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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.

September 9, 2020

California law conforms to Federal Income Tax treatment of PPP Loan Forgiveness

On September 9, 2020, Governor Gavin Newsom signed Assembly Bill 1577 into law, which amends California’s tax code as it relates to loan forgiveness under the Paycheck Protection Program.

PPP loans are subject to forgiveness when borrowers use proceeds to pay for payroll costs, interest on mortgage obligations, rent, and utilities. For PPP loan borrowers, for purposes of federal income taxation, existing federal law EXCLUDED from gross income any amounts of PPP loans that are FORGIVEN.

With the passage of  AB 1577 adds of sections 17131.9 and 24308.6 to the California Revenue and Taxation Code, California tax law, effective for taxable years on and after January 1, 2020, California tax law conforms to federal income tax law.  Gross income is not to include any covered loan amount forgiven pursuant to the CARES Act, the PPP and Health Care Enhancement Act, or the PPP Flexibility Act of 2020.

Regarding deductions paid from PPP loans, AB 1577 provides that any credit or deduction allowed for any amount paid or incurred by a taxpayer upon which the state income and franchise tax exclusions are based shall be reduced by the amount of the exclusion allowed under the new law. California tax law is consistent with federal tax law and under AB 1577 denies business expense deductions for expenses paid using forgiven PPP loan funds.

 

Tax Alerts
Tax Briefing(s)

The IRS has announced the launch of two new online tools to help families verify, manage and monitor monthly payments of child tax credits under the American Rescue Plan Act (ARP) ( P.L. 117-2). These are in addition to the Non-filer Sign-up tool announced last week, which helps families register for child tax credits. The tools are both available through the Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.


Partnerships, S corporations, and U.S. persons with interests in foreign partnerships may rely on transition relief from penalties for tax years beginning in 2021 with respect to new Schedules K-2 and K-3.


The Departments of the Treasury, Labor, and Health and Human Services (the Departments), have issued interim final rules and identical proposed regulations to implement provisions of the No Surprises Act.


The IRS has proposed regulations that would amend the rules for filing electronically and affects persons required to file partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns.


Secretary of the Treasury Janet L.Yellen addressed the support for a global minimum tax for corporations at a press conference at the close of the G20 Finance Ministers and Central Bank Governors Meetings, on July 11, 2021.


The IRS has provided a procedure for making elections and revocations under Act Sec. 2303(e) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136) for taxpayers with a net operating loss (NOL) for any tax year beginning in 2018, 2019, or 2020, all or a portion of which consists of a farming loss (farming loss NOLs). The procedure is effective on the date of its release, June 30, 2021.


The IRS has provided answers to questions that certain transportation companies may have regarding Treasury grants and related taxes.


The IRS reminded taxpayers that their website (www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules.