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Congress Passes Year-End Spending, Stimulus Bill with Tax Extenders
December 23, 2020
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The Consolidated Appropriations Act, 2021 (CAA, 2021) passed Congress on December 21, 2020, and is awaiting the President’s signature. The CAA is 5,500 pages that touch on many areas of tax law, and additional changes could occur as the President is asking Congress to increase the direct stimulus checks to individuals. Some of the most significant changes are highlighted below.
Tax Changes
New Recovery Rebate
Much like the direct payments to taxpayers under The CARES Act, the new payments are called rebates. Each individual and qualifying child will get a $600 rebate. Couples filing jointly will get a $1,200 rebate plus $600 for each eligible 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% for every excess dollar of income until completely phased out. As before, it is technically a 2020 credit, but the prepayments are based on 2019 income. If more credit is due based on the 2020 income it will be given as a credit on the 2020 return. If less credit is earned based on the 2020 income, no adjustment or payback is required.
Educator Expenses Expansion
Educators are currently allowed an above-the-line deduction of up to $250 for trade or business expenses. The new law adds personal protective equipment (PPE) to the list of eligible expenses.
PPP Loan Forgiveness Clarification
The new law makes clear that forgiveness of PPP loans is completely free of unfavorable tax consequences. The IRS had interpreted the forgiveness to effectively be taxable by disallowing expenses used to secure forgiveness. The new law makes clear that the basis in a pass-through entity is not adversely affected by forgiveness as well.
EIDL Loan Forgiveness Clarification
Before the PPP loans were available some taxpayers took advantage of Economic Injury Disaster Loans (EIDL). The new law makes clear that forgiveness of these loans is also completely free of tax consequences just like the PPP loans.
Families First Coronavirus Act & Emergency Paid Sick Leave Act
The credits for paying employee sick leave under these acts is extended through March 31, 2021. The benefits were supposed to end at the end of 2020. Also, the CCA allows self-employed individuals to use 2019 earnings to calculate the credit.
Employment Tax Deferral Extended
The payment of the employer portion of payroll taxes (FICA and Medicare) was deferred under the CARES Act. The taxes that could be deferred were only those taxes earned through the end of 2020. The CCA extends that period through March 31, 2021. The payments of the deferred taxes are still due December 31, 2021, and 2022.
Expanded Business Meals Deductions
For expenditures in 2021 and 2022, otherwise deductible meals will be deductible at 100% instead of the normal 50% rate. To qualify for the enhanced deduction the meals must be provided by a restaurant.
Low Income Housing Credit Changes
The credit is expanded to lower the annual floor credit rate allowed from 9% to 4% and the total amount of Federal credits available by each state has also been increased.
Alternative Depreciation System Life for Residential Rental Property
Residential Rental Property has an Alternative Depreciation System (ADS) life of 30 years but, only for years beginning after 2017. Before the change, the ADS life was 40 years. Taxpayers electing out of the §163(j) interest limitation rules are forced to use ADS depreciation prospectively. Property placed in service prior to 2018 would have been forced to use the old 40 life. The CCA changes this to 30 years in this situation only. Property required to use ADS for another reason is still obligated to use the 40-year life if it was placed in service before 2018.
Refundable EIC & CTC Credit Enhancement
The Earned Income Credit (EIC) and Child Tax Credit (CTC) can use 2019 income on the 2020 return in calculating these refundable credits.
Charitable Deduction by Non-Itemizers
The CARES Act allows a $300 ($600 for married filers) charitable deduction for non-itemizers for cash contributions made before December 31, 2020. The CCA extends this benefit through 2021.
Charitable Contribution Limitations
The 60% of Adjusted Gross Income (AGI) limitation for cash contributions is suspended for 2020 and 2021. This means cash contributions over 60% can be made to 50% charities and deducted up to 100% of taxable income. Normally the deduction would be limited to 60% of AGI.
Expanded FSA Carryover
Normally Flexible Spending Arrangements (FSAs) can carryover unused amounts of up to $550 for several months past the year-end. The CCA allows employers to extend this carryover for 12 months past the year-end for 2020 and 2021.
Tax Extenders
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, part of the Consolidated Appropriations Act of 2021, included some long-awaited assistance and clarification for many taxpayers. It contains numerous tax extenders for temporary tax provisions that expire after a short period of time. This package will extend some of these provisions and make some of them permanent.
Additional details on common Business and Individuals extenders are summarized below.
BUSINESS TAX EXTENDERS
Energy-Efficient Commercial Buildings Deduction
This Act would make Section 179D a permanent deduction and provides for an annual inflation adjustment. Under this section, taxpayers can claim a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.
Railroad Track Maintenance Credit
The Act would make the credit permanent but reduces the credit from 50% to 40% for tax years beginning after December 31, 2022.
Controlled Foreign Corporations Look-Through Rule
This rule allows US-based companies who own controlled foreign corporations and have payments of interest, dividends, rents and royalties between related controlled foreign corporations to not treat it as foreign personal holding company income. This Act extended the rule through 2025.
New Markets Tax Credit
The Act extends the $5 billion credit allocation for each year from 2020 through 2025 and extends the carryover period for unused credit through 2030. This credit is equal to 39% of the capital invested in a qualified community development entity.
Work Opportunity Credit
The Act extends this credit through 2025 for employers who hire individuals who are members of targeted groups under the Work Opportunity Tax Credit Program.
