Both businesses and individuals desire to keep as much of their hard-earned money as possible when it comes time to pay taxes. Many will be relieved to know the Consolidated Appropriations Act, 2021 (CAA) contains numerous provisions related to income taxes that help them do just that. The following highlights several of these provisions, grouped by whether they impact businesses or individuals.
Businesses
While we have long known that forgiven proceeds from Paycheck Protection Plan (PPP) loans were not taxable income, the IRS had taken the position that taxpayers could not deduct expenses paid with those proceeds. This effectively made the forgiven proceeds taxable. The CAA clarifies that recipients of the PPP funds may deduct all expenses paid with the loans, even if the loan is forgiven. It also provides that the tax-exempt income generated by the loan forgiveness increases the shareholder’s basis in a pass-through entity.
The CAA similarly clarifies that forgiven proceeds from Economic Injury Disaster Loans (EIDL) are not taxable income, and taxpayers may fully deduct expenses paid with those proceeds. The same applies for the advances received on those loans at the time of application.
Under the CARES Act, the Employee Retention Credit (ERC) allowed employers to take a credit in 2020 of 50% of wages up to $10,000 per employee if the business shut down or suffered a severe reduction in revenue due to COVID-19 and related restrictions. The CAA extends the credit through July 1, 2021, and increases the amount to 70% of up to $10,000 per employee per quarter for the first two quarters of 2021. Also, the CAA diminished the reduction in revenue necessary to claim the credit from 50% to 20%. Finally, and importantly, the CAA now allows an employer to claim the credit even if they had PPP loans forgiven. The only limitation is that the amounts credited under the ERC cannot be used as payroll to justify forgiveness of a PPP loan.
For 2021 and 2022, business can deduct 100% of meals provided by a restaurant rather than being subject to the 50% limit that generally applies otherwise.
Farmers have long been allowed to carry back net operating losses for two years or to waive the carryback entirely. The CARES Act increased the carryback period to five years. The CAA allows farmers to elect out of the five-year carryback but retain the two-year carryback.
The New Markets Tax Credit and the Work Opportunity Credit had been set to expire after 2020. The CAA extends both credits through 2025 under the same terms.
Individuals
Under the CARES Act, taxpayers received an advance on refundable credit to be taken on the 2020 tax return. The CAA structures the second round of economic stimulus payments (currently $600 per person) in the same way, simply adding to the amount of the credit. Any taxpayer who does not receive an advance payment but qualifies for one on their 2020 return will receive the credit on the return. If the advance exceeds the amount of credit the taxpayer ultimately qualifies for, no repayment is required.
The CARES Act permitted taxpayers who did not itemize deductions to claim an above-the-line deduction of up to $300 for charitable contributions for 2020. This limit remained the same for individual and joint returns. The CAA extends that above-the-line deduction to 2021 and allows married taxpayers filing on a joint return to claim up to $600.
The CAA modifies and consolidates the tax credits for Qualified Tuition and related expenses while it repeals the deduction for “higher education expenses” paid after 2020.
The CAA also extends through 2021 the 100% of AGI limitation on charitable contribution deductions made in cash that the CARES Act had instituted for 2020.
The floor for deduction of medical expenses has been 7.5% of adjusted gross income (AGI) but was slated to rise to 10% of AGI starting in 2021. The CAA makes the 7.5% of AGI floor permanent.
The provision which allowed a taxpayer to exclude from gross income the forgiveness of a mortgage secured by their principal residence up to $2 million through 2020 now extends through 2025, but the limit is $750,000 ($375,000 each for a married couple filing separately) for years after 2020.
Further Guidance
Due to the number of provisions within the CAA, taxpayers may find it particularly difficult to navigate what they can and cannot claim or deduct this tax season. Rest assured the Hantzmon Wiebel team will expertly help you navigate your tax returns. Contact a team member to discuss any questions you may have.
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
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