On Sunday, December 27, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021). The Act includes many favorable provisions, including several tax changes that have been modified from earlier legislation and many that have been extended. Various provisions, including $600 stimulus payments, and an extension of payroll credits, relate to the COVID-19 pandemic.
Since this Act contains over 5,500 pages, we have chosen to highlight the provisions we believe are most relevant to our clients. For complete coverage of the entire Act, please use the link below.
https://docs.house.gov/billsthisweek/20201221/BILLS-116HR133SA-RCP-116-68.pdf
BUSINESS PROVISIONS:
Paycheck Protection Program (PPP) Forgiveness
Congress clarified that expenses associated with PPP loan forgiveness are fully deductible. Previously, the IRS had taken the position that expenses associated with PPP loan forgiveness were not deductible. This change provides welcome relief to all PPP loan recipients. PPP loan forgiveness remains excluded from taxable income as provided by the CARES Act.
Paycheck Protection Program (PPP)
The legislation includes a second round of PPP loans, generally available to businesses with up to 300 employees that have incurred a 25% reduction in gross receipts in one or more quarters in 2020 measured against the comparable quarter for 2019. Many of the terms of the new program are consistent with the original program. However, the new program expands the lists of costs eligible for PPP loan forgiveness. Those costs include certain covered operational expenditures, property damages, supplier costs, and personal protection equipment.
Business Meals
Under current law, business meals are only 50% deductible. For 2021 and 2022, a 100% deduction for business-related meals provided by a restaurant is allowable. Entertainment expenses remain non-deductible.
Employee Retention Credit
The CARES Act added a refundable payroll tax credit equal to 50% of certain compensation paid from March 13, 2020, to December 31, 2020. The employee retention credit is improved under CAA and applies to wages paid from January 1, 2021, through June 30, 2021. Specifically, the enhanced credit is:
· Calculated for wages paid up to $10,000 per quarter as opposed to per year.
· Based on 70% of qualified wages, rather than 50% provided by the CARES Act.
· Available to employers whose gross receipts decline by 20% rather than the 50% allowed for in the CARES Act.
Additionally, the legislation clarifies that PPP borrowers are not prohibited from claiming this credit on wages. However, PPP borrowers may not claim the credit on wages paid for with forgiven PPP loan proceeds.
Credits for Paid Sick and Family Leave
The refundable payroll tax credits for paid sick and family leave are extended through March 31, 2021.
Payroll Taxes
The IRS previously permitted employees to defer their share of Social Security tax on applicable wages paid from September 1, 2020, through December 31, 2020. Any deferred Social Security tax was to be repaid through additional withholding from January 1, 2021, through April 30, 2021. The new bill allows the deferred tax to be repaid throughout 2021 rather than the original 4 month period.
Charitable Contributions
Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) does not apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions can be as much as 25% of taxable income. The new bill establishes a category of “qualified disaster relief contributions” for which corporations are allowed a deduction of up to 100% of taxable income. In order to qualify, the contribution must be made during the period beginning on January 1, 2020, and ending 60 days after enactment of the CAA and the contribution must be made for relief efforts in one or more qualified disaster areas.
Tax Extenders
The Work Opportunity Tax Credit (WOTC) has been extended through 2025 as part of the new bill. Other provisions have become permanent, including the Section 179D energy-efficient commercial buildings deduction.
INDIVIDUAL PROVISIONS:
Stimulus Checks
Another round of economic impact payments is included with the bill. Payments of $600 per individual plus $600 per qualifying child (age 16 and younger who are dependents). Similar to the first round of checks, the benefit phases out for individuals with adjusted gross income between $75,000 and $99,000; $150,000 and $198,000 for married couples.
Enhanced Unemployment Benefits
An additional $300 per week unemployment benefit in addition to state-provided benefits will be available through March 14, 2021.
Charitable Contributions
The CARES Act increased the limitations on deductions for charitable contributions made by individuals who itemize. Generally, an individual taxpayer cannot claim charitable contribution deductions in excess of 60% of adjusted gross income (AGI). The CARES Act increased that limitation to 100% of AGI for the 2020 calendar year allowing individuals to offset all of their income with charitable contribution deductions. The CAAextends that treatment through 2021.
Additionally, the CARES Act allowed all non-itemizers to claim an above-the-line deduction for up to $300 in cash donations. The new law extends this provision for donations made through 2021 and increases the amount non-itemizing married couples can claim as an above-the-line deduction to $600.
Educator Expenses
Eligible educators may deduct up to $250 in qualified expenses. Personal protective equipment (PPE), disinfectant, and other supplies purchased to prevent the spread of COVID-19 were added to the list of qualified expenses that educators may deduct.
Tax Extenders
The exclusion of gross income from the discharge of debt on a qualified home has been extended through 2025. However, beginning in 2021, the exclusion amount has been reduced to $750,000 (married filing joint) or $375,000 (other taxpayers). Mortgage insurance premiums continue to be deductible through 2021 for those that qualify. Other provisions made permanent include the lower 7.5% threshold for medical expenses and the above-the-line tuition and fees deduction.