Making sense of the Consolidated Appropriations Act: How to deal with all of the tax provisions
The enactment of the Consolidated Appropriations Act, 2021, H.R. 133 on Dec. 27, 2020 (the “Stimulus Act”) was unprecedented for its scope and for the length of the legislation. It provided much needed relief to many sectors of the United States still struggling from the impact of the COVID-19 epidemic through a combination of funding for government programs, renewal of the Paycheck Protection Program, and extension or expansion of a multitude of expiring tax incentives. The act combines a $1.4 trillion extension of government funding with nearly $1 trillion in new stimulus measures. The various tax provisions amount to approximately one-third of the nearly $328-billion total of the act’s stimulus measures.
The discussion below focuses on the tax aspects of the Stimulus Act.
Tax Provisions for Individuals
Stimulus Checks: Eligible individuals will receive $600 tax credit ($1,200 for married couples filing jointly) and an additional $600 for each dependent child under the age of 17. The credit phases out starting at $75,000 of modified adjusted gross income, $112,500 for heads of household and $150,000 for married taxpayers filing jointly and fully phases out at $87,000 for individuals, $124,500 for heads of household and $174,000 for married taxpayers filing jointly. The Stimulus Act authorizes the Treasury Department to issue advance payments of tax credit as it did under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Advance payments will be issued based on information provided on 2019 tax returns and should be issued by Jan. 15, 2021.
Charitable Contributions: The CARES Act allowed individual taxpayers claiming the standard deduction to claim a deduction for up to $300 of charitable contributions made during 2020. The Stimulus Act extends that deduction into 2021 and also increases the allowable deduction to $600 for joint returns. The CARES Act also allowed individuals who itemize deductions to fully deduct all cash charitable contributions made in 2020, and the Stimulus Act extends that for cash donations made in 2021.
Deductibility of Medical Expenses: The CARES Act reduced the floor for deducting unreimbursed medical expenses from 10% of adjusted gross income to 7.5%, and the Stimulus Act extends that reduction permanently.
Carryover of Cafeteria Plan Benefits: Contributions and benefits under flexible spending accounts for health or dependent care expenses generally must be used by the end of the taxable year in which the contributions are made or benefits are received. The Stimulus Act allows employers to amend their benefit plans to allow for contributions and benefits remaining in these accounts at the end of 2020 to be carried over and used 2021. In addition, those benefits remaining at the end of 2021 can be carried over and used in 2022.
Withdrawals and Loans from Retirement Accounts: The CARES Act allowed certain individuals directly affected by COVID-19 to take distributions of up to $100,0000 from their retirement plans prior to Dec. 31, 2020 without incurring a 10% early withdrawal penalty and to spread out the inclusion of income for those distributions over three years or to repay the distributions within three years (see the MH Alert here for details). The Stimulus Act expands the availability of this relief on a permanent basis to any individual living in a federally-declared disaster area, allowing distributions of up to $100,000 per disaster. The Stimulus Act also allows individuals to take loans of up to the lesser of $100,000 or 100% of the vested account balance from a retirement account at any time prior to June 25, 2021 for individuals living in in a federally-declared disaster area which suffered an economic loss from the disaster. Because the United States has been declared a federal disaster area due to COVID-19 (see alert MH alert here), these loans are available to anyone in the United States with COVID-19 related losses.
Disaster-related personal casualty losses: Individuals claiming the standard deduction generally may not deduct net personal casualty losses. The Stimulus Act removes this limitation.
Extension of Exclusion Qualified Principal Residence Forgiveness Income: Generally, the cancellation of a loan creates taxable income for the debtor, but the forgiveness of mortgage loans used to purchase, construct or substantially improve the borrower’s principal residence was excluded for loans of up to $2 million ($1 million for married individuals filing separately) if forgiven in 2020. That exclusion has been extended for qualified principal residence loans forgiven through Dec. 31, 2025, but the maximum loan amount was reduced to $750,000 ($375,000 for married individuals filing separately).
Educator expenses for personal protective equipment: Elementary and secondary school teachers are allowed a deduction of up to $250 per year for certain qualified expenses. The Stimulus Act requires Treasury to issue regulations providing that costs for personal protective equipment and other supplies used to combat the spread of COVID-19 are eligible expenses for purposes of this deduction, retroactive to March 12, 2020.
