President Donald Trump signed into law the Consolidated Appropriations Act, 2021 (“the Act”). The Act is made up of the Additional Coronavirus Response and Relief Act (ACRRA) and the Taxpayer Certainty and Disaster Relief Act of 2020. The approximately $900 billion of pandemic stimulus provides emergency relief for both individuals and businesses, and consists of a multitude of items, including PPP loans, EIDL grants, employee retention credits, economic impact payments, unemployment benefits, the addition of new tax provisions, and the extension of expiring provisions.
The Act’s most notable item is the reopened Paycheck Protection Program (PPP), providing a second round of additional funding for struggling businesses through March 31, 2021. The Act creates “second draw” loans for the smaller, harder-hit businesses, and simplifies the loan forgiveness application process. Perhaps the largest win for businesses was resolving the conflict between Congress and the IRS on the deductibility of expenses funding forgiven PPP loans. While Congress had intended for the PPP loans not to be taxable, the IRS had issued revenue rulings maintaining the position that expenses related to forgiven PPP loans would not be deductible. The Act clarified Congress’ position overriding the IRS, allowing the expenses to be tax-deductible.
Additional Coronavirus Response and Relief Act
The ACRRA was designed to assist individuals and businesses during the pandemic and help the economy recover. While a full summary of the Act is not feasible in this briefing, a summary of key items includes:
- Economic Impact Payments – a second round of one-time economic stimulus payments of up to $600 per taxpayer, or $1,200 for married filing jointly, plus $600 per dependent under age 17 at the end of 2020. The payments begin phasing out for taxpayers with AGI over $75,000 Single, $150,000 married filing jointly, or $112,000 head of household.
- Unemployment benefits – extends federal pandemic unemployment compensation by $300 a week for individuals from December 26, 2020 to March 14, 2021.
- Deductibility of PPP expenses – overrides the IRS position on taxability of PPP loans by clarifying that business expenses used in obtaining Paycheck Protection Program (PPP) loans are tax-deductible.
- Small business loans – more than $284 billion for additional PPP loans for small businesses.
- Eviction moratorium, rental assistance – extends the temporary eviction moratorium through January 31, 2021, and provides $25 billion in tax-free rental assistance.
- Tax credits – tax credits for companies offering paid sick leave.
- Child care assistance – $10 billion to state revenue funds to supplement child care assistance for low-income families.
- Broadband – several billion dollars to fund increased broadband access to assist employees in working remotely.
- Transportation – support for transportation services, including $2 billion for airports and $16 billion in payroll support for airline workers and contractors.
- Vaccine distribution – over $8 billion for activities to plan, prepare for, promote, distribute, administer, monitor, and track coronavirus vaccines to ensure broad-based distribution, access, and vaccine coverage.
- Vaccine development – over $22 billion shall remain to develop and purchase vaccines, therapeutics, diagnostics, and necessary medical supplies.
- COVID testing – $22.4 billion for expenses related to testing, contact tracing, surveillance, containment, and mitigation to monitor and suppress COVID-19.
- Clinical research – over $1 billion for research and clinical trials related to long-term studies of COVID-19.
- Health care reimbursement – $3 billion to reimburse, through grants or other mechanisms, eligible health care providers for healthcare-related expenses or lost revenues attributable to the coronavirus.
- Mental health services – over $4 billion for mental health services and substance abuse and mental health services and suicide prevention programs.
Taxpayer Certainty and Disaster Tax Relief ACT of 2020
Included in the Consolidated Appropriations Act, 2021 is the Taxpayer Certainty and Disaster Relief Act of 2020 (TCDTRA). Several new provisions were added in the TCDTRA, and certain Internal Revenue Code provisions were extended either through 2021, or 2025, while other provisions were made permanent. Key tax items of interest are summarized below:
Full Deduction for Business Meals
Businesses may now claim a 100% deduction instead of 50% for food or beverages provided by restaurants. The meals may be for dine-in, delivery or takeout, for purchases paid or incurred between January 1, 2021, through December 31, 2022.
Individuals may claim a $300 above-the-line deduction ($600 married filing joint) for cash contributions made to qualified organizations for 2021. A 50% accuracy-related penalty will be imposed on an underpayment of tax arising from an overstatement of the deduction.
The AGI limitation on charitable contributions was increased to 100% and extended to include the 2021 tax year.
Contributions must be made in cash to qualified organizations. Contributions cannot be made in property or be paid to private foundations or donor-advised funds.
