Additional Business and Individual Provisions Included in New Stimulus Bill

Additional Business and Individual Provisions Included in New Stimulus Bill

January 8, 2021 - We finally have some additional stimulus relief, signed into law by the president on December 27, 2020.  This comes in the form of the “Consolidated Appropriations Act, 2021 (CAA, 2021)”.  Included in the CAA, 2021 were provisions designed to help small businesses and individuals with some pandemic relief.  These parts of the CAA, 2021 are known as the COVID-Related Tax Relief Act of 2020 (“COVIDTRA”) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTR”).  Some of the more notable provisions of the COVIDTRA include the Economic Injury Disaster Loan Program round 2, the Paycheck Protection Program round 2, as well as addressing the tax deductibility of costs associated with Paycheck Protection Program forgiveness.  Also included in the CAA, 2021 were a number of other provisions.  Below is a summary of some of the other provisions included in the COVID-Related Tax Relief Act of 2020 and Taxpayer Certainty and Disaster Tax Relief Act of 2020:

50% Limit on Business Meal Deduction is Suspended for Meals Provided by Restaurants 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. This deduction is generally limited to 50%.

New Law. Under the COVIDTRA, the 50% deductibility limit won’t apply to expenses for food or beverages provided by a restaurant that are paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.

Individuals May Elect to Base 2020 Refundable CTC & EIC on Preceding Year's Earned Income

Background. 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% percent of the amount that the taxpayer’s taxable earned income for the tax year that exceeds $2,500.

The earned income credit (EIC) equals a percentage of the taxpayer's 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.

New Law. Under the Act, in determining the refundable CTC and the EIC for 2020, taxpayers may elect to substitute the earned income for the preceding tax year if that is greater than the taxpayer’s earned income for 2020.

Certain Charitable Contributions Deductible by Non-Itemizers

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. (deduction limits of $300 also applied to married filers). A 20% penalty applies to tax under payments attributable to any overstated cash contribution by non-itemizers.

New Law. The above rule is extended 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% applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.

$250 Educator Expense Deduction Applies to PPE

Eligible educators (i.e., kindergarten through grade 12 teachers, instructors, etc.) are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them.

New Law. COVIDTRA provides that, not later than February 28, 2021, the IRS must, by regulation or other guidance, clarify that personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 are treated as otherwise allowable trade or business expenses paid by eligible educators for the purposes of the $250 educator expense deduction.

New Recovery Rebate

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136), signed into law March 27, 2020, provided for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments (EIP).

New Law. The COVIDTRA contains a new program, which it refers to as "additional 2020 recovery rebates."

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 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. 

The credit is available on the taxpayer's 2020 return.  However, advanced payments of this credit will be sent by the government directly to qualifying individuals.

The provision provides for Treasury to issue advance payments based on the information on 2019 tax returns.

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.

Employee-Side Payroll Tax Deferral

Background. On August 8, 2020, President Trump signed a Presidential Memorandum directing Treasury Secretary Mnuchin to permit the postponement of the withholding, deposit, and payment of the employee's share of Social Security tax (6.2%), as well as the employee's share of Railroad Retirement Tax Act (RRTA) Tier 1 taxes on wages and compensation paid from September 1, 2020 through December 31, 2020 for employees whose amount of wages or compensation, payable during any biweekly pay period generally is less than $4,000, or the equivalent amount with respect to other pay periods. Amounts were to be deferred without any penalties, interest, or additional amount to the tax. The IRS issued Notice 2020-65 to provide further guidance to employers on the withholding and remittance of the taxes involved in that order, postponing the withholding and remittance of the taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Penalties, interest, and additional amounts would begin to incur on May 1, 2021.

Extension of Provisions. Section 274 of ACCR extends the repayment period of the deferred employee taxes through December 31, 2021. It also provides that penalties and interest will not begin to accrue on the deferred amounts until January 1, 2022. 

Extension of Unemployment Insurance (“UI”) Benefits

COVIDTRA includes an 11-week extension of the unemployment compensation benefits first provided in the CARES Act that were due to expire on December 26th. This includes the Federal Pandemic Unemployment Assistance (FPUA) that extends UI benefits to workers who are traditionally ineligible, including gig economy workers and Independent Contractors. The FPUA will provide an additional $300 per week supplement to state UI compensation.

10% Early Withdrawal Penalty Does Not Apply to Qualified Disaster Distributions

A 10% early distribution penalty generally applies to, among other things, a distribution from employer retirement plan to an employee who is under the age of 59½.

New Law. The Taxpayer Certainty and Disaster Tax Relief Act (TCDTR) provides that the 10% penalty does not apply to any qualified disaster distribution.

A "qualified disaster distribution" is any distribution from an eligible retirement plan made (i) on or after the first day of the incident period of a qualified disaster and before the date which is 180 days after the date of the enactment of the TCDTR, and (ii) to an individual whose principal place of abode at any time during the incident period of such qualified disaster is located in the qualified disaster area with respect to such qualified disaster and who has sustained an economic loss by reason of such qualified disaster.

The aggregate amount of distributions received by an individual which may be treated as qualified disaster distributions for any tax year may not exceed the excess (if any) of $100,000, over the aggregate amounts treated as qualified disaster distributions received by such individual for all prior tax years.

