As we enter into a new calendar year, Cassady Schiller wants to make sure that you understand the provisions in Congress’ new stimulus package signed by the President on December 27, 2020 and how they may impact you both personally and within your business. While the below summary represents those provisions that pertain most broadly to our clientele, there may be specific provisions applicable to your situation, which we will be happy to address with you individually.
Individual/Personal Provisions
Additional 2020 Recovery Rebate/Stimulus Checks
Advanced payments of a refundable tax credit have already begun being deposited in taxpayers’ bank accounts. The credit is $600 per taxpayer ($1,200 for MFJ), in addition to $600 per qualifying child. The credit phase-out begins at $75,000 ($150,000 for MFJ) at a rate of $5 per $100 of additional income.
The phase-out of such advanced payments is determined using the taxpayer’s 2019 tax return. If the amount of advance payment received exceeds the amount as determined on the taxpayer’s 2020 tax return, the taxpayer will not be required to repay any amount of the advanced payment. If the amount determined on the taxpayer’s 2020 tax return exceeds the amount of advanced payment received, the taxpayer will receive the difference as a refundable tax credit. Note that the previous determination of eligibility was also based on a taxpayer’s 2019 return, but since those payments were made prior to the filing deadline for 2019 returns, a taxpayer’s 2018 return may have been used to determine eligibility if the 2019 return had not yet been filed.
Charitable Contributions (Non-Itemizers)
A pre-AGI charitable contribution deduction is available to taxpayers claiming a standard deduction on their 2021 tax return. This provision permits MFJ taxpayers to claim a maximum $600 deduction, while non-married and MFS taxpayers will be allowed a $300 deduction. Such contributions must be cash contributions (i.e. cash, check, EFT, payroll deduction, etc.) to a public charitable organization, whereas noncash contributions (e.g. Goodwill donations) and contributions to donor-advised funds, supporting organizations and private foundations, even if made in cash, are specifically disallowed for this pre-AGI deduction.
With the previous CARES Act passed in the spring of 2020, standard deduction taxpayers were able to claim on their 2020 tax return a maximum $300 pre-AGI charitable contribution. The maximum amount was $300 regardless of filing type (i.e. MFJ, MFS, single, etc.). Similar to the above, such contributions must be cash contributions to public charitable organization.
Charitable Contributions (Itemizers)
The CARES Act provision allowing itemized cash contribution deductions up to 100% of AGI for 2020 now extends through 2021. The previous limitation was set to 60%. However, donations must be made in the form of cash to a qualifying public charitable organization. Therefore, cash donations to donor-advised funds, supporting organization and private foundations do not qualify for the 100% of AGI deduction limit, but may still be deductible under the previous limitation(s).
Medical Expense Deduction Modification
The AGI limitation for claiming itemized medical expenses has been permanently set to 7.5% of AGI for calendar year 2021 and beyond for all taxpayers. This threshold was previously set to increase to 10% for 2021 and beyond for those taxpayers under the age of 65.
Mortgage Insurance Premiums Deduction
Through 2021, taxpayers may claim qualified mortgage insurance premiums as mortgage interest for purposes of their itemized mortgage interest deduction. This deduction phases out for taxpayers with AGI of $100,000 ($50,000 MFS).
Educator Expenses
While guidance and regulation are still forthcoming from the Secretary of the Treasury, taxpayers who are educators may include personal protective equipment (PPE) and other supplies used for the prevention of the spread of COVID-19, when paid out-of-pocket without reimbursement, as eligible expenses for purposes of the educator expense deduction.
Emergency Financial Aid Grants to College Students
Certain emergency financial aid grants provided under the CARES Act are excluded from gross income of college and university students. Students are “held harmless” for purposes of determining eligibility for the American Opportunity and Lifetime Learning tax credits.
Nonbusiness Energy Credit
Extended through 2021, a credit of 10% of the amounts paid or incurred by a taxpayer for qualified energy improvements to a building/home’s “envelope” (windows, doors, skylights, and roof) treated as a principal residence.
Energy-efficient credits are available for furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulation fans. Such fixed-dollar credits have a lifetime maximum of $500.
Business Provisions
Paycheck Protection Program 2.0 (PPP2)
As of the date of the announcement, we are still awaiting SBA guidance as to the rollout, applications, and regulations surrounding this program. Please visit our previous announcement regarding the provisions contained within the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act for eligibility and requirements for PPP2 funds HERE.
Employee Retention Tax Credit (ERTC)
The ERTC availability has been made retroactive to PPP recipients with respect to qualifying wages in 2020 that are not paid with forgiven PPP loan proceeds. Please note this credit is to be claimed on your Q4 payroll tax filing due January 31, 2021.
Additionally, for 2020 wages, group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, which is consistent with IRS guidance.