Retirement Plan Relief
Individuals may take penalty-free withdrawals up to $100,000 from qualified retirement accounts, reduced by other amounts treated as qualified disaster distributions for prior taxable years. The $100,000 limitation is applied separately for individuals affected by more than one disaster. The amount withdrawn is recognized in gross income ratably over a three-year period beginning with the year of withdrawal, unless the taxpayer elects to have it recognized in the year of the withdrawal. The distributions are not subject to withholding.
Individuals with plans accepting rollover contributions may repay the distributed amounts within a three-year period, beginning on the date on which the distribution was received. The distribution repayment will not be counted against the one rollover per year limitation.
Flexible Spending Account Carryovers
The “use it or lose it” nature of health and dependent care plans were temporarily modified. Individuals may carry over unused 2020 benefits remaining in health and dependent care FSA accounts to their 2021 accounts without disqualifying their cafeteria plan. Unused 2021 benefits may be carried over to 2022. Health care FSA will provide post-termination reimbursements for persons terminated in 2020 or 2021 throughout the end of the plan year, including the 12 month grace period.
The age limit on dependent care FSA accounts was increased from 13 to 14 years old during the plan year if there were unused amounts from the preceding year.
Participants in health care and dependent care flexible spending plans may prospectively modify their employee contribution amounts for the 2021 plan year. Employers may retroactively amend their cafeteria plans to the beginning of the previous calendar year.
Employee Retention Credit
The TCDTRA retroactively amended the CARES Act to allow previously ineligible PPP loan recipients the ability to claim the employee retention credit. The eligibility period was extended by six months to qualified wages paid before July 1, 2021. In addition, the allowable percentage increased from 50% to 70% of qualifying wages. The maximum allowable credit per employee was increased from $10,000 qualified wages annually to $10,000 per quarter.
Taxpayers may not receive a double tax benefit. Wages used to determine Work Opportunity Credits, Empowerment Zone Employment Credits, and Employer Credits for Paid Family and Medical Leave, and other credits, may not also be used to claim the employee retention credit.
Disaster-Related Employee Retention Credit
Eligible employers in qualified disaster zones whose businesses were inoperable during the disaster period ending on December 27, 2020, may claim a disaster-related employee retention credit. The credit amount is equal to 40% of the qualified wages paid to each employee, capped at $6,000 per year, per employee, such that the maximum credit amount is $2,400 per employee.
The disaster-related employee retention credit is separate from and not related to the employee retention credit in the previous section, but similarly may not receive a double tax benefit on wages used to determine other credits.
Highlights of other new provisions included from the TCDTRA include:
- Pension plans are permitted to make distributions to employees who reached age 59 1/2 and are still working.
- Allows earned income credit and child tax credit to be based on 2019 earned income rather than 2020 earned income.
- Taxpayers electing real property trades or businesses under the business interest limitation rules may depreciate the pre-2018 residential rental property over 30 years, regardless of when the property was placed in service.
- Minimum 4% of low-income housing credit.
Provisions Made Permanent
The following key tax provisions were made permanent through the TCDTRA:
- Reduces the medical expenses deduction from 10% to 7.5% of AGI.
- Repeals the deduction of qualified tuition and related expenses, and transitions to an increased income limitation on lifetime learning credits.
- Section 179D energy-efficient commercial building deduction, with modifications.
- Excludes benefits provided to volunteer firefighters and emergency medical responders from income.
Provisions Extended Through 2025
The following key tax provisions were extended through the 2025 tax year by the TCDTRA:
- New markets tax credit.
- Work opportunity credit.
- Empowerment zone tax incentives.
- Employer credit for paid family and medical leave.
- Exclusion from gross income of discharge of qualified principal residence indebtedness, with a modification reducing the maximum amount from $2 million to $750,000.
- Exclusion for certain employer payments of student loans.
Provisions Extended Through 2021
The following key tax provisions were extended through the 2021 tax year by the TCDTRA:
- Treatment of mortgage insurance premiums as qualified residence interest.
- Credit for health insurance costs of eligible individuals.
- Nonbusiness energy property.
- Credit for new qualified fuel cell motor vehicles.
- Credit for alternative fuel refueling property credit
- Two-wheeled plug-in electric vehicle credit
- Energy-efficient homes credit
- Extension of excise tax credits relating to alternative fuels
Author, Beeta Lecha
Principal, Spiegel Accountancy Corp
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.