The 5,593-page, $900 billion Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, included significant PPP loan program changes and many tax changes, including the extension of various expiring provisions and expansions of certain earlier pandemic tax relief provisions.
Here are some of the changes that might be relevant to you and your clients.
Additional Refundable Tax Credit
The CAA provides a refundable tax credit in the amount of $600 per eligible family member, namely $600 per taxpayer ($1,200 for married taxpayers filing jointly) and $600 per qualifying child (though President Biden has proposed adding an additional $1,400 of stimulus per taxpayer).
Similar to the CARES Act, the CAA credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married taxpayers filing jointly) at a rate of $5 per $100 of additional income, and the Treasury Department is authorized to issue advance payments of this credit in the same way it made stimulus payments under the CARES Act.
Pandemic Unemployment Assistance Program
Under this program, a jobless individual would receive a weekly $300 enhancement for an additional 11 weeks, from the end of December through March 14, 2021 (though President Biden has proposed raising this amount to $400). This extension brings the total weeks of benefits to 50 weeks (most states pay benefits for 26 weeks; the CARES Act extended benefits for 13 weeks, and the CAA adds 11 more weeks for a combined 50 weeks of benefits). This unemployment income is taxable at the federal level and in most states, meaning we should double-check our clients’ withholdings to avoid a surprise shortfall and penalties.
The CAA simplifies the Free Application for Federal Student Aid (FAFSA) form beginning in 2023 by reducing the number of questions from 108 to 36 and replacing the expected family contribution figure with a student aid index.
A Second Round of Paycheck Protection Program Loans
A second round of PPP loans is available for businesses with fewer than 300 employees that experienced a revenue decrease of at least 25 percent in a 2020 quarter, as compared to the same quarter in 2019. Businesses, other than publicly traded companies, may apply for a first or second loan of up to $2 million. This legislation simplifies the forgiveness application for businesses with PPP loans under $150,000.
Retroactive to the date of enactment of the CARES Act, the CAA clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that's forgiven, and the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
Tax Extenders Made Permanent
Section 213(f) has a reduction in the medical expense deduction floor, which allows individuals to deduct unreimbursed medical expenses that exceed 7.5 percent of adjusted gross income (previously 10 percent).
It also reduces surprise medical bills for those who incur out-of-network provider costs unexpectedly by requiring health providers work with insurance companies to settle on a fair amount.
Section 179D offers a deduction for energy-efficient commercial buildings for energy-efficient improvements to lighting, heating, cooling, ventilation, and hot water systems (the amount will be inflation-adjusted after 2020).
Section 139B offers a gross income exclusion for certain benefits provided to volunteer firefighters and emergency medical responders.
Section 45G reduces the railroad track maintenance credit from 50 to 40 percent.
Extensions Included in the CAA
The following extensions were included in the CAA:
Five-Year Extensions (Through 2025):
- Sec. 45D: New markets tax credit.
- Sec. 45S: Employer credit for paid family and medical leave (note this credit is different from the payroll tax credits for paid sick and family leave).
- Sec. 51: Work opportunity credit.
- Sec. 108(a)(1)(E): Gross income exclusion for discharge of indebtedness on a principal residence; note that the amount of exclusion is lowered to $750,000 ($375,000 for married individuals filing separately) from $2 million ($1 million for married individuals filing separately).
- Sec. 127(c)(1)(B): $5,250 exclusion for certain employer payments of student loans. Eligible student loan repayments are payments by the employer pursuant to a written plan—whether paid to the employee or a lender—of principal or interest on any qualified higher education loan for the education of the employee, but not of a spouse or dependent.
- Sec. 168(e)(3)(C)(ii): Seven-year recovery period for motorsports entertainment complexes.
- Sec. 181: Special expensing rules for certain film, television, and live theatrical productions.
- Sec. 954(c)(6): Look through treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.
- Sec. 1391(d): Empowerment zone designation.
- Sec. 4611: Oil Spill Liability Trust Fund financing rate.
Two-Year Extensions (Through 2022):
- Sec. 25D: Residential energy-efficient property credit (the Act also makes qualified biomass fuel property expenditures eligible for the credit. The $500 lifetime limit still applies).
- Sec. 48: Energy investment tax credit for solar and residential energy-efficient property.
- Sec. 45Q: Carbon oxide sequestration credit (through 2025).
