The Consolidated Appropriations Act of 2021 was signed into law December 27, 2020 and contained both a $900 billion stimulus bill and an $1.4 trillion omnibus spending bill. Included within this legislation were numerous tax provisions, some stimulus related and some not stimulus related. Below is a summary of the tax relevant provisions and stimulus relief. This piece of legislation is large (over 5,500 pages) and so it will take time to learn all the details of what is included, and some items will also require further interpretation and guidance from other government entities (e.g. IRS and Small Business Administration). This blog will be updated as additional relevant information is known.
Economic Impact Payments
Eligible taxpayers will receive a $600 Economic Impact Payment (EIP), so $1,200 for Married Filing Joint or $600 for all other filing statuses, plus $600 per qualifying child (under age 17). As with the first round of EIP, taxpayers with income over certain thresholds will have their payments partially or completely phased out.
Income threshold phaseouts by filing status are:
- $75,000 – $87,000 for Single and Married Filing Separate
- $112,500 – $124,500 for Head of Household
- $150,000 – $174,000 for Married Filing Joint
The payments will be reduced by 5% of the taxpayer’s AGI that is above the lower threshold and is entirely phased out once income reaches the higher threshold. For example, a taxpayer filing as Single with no dependents with AGI of $80,000 on their 2019 tax return, would receive a payment of $350 ($80,000-$75,000=$5,000 income above lower threshold, $5,000*5%=$250 payment phaseout, $600-$250=$350 max payment less phaseout amount). The payments will be calculated using 2019 tax return information (or 2018 tax return information if 2019 return has not been filed yet).
Eligible taxpayers (still subject to income limits above) include anyone except: non-resident aliens, taxpayers who do not have a Social Security Number and/or taxpayers who qualify as a dependent of another taxpayer.
Reminder: these payments (including the payments that were part of the CARES Act earlier in 2020), are actually advance payments of 2020 tax credits. So if you did not receive stimulus payments or received reduced payments, but based on your 2020 income you qualify for the payments (or increased payments), you will get the credits when you file your 2020 tax return. Fortunately, there is no “claw-back” provision, so if you received a payment but would no longer qualify (or qualify for a lower amount) based on your 2020 filing, you are NOT required to pay back the credit (unless received fraudulently).
Unfortunately, same as the first round of EIP, dependents who are 17 or older do not qualify for their own payments nor do their parents qualify to get a payment on their behalf. It is especially important to review the criteria for dependency when filing your 2020 tax returns. If your older child does actually qualify to take their own exemption, it may make more sense for them to file that way in order to get the credits on their 2020 tax return. Please note: a child must NOT qualify to be a dependent on someone else’s return to be eligible for the payments, so simply filing their own return will not result in a credit. A tax return filed with a taxpayer taking their own exemption even though they qualify as a dependent of another taxpayer in order to receive the EIP credits, could be considered fraud.
The bill also retroactively expanded the eligibility to all taxpayers with a valid SSN, even if they file a tax return with a taxpayer who used an ITIN. Under the CARES Act, these taxpayers did not qualify for the first EIP for themselves or eligible dependents. Due to this change, these taxpayers will receive the 2nd EIP and can get a credit for the 1st EIP when filing their 2020 tax return (assuming they meet other qualifications).
The IRS has already started to process the EIP. More info can be found on the IRS website: IRS Begins to Issue EIP Payments. Please note: many banks are showing these deposits as “pending”. In order to get the funds out quickly, the IRS began to process payments before the actual payment date. Do not use these funds until they are showing as “available” in your bank balance.
You can check the status of your EIP by using the IRS Get My Payment tool.
Expanded Unemployment Assistance
Several programs to expand state unemployment benefits were included in the CARES Act but had expired or were set to expire on Dec 31, 2020. These programs have been extended and/or modified as follows:
- Federal Pandemic Unemployment Compensation (FPUC): under FPUC, those collecting unemployment received an additional $600 in weekly benefits but those additional payments stopped at the end of July. This program has been reinstated but the additional weekly benefit amount has been reduced to $300. The payments will now go through March 14, 2021.
- Pandemic Emergency Unemployment Compensation (PEUC): PEUC provided for an additional 13 weeks of unemployment for those who had exhausted the timeline of normal state unemployment benefits (26 weeks in most states). This program has been extended from 13 weeks to 24 weeks, which extends the period an individual can collect unemployment, in most states, to 50 weeks. This program will expire on March 14, 2021 for new applicants but those already collecting benefits can receive payments through April 4, 2021 (as long as still within 50 weeks).
