By Tim Moore
Following a period of uncertainty and considerable publicity leading up to a potential government shutdown last week, President Trump signed the combined stimulus and appropriations bill (“Consolidated Appropriations Act, 2021”, “Bill”) into law.
The combined Bill provides funding to keep the government operating while delivering a wide range of benefits to individuals and businesses hit hard by the Coronavirus pandemic. Of importance here, there are not so widely reported provisions that are tax related and that will provide a measure of relief to taxpayers, both individual and business.
More Recovery Rebates – The Bill provides for a credit/payment of $600 per person, which will be sent to eligible taxpayers in the form of a cash payment. It represents a refundable tax credit against 2020 tax. The initial payment will be based on the income of the taxpayer(s) from 2019, but the final amount of the credit on the tax return will be based on the income the taxpayer(s) report on their 2020 income tax return. The credit phases out for single taxpayers starting at $75,000 of modified Adjusted Gross Income ($112,500 for Head of Household and $150,000 for Married Filing Jointly) with a $5 reduction for each additional $100 of income. If an advance payment exceeds the credit as finally determined, the recipient will not be required to repay the difference, but if the payment is less than the final credit, the taxpayer(s) will be given the difference as a reduction of their tax bill.
Flexible Spending Arrangement (FSA) Temporary Rules – The Bill relaxes rules regarding carryover of unused benefits from 2020 to 2021 and 2021 to 2022 for both health and dependent care, generally, up to the full annual amount. Plans must specifically adopt these changes in order for participants to benefit.
Charitable Contributions – There are various provisions that affect the deductions for charitable contributions. For taxpayers who do not itemize their deductions, the $300 deduction for charitable cash contributions has been increased to $600 for joint filers in 2021. For taxpayers who itemize, the CARES Act had suspended the 60% of AGI limitation for one year, 2020, and eliminated the percentage limitation for contributions made for efforts in qualified disaster areas. The Bill extends these changes to 2021.
Medical Expense Itemized Deductions –The law reduces/restores the 7.5% floor for deduction of medical expenses for all taxpayers, regardless of age, retroactively and prospectively to 2019 and 2020.
Educator Expense Deduction – For educators accustomed to a deduction for out-of-pocket costs associated with supplies for their work, the Bill clarifies that supplies, like PPE, provided to reduce the spread of the Coronavirus, are eligible for the deduction.
Tuition Deduction to Tax Credit – The former deduction for qualified tuition and related expenses, after 2020, will be replaced by increased phase-outs of the Lifetime Learning Credit. In most cases, this change should not make much difference, but the alteration is worthy of note if the deduction has been taken in the past and would otherwise have still applied beyond 2020.
PPP Loans – We previously reported on the deductibility of expenses paid with PPP loans as well as the implementation of PPP2. This is great news and you can read more about it here.
100% Deduction for Business Meals – If you were in business prior to the 1986 Tax Act, you may reminisce about the ability to deduct 100% of business-related meals. The good ole days are back…for two years – 2021 and 2022. Ostensibly, this is an offering to help re-invigorate the restaurant industry hard hit by the pandemic.
Employee Retention Credit – A credit under the CARES Act provided a benefit for employers subject to suspension of operation or significant decline in gross receipts. The benefit consists of a refundable credit, immediately accessible against payroll tax deposits, based on wages paid to retained employees between March 13, 2020 and January 1, 2021. The Bill extends the credit to June 30, 2021 while increasing the credit rate, broadening the definition of a significant decline in gross receipts, increasing the wage base and providing a wealth of other clarifications/expansions of its applicability. Notably, there is clarification that recipients of PPP loans may qualify for the credit, so long as those same wages were not funded with PPP loan proceeds that are forgiven.
Sick and Family Leave Tax Credit (FFCRA leave credits) – This refundable credit against payroll taxes that helps subsidize COVID related sick and family leave was extended until March 31, 2021. Prior to January 1, 2021, most employers were required to provide the leave, but it is made voluntary effective in 2021. For employers that wish to provide the leave in 2021, the refundable credit is still available. To read our previous article on this topic click here.
Extenders (both Individual and Business)
The Bill put in place several so-called Extenders that increase the life of previously enacted tax breaks, most of which were not related to the pandemic provisions. Generally, they include:
- Exclusion from income of qualified principal residence debt forgiveness – through 2025
- Employer tax credit for paid family and medical leave – through 2025
- Tax-free employer payment of student loans – through 2025
- Mortgage insurance premiums deductible as qualified residence interest – through 2021
- Nonbusiness energy property credit (10% for window, doors and the like) – through 2021
- Energy efficient homes credit (up to $2,000) for qualified new homes – through 2021
- Residential energy-efficient property/biomass fuel property credit – generally through 2022
These are but a few of the numerous tax provisions in the Bill. There are others that relate more specifically to real estate, venue operators, the brewing/distilling industry, farming, motorsports and other industries. There are also provisions that provide for enforcement, compliance and ministerial rules associated with benefits granted under this Bill and the previous relief bills.
For more information on how the Consolidated Appropriations Act impacts you or your business, please contact Snyder Cohn.
Disclaimer: Please note this article is based on the information that is currently available and is subject to change.