In the case of any qualified disaster distribution, any amount required to be included in gross income for such tax year shall be so included ratably over the 3-tax year period beginning with such tax year. A taxpayer can elect to not have this 3-tax year rule apply.

Emergency Financial Aid Grants

An individual taxpayer may claim the American opportunity tax credit and/or the Lifetime Learning credit for higher education expenses paid at accredited post-secondary educational institutions for themselves, their spouses, and their dependents. However, higher education expenses paid for by tax exempt income can’t be used to claim either of these credits.

New Law. COVIDTRA excludes certain CARES Act emergency financial aid grants from the gross income of college and university students.

Effective date. This provision applies to qualified emergency financial aid grants made after March 26, 2020, the date of enactment of the CARES Act.

Corporations Can Deduct Their "Qualified Disaster Relief Contributions" Up to 100% of Taxable Income

In general, a corporation's charitable deduction can't exceed 10% of its taxable income, computed with certain modifications. If a corporation's charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for the five succeeding years, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (PL 116-136, 3/27/2020) provided that “qualified contributions"-i.e., certain cash or check contributions made during 2020 to a 50% charity-are disregarded in applying the 10% limit on charitable contributions of corporations and the rules on carryovers of excess contributions.

Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% of the corporation's taxable income over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year.

If the aggregate amount of qualified contributions exceeds the limitation in the previous paragraph, the excess is taken into account under the carryover rules.

New Law. The TCDTR establishes a new category of "qualified disaster relief contributions," for which corporations are allowed a deduction up to 100% of taxable income.

The TCDTR defines a "qualified disaster relief contribution" as any qualified contribution if the contribution is paid during the period beginning on January 1, 2020, and ending on the date that is 60 days after the date of the enactment of the TCDTR, and is made for relief efforts in one or more qualified disaster areas.

In addition, the taxpayer must obtain a contemporaneous written acknowledgment from the donee organization that the contribution was or will be used for those disaster relief efforts. The taxpayer must also elect to have TCDTR apply to the contribution.

Effective date. Contributions paid during the period beginning on January 1, 2020, and ending on the date that is 60 days after the date of the enactment of the TCDTR.

Employee Retention Tax Credit

Background. Under the CARES Act, the Employee Retention Credit (“ERC”) provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee. The ERC may be claimed for wages paid after March 12, 2020, and before January 1, 2021. "Eligible Employers" include private-sector businesses and tax-exempt organizations whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts (sometimes referred to as a "significant decline in gross receipts"), measured on a year-over-year basis.

New Law. Beginning on January 1, 2021 and through June 30, 2021, TCDTR extends and expands the following CARES Act provisions:

  • Increases the ERC rate from 50% to 70% of qualified wages;
  • Increases the refundable payroll tax credit from a maximum of $5,000 to $14,000;
  • Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
  • Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
  • Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
  • Allows certain public instrumentalities to claim the credit;
  • Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
  • Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year;
  • Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit; and
  • Provides that employers who receive a Paycheck Protection Program (PPP) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds.

Grants for Shuttered Venue Operations. 

The COVIDTRA also establishes grants for struggling in-person industries, such as movie theaters, museums, and live venues. For eligible individuals or entities, grants may be awarded under varying levels of priorities based on the percentage of lack of revenue.

Tax Credit for Employers Providing Paid Leave Under the Families First Coronavirus Response Act (FFCRA)

BackgroundEffective April 1, 2020 through Dec. 31, 2020, the Families First Coronavirus Response Act (FFCRA, P.L. 116-127) requires certain employers to provide paid leave to workers who are unable to work or telework due to circumstances related to COVID-19 (Qualified Paid Leave). FFCRA offsets the costs of providing Qualified Paid Leave, up to certain amounts, with refundable tax credits against employment taxes for qualified leave wages taken beginning April 1, 2020, and ending December 31, 2020.

Extension of Credits for Paid Sick and Family Leave.  CAA, 2021 extends the refundable tax credits available to employers who provide paid sick and family leave related to the coronavirus (COVID-19) pandemic as enacted in the FFCRA through March 31, 2021.

Employers are not required to provide paid sick leave or paid family leave for coronavirus-related reasons under the FFCRA after December 31, 2020. But the COVID-relief bill allows employers with less than 500 employees to voluntarily provide this leave and take the tax credit associated with the leave through March 31, 2021. Tax credits are available for qualifying wages (up to a cap) paid while an employee is on leave if (1) the leave would have been required under the FFCRA had the FFCRA been extended through March 21, 2021, and (2) all requirements related to leave under the FFCRA are met.

The bill does not change the maximum amount of paid leave subject to the tax credit for an individual employee. This means that if an employee took 80 hours of paid sick leave to quarantine in 2020, and the employer claimed the tax credit on wages paid during that leave, the employer cannot claim an additional tax credit on wages paid to that same employee for additional paid sick leave in 2021.  

The new bill does not extend the mandate for employers to provide paid leave, set to expire December 31, 2020.

Most of what is included in the CAA, 2021 are details of the funding the government will need to function for the upcoming 2021 fiscal year.  However, as you can see from above there are a lot of provisions included in this new bill that will effect business and individuals and most of these provisions are very complex.  There are some provisions as well as extenders that were not included in this article.  If you have any questions with or if you would like to discuss any of these provisions please contact your tax professional at Dermody, Burke, and Brown, CPAs.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.