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The Consolidated Appropriations Act, 2021 and the Potential Benefits to Architecture and Engineering Firms

As the challenging year of 2020 was ending, former President Trump signed the Consolidated Appropriations Act, 2021 (the “Act”) into law, a $2.3 trillion spending bill aimed at helping struggling small businesses, their owners, and employees who continue to be negatively impacted by the ongoing pandemic.

The Act creates new tax provisions and stimulus, provides clarity and flexibility on existing tax provisions and stimulus, and makes permanent (and enhanced) a specific tax deduction utilized by many architectural and engineering firms. This article is a high-level overview of some of the Act’s provisions and changes that have the potential to aid impacted firms, their owners, and employees as these uncertain times continue.

What’s New?

Paycheck Protection Program – Round 2 (PPP2)

The Act provides for an additional round of funding ($284 billion) for the popular Paycheck Protection Program (the “PPP”) originally introduced in March of 2020. Under the Act, eligibility qualifications for PPP2 loans have changed from those of the first PPP funding round. Some of the key new and revised requirements and provisions for PPP2 loans are as follows:

  • The firm received an initial PPP loan in accordance with the eligibility criteria in the Consolidated First Draw PPP Interim Final Rule (“IFR”).
  • The firm has used, or will use, the full amount of its initial PPP loan on approved expenses on or before the expected date when the PPP2 loan will be disbursed.
  • The firm employs 300 or less employees (as defined).
  • The firm experienced a gross receipts or revenue reduction of 25% or more in all or part of 2020 compared with all or part of 2019. The reduction is calculated by comparing gross receipts or revenue in any 2020 quarter with an applicable quarter in 2019, or, in a provision added in the IFR, a borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual gross receipts of 25% or greater in 2020 compared with 2019.
  • The firm was in operation on February 15, 2020 and has not permanently closed.

The application deadline for a PPP2 loan is March 31, 2021 and allows for a maximum borrowing set at the lesser of $2 million or 2.5 times (3.5 times for certain hard hit industries) the average monthly payroll costs incurred or paid by the firm during time periods specified in the Act. Also of note is the expansion of the eligible expense categories to include personal protection equipment and certain covered operational and supplier amounts.

What’s Been Clarified?

PPP Expense Deductibility

As was long hoped for, the Act provides clarity on the deductibility of expenses paid with PPP loan proceeds making eligible forgiven expenses deductible for federal income tax purposes. One significant caveat surrounding the federal tax treatment of PPP expenses is that individual state tax treatments may not conform to those of the federal which could create unanticipated higher state taxes. The deductibility of forgiven expenses for federal purposes also has an added benefit for firms that take the research and development credit. Prior to PPP expenses being made deductible, firms needed to strategically select which expenses they were seeking forgiveness for to help maximize their research and development credit. The approach would have been to use non-payroll expenses to the extent possible to reduce forgiven payroll expenses and thereby maximize non-forgiven payroll used in the calculation of the research and development credit. Now that expenses are deductible it is possible a firm’s payroll expense alone will be sufficient to obtain full forgiveness. (especially considering the covered period was extended up to 24 weeks) alleviating the need to provide and retain more support and documentation for a firm’s forgiveness application (e.g., cancelled checks, lease agreements, utility bills, etc.).

What’s Been Made More Flexible?

Before the passage of the Act, PPP recipients were unable to take advantage of the Employer Retention Credit (“ERC”). Under the Act PPP recipients who meet certain additional eligibility criteria may now be eligible to receive the ERC as well. The maximum amount of the ERC differs for 2020 and 2021. For 2020, the ERC for eligible participants is limited to 50% of an eligible employee’s qualified wages up to an annual cap of $10,000 of wages for a maximum per employee credit of $5,000. For 2021, the potential ERC has increased to 70% of an eligible employee’s wages, up to $10,000, for each of the first two quarters. Thus, for 2021, a firm can obtain up to $14,000 of ERC for each eligible employee. In addition to being able to receive both a PPP loan and an ERC, the ERC eligibility rules have been relaxed under the Act allowing more firms to qualify. Some of the 2021 ERC provisions and qualifications include:

  • ERC availability has been extended to qualified wages paid before July 1, 2021 (i.e. through the first two quarters of 2021).
  • Eligibility requirements have been changed to include not only firms whose operations were either fully or partially suspended by a government order as a result of the pandemic, but also includes those firms whose gross receipts or revenues were less than 80% of the gross receipts or revenues for the same quarter in 2019.
  • The maximum number of employees a firm may have in order to be eligible for the 2021 ERC was increased from 100 employees or less in 2020 to 500 employees or less in 2021.

One caveat is be aware of the “interplay” between PPP and ERC in that although a firm may be eligible for both they cannot use forgiven wages in calculating the ERC. In order to maximize their overall benefit using a combination of PPP forgiveness and ERC, firms will need to maximize PPP forgiveness on non-wage expenses to help reduce duplicative wage expenses and prevent “double dipping” while being cognizant that 60% of PPP expenses need to be for payroll costs. This strategy is the same approach that was going to be needed to maximize PPP forgiveness and a firm’s research and development credit prior to expenses being made deductible. 

What’s Been Made Permanent and Enhanced

The 179D commercial buildings energy efficiency tax deduction allows building owners to claim a $1.80 per square foot tax deduction for installing qualifying systems and buildings. Firms involved in this capacity with government-owned buildings are eligible to be assigned the deduction from the government agency if the firm is the primary designer of the applicable system and the agency allocates the deduction (or portion thereof) by providing an allocation letter to the firm. Typically, eligible projects include courthouses, post offices, government offices, airports, libraries, and schools. Also of note as part of the Act, the per square foot amount (which has remained unchanged since 179D originally became part of the tax code) is set to be adjusted annually for inflation beginning in 2021.

With the recently released tax legislation, firms should look to ensure they are taking advantage of all available tax provisions and stimulus measures they are eligible for and are using strategies to maximize them to the extent possible. Should you have any questions, or if you are looking for additional information that may help your firm, its owners, or its employees, please reach out to your Citrin Cooperman advisor.

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