Key Tax Provisions in COVID-19 Relief Package
Congress included a number of tax-related items in the year-end $900 billion COVID-19 relief package, including several provisions advocated by NAHB that will help small businesses and single-family and multifamily builders. Favorable tax provisions for members encompass the following areas:
- Paycheck Protection Program
- Low-Income Housing Tax Credit
- Employee Retention Tax Credit
- Tax extenders
- Multifamily depreciation
- Disaster tax relief
- Family Medical and Sick Leave credits
Paycheck Protection Program
Recipients who subsequently have their loans forgiven under the Paycheck Protection Program (PPP) will be eligible to receive additional tax relief. In April 2020, the IRS issued a controversial ruling that businesses werenot eligible for tax deductions of business expenses paid for by a forgiven PPP loan.
By reversing this decision, a move that NAHB called for, Congress effectively allows businesses to receive two tax benefits on forgiven PPP loans:
- Forgiven debt is not treated as taxable income.
- Business expenses paid for with the forgiven debt may be deducted if otherwise allowed.
The bill also ensures businesses that receive an Economic Injury Disaster Loan (EIDL) grant can also claim all eligible deductions. Affected businesses should consult with their tax advisor for further guidance.
Low-Income Housing Tax Credit
In a major victory for NAHB multifamily members, the legislation includes a provision that NAHB has been seeking for several years. The bill establishes a permanent minimum 4% credit floor for acquisition and bond-financed projects through the Low-Income Housing Tax Credit.
The 4% credit floor will make more types of properties financially feasible and significantly increase unit production. It is estimated that this will allow multifamily developers to finance more than 125,000 additional affordable rental units over the next decade.
Employee Retention Tax Credit
In addition to the PPP changes, Congress is also expanding the Employee Retention Tax Credit (ERTC), which was created in the CARES Act. The changes will allow businesses who received a PPP loan to also claim the ERTC with respect to wages that are not paid for with forgiven PPP loan proceeds. This change is retroactive to March 13, 2020, so businesses that received a PPP loan may wish to consult with their tax advisor to determine if they also qualify for the ERTC.
Beginning on Jan. 1, 2021 through June 30, 2021, the ERTC is enhanced, which includes a significant easing of the qualification thresholds. The credit rate is increased from 50 percent to 70 percent of qualified wages, and the required year-over-year gross receipts decline threshold is reduced from 50 percent to 20 percent.
Qualifying wages are also increased from $10,000 per year to $10,000 per quarter. Finally, the 100-employee delineation for determining the relevant qualified wage base is increased to 500 employees. Tax-exempt organizations that otherwise meet the requirements of the ERTC are also generally eligible. Employers should consult with their tax advisor to determine eligibility.
In another victory for NAHB and the housing community, Congress extended — and in one instance made permanent — a number of key temporary tax provisions known as “tax extenders” that were set to expire on Dec. 31, 2020:
- Deduction for Mortgage Insurance.Allows taxpayers, subject to an income cap beginning at $100,000, to deduct premiums paid for private mortgage insurance and FHA/RHA/VA insurance premiums. This provision received a one-year extension through Dec. 31, 2021.
- Section 45L Tax Credit for Energy-Efficient New Homes. Provides builders a $2,000 tax credit for the construction of homes exceeding heating and cooling energy standards by 50%. The base energy code is the 2006 International Energy Conservation Code plus supplements. Builders must have tax basis in the home to claim the credit (i.e., they must own and then sell/lease the residence). This provision received a one-year extension until Dec. 31, 2021.
- Section 25C Tax Credit for Qualified Energy-Efficiency Improvements. Offers a credit worth up to $500 (subject to a $500 lifetime cap), with lower caps for certain products, such as windows, for consumers to install qualified energy-efficient upgrades. This provision received a one-year extension until Dec. 31, 2021.
- Mortgage Forgiveness Tax Relief. Eliminates any taxes home owners might face because of renegotiating the terms of a home loan, which result in forgiving or canceling a portion of the outstanding loan balance, particularly in connection with short sales. It applies only to principal residences and a maximum mortgage amount of $750,000. This provision received a five-year extension through Dec. 31, 2025.
- Section 179D Energy-Efficient Commercial Buildings Deduction. Makes permanent a deduction for commercial and multifamily buildings that exceed specific energy-efficiency requirements. The energy efficiency targets are updated and the deduction rate is indexed to inflation.
- Section 25D Tax Credit for Power Production Property: Allows a tax credit for the installation of qualifying alternative energy equipment, which includes solar, geothermal heat pumps, small wind turbines, and fuel cell property. This credit is being phased-out, but Congress is extending the phase-out until Dec. 31, 2023. Under this longer phase-out, the credit rate will be 26% until Jan. 1, 2023, when the credit rate falls to 22% for the final year. Biomass fuel property also is added as an eligible expenditure.
The Tax Cuts and Jobs Act limits deductions for business interest but included an election for multifamily real estate to fully claim the business interest deduction in exchange for a slightly longer depreciation period of 30 years. Due to an error in drafting, multifamily buildings placed in service prior to Jan. 1, 2018, that elected to fully claim the business interest deduction were subjected to a longer depreciation period. This bill corrects the drafting error to restore the 30-year depreciation period to these multifamily properties. Multifamily properties that did not make the business interest deduction election retain the 27.5-year depreciation period.
Disaster Tax Relief
The bill provides tax-related disaster relief for any area where a major presidential disaster declaration was made beginning Jan. 1, 2020, through 60 days after the bill is signed into law. It does not include COVID-19 disaster declarations, but rather “traditional” disasters. The relief allows penalty-free access to retirement funds; special rules for claiming the employee retention tax credit for employers affected by a qualifying disaster; and additional allocations of low-income housing tax credits for 2021 and 2022 for qualifying states.
Family Medical and Sick Leave Credits
The Families First Coronavirus Response Act required many employers to offer paid family medical and sick leave for COVID-19 related reasons, but provided those employers with tax credits to cover the cost of the paid leave. While the mandate ends on Dec. 31, 2020, Congress will extend the tax credits through March 31, 2021, for employers who voluntarily offer this COVID-related medical and sick leave.