Just recently enacted was the Consolidated Appropriations Act, 2021, which included a plethora of new law changes, extensions and clarifying amendments to certain CARES Act provisions. In this article we will highlight those items most applicable to those in the real estate community.
One of the most anticipated and hoped-for provision in the legislation was the deductibility of PPP expenses. Based on information we had prior to this act based on an IRS ruling, all expenses funded with PPP loans were not going to be deductible. This resulted in considerable unplanned income for many taxpayers. Thankfully, the recent legislation overrides this, and the expenses are now deductible.
Additionally, the Act expanded the costs that may be covered under the forgiveness provisions. These costs now include property damage due to public disturbances (not covered by insurance), payment for any software/cloud computing services, purchases of essential business goods and supplies on contracts entered before start of the PPP covered period, and employer personal protection equipment.
They have also asked the SBA to develop a forgiveness application that is only one page that requires the borrower to estimate the number of employees they were able to retain and to provide an estimate of the amount of PPP loan dollars spent on payroll. This new application is for loans up to $150,000.
Another big PPP item is that they now allow a second draw of PPP loans. Businesses that have fewer than 300 employees and can show at least a 25% reduction of gross receipts over a prior-year period may be eligible for a new loan the lesser of 2.5 times the average payroll over a specified 12 months or $2 million. Note there are special provisions of using 3.5 times the average monthly payroll if you fit certain IRS definition of working in the accommodation and food services sector.
Low-Income Housing Tax Credit
The Low-Income Housing Tax Credit (LIHTC) enacted as part of the 1986 Tax Reform Act encourages the acquisition, construction and rehabilitation of affordable rental housing for low- and moderate-income tenants. The program works by providing tax credits to each state, and in turn, each state awards the credits to certain developers of affordable housing projects. The credit itself is claimed over a 10-year period by owners of the residential rental property.
The recently passed bill establishes a 4% LIHTC credit rate for acquisitions and housing bond-financed projects starting in 2021. This substantially improves the outlook, as the December rate was 3.09% under Rev. Rul. 2020-26. Additionally, for 2021 and 2022, they also are providing additional housing credit allocations for qualified disaster zones by increasing each state’s credit limit.
New Markets Tax Credit
The New Markets Tax Credit program was enacted by the Community Renewal and Tax Relief Act of 2000 as a stimulus to encourage investment in low-income communities. They work by providing capital to community development entities and are awarded credits to use on their federal income taxes. The Consolidated Appropriations Act has extended this program to the end of 2030.
Rental assistance program
Included in the Act is also $25 billion in emergency rental assistance. The funds will be allocated based on the state or locality’s proportionate share of the total U.S. population, and each state will receive a minimum of $200 million.
Qualifying participants: The assistance is available to eligible households, which is defined as those with one or more individuals who are obligated to pay rent on a residential dwelling. The state or local government who is granting the cash must determine the following:
- One or more individuals within the household has qualified for unemployment benefits or has a reduction in household income, experienced significant expenses, or experienced other financial hardship either directly/indirectly to due to the pandemic
- One or more individuals within the household can demonstrate risk of housing uncertainty or homelessness, which may include past-due utility or rent notice, eviction notice, an unsafe or unhealthy living conditions, or any other evidence of such risk as determined by the assistance grantor
- The household has a household income that is not more than 80% of the area median income for the household. This is based on total income for 2020 or monthly income at the time of the application
The agencies making the assistance payments will make them directly to the landlord or utility providers on behalf of the eligible participant (unless the landlord does not participate, in which the funding may go to the eligible households). Additionally, landlords may assist renters in applying for assistance or apply on their behalf to satisfy their obligations. The tenant, however, must sign.
There are various other requirements that will need to be done by the agencies granting the cash and by the applicant, but overall this program should significantly help both the landlords who have received a reduction in cash flow and the tenants who are unable to pay.
Depreciation of residential real property
As a minor additional change in the Consolidated Appropriations Act, real property trades or businesses that were subject to the Tax Cuts and Jobs Act’s 30% business interest expense limitation of Sec. 163(j) had the option to make an irrevocable election to be an excepted trade or business and therefore not subject to the limitation.
Previously, if your residential rental property was acquired prior to 2018, if you were to make this election you would need to change your depreciation life from 27.5 years to 40-years, while if your property was purchased after January 1, 2018, you only had to change the life to be ADS 30-year life. The Consolidated Appropriations Act changes the pre-2018 property to also be 30-years. This will make the analysis for the election much different and beneficial to many taxpayers.
Learn more about provisions in the Consolidated Appropriations Act by visiting our COVID-19 resource center.
Changes the Consolidated Appropriations Act of 2021 made to the Employee Retention Tax Credit
Provisions you may not know about in the Consolidated Appropriations Act
PPP and other SBA loan provisions in Consolidated Appropriations Act of 2021