- Pandemic Unemployment Assistance (PUA): PUA extended unemployment benefits to certain workers traditionally not eligible for unemployment benefits under state law, such as those self-employed workers, independent contractors, or workers who have a limited work history and allowed for benefits for up to 39 weeks. This program has been extended 11 weeks (bringing total weeks to 50). This program will expire on March 14, 2021 for new applicants but those already collecting benefits can receive payments through April 4, 2021 (as long as still within 50 weeks).
New provisions for unemployment assistance:
- Mixed Earner Unemployment Compensation: Individuals who are collecting unemployment based on their “traditional”, i.e. W-2, employment but also receive at least $5,000 a year in self-employment income will now receive an additional $100 weekly benefit (on top of additional $300 benefit under FPUC). This will allow the applicants with mixed job history to get credit for self-employment income that was not included in calculating their initial benefit amount. This provision will expire March 14, 2021.
- Fraud Provisions: requirements on the types and timing of documentation required for applicants applying for PUA were issued. States must have procedures in place to validate documentation/eligibility of PUA applicants and verify the identity of all applicants. States must also have a process in place for employers to report employees who have refused work without good cause (which would render them ineligible for unemployment benefits). The cost of putting these procedures into place will be funded by the federal government.
Note: due to the timing of the legislation, it is possible some individuals collecting unemployment will see a lapse in benefits, but any missed payments should be “made-up” once the states are able to update their systems to include these changes.
Earned Income Credit & Child Tax Credit
For tax year 2020, taxpayers may elect to use their 2019 taxable income to determine their Earned Income Credit and/or Additional Child Tax Credit if it results in higher credits than using their 2020 income. These credits are calculated using “earned income” and since some taxpayers have seen a decrease in earned income in 2020 (unemployment is considered unearned income), their credits could be lower than what they are used to receiving if based on 2020 income. Having the option to use 2019 taxable income would allow them to receive these credits without being penalized for a drop in earned income in 2020.
Medical Expense Deduction
Starting in tax year 2021, the floor for medical expense itemized deductions is permanently 7.5%. This was scheduled to increase to 10% in 2021. If you itemize your deductions, only medical expenses that are in excess of this floor are deductible. For example, if you have an AGI of $75,000, you are able to include medical expenses that are above $5,625 ($75,000 x 7.5%) in your itemized deductions. If the floor had increased as originally scheduled to 10%, that number would have increased to $7,500, a loss of an $1,875 deduction. Note: these floors are based on aggregate expenses, not each individual expense.
Above-the-Line Charitable Contribution Deduction
The above-the-line deduction for charitable contributions which was originally only in place for 2020 has been extended to tax year 2021. The amount has been increased from $300 to $600 for Married Filing Joint taxpayers for 2021 (remains $300 for 2020). See more info on our blog about this deduction and which contributions qualify: Blog: $300 Above the Line Charity Deduction.
Penalty Related to Overstating Charitable Contributions
The penalty for any underpayment of tax related to overstated charitable contributions has been increased for 2020 from 20% to 50% of the understated tax. Be sure to have documentation of charitable deductions!
Flexible Spending Accounts
Unused balances in flexible spending accounts (for health care and dependent care expenses) may be carried over from 2020 to 2021, and again from 2021 to 2022, if the employer allows. Normally, any unused balances revert back to the employer if not used within the plan guidelines. This is especially useful if you have reduced childcare costs in 2020 for COVID related reasons. The age for dependent care expenses has also increased from under age 13 to under age 14 if the child turned 13 during the pandemic.
Payback of Deferred Payroll Tax
Under a presidential memorandum issued in Aug 2020, employers could defer the employee side of Social Security for certain employees on wages received Sept-Dec 2020. The payback period deadline for this was April 30, 2021. The payback period has now been extended to Dec 31, 2021. If you deferred your Social Security withholding during 2020, contact your employer about repayment options.
Starting in tax year 2021, the Tuition and Fees Deduction has been repealed but the limits for the Lifetime Learning Credit (LLC) have been increased to be in line with the American Opportunity Credit (AOTC) income limits ($180,000 for MFJ and $90,000 for all other filing statuses as of 2019). For more info on these education credits, see this IRS Education Credits Comparison Chart. Please note, this chart is for tax 2019 and does not reflect the increase in income limits for the LLC that go into effect in 2021.
Qualified expenses that are paid out-of-pocket by educators that meet certain requirements (IRS Tax Topic: Educator Expenses), can be used for an “above-the-line” deduction of up to $250 per taxpayer. The definition of qualified expenses will be expanded to include personal protective equipment and other supplies used for the prevention of the spread of COVID-19 purchased March 12, 2020 or later.
