Newburg Staff Writers-January 8th, 2021 (10:00AM)
We wanted to highlight some of the key tax provisions impacting individuals and businesses contained within the new Consolidated Appropriations Act of 2021 (the ‘Act’).The Act signed into law on December 27, 2020 contains over 5,000 pages of text. While not all inclusive, we have included below some of the key provisions:
Additional Refundable Tax Credit (Stimulus Checks)
This Act provides a refundable tax credit in the amount of $600 per eligible family member ($1,200 for married filing joint), in addition to $600 per qualifying child.
This credit starts phasing out at $75,000 of modified adjusted gross income ($112,500 for head of household and $150,000 for married filing joint) at a rate of $5 per $100 of additional income.
For more information regarding the status of your stimulus check, you can check the status via this link https://www.irs.gov/coronavirus/get-my-payment
PPP Loan Deductibility
The Act reverses the previous IRS position regarding PPP expenses. Effective for all tax years ending after March 27, 2020, deductible expenses paid with the proceeds of a forgiven PPP loan may be deducted for tax purposes. The forgiveness will be treated as tax exempt income for purposes of stock basis calculations for PPP recipients that are S Corporations or Partnerships.
Deduction of Business Meals
For 2021 and 2022 business expenses paid or incurred for food and beverages provided by a restaurant are 100% deductible. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022.
Retirement Plan Distributions
The Act allows for distributions from retirement plans of up to $100,000 to avoid the 10% penalty applicable to early retirement distributions. The distribution, however, will be subject to income tax over a 3-year period. This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.
Expansion of Employee Retention Tax Credit (ERTC)
To be eligible for the employee retention tax credit a business must be fully or partially suspended due to an order from a governmental authority limiting travel, commerce or meetings during the applicable calendar year OR suffer a significant decline in gross receipts (50% or 20% decline depending on time period) during a calendar quarter when compared to the same quarter during the previous year.
The new Act now allows use of BOTH the PPP and the ERTC as long as wages that are paid with forgiven PPP proceeds are not used for the ERTC calculation (no double dipping).
For the periods March 12, 2020 thru December 31, 2020, businesses can go back and amend their quarterly tax returns to claim the ERTC credit. To qualify during this period the business must EITHER experience:
- the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19** OR
- gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
**NOTE: The Act does not give precise definitions as to what constitutes either “partial” or “full” suspensions of operations.
The Act also extends the availability of the ERTC to qualified wages paid through June 30, 2021. It was set to expire with wages paid after December 31, 2020 and now includes enhanced provisions to include more businesses.
For the periods January 1, 2021 thru June 30, 2021 they have expanded/loosened the qualification criteria:
- An increase in the credit rate from 50% to 70% of qualified wages and increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter; for max of $7k per employee per quarter (so max of $14k per employee)
- A reduction in the required year-over-year gross receipts decline from 50% to 20%;
- A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
- An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
- Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit. Group health care plan expenses can also be treated as qualified wages.
Extension of Families First Coronavirus Response Act (FFCRA) Tax Credits
These credits were extended until March 31, 2021. It is only extended to employers who are required to provide the FFCRA leave through December 2020. The credit provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. Workers may receive up to 80 hours of paid sick leave for their own health needs or to care for others and up to an additional ten weeks of paid family leave to care for a child whose school or place of care is closed or child care provider is closed or unavailable due to COVID-19 precautions. The FFCRA covers the costs of this paid leave by providing small businesses with refundable tax credits.
Deferral of Employees’ Portion of Payroll Tax
Employers were permitted to defer collection of Social Security Tax from employees with respect to wages beginning September 1, 2020. The Act extends the repayment period through Dec. 31, 2021 on employees’ share of certain payroll taxes deferred from Sept. 1, 2020 through Dec. 31, 2020 through Dec. 31, 2021.
Enhanced Charitable Contributions
The Act extends and modifies the $300 charitable deduction for non-itemizers for 2021 and increases the maximum amount that may be deducted to $600 for married couples filing jointly. Note that for tax year 2020, $300 is the maximum allowed per tax return, regardless of filing status. The Act also extends the enhanced charitable deductions for individuals who do itemize. For cash contributions made on or before December 31, 2021an individual may elect to take an itemized deduction for cash contributions up to 100% of their gross income. A corporate taxpayer may deduct contributions up to 25% of its taxable income.
Renewable Energy Credit Extension
The 26% Investment Tax Credit (ITC) for solar projects remains available for projects that begin construction through the end of 2022. The ITC will drop to 22% for projects that begin before the end of 2023 and 10% for large scale projects in 2024.
Work Opportunity Credits (WOC)
WOC is available to employers for hiring individuals from certain targeted groups. The credit was set to expire at the end of 2020. The Act extends the credit through 2025.
New Disaster Relief Tax Incentives
The Act allows a tax credit of 40% of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone (as defined in the Act). The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.
The Act permits individuals who have a net disaster loss (as modified by the Act) to increase their standard deduction amount by the amount of the net disaster loss.
The Act removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit. This is applicable to tax years 2021 and beyond.
The Act requires the Treasury to issue regulations providing that the cost of personal protective equipment and other supplies used for the prevention of the spread of Covid-19 is treated as an eligible expense for the educator expense deduction (currently $250). This will apply retroactively to March 12, 2020.
Flexible Spending Arrangements
This Act allows taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. It also permits employers to allow employees to make a 2021 midyear prospective change in contribution amounts.
- The Act extends the provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020. The CAA extends the provision to 2025. The maximum annual payment is $5,250.
- Medical expense deduction floor goes back to 7.5% of adjusted gross income for tax years beginning after December 31, 2020.
- For buildings placed in service after December 31, 2020 making the deduction for energy efficient buildings permanent and indexing for inflation the dollar limits eligible for deduction.
- The application for the advantageous look-through rule for related controlled foreign corporations for five years until tax years beginning in 2026.
- Expensing of otherwise capitalizable expenses for qualified film, television, and live theatrical production expenses for qualified productions between December 31, 2020 and 2025.
- Extending the employer credit for paid family and medical leave through tax years that begin in 2025.
- Exclusion from an employee’s income for a payment by an employer of certain of the employee’s student loan principal and or interest for payments made before January 2026.
- Extends the deduction for qualified mortgage insurance premiums through 2021.
- Gross income exclusion for discharge of indebtedness on a principal residence was extended through 2025. The amount of the exclusion is lowered to $750,000 from $2 million.
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Newburg | CPA