One-Year Extensions (Through 2021):
- Sec. 25C: 10 percent credit for qualified nonbusiness energy property.
- Sec. 30B: Credit for qualified fuel cell motor vehicles.
- Sec. 30C: 30 percent credit for the cost of alternative (nonhydrogen) fuel vehicle refueling property.
- Sec. 30D: 10 percent credit for plug-in electric motorcycles and two-wheeled vehicles.
- Sec. 35: Health coverage tax credit.
- Sec. 40(b)(6): Credit for each gallon of qualified second-generation biofuel produced.
- Sec. 45(e)(10)(A)(i): Production credit for Indian coal facilities.
- Sec. 45(d): Credit for electricity produced from certain renewable resources.
- Sec. 45A: Indian employment credit.
- Sec. 45L: Energy-efficient homes credit.
- Sec. 45N: Mine rescue team training credit.
- Sec. 163(h): Deduction for qualified mortgage insurance premiums as qualified residence interest, subject to the same restrictions.
- Sec. 168(e)(3)(A): Three-year recovery period for racehorses two years old or younger.
- Sec. 168(j)(9): Accelerated depreciation for business property on Indian reservations.
- Sec. 4121: Black Lung Disability Trust Fund increase in excise tax on coal.
- Sec. 6426(c) and Sec. 6427(e): Excise tax credits and other benefits for alternative fuels
- American Samoa economic development credit (P.L. 109-432).
CARES Act Extensions and Related Provisions
The CAA requires the Treasury Department issue regulations or other guidance on whether the cost of personal protective equipment and other supplies used to prevent the spread of COVID-19 are an eligible expense for purposes of the Section 62 educator expense deduction (currently $250).
The regulations or guidance will apply retroactively to March 12, 2020.
Farmer Net Operating Loss Carrybacks
The CAA allows farmers who elected a two-year net operating loss (NOL) carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act.
The CAA also allows farmers who previously waived an election to carry back a NOL to revoke the waiver.
Waiver of Information Filing Requirements
The CAA gives the Treasury Department authority to waive information filing requirements for:
- Any amount excluded from income by reason of the exclusion of covered loan amount forgiveness from taxable income.
- The exclusion of emergency financial aid grants from taxable income.
- The exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
Payroll Tax Credits
The CAA extends the refundable payroll tax credits for paid sick and family leave (enacted in the Families First Coronavirus Response Act) through the end of March 2021.
It also modifies the payroll tax credits so that they apply as if the corresponding employer mandates were extended through March 31, 2021.
The CAA also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.
Sick Leave Examples from the IRS
There are two examples:
Example 1: If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments.
The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
Example 2: If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
Employee Retention Tax Credit Modifications
The CAA extends the CARES Act employee retention tax credit (ERTC) through June 30, 2021.
It also expands the ERTC and contains technical corrections.
The most noteworthy modification provides that employers who receive PPP and second-draw PPP funds may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP and second-draw PPP proceeds.
New Law Employee Retention Tax Credit Modifications
The expansions of the ERTC include:
- An increase in the credit rate from 50 to 70 percent of qualified wages.
- An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter.
- A reduction in the required year-over-year gross receipts decline from 50 to 20 percent.
- A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility.
- A provision to allow certain governmental employers to claim the credit.
- An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base.
- Rules allowing new employees who were not in existence for all or part of 2019 to be able to claim the credit.
The CAA also (retroactive to the effective date of the CARES Act) clarifies the determination of gross receipts for certain tax-exempt organizations. It also clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.
Deferral of Employees’ Portion of Payroll Tax
In August, the Trump administration issued a memorandum allowing employers to defer the withholding, deposit, and payment of the employee portion of the Old-age, Survivors, and Disability Insurance (OASDI) tax for any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000.
It applied to payroll taxes on wages paid from Sept. 1 through December 31, 2020.
Employers were required to increase withholding and pay the deferred amounts ratably from wages and compensation paid between Jan. 1, 2021 and April 30, 2021. The CAA extends the repayment period through December 31, 2021.
Miscellaneous Tax Provisions
The CAA temporarily allows a 100 percent business expense deduction for meals (rather than the current 50 percent) if the expense is for food or beverages provided by a restaurant.
This provision is effective for expenses incurred after December 31, 2020 and expires at the end of 2022.
Certain Charitable Contributions Deductible by Non-itemizers
The CAA extends and modifies the $300 charitable deduction for non-itemizers for 2021 and increases the maximum amount that may be deducted to $600 for married couples filing jointly.
