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Jan. 6 2021

On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.  The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).  In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the CAA also contains numerous tax provisions and extenders as follows:

Do note that any of the below provisions that are applicable to income tax at the state level, California may not conform.

Individual Provisions

Increased deduction for medical expenses – The CAA permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income (“AGI”).  Previous law only allowed for a deduction of medical expenses in excess of 10% of AGI.

Child Tax Credit & Earned Income Credit (“CTC” & “EIC”) – The CAA allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.

Charitable contributions for taxpayers who do not itemize deductions – The CARES act, passed earlier in 2020, created a new above-the-line deduction for charitable contributions made in 2020 for taxpayers who do not itemize deductions.  The maximum allowable deduction is $300 ($600 for a married couple).  The CAA extends this rule through 2021.

Income limitations for charitable contributions – Under previous law, charitable contributions to qualified organizations were generally limited to 60% of a taxpayer’s AGI.  The CARES act removed the limitation for 2020; the new Act also removes the limitation for 2021.

Education credits – The CAA removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit.  This applies to tax years 2021 and beyond.

Exclusion from income for forgiveness of qualified principal residence indebtedness – Forgiveness of debt is generally included in taxable income.  An exception applied for forgiveness of debt that was used to acquire a personal residence.  The maximum which could be excluded was $2 million for a married couple.  This provision was set to expire in 2020.  The CAA extends this exclusion through 2025, but at a reduced amount of $750,000.

Mortgage insurance premiums – The CAA extends the deduction for qualified mortgage insurance premiums through 2021.

Retirement plan distributions – The CAA allows for distributions from retirement plans of up to $100,000 without being subject to the 10% penalty that applies to early retirement distributions.  The distribution, however, will be subject to income tax over a 3-year period.  This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.

Payroll Provisions

FSA Plans – Employers may choose to allow a carryover of unused funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year.

Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – The FFCRA, passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19.  The Act extends this credit through March 31, 2021.

Employer tax credit for paid family and medical leave – Earlier tax law allowed businesses to claim a general business credit for paid family and medical leave up to 12 weeks per year.  The provision was set to expire at the end of 2020; the Act extends this credit through 2025.

Work opportunity credit – The work opportunity credit is available to employers for hiring individuals from certain targeted groups.  The credit was set to expire at the end of 2020.  The CAA extends the credit through 2025.

Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown.  The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.

Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020.  The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021.  The CAA extends the required repayment period to December 31, 2021.

Employer payment of student loans – The CAA extends the current CARES act provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020.  The CAA extends the provision to 2025.  The maximum annual payment is $5,250.

Business Tax Provisions

Deductions for expenses paid using PPP loan proceeds – The CAA clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds.

Bringing back the business lunch – The CAA temporarily allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022.

Qualified disaster relief contributions – The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions made to organizations for disaster relief efforts.  Contributions must be made between January 1, 2020 and 60 days after passage of the Act.  Corporations could receive a deduction of up to 100% of taxable income.

Accelerated depreciation of residential rental property for electing real property trade or business – Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election.  Under the election, the interest limitations will not apply; however, the taxpayer must use ADS depreciation rules resulting in a longer useful life and lower depreciation expense each year.  Under prior law, residential rental property placed in service prior to January 1, 2018 was subject to a 40-year ADS useful life.  The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to January 1, 2018.

December 27, 2020

 

On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.  The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).  In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the CAA also contains numerous tax provisions and extenders as follows:

Do note that any of the below provisions that are applicable to income tax at the state level, California may not conform.

Individual Provisions

Increased deduction for medical expenses – The CAA permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income (“AGI”).  Previous law only allowed for a deduction of medical expenses in excess of 10% of AGI.

Child Tax Credit & Earned Income Credit (“CTC” & “EIC”) – The CAA allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.

Charitable contributions for taxpayers who do not itemize deductions – The CARES act, passed earlier in 2020, created a new above-the-line deduction for charitable contributions made in 2020 for taxpayers who do not itemize deductions.  The maximum allowable deduction is $300 ($600 for a married couple).  The CAA extends this rule through 2021.

Income limitations for charitable contributions – Under previous law, charitable contributions to qualified organizations were generally limited to 60% of a taxpayer’s AGI.  The CARES act removed the limitation for 2020; the new Act also removes the limitation for 2021.

Education credits – The CAA removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit.  This applies to tax years 2021 and beyond.

Exclusion from income for forgiveness of qualified principal residence indebtedness – Forgiveness of debt is generally included in taxable income.  An exception applied for forgiveness of debt that was used to acquire a personal residence.  The maximum which could be excluded was $2 million for a married couple.  This provision was set to expire in 2020.  The CAA extends this exclusion through 2025, but at a reduced amount of $750,000.

Mortgage insurance premiums – The CAA extends the deduction for qualified mortgage insurance premiums through 2021.

Retirement plan distributions – The CAA allows for distributions from retirement plans of up to $100,000 without being subject to the 10% penalty that applies to early retirement distributions.  The distribution, however, will be subject to income tax over a 3-year period.  This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.

Payroll Provisions

FSA Plans – Employers may choose to allow a carryover of unused funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year.

Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – The FFCRA, passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19.  The Act extends this credit through March 31, 2021.

Employer tax credit for paid family and medical leave – Earlier tax law allowed businesses to claim a general business credit for paid family and medical leave up to 12 weeks per year.  The provision was set to expire at the end of 2020; the Act extends this credit through 2025.

Work opportunity credit – The work opportunity credit is available to employers for hiring individuals from certain targeted groups.  The credit was set to expire at the end of 2020.  The CAA extends the credit through 2025.

Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown.  The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.

Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020.  The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021.  The CAA extends the required repayment period to December 31, 2021.

Employer payment of student loans – The CAA extends the current CARES act provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020.  The CAA extends the provision to 2025.  The maximum annual payment is $5,250.

Business Tax Provisions

Deductions for expenses paid using PPP loan proceeds – The CAA clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds.

Bringing back the business lunch – The CAA temporarily allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022.

Qualified disaster relief contributions – The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions made to organizations for disaster relief efforts.  Contributions must be made between January 1, 2020 and 60 days after passage of the Act.  Corporations could receive a deduction of up to 100% of taxable income.

Accelerated depreciation of residential rental property for electing real property trade or business – Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election.  Under the election, the interest limitations will not apply; however, the taxpayer must use ADS depreciation rules resulting in a longer useful life and lower depreciation expense each year.  Under prior law, residential rental property placed in service prior to January 1, 2018 was subject to a 40-year ADS useful life.  The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to January 1, 2018.

Tax Alerts
Tax Briefing(s)

  Rental Real Estate as Qualified Business Income Deduction effective to December 31, 2025

 If you operate a rental real estate business, you may qualify to claim the business income deduction under Section 199A in one of two ways- details in our article detail.

 


For years 2021 and 2022 only,  Meals and entertainment 100% deductible  under certain conditions.  California does not conform and will limit deduction to 50%.

 


The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.


Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.


The IRS addressed the following common myths about tax refunds:


The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return.


The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002.


Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.


The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022.


The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.


The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.


The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.


The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.


The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.