The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member for 2020.
On December 27, 2020, the president signed the Consolidated Appropriations Act, putting the nation’s businesses and individuals impacted during the COVID-19 pandemic one step closer to stimulus funds that provide financial relief. The COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR) are both part of the Consolidated Appropriations Act, 2021 (CAA).
Below we provide a summary of the individual and business tax provisions.
Individual Provisions of the CAA
New Recovery Rebate
The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member (although the president has called for $2,000) for 2020. The credit is $600 per taxpayer ($1,200 for married taxpayers filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income. Interestingly, the House, on the evening of December 28, passed a bill authorizing the president’s demand for a $2,000 recovery payment. While the fate of the bill in the Senate is unclear as of this Alert, we believe it’s unlikely to pass as Republicans may attempt to link all of President Trump’s demands, including election security issues and an overhaul of the legal shield currently in place for social media companies.
The term "eligible individual" does not include any nonresident alien, anyone who qualifies as another person's dependent, and estates or trusts. The credit is available on the taxpayer's 2020 return.
The provision provides for the Treasury Department to issue advance payments based on information from 2019 tax returns. Eligible taxpayers who are treated as having provided returns through the IRS nonfiler portal with respect to their Economic Impact Payment (EIP) will also receive payments.
In general, taxpayers without an eligible Social Security number are not eligible for the payment. However, unlike the CARES Act, families with members of mixed immigration status with a valid Social Security number for one spouse are also eligible for the payments. For example, married taxpayers filing jointly where only one spouse has a Social Security number are eligible for a payment of $600, in addition to $600 per child with a Social Security number.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors.
Charitable Contribution Deductions
For 2020, individuals who normally do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. This $300 limit also applies to married filers. A 20 percent penalty is applied to tax underpayments attributable to any overstated cash contribution by nonitemizers. The TCDTR extends the above rule through 2021, allowing individual cash contributions of up to $300 ($600 for married filers) to be deducted above-the-line for cash contributions to qualified charitable organizations. An increased penalty of 50 percent applies to tax underpayments attributable to any overstated cash contribution by nonitemizers. Under pre-TCDTR law, individuals could not take an itemized deduction of more than 60 percent of their adjusted gross income on charitable contributions, of cash, made to 50 percent charities. For 2020 and 2021, the percentage limitation rules for individuals making qualified charitable contributions, in cash, to 50 percent charities do not apply. This provision essentially extends the CARES Act 100 percent AGI contribution rule.
Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements
A cafeteria plan may permit the carryover of unused amounts remaining in a health flexible spending arrangements (FSA) as of the end of a plan year to pay or reimburse a participant for medical care expenses incurred during the following plan year, subject to the carryover limit (currently $550). This is sometimes referred to as the carryover rule.
The TCDTR expands the carryover period for 2020 and 2021. The provision also allows employers to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of such plan year for unused benefits and contributions to health flexible spending and dependent care flexible spending arrangements. As a result, this provision helps taxpayers with unused balances in the FSAs that would normally be lost.
In addition, an employer may allow an employee who ceases to participate in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which the employee's participation ceased, including any extended grace period.
The TCDTR also provides a special carry forward rule for dependent care FSAs where the dependent aged out during the pandemic. Contact us for further information.
Child Tax Credit and Earned Income Tax Credit
While these tax credits would generally be based on the 2020 tax year in connection with your 2020 tax returns, the computations are adjusted as a result of the impact of the pandemic. For example, earnings for 2020 may be low due to job loss, lower earnings, underemployment, etc., and produce reduced tax credits. As a result, the new law permits use of 2019 income to determine eligibility for these tax credits for tax year 2020. Additionally, this provision will prevent unemployment insurance benefits received in 2020 from reducing these tax credits.
Unemployment Benefits
The CAA extends the $300 per week federal unemployment subsidy payment for 10 weeks, through March 14, 2021.
Business Provisions of the CAA
Clarification of Tax Treatment of Covered Loan Forgiveness
The CARES Act (which we wrote about in this Alert) provides that a recipient of a Paycheck Protection Program (PPP) loan may use the loan proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities and interest on any other existing debt obligations. If a PPP loan recipient uses their PPP loan to pay those costs, they can have their loan forgiven in an amount equal to those costs. PPP loan forgiveness does not give rise to taxable income and the Tax Code generally does not allow a taxpayer to deduct expenses that are paid with tax exempt income.
Under COVIDTRA, taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. Based on review of the legislation’s history, this provision confirms the intent of our lawmakers and creates a two-part subsidy―(1) for tax-free income on the debt forgiveness and (2) a deduction of costs.
Additionally, this provision is effective for tax years ending after the date of the original CARES Act (which is March 26, 2020) and is, therefore, retroactive for tax year 2020.