Employer Payment of Student Loans
The CARES Act included a provision that allowed employers to make payments towards employees’ student loans in 2020 of up to $5,250. These payments would be excluded from the employees’ taxable income. This provision has been extended through 2025.
Mortgage Forgiveness Debt Relief
The exclusion from taxable income of discharged debt (related to debt forgiveness or restructuring) on a principal residence has been extended through tax year 2025 (was set to expire on Dec 31, 2020). The maximum amount though has been decreased from $2 million to $750,000 for Married Filing Joint taxpayers and from $1 million to $375,000 for all all filing statuses.
Benefits for Volunteer Firefighters and Emergency Responders
The exclusion from gross income of certain benefits provided to volunteer firefighters and emergency medical responders (e.g. real estate tax reductions), previously scheduled to expire after tax year 2020, has been made permanent.
Paycheck Protection Program
Numerous changes have been made to the Paycheck Protection Program (PPP), including:
- Tax deductibility of expenses paid using PPP funds: Business expenses paid for using forgiven (or forgivable) PPP funds will now be deductible. Previously, the IRS had issued guidance that those expenses would not be tax deductible since they were paid with tax-exempt income, as is the general rule. This means that the PPP funds will remain non-taxable and the expenses paid using those funds will still be deductible.
- Expansion of qualified expenses: In addition to payroll (wages, health insurance & retirement contributions), rent, mortgage interest and utility expenses, PPP funds can now be used for:
- Expanded payroll costs- now includes group life and disability insurance.
- Operating expenses- business software or cloud computing services that facilitates business operations, product or service delivery, payroll processing, human resources, sales and billing functions or accounting.
- Property damage, not covered by insurance, related to public disturbances in 2020.
- Supplier costs that are essential to operations and are made pursuant to a contract, order or purchase order.
- Expenses related to worker protection or complying with federal, state or local COVID-19 related requirements, e.g. PPE, plexiglass, floor markers.
- Note: 60/40 rule still applies. At least 60% of expenses must be used to cover payroll expenses in order for the loan to be fully forgivable.
- PPP “second draw”: eligible businesses that received and have used all funds from a PPP loan, may apply for a second round of PPP funding. The application deadline is currently March 31, 2021 (assuming funding remains). The loan calculation will still be calculated based on 2.5 months of payroll, except for businesses in the Accommodation and Food Industry which can use 3.5 months of payroll. To be eligible businesses must meet the following criteria:
- The business must have had a reduction in gross receipts of at least 25% during a quarter of 2020 when compared to the same quarter in 2019. Businesses that weren’t open in the 1st, 2nd or 3rd quarter of 2019, can compare any quarter in 2020 to the 4th quarter of 2019.
- The business must have less than 300 employees per physical location.
- The business cannot be a publicly held company.
- Simplified loan forgiveness: PPP loans of less than $150,000 will have a simplified forgiveness application that will only require: number of employees retained because of PPP, estimated cost of funds used on payroll, basic loan information and various certifications regarding compliance with loan requirements. Note: businesses should still keep documentation of payroll and other expenses for 4 years from date of forgiveness since businesses can still be audited if fraud is suspected.
- PPP loan forgiveness will no longer be reduced by the amount of an EIDL grant received.
Note: it will take time for the SBA to issue guidance to banks regarding these changes and time for the banks to incorporate into their systems. Due to that, businesses may not immediately be able to apply for simplified forgiveness or 2nd draws on their PPP loans.
Economic Impact Disaster Loans
Economic Impact Disaster Loans (EIDL) and the associated EIDL Advance are issued by the Small Business Administration (SBA). The loan proceeds can be used for working capital and normal operating expenses. The terms of the loan are favorable. Changes to the program are:
- The deadline to apply has been extended to December 31, 2021 (assuming funding remains).
- The EIDL Advance, which is a grant of up to $10,000, has been extended but as a Targeted EIDL Advance. To qualify, the applicant must be located in a low-income community and have more than a 30% reduction in revenue during an 8-week period beginning on March 2, 2020, or later. Prior EIDL applicants who did not receive the full $10,000 grant but are located in a low-income community will now qualify for the full $10,000 grant and the SBA will be contacting those applicants. Please note, applicants can decline the EIDL Loan and still receive the advance/grant portion of the program.
- It has been clarified that these grants (both the original EIDL Advance and the Targeted EIDL Advance) are non-taxable and expenses paid with them are still tax deductible.
More info on the EIDL program can be found on the SBA website: SBA EIDL Information Page.
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a payroll tax credit that can be claimed by businesses with employees that was either partially or fully shut down by government order and/or had a significant drop in gross income. Summary of changes follows:
- The ERTC has been extending to June 30, 2021 (originally set to expire Dec 31, 2020).