Note that for tax year 2020, $300 is the maximum allowed per tax return, regardless of filing status.
The Sec. 6662 penalty is increased from 20 to 50 percent of the underpayment for taxpayers who overstate this deduction. This applies to cash contributions.
Modification of Limitations on Charitable Contributions
The CAA extends through 2021 the increased limit of 100 percent (from 60 percent) of individual’s adjusted gross income from the CARES Act for qualified contributions by individual taxpayers who itemize cash contributions made to a qualifying organization during 2020 or 2021.
The CAA also extends through 2021 the increased limit of 25 percent (from 10 percent) of corporation’s taxable income from the CARES Act on qualified cash contributions.
Earned Income Tax Credit/Child Tax Credit Relief
The CAA allows those claiming the earned-income tax credit and the refundable portion of the child tax credit to use earned income from 2019 rather than 2020 for qualification purposes. This provision allows the credit for people who might otherwise have lost eligibility due to a reduction in earned income or a job loss.
For joint returns, the taxpayers’ earned income is the sum of each spouse’s income from the prior year.
The CAA repeals the Section 222 deduction for qualified tuition and related expenses but in its place increases the phaseout limits on the Lifetime Learning Credit, effective for tax years beginning after December 31, 2020.
The increased income phase-out thresholds for the Lifetime Learning Credit are $80,000 ($160,000 for married filing jointly couples) after 2020 (similar to the phase-out thresholds for the American Opportunity Tax Credit).
For a 22 percent federal income tax bracket taxpayer, the prior $4,000 deduction would have provided $880 in tax benefit while the 20 percent Lifetime Learning Credit would only provide $800 of benefit.
The advantage is the Lifetime Learning Credit could provide as much as $2,000 of benefit on $10,000 of education expenses.
Minimum Rate of Interest for Certain Determinations Related To Life Insurance Contracts
The CAA updates the Section 7702 fixed interest rate for permanent life insurance contracts and ties the rate going forward to benchmark interest rates that are periodically updated.
The prior rate was an assumption of a guaranteed 4 percent growth rate in cash value; the 2021 rate will be 2 percent. Starting in 2022, the rate will be adjusted for inflation.
The insurance industry considers this a win for consumers and carriers, but it looks like only a win for insurers whose profit margins on permanent life insurance have been declining for decades.
Minimum Age for Distributions During Working Retirement
The CAA modifies Section 401(a) to allow certain qualified pensions to make distributions to workers who are 59½ or older and who are still working.
For certain construction and building trades workers, the age is lowered to 55.
Money Purchase Pension Plans
The CARES Act temporarily allowed individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans.
The CAA adds money purchase pension plans to the retirement plans qualifying for these temporary rules.
The provision applies retroactively as if included in Section 2202 of the CARES Act.
Temporary Rule Preventing Partial Plan Termination
The CAA provides that qualified plans will not be treated as having a partial termination under Section 411(d)(3) during any plan year that includes the period March 13, 2020, through March 31, 2021, as long as the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number covered on March 13, 2020.
Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements
The CAA allows taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022 if the plan is amended to include this provision.
The CAA also permits employers to allow employees to make a 2021 mid-year prospective change in contribution amounts. It also raises the age for dependent care from age 12 to 13 for 2020.
The CCA makes various excise tax changes for beer, wine, and distilled spirits.
Disaster Tax Relief
Use of retirement funds for disaster mitigation. The CAA allows residents of presidentially declared disaster areas to take a qualified distribution of up to $100,000 from a retirement plan or individual retirement account (IRA) without penalty.
Amounts withdrawn are included in income over three years or may be recontributed to the plan. It also increases the allowable amount of a loan from a retirement plan to $100,000 (from $50,000) if the loan is made due to a qualified disaster and meets various other requirements.
Employee Retention Credit for Disaster Zones
The CAA allows a tax credit of 40 percent of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone (as defined in the CAA).
The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.
Qualified Disaster Relief Contributions
The CAA modifies the CARES Act’s modification of the charitable contribution limits for 2020 to allow corporations to make qualified disaster relief contributions of up to 100 percent of their taxable income.
Qualified Disaster-Related Personal Casualty Losses
CAA permits individuals who have a net disaster loss (as modified by the Act) to increase their standard deduction amount by the amount of the net disaster loss.