Business Tax Extenders in the Consolidated Appropriations Act of 2021

SC&H’s Key Takeaways

  • Various employer credits are extended under the CAA, including the Work Opportunity Tax Credit, and the Employee Retention Tax Credit is now available to more employers and the benefits have been greatly enhanced.
  • The CAA made changes to the Family First Act allowing a refundable tax credit.
  • The repayment period for deferred employee taxes through December 31, 2021.
  • Accelerated depreciation for energy efficient buildings is made permanent.
  • Employers can continue to make contributions to employees’ student loan debts.
  • The CAA provides an extension to tax credits related to solar and wind power.

Credits to Incentivize Employers to Hire and Retain Employees

The Employee Retention Tax Credit was a cornerstone of the CARES Act, which was signed into law on March 27, 2020. The CARES Act, however, included a provision that if an employer takes out a Payroll Protection Program loan, the employer could not also claim the ERTC. The CAA makes several technical changes to the ERTC including the extension of the time to pay applicable wages through June 30, 2021. It had been scheduled to expire on December 31, 2020. We have written extensively on the ERTC in a previous blog, “Is Your Business Maximizing Its Payroll Tax Credits Under the Consolidated Appropriations Act?”.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit has long been a popular credit set up by Congress to drive greater employment of certain employee groups. The credit, which reduces the employer’s income tax, is based on the first-year wages paid to specific employees that are within the targeted groups. The groups include unemployed or disabled veterans, summer youth employees, and individuals who live in an enterprise or empowerment zone. The CAA extends the credit and the program for 5 years and will consider wages paid before December 31, 2025.

Family First Act Payroll Tax Credits

The CARES Act modified the Family First Act to include provisions for those affected by the coronavirus pandemic. The Consolidated Appropriations Act (CAA) made further modifications that provide a refundable tax credit to employers who elect to pay certain relief to employees. We have written extensively on the Family First Act payroll tax credits in a previous blog, “Is Your Business Maximizing Its Payroll Tax Credits Under the Consolidated Appropriations Act?”.

Deferral of Employee Payroll Taxes

Back in August of 2020, the IRS issued Notice 2020-65, allowing voluntary deferral of the 6.2% Social Security tax paid by employees. This deferral applies to wages and compensation paid from September 1, 2020 through December 31, 2020 and is generally applicable to employees whose wages and compensation are less than $4,000 during a two week pay period. This deferral was required to be paid back, through additional withholdings, between January 1, 2021 and April 30, 2021. Deferred taxes not paid by May 1, 2021 would be subject to additional interest and penalties.

The CAA contains a provision that extends the repayment period of deferred employee taxes through December 31, 2021. This will help lessen the impact, per pay period, for those who opted to participate. The CAA also changes the beginning accrual date for penalties and interest until January 1, 2022.

Accelerated Depreciation for Energy Efficient Buildings

Generally, buildings are depreciated over a 39-year life. This translates to a deduction of roughly an annual write-off of 2.5% of the building’s cost. With Section 179D, first-year deductions may be taken for up to $1.80 per square foot of a commercial building in the year the building is placed in service. Deductions are allowed for qualifying expenditures related to interior lighting, heating, and cooling and the building envelope for commercial buildings that meet certain energy efficient standards. This Section 179D incentive was scheduled to expire for property that was placed in service after 2020. As part of the CAA, the Section 179D incentives are made permanent and add certainty to the accelerated deduction.

Tax-Free Employer Contributions for Student Loans

The CARES Act, signed into law on March 27, 2020, includes a provision allowing employers to make 2020 contributions to pay an employee’s student loan debt. The payment is free from payroll and income taxes for both the employer and the employee. Employers should have a written educational assistance program in place with a written plan that is not discriminatory in favor of highly compensated employees and must be clearly communicated to employees. The CAA extends this incentive through December 2025. Employers will be able to include this benefit in their compensation packages tax-free for payments made before 2026. Payments above $5,250 in one tax year or made after 2025 would be included in the employee’s wages and subject to payroll taxes for both the employee and the employer.

Investment Tax Credit for Solar Power

The investment tax credit (ITC) is a 26% credit on solar projects available to residential and commercial taxpayers. The ITC was slated to drop to 21% in 2021. However, the CAA extends the 26% credit until December 31, 2022, when it will drop to a 22% credit. The credit will remain available to both residential and commercial taxpayers in 2023 at the 22% rate but will drop to 0% for residential projects and 10% for commercial projects in the years 2024 and later.

Production Tax Credit for Wind Power

The wind production tax credit (PTC) is a 60% tax credit available to onshore projects beginning construction by the end of 2021. Under old law, the credit was scheduled to drop to 40% in 2021 but the CAA extended the 60% credit until the end of 2021. The credit will completely disappear in 2022, dropping to 0%, barring any further law changes. The extension of the PTC and the ITC is meant to help incentivize taxpayers to pursue renewable energy while providing a boost to the clean energy job market.