Employer Credit for Paid Family and Medical Leave
This credit has been extended through December 31, 2025, for employers that pay their employees at least 50% of their normal pay while the employee is on leave. The credit is limited each year to 25% of the wages paid and 12 weeks of pay per employee.
Employee Retention Credit
The credit has been extended through June 30, 2021. The credit rate has increased from 50% to 70% of qualified wages. Along with other enhancements and clarifications, an increase in the limit on per employee qualifying wages has been increased from $10,000 per year to $10,000 per quarter. Employers who receive PPP loans may still qualify for this credit with respect to wages that are not paid with forgiven PPP proceeds.
INDIVIDUAL TAX EXTENDERS
Medical Expense Deduction Floor
The 7.5% medical expense itemized deduction floor that would expire 12/31/2020 would become a permanent floor. This floor allows individuals to claim an itemized deduction for the unreimbursed medical expenses that exceed 7.5% of their adjusted gross income.
Benefits for Volunteer Firefighters and Emergency Medical Responders
The Act makes the exclusion of qualified payments and qualified state and local tax benefits from gross income for qualified volunteer emergency response organization members permanent.
Lifetime Learning Credit and American Opportunity Tax Credit
The Act removes the different phaseout rules for each credit and replaces them with a single phaseout limit of $80,000 ($160,000 in the case of a joint filer).
Tuition and Fees Expense
The Act repealed the above-the-line deduction for qualifying tuition and fees paid for tax years after 12/31/2020.
Cancelation of Home Indebtedness
The discharge of indebtedness from a qualified principal residence has been extended to tax years before January 1, 2026, can be excluded from gross income. The maximum acquisition indebtedness limit has been reduced to $750,000 and $375,000 for married individuals filing separately for the period after December 31, 2020.
Non-Business Energy Property Credit
The personal tax credit for making a home more energy-efficient, up to a $500-lifetime credit has been extended through 2021. The improvements include windows, doors, skylights, roofs, furnaces, boilers, heat pumps, water heaters, central air conditioners and circulating fans for principal residences.
EXTENSION OF CERTAIN EXPIRING PROVISIONS
Subtitle A—Certain Provisions Made Permanent
- Sec. 101. Reduction in medical expense deduction floor.
- Sec. 102. Energy-efficient commercial buildings deduction.
- Sec. 103. Benefits provided to volunteer firefighters and emergency medical responders.
- Sec. 104. Transition from deduction for qualified tuition and related expenses to increased income limitation on lifetime learning credit.
- Sec. 105. Railroad track maintenance credit.
- Sec. 106. Certain provisions related to beer, wine and distilled spirits.
- Sec. 107. Refunds in lieu of reduced rates for certain craft beverages produced outside the United States.
- Sec. 108. Reduced rates not allowed for smuggled or illegally produced beer, wine, and spirits.
- Sec. 109. Minimum processing requirements for reduced distilled spirits rates.
- Sec. 110. Modification of single taxpayer rules.
Subtitle B—Certain Provisions Extended Through 2025
- Sec. 111. Look-thru rule for related controlled foreign corporations.
- Sec. 112. New markets tax credit.
- Sec. 113. Work opportunity credit.
- Sec. 114. Exclusion from gross income of discharge of qualified principal residence indebtedness.
- Sec. 115. 7-year recovery period for motorsports entertainment complexes.
- Sec. 116. Expensing rules for certain productions.
- Sec. 117. Oil spill liability trust fund rate.
- Sec. 118. Empowerment zone tax incentives.
- Sec. 119. Employer credit for paid family and medical leave.
- Sec. 120. Exclusion for certain employer payments of student loans.
- Sec. 121. Extension of carbon oxide sequestration credit.
Subtitle C—Extension of Certain Other Provisions
- Sec. 131. Credit for electricity produced from certain renewable resources.
- Sec. 132. Extension and phase-out of energy credit.
- Sec. 133. Treatment of mortgage insurance premiums as qualified residence interest.
- Sec. 134. Credit for health insurance costs of eligible individuals.
- Sec. 135. Indian employment credit.
- Sec. 136. Mine rescue team training credit.
- Sec. 137. Classification of certain race horses as 3-year property.
- Sec. 138. Accelerated depreciation for business property on Indian reservations.
- Sec. 139. American Samoa economic development credit.
- Sec. 140. Second-generation biofuel producer credit.
- Sec. 141. Nonbusiness energy property.
- Sec. 142. Qualified fuel cell motor vehicles.
- Sec. 143. Alternative fuel refueling property credit.
- Sec. 144. 2-wheeled plug-in electric vehicle credit.
- Sec. 145. Production credit for Indian coal facilities.
- Sec. 146. Energy-efficient homes credit.
- Sec. 147. Extension of excise tax credits relating to alternative fuels.
- Sec. 148. Extension of residential energy-efficient property credit and inclusion of biomass fuel property expenditures.
- Sec. 149. Black lung disability trust fund excise tax.
Please contact your BMF Advisor if you would like to review any of the items mentioned, schedule a tax planning strategy session or discuss potential implications of the various tax law changes.
Melissa G. Dunham?>
CPA, MTax, MBA
Partner, Taxation Services
330.255.2455
mdunham@bmf.cpa
Michael A. Hydell?>
CPA, MTax
Senior Manager, Taxation Services
330.255.2456
mhydell@bmf.cpa
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