New Round of Funding Under the Paycheck Protection Program
The renewed PPP, containing $284 billion in new funding, has several changes from the version that passed in March, including capping the size of eligible small businesses at 300 employees from the earlier 500-employee maximum and limiting the size of a loan to $2 million, which can be fully forgiven if businesses keep people on their payroll. Other forgiveness requirements include the need for companies to document a 30 percent reduction from the gross receipts of the entity during the same quarter in 2019, including all revenues from the normal operation of the business before subtraction of expenses, but will not include amounts borrowed, including prior amounts received under the first iteration of the PPP loan program.
As mentioned above, in a win many businesses were seeking, the bill would allow small firms that already got PPP funding to take tax deductions on expenses paid for with the loans. Many borrowers have requested a second round of PPP loans, and many potential borrowers who were unable to receive a PPP loan during the first round would like to have access to a PPP loan. The CAA allows new and previous borrowers to receive a PPP loan if they meet the requirements of an “eligible entity.” Borrowers who received less than $150,000 in PPP loans during the first round will now only have to submit a one-page application for forgiveness, but all of the same rules apply.
For a deeper discussion on the important changes to PPP loan terms and conditions as well as new opportunities to receive a second PPP loan, see the Duane Morris COVID-19 Strategy Team Alert. For certain entertainment and live events businesses that have been forced to close due to COVID-19 restrictions, you may be eligible for Shuttered Venue Operator Grants as discussed in this Alert.
Clarification of Tax Treatment of Certain Loan Forgiveness and Other Business Financial Assistance
The CARES Act expanded access to Economic Injury Disaster Loans (EIDL) and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of CARES Act loans.
Under COVIDTRA, gross income does not include forgiveness of EIDL loans, emergency EIDL grants and certain loan repayment assistance. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income.
Authority to Waive Certain Information Reporting Requirements
Generally, a lender that discharges at least $600 of a borrower’s indebtedness is required to file a Form 1099-C, Cancellation of Debt, with the IRS, and to furnish a payee statement to the borrower.
Under COVIDTRA, the Treasury Department is permitted to waive information reporting requirements for any amount excluded from income by the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
Minimum Low-Income Housing Tax Credit Rate
The amount of the annual low-income housing credit is generally a percentage prescribed by the IRS intended to result in a credit, in the aggregate over the 10-year credit period, of a present value of 70 percent of the qualified basis for certain new buildings and 30 percent of the qualified basis for certain other buildings. However, there is a 9 percent per year floor on the credit for new buildings that aren't federally subsidized.
TCDTR provides a 4 percent per year credit floor for buildings that aren't eligible for the 9 percent credit floor.
Depreciation of Certain Residential Rental Property Over a 30-Year Period
The Tax Cuts and Jobs Act (TCJA) (which we wrote about in an previous Alert) allowed real property trade or businesses to elect out of the business interest deduction limitations imposed by the TCJA. In return however, the electing taxpayer had to, for tax years beginning after December 31, 2017, treat the elected-for nonresidential real property, qualified improvement property and residential rental property as subject to the alternative depreciation system (ADS). Also, the TCJA changed the ADS recovery period for residential rental property from 40 years to 30 years for property placed in service after December 31, 2017.
Under CAA, for tax years beginning after December 31, 2017, there is a 30-year ADS period for residential rental property even though it was placed in service before January 1, 2018, if the property is held by an electing real property trade or business and, before January 1, 2018, wasn’t subject to the ADS.
Minimum Rate of Interest for Certain Determinations Related to Life Insurance Contracts
To qualify as life insurance contracts for tax purposes, permanent life insurance policies must meet several requirements. These requirements include two interest rate assumptions for determining the premiums that can be used to fund the contracts. The interest rate assumptions were set by statute at 4 percent and 6 percent when the requirements were put in place in 1984.
TCDTR updates these rules to reflect the interest rate environment that has been exacerbated by the current crisis, and ensures that the rates will continue to appropriately reflect economic conditions by tying the rates to either a floating rate prescribed in the National Association of Insurance Commissioners’ Standard Valuation Law or a floating rate based on the average applicable federal mid-term rates over a 60-month period.
Limit on Business Meal Deduction Suspended for Restaurant Meals in 2021 and 2022
Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel. The deduction is generally limited to 50 percent of the otherwise allowable amount.
However, under previous law, there was no exception for meals provided by a restaurant. Under the CAA, the 50 percent limit will not apply to expenses for food or beverages provided by a restaurant that are paid or incurred after December 31, 2020, and before January 1, 2023.
As a result, the deduction for business meals has been increased from 50 percent to 100 percent for 2021 and 2022. The 50 percent limitation, which dates back to 1993, will return in 2023.
Low-Income Housing Tax Credit—Increased Ceiling
A low-income housing tax credit (LIHTC) is allowed annually over a 10-year credit period beginning with the tax year a qualified building is placed in service, or, under an irrevocable election, the next tax year. There is a limit on the total amount of credits available for buildings not financed with tax-exempt bonds subject to certain state volume limitations.
Under previous law, each state is permitted to annually allocate low-income housing credits, with a ceiling amount for calendar year 2020, equal to the greater of (1) $2.8125 multiplied by the state population or (2) $3,217,500. Subject to certain exceptions, a housing credit allocation is taken into account only if it's made no later than the close of the calendar year in which the building is placed in service. Under the carryover allocation exception, a credit allocation is taken into account if it's made with respect to a “qualified building” placed in service not later than the close of the second calendar year following the calendar year in which the allocation is made.
