05 Jan What You Need to Know about the Tax Provisions of the Consolidated Appropriations Act, 2021 (The Act)
Additional relief is on the way for individuals and businesses. Here are the key provisions of the additional round of stimulus in The Act passed by Congress and signed by the President.
New Round of Recovery Rebate Payments
These payments are limited to $600 per individual this time around, but allowable for dependent children and certain other dependents at the same rate versus $500 previously. As such, a family of four would qualify for $2,400. The amounts phase out for single taxpayers at $75,000 and $150,000 for joint filers. The amount is a credit on 2020 taxes, but the Government will send checks based on 2019 tax filings.
Paycheck Protection Program (PPP) Loans
Forgiven PPP loans remain nontaxable. Congress specifically overrode the IRS position that expenses attributable to the forgiveness were not deductible. As such, expenses utilized to qualify for forgiveness will now be deductible. The Act also authorizes additional permissible nonpayroll costs to qualify for forgiveness, including costs related to personal protective equipment (PPE).
Employee Retention Credit
Previously, if a business took out a PPP loan, they were not allowed to also take the Employee Retention Credit. The new law retroactively changes that to allow the Employee Retention Credit if you also have a PPP loan. You just cannot utilize the same wages that you utilized for forgiveness for the Employee Retention Credit. This change is retroactive to the date of the enactment of the CARES act.
In addition, the Employee Retention Credit has been extended to June 30, 2021, with some changes post 2020. The percentage of qualified wages eligible for the credit increases to 70% (up from 50%) of qualified wages up to $10,000. Also, the $10,000 per employee is now per quarter, which would allow $7,000 per quarter in the first 2 quarters of 2021 ($14,000) vs. $5,000 for all of 2020.
In 2020, if the business had under 100 employees, all wages would qualify, whether or not the employees were providing services. In 2021, that threshold is now 500 employees. The business still must either have been fully or partially suspended due to a shutdown order or have had a gross receipts decline. This gross receipt test which looked for a 50% decline in revenue for 2019 to 2020, now requires only a 20% decline for 2021. Thus, more businesses should qualify for the credit.
The usual 50% limitation on business meals is suspended from January 1, 2021 until December 31, 2022 as long as the food and beverages are provided by a restaurant.
Residential Rental Property Depreciation
Some owners of rental property elect not to have the business interest limitation (163j) apply to them. Such owners must elect to depreciate certain classes of property over longer useful lives under the Alternative Depreciation System (“ADS”) to not be subject to the business interest limitation. TCJA (2017 Tax Act) shortened the ADS life of residential rental property from 40 to 30 years, but only for property placed in service after December 31, 2017.
The Act now allows all such property to have an ADS life of 30 years including property placed in service before January 1, 2018. The change is retroactive to tax years beginning after December 31, 2017. As such, real property owners will have to decide whether to file amended returns or apply for changes in accounting methods.
If in a Federal disaster area (other than COVID-related, which included the entire United States), the disaster relief provision allows for a maximum credit of $2,400 per employee (40% of up to $6,000 in qualified wages). This is for businesses that operated in a disaster zone and became inoperable anytime from the date of the disaster to December 20, 2020 (the date of enactment of the stimulus bill).
The following credits and other provisions have been extended under the stimulus bill:
- Work Opportunity Tax Credit (WOTC) extended until 12/31/2025
- New Markets Tax Credit (NMTC) extended until 12/31/2025
- Section 179D Energy Efficient Commercial Buildings Deduction is extended permanently and indexed for inflation
- Three-year recovery period for racehorses extended until 12/31/2021
- Seven-year recovery period for motorsports entertainment complexes extended until 12/31/2025
- Expensing of qualified film, television, and live theatrical production costs extended until 12/31/2025
- Mortgage Insurance Premiums treated as qualified residence interest extended through 2021
- Discharge of personal residence forgiveness as nontaxable income extended until 12/31/2025
Please note that the above the line deduction for tuition and related expenses will sunset December 31, 2020 (it has not been extended).
The $300 charitable deduction for non-itemizers in 2020 is increased to $600 for joint filers in 2021. The 100% of Adjusted Gross Income limitation for cash contributions to public charities is extended through December 31, 2021.
Limitations of charitable contributions by corporations to 10% was increased to 25% by the Cares Act through 2020. The Act extends this through 2021. In addition, contributions of food inventory normally limited to 15% of income and increased by the Cares Act to 25% through 2020 is extended through 2021.
The 10% floor on medical deductions set to take effect in 2021 will permanently remain at 7.5% under The Act.
The provision allowing employers to pay for employee’s student loans up to $5,250 per year with such amounts being excluded from the employee’s taxable income has been extended to December 31, 2025.
Voluntary Deferral of Payroll Taxes
The provision allowing voluntary deferral of the employees’ portion of social security taxes (6.2%) from September 1, 2020 until December 31, 2020 with payback being made between January 1, 2021 and April 30. 2021 through additional withholding by the employer is now extended to allow payback to be made through December 31, 2021.
The $250 above the line deduction for unreimbursed teacher expenses is expanded to include PPE expenses (masks, disinfectant and other supplies to prevent the spread of COVID-19).
Rollover of Flexible Spending Arrangements (FSA) Benefits
Individuals can rollover unused benefits in their FSA and Dependent Care accounts from 2020 to 2021 and 2021 to 2022.
We will be providing more details regarding The Act in coming weeks. If you have questions about how these changes impact your unique situation or how to maximize your tax benefit, contact your Schmidt Westergard & Company tax professional at 480-834-6030.