Tax Provisions for Businesses
Deductions Permitted for Expenses Eligible for PPP Loan Forgiveness: For many Paycheck Protection Program (“PPP”) loan borrowers, the most significant provision of the Stimulus Act is confirmation that borrowers will be able to deduct qualified expenses paid with PPP loan proceeds for items that are ordinarily deductible for tax purposes. While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, and the IRS issued guidance disallowing the deduction of expenses paid with PPP loan proceeds (see MH alert here). The Stimulus Act rejects the IRS position and also clarifies that any income tax basis increase that results from a PPP loan will not be lost when the PPP loan is forgiven. This change effectively provides additional cash flow to PPP borrowers who no longer need to reserve cash to pay taxes on the amount of their PPP forgiveness-related expenses and may be able to reduce their Q4 2020 estimated tax payments after adjusting for this deduction. However, some states have indicated they will not follow the federal treatment of such expenses and therefore, it will not be deductible for state tax purposes. It is important to consider the state tax treatment when preparing estimated tax payments.
Temporary allowance of full deduction for business meals: The Stimulus Act temporarily removes the 50% limit on the business expense deduction for meals so long as the food or beverages are provided by a restaurant and incurred between Jan. 1, 2021 and Dec. 31, 2022.
Deferral of payroll tax: On Aug. 8, 2020, President Trump signed an executive memorandum directing Treasury to defer certain payroll tax obligations to allow employers to defer the payment of payroll taxes for certain employees whose pretax compensation during any biweekly pay period is less than $4,000. The deferral applied to wages paid from Sep. 1, 2020 through Dec. 31, 2020. Initially, employers were required to increase withholding and pay the deferred amounts from compensation paid between Jan. 1, 2021 and April 30, 2021. The Act now extends that repayment period until Dec. 31, 2021. While few employers took advantage of the deferral opportunity, those that did will now have additional time to pay the deferred taxes.
Employee retention tax credit: The Act extends the employee retention tax credit (ERTC) through the first two quarters of 2021. The Stimulus Act expands the credit as follows:
- An increase in the credit percentage from 50% to 70% of qualified wages.
- An increase in the creditable limit on per employee wages from $10,000 for the year to $10,000 for each quarter.
- 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.
- A provision to allow certain governmental employers to claim the credit.
- An increase from 100 to 500 in the number of employees counted when determining which qualified wage base applies.
- Rules allowing employers who were not in existence for all or part of 2019 to be able to claim the credit.
The Stimulus Act further provides that:
- Employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds.
- Group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.
- For purposes of certain tax-exempt organizations, any reference to gross receipts shall be treated as a reference to gross receipts within the meaning of section 6033 of the Code.
The provisions related to the ERTC take effect as if they were included in the provisions of the CARES Act to which they relate.
FFCRA payroll tax credits: The Families First Coronavirus Response Act (“FFCRA”) provided up to 80 hours of emergency paid sick leave, and up to 12 weeks of partially paid emergency family leave, to employees who were unable to work for reasons related to COVID-19. While the FFCRA imposed a temporary paid federal leave requirement, it also provides a corresponding offset from payroll taxes for wages paid to employees taking FFCRA leave. The mandatory leave provisions of the FFCRA expired on Dec. 31, 2020, but the Stimulus Act extends the time for employers to claim refundable payroll tax credits for FFCRA leave through March 31, 2021.
Depreciation of certain residential rental property over 30-year period: The Stimulus Act allows real estate businesses to elect to claim depreciation deductions over a 30-year recovery period for residential rental property placed in service before Jan. 1, 2018.
Corporate Charitable Contributions: The CARES Act increased the limit on charitable deductions for C corporations from 10% of taxable income to 25% of taxable income for contributions made in 2020. The Stimulus Act extends this increase through 2021.
Extension of Tax Credits: The Stimulus Act extended for five additional years a number of business-related tax credits that had been set to expire at the end of 2020, including the New Markets Tax Credit, the IRC 45S credit for Family and Medical Leave and the Work Opportunity Tax Credit.
The Stimulus Act includes a number of other extensions of expiring tax provisions and created other tax incentives for certain targeted industries.
The Stimulus Act is extremely lengthy at 5,593 pdf pages long, and it includes an abundance of tax provisions that may affect you or your business. Should you have any questions regarding the tax provisions outlined herein or how the Stimulus Act may otherwise affect you or your business, please feel free to contact us for further guidance.