A “qualified building” under the carryover allocation exception is any building that is part of a project of which the taxpayer's basis in the project, as of the date one year after the date the allocation was made, is more than 10 percent of the taxpayer's reasonably expected basis in the project at the close of the second calendar year after the calendar year of the allocation.
Under the new law, for purposes of the LIHTC, the 2021 and 2022 state housing credit ceiling for any state will be increased by the aggregate housing credit dollar amount allocated by the state’s housing credit agencies for that calendar year to buildings located in any qualified disaster zone in that state.
The increase determined under the above rule for any state won’t exceed, (i) for calendar year 2021, that state’s applicable dollar limitation (defined below), and (ii) for calendar year 2022, that state’s applicable dollar limitation reduced by the amount of any increase determined under the above rule for that state for calendar year 2021. These rules are complex. If your business or personal tax situation includes low-income housing tax credits, contact us for further information.
Elective Deferral of Employee Social Security Taxes Extended
For employers who participated in the “voluntary tax holiday” whereby President Trump’s executive order permitted employers to defer the payment of employee Social Security taxes on certain eligible salaries (i.e., biweekly salary less than $4,000) for the period September 1 through December 31, 2020, until April 30, 2021, you now have until December 2021.
Payroll Tax Credits
The new law extends refundable payroll tax credits for paid sick and emergency medical family leave, which were to expire December 31, 2020, through the end of March 2021.
The law provides a comparable benefit for self-employed persons. It permits an election for self-employed individuals to use average daily self-employment income from 2019 in computing the credit.
Employee Retention Tax Credit
This tax credit has been extended to June 20, 2021, and has been modified significantly. For example, the credit applies to per-employee eligible wages of $10,000 per quarter rather than $10,000 per year; the credit rate increases from 50 percent (for a maximum $5,000 credit for the year) to 70 percent of wages (for up to $7,000 per quarter per eligible employee); the substantial reduction of gross income requirement is now defined as a 20 percent reduction and not a 50 percent reduction; a safe harbor is created so that an employer can use prior-quarter gross receipts in determining eligibility; in determining eligible wages for the credit, the break point is increased from 100 employees to 500 employees; and new employers―those not in existence for all or part of tax year 2019―are permitted to receive the credit.
Extender Provisions
Many so-called extender provisions were set to expire on December 31, 2020. In addition to COVID-19 relief, the CAA renews them through 2025. Examples include:
Section 179D Energy Efficient Commercial Building Deduction
The 179D commercial buildings energy efficiency tax deduction primarily enables building owners to claim a tax deduction for installing qualifying systems and buildings. This provision was scheduled to expire 2020. It has now been made permanent. Generally, the deduction is based on $1.80 per square foot. The new law adjusts the $1.80 rate based on inflation after 2020, using 2019 as the base year.
Qualified Tuition and Related Expenses
The CAA removes the phaseout rules for the American Opportunity Tax Credit and the Lifetime Learning Credit and creates a single phaseout for years 2021 and beyond. The deduction for higher education expenses is repealed for tax years after 2020.
New Markets Tax Credit
The $5 billion allocation of available credits is extended for 2021 through 2025.
Work Opportunity Credit
The program providing a credit for employers hiring individuals covered by 10 targeted groups is extended through 2025.
Principal Residence Indebtedness Discharge
Excluded from gross income was debt discharge on qualified principal residence debt of up to $2 million ($1 million for a married filing separate filer). This provision was scheduled to end after 2020. The CAA extends the exclusion for discharges between years 2021 and 2025. However, the maximum exclusion has been reduced to $750,000 ($375,000 for married separate filers).
Mortgage Insurance Premiums Treated as Qualified Resident Interest
Treatment of mortgage insurance premiums related to acquisition indebtedness in connection with a principal residence as interest expenses is extended through 2021.
Empowerment Zone Tax Incentives
For the period the designation of an empowerment zone is in effect, the tax incentives are extended through December 31, 2025.
Exclusion for Employer Payment of Student Loans
Up to $5,250 of employer payments in connection with a qualified educational assistance program will be treated as a nontaxable benefit and is extended for payments through 2025.
Employer Paid Family and Medical Leave Program
Employers who provide paid family and medical leave are entitled to a tax credit of 12.5 percent of eligible wages paid for a maximum of 12 weeks. This credit was scheduled to end after 2020. The CAA extends this credit through 2025.
TAG’s Perspective
Challenges continue during this COVID-19 environment, including safety, health, vaccines and rapidly changing federal economic stimulus activities. The CAA provides additional, and much needed, individual and business economic relief. We will not be surprised to see further COVID-19-related changes at the state and local levels and additional COVID-19 relief legislation as the new presidential administration takes office and the 117th Congress convenes.
For More Information
If you would like more information about this topic or your own unique situation, please contact any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.