On December 27, President Trump signed the Consolidated Appropriations Act of 2021 (CAA), which provides pandemic relief, as well as other tax and health-related provisions.
The CAA contains the COVID-Related Tax Relief Act of 2020 (COVIDTRA), as well as a government funding law. Here are some of the highlights.
Direct payments to certain individuals. The CARES Act, passed earlier this year, provided for direct payments to certain people that the government called Economic Impact Payments (EIPs).
The COVIDTRA contains a new program, which it refers to as “additional 2020 recovery rebates” to people under certain income thresholds.
The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married couples filing jointly), in addition to $600 per qualifying child. It “phases out” starting at $75,000 of modified adjusted gross income for individuals ($150,000 for married couples filing jointly and $112,500 for heads of household) at a rate of $5 per $100 of additional income.
The credit is available on taxpayers’ 2020 returns. However, the CAA provides for the U.S. Treasury Department to issue advance payments based on the information provided to the IRS.
Change to the business meal deduction rules. Under the CAA, a business can deduct 100% of business meals for the next two years, provided the food is purchased from a restaurant. In general, taxpayers can deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel.
Currently, the deduction is generally limited to 50% of the otherwise allowable amount (although there are some exceptions). Under the CAA, the 50% limit will apply to expenses for food or beverages provided by restaurants that are paid or incurred after December 31, 2020, and before January 1, 2023.
Extended tax break for charitable donations made by non-itemizers. This break was created under the CARES Act, and the CAA extends it for another year.For 2020, individuals who don’t itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. (The deduction limit of $300 also applies to married filers.) The CAA extends this rule through 2021, allowing individual cash contributions of up to $300 ($600 for married joint filers) to be deducted above-the-line to qualified charitable organizations.
More Paycheck Protection Program (PPP) loan funds. In addition to providing more funding for these loans, there’s an expansion of PPP eligible expenses and changes to the eligibility for certain types of businesses. The CAA clarifies that expenses paid with PPP proceeds are tax-deductible in the year incurred.
The CAA provides for taxpayers who received a PPP loan in 2020 to apply for a second PPP loan (PPP2) if they meet certain eligibility requirements:
- 300 or fewer employees per location,
- Full amount of the original PPP loan has been spent,
- 25% decline in gross receipts in any quarter in 2020 when compared to the same quarter in 2019.
Taxpayers who did not receive a PPP loan in 2020 (first-time borrowers) will be eligible to apply for a loan under substantially the same terms as the original PPP loan program. The maximum loan amount will be $2M. For most taxpayers, they will be eligible for a loan equal to 2.5 times their average monthly payroll. Restaurants and others with a NAICS code beginning with “72” will be eligible for a loan equal to 3.5 times their average monthly payroll.
Forgiveness provisions are similar to existing rules, with an expansion of covered costs eligible for forgiveness. In addition, the forgiveness process for loans of $150,000 or less will be simplified.
Various tax “extender” breaks. The CAA extends certain tax law provisions that were scheduled to expire at the end of 2020, including the Work Opportunity Tax Credit (WOTC). As background, the tax code contains dozens of temporary tax provisions with fixed termination dates. Often, these expiring provisions are temporarily extended for a short period of time (for example, one or two years).
In terms of the WOTC, an elective general business credit is available under the tax code to employers hiring individuals who are members of one or more often targeted groups. It’s based on qualified first-year wages paid to the individual hired. Under prior tax law, the credit applied to hires made before January 1, 2021. The CAA extends the credit through 2025 and applies to individuals who begin work for the employer after December 31, 2020.
Temporary special rules for flexible spending arrangements (FSAs). A cafeteria plan may permit the carryover of unused amounts remaining in a health 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 a carryover limit (currently $550). The CAA 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 and dependent care FSAs.
In addition, an employer may allow an employee who stops participating 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 CAA also provides a special carry-forward rule for dependent care flexible spending arrangements where the dependent aged out during the pandemic.
Larger tax credits for some parents. Under the tax code, to the extent the child tax credit (CTC) exceeds a taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% of as much of the taxpayer’s taxable earned income for the tax year as exceeds $2,500. In addition, the earned income tax credit (EITC) for lower-income taxpayers equals a percentage of their earned income.
For both purposes, earned income means wages, salaries, tips and other employee compensation, if includible in gross income for the tax year. Earned income also includes self-employment income, computed without the deduction for one-half of self-employment tax.
Under the CAA, in determining the refundable CTC and the EITC for 2020, taxpayers can elect to substitute the earned income for the preceding tax year if it’s greater than the taxpayer’s earned income for 2020. These changes apply beginning in 2020.
A special break for teachers who buy personal protective equipment (PPE). Currently, eligible educators are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them. The CAA provides that, not later than February 28, 2021, the IRS must, by regulation or other guidance, clarify that PPE, disinfectant and other supplies used for the prevention of the spread of COVID-19 are covered under the $250 tax break for teachers.
These are only some of the provisions contained in the law. There are many other key provisions including:
- An extra $300 per week to people who are unemployed and receiving state aid,
- Changes to disaster-related distributions from retirement plans, and
- An extension of the refundable tax credits available to employers who provide paid sick and family leave related to the COVID-19 pandemic.