan amounts for farmers and ranchers, and PPP loan eligibility is expanded to include certain news, destination marketing and tax-exempt trade organizations.
Forgiveness for Smaller PPP Loans and Hold-Harmless Safe Harbor for Banks: For both rounds of PPP loans, simplified applications will be provided for loans of $150,000 or less, and banks will be held harmless from enforcement and penalties when relying on certifications made by PPP loan applicants and borrowers.
Deductibility of Expenses Paid with Proceeds of Forgiven Loans: Under the CAA, no deduction is denied—and no tax attribute reduced, or tax basis adjustment denied—with respect to forgiven PPP loans. Also, forgiven PPP loans are treated as tax-exempt income that increases the tax basis of partners and S corporation shareholders in their respective ownership interests. These changes are retroactive as if included in the original CARES Act legislation establishing the PPP.
EIDL Advances: The CARES Act created emergency advances, or grants, of up to $10,000 under the Economic Injury Disaster Loan (EIDL) program. Taxpayers receiving an EIDL grant were required by the CARES Act to reduce any PPP loan forgiveness by the EIDL grant amount. The CAA repeals this requirement and provides that any EIDL grants do not reduce a borrower’s PPP loan forgiveness amount. Accordingly, the SBA is no longer deducting EIDL grants from PPP loan forgiveness amounts and will need to provide guidance on making appropriate adjustments to existing PPP loans held by lenders for previously deducted EIDL grants.
ERC Extension and Expansion: The refundable ERC is extended through July 1, 2021. For calendar quarters beginning after December 31, 2020, the credit rate is increased from 50% to 70%, the limit on per-employee creditable wages is increased from $10,000 for the year to $10,000 per quarter, and the required year-over-year decline in gross receipts on a quarterly basis is reduced from 50% to 20%.
Importantly, the definition of a “large employer” that can only claim the credit for employees that are not working because of the COVID-19 pandemic is increased from more than 100 to more than 500 employers.
This change may provide an opportunity for many more banks to consider utilizing the ERC. Retroactive to its inception, the ERC is expanded to allow employers who receive PPP loans to qualify for the ERC for wages not paid with forgiven PPP loan proceeds and to include group health plan expenses even if no other wages are paid to an employee.
Paid Sick and Family Leave: While the mandate to provide paid leave is not extended (it expired December 31, 2020,) an employer may still claim the credit if an employee would have qualified for mandated paid leave had the mandate been extended and the employer provides paid leave anyway.
Expiring Tax Provisions and Other Changes
The CAA makes permanent some of the tax incentives expiring at the end of 2020 and temporarily extends others. Of note to bankers, both the New Markets Tax Credit and the Work Opportunity Tax Credit are extended through 2025.
Other changes of note include:
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