Tax provisions in the year-end coronavirus relief act: The bill expands pandemic relief, extends expiring provisions, and revises other general tax provisions.

• Author: Nevius, Alistair M.

The Consolidated Appropriations Act, 2021, P.L. 116-260, the omnibus spending and coronavirus relief bill enacted in December, included many tax provisions, including the extension of various expiring provisions, extensions and expansions of certain earlier pandemic tax relief provisions, and much more. Among its general tax provisions, the act temporarily (through 2022) allows 100% deductibility of certain business meal expenses, extends the $300 charitable contribution deduction for nonitemizers, and enacts various disaster tax relief provisions.

Pandemic relief

The act provides a refundable tax credit in the amount of $600 per eligible family member by adding a new Sec. 6428A to the Code. The credit is $600 per taxpayer ($1,200 for married taxpayers filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married taxpayers filing jointly) at a rate of $5 per $100 of additional income. Treasury is authorized to issue advance payments of this credit (economic impact payments) in the same way it made stimulus payments under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

While the CARES Act originally prohibited married taxpayers who filed a joint return from claiming the credit if one of the spouses did not have a valid Social Security number, the Consolidated Appropriations Act allows a $600 credit (rather than $1,200) for joint filers if only one spouse's Social Security number is included on the return. (This rule will not apply where at least one spouse was a member of the U.S. armed forces at any time during the tax year and the Social Security number of at least one spouse is included on the return.) The act also amended Sec. 6428 to allow half the joint credit amount ($1,200) for CARES Act recovery rebates when only one spouse's Social Security number is included on the return.

Deductibility of PPP-funded expenses

The act clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower's assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for second-draw PPP loans, effective for tax years ending after the date of enactment of the provision.

While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).

In November, the IRS expanded on this position by issuing Rev. Rul. 2020-27, which held that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period.

The AICPA disputed this interpretation of the CARES Act loan forgiveness rules, arguing that it was not Congress's intent to disallow the deduction of otherwise deductible expenses. Congress agreed with that position.

In addition to the clarification about the deductibility of expenses paid with PPP funds, the act clarifies that gross income does not include forgiveness of certain loans, emergency Economic Injury Disaster Loan grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section and that tax basis and other...