Effective January 1, 2021 through June 30, 2021:
Credit rate is increased to 70% of qualified wages (up from 50%)
Eligibility is expanded to those businesses with a decline in gross receipts of 20% in the first or second quarter of 2021, as compared to the first for second quarter of 2019 - A safe harbor is available allowing employers to use prior quarter gross receipts to determine eligibility
Increased limit per employee to $10,000 per quarter (previously $10,000 for the entire year)
In determining the qualifying wages, the employee threshold is increased to 500 employees (previously 100 employees)
Advanced credit at any point in the quarter is available to employers with 500 or fewer employees
New employers not in existence for all or part of 2019 may be eligible
Tax Treatment of Federal Assistance to Businesses
Provisions within the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act explain:
Business gross income (for tax purposes) does not include forgiveness of Paycheck Protection Program (PPP) loans, emergency Economic Injury Disaster Loan (EIDL) grants, and/or other certain loans and repayment assistance provided under the CARES Act.
Deductions are allowed for otherwise deductible expenses paid with the proceeds from the above stated financial instruments, and that the tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income.
Paid Family and Medical Leave Tax Credit
Extended through 2025, eligible employers may claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages. The credit could increase to 25% in certain circumstances.
Please reach out to your Cassady Schiller contact to determine if your business is considered an eligible employer.
Self-Employed Paid Sick Leave Tax Credit
Under the Family and Medical Leave Act (FMLA) provision of the Families First Coronavirus Response Act (FFCRA), the federal government established a tax credit for paid sick leave to eligible self-employed taxpayers who are unable to work (including telework or working remotely) due to:
Being subject to a federal, state, or local quarantine or isolation order due to COVID-19,
Being advised by a health care provider to self-quarantine due to COVID-19, or
Experiencing COVID-19-related symptoms and seeking a medical diagnosis.
If all of the necessary FFCRA requirements are met, self-employed individuals would be eligible for qualified sick leave for each day during the year that you were unable to work for the above reasons (up to 10 days). The tax credit is worth the lesser of
$511 per day, or
100% of your average daily self-employment income for the year per day.
A provision in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act now provides self-employed individuals an election to use their 2019 net earnings from self-employment in determining their average daily self-employment income for purposes of the above comparison.
Self-Employed Paid Family Leave Tax Credit
Under the Family and Medical Leave Act (FMLA) provision of the Families First Coronavirus Response Act (FFCRA), the federal government established a tax credit for paid family leave to eligible self-employed taxpayers who are unable to work (including telework or working remotely) due to:
Caring for someone else impacted by COVID-19 (up to 10 days), or
Your child's school or child care provider was closed or unavailable due to COVID-19 (up to 50 days)
If all of the necessary FFCRA requirements are met, self-employed individuals would be eligible for qualified family leave for each day during the year that you were unable to work for the above reasons (limited to the days indicated above). The tax credit is worth the lesser of
$200 per day, or
67% of your average daily self-employment income for the year per day.
A provision in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act now provides self-employed individuals an election to use their 2019 net earnings from self-employment in determining their average daily self-employment income for purposes of the above comparison.
Carryover of Flexible Spending Arrangement (FSA) Benefits
This provision permits the carryover of health and dependent care FSAs up to the full amount from 2020 to 2021, and from 2021 to 2022. Plans are permitted to extend the maximum age of eligible dependents from 12 to 13 for dependent care FSAs for the 2020 plan year and any unused amounts from the 2020 plan year which are carried over into the 2021 plan year. Additionally, plans are permitted a prospective change in election amounts for health and dependent care FSAs for plan years ending in 2021.
Full Deduction (100%) for Business Meals
Businesses may claim a 100% deduction for business meals, including any carry-out or delivery meals, provided by a restaurant that are paid or incurred in 2021 or 2022.
However, for such meals paid or incurred in 2020, the deduction will continue to be limited to 50%.
Extension of Certain Deferred Payroll Taxes
For those employers and employees who elected to participate in the President’s payroll tax deferral beginning September 1, 2020 through December 31, 2020, the repayment of such deferral has been extended through December 31, 2021 (previously April 30, 2021). Therefore, employers should increase withholding during the 2021 calendar year to account for this repayment before penalties and interest on an unpaid liability begin accruing on January 1, 2022.
Charitable Contributions
The CARES Act provision allowing corporations to deduct up to 25% of taxable income for 2020 now extends through 2021. The previous limitation was set to 10%.
Residential Rental Property Depreciation
The deprecation period for residential rental property placed in service before January 1, 2018 and held by an electing real property trade or business is 30 years. This provision applies only if the alternative depreciation system (ADS) did not apply with respect to such property prior to January 1, 2018.
Controlled Foreign Corporation (CFC) Look-Thru
Look-through treatment for payments of dividends, interest, rents and royalties between related CFCs is extended through 2025.
Work Opportunity Tax Credit (WOTC)
The WOTC claimed by employers for hiring individuals who are members of one or more of ten targeted groups is extended through 2025. Information regarding these targeted groups may be found HERE.
Employer Payment of Student Loans
Extended through 2025, employers may contribute up to $5,250 annually towards an employee’s student loans, and such payment would be excluded from the employee’s income. Employers are exempt from federal (and potentially state) payroll taxes on such payments, as well as claiming the payment as a fringe benefit deduction for income tax purposes. Employees are exempt from both federal (and potentially state) payroll taxes and income taxes up to the $5,250 maximum.
We realize there is a lot to digest in these provisions. At Cassady Schiller, we are prepared to help you understand how these changes can apply to your specific situation. Accordingly, please reach out to us to see how we can help you take full advantage of these new provisions.