- PPP recipients can now also claim the ERTC as long as the payroll expenses being used to claim the credit are not the same as the ones used to qualify for PPP loan forgiveness. This is based on exact expenses, so if you paid your employees in April-June 2020 using PPP funds, you can use the payroll expenses incurred in July 2020-June 2021 to claim the credit (assuming other requirements are met, see additional bullets). Note: Further clarification is needed on how a business that originally was disqualified from claiming the credit due to being a PPP recipient will now be able to claim the credit for quarters in 2020 that payroll returns have already been filed for.
- Definition of significant drop in gross receipts has been changed, however the old rules still apply to credits claimed related to 2020 expenses:
- 2020: the first quarter a business qualifies was a quarter in which gross receipts were less than 50% of the receipts in the same quarter in 2019. From that point on, every subsequent quarter in 2020 was also an eligible quarter until the END of the first quarter in which gross receipts exceeded 80% of the receipts from the same quarter in 2019.
- 2021: a business qualifies for the credit in any quarter of the first half of 2021 in which gross receipts is less than 80% of the same quarter in 2019. Thus, in the 1st quarter of 2021, a business would compare its receipts to the 1st quarter of 2019, NOT the 1st quarter of 2020. If a business did not exist in the same quarter of 2019, then the same quarter in 2020 may be used. Businesses also have the option to elect to satisfy the gross receipts test by looking at the immediately preceding quarter and comparing that quarter to the corresponding quarter in 2019. For example, an employer who could not satisfy the gross receipt test in the 1st quarter of 2021, could still have an eligible quarter by electing to compare gross receipts in Q4 of 2020 (immediately preceding quarter) to Q4 of 2019. If there is a drop of more than 20% quarter-over-quarter, Q1 of 2021 will be an eligible quarter.
- Maximum credit amounts have increased for significantly for 2021, however the old rules still apply to 2020 wages/credits:
- 2020: 50% of wages, capped at $10,000 per employee for ALL quarters ($5,000 per employee for the whole year).
- 2021: 70% of wages, capped at $10,000 per employee PER quarter ($7,000 per employee per quarter or $14,000 per employee for 1st half of the year).
- Payments made for employee health coverage, even if being paid for an employee that is not being paid wages, qualify for the credit.
Note: This credit is complex! Most businesses disregarded the credit since they received PPP funds. Now that PPP recipients are retroactively qualified, it will take a fair amount of analysis and calculations to determine if you qualify for the credit, which quarters you qualify for and how to calculate the credit following the two sets of rules. It will also be important to decide which expenses are being used for PPP forgiveness. If more non-payroll expenses (up to 40% without reducing forgiveness) or wages paid to an employee in excess of $10,000 in a quarter can be allocated to PPP forgiveness, then this could result in more wages available for ERTC and thus higher ERTC credits. This could be a sizable credit though, so it is worthwhile to review your eligibility and qualifying expenses. Further guidance from the IRS, once issued, should hopefully help.
Paid Sick and Family Leave Credits
Under the Family First Coronavirus Response Act (FFRCA), employers were required to provide paid leave to employees under certain circumstances related to Covid-19 through December 31, 2020. Employers could claim credits on their payroll tax returns to cover payroll expenses incurred related to such paid leave. While not mandatory, employers have the option to offer leave under the FFRCA through March 31, 2021 and still be entitled to the related payroll tax credits. The maximum leave time has not been increased (two weeks, up to 80 hours), so if an employee has already maxed their paid leave under FFRCA, the employer will not qualify for credits on any additional paid leave.
Business Meals Deduction
Deductibility of business meals provided by a restaurant has increased from 50% to 100% for 2021 and 2022. This will hopefully be an incentive for businesses to support the restaurant industry.
Energy Efficient Commercial Building Deduction
The Energy Efficient Commercial Building Deduction (Sec 179D), which was set to expire at the end of 2020 has been made permanent. The deduction is related to certain energy-efficient construction of or improvements to commercial buildings or apartment buildings of 4 stories of more. Generally, the owner of the building qualifies for the deduction, but in some cases may allocate the deduction to the designer.
Work Opportunity Tax Credit
Set to expire at the end of 2020, the Work Opportunity Tax Credit (WOTC) has been extended through tax year 2025. The WOTC is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment, e.g. long-term unemployment recipients, veterans, ex-felons, etc. With so many individuals facing unemployment, even more businesses may qualify for this credit. Pre-screening and certification must be done with the applicable state agency before being eligible for the credit. More info can be found here: IRS WOTC Information Page and for CT businesses here: CT Department of Labor WOTC Information Page.