President Signs Year-End Agreement on Pandemic Relief, Stimulus, and Tax Extenders

Highlights:

• President Trump signs the bill after voicing displeasure with its contents

• The bill includes a second, but reduced, stimulus payment

• The bill extends many earlier COVID-19 relief provisions

• It includes many “tax extenders” with varying expiration dates

Late in the day on December 27, 2020, President Trump relented and signed the massive Consolidated Appropriations Act, 2021, one that finally took shape after weeks of Capitol Hill negotiations as part of a major omnibus package.

The legislation includes several extensions of popular provisions of earlier COVID relief and stimulus acts passed in 2020. This includes additional loans under the Paycheck Protection Program (PPP)(including the allowance of a second round of loans for certain small businesses), relief for the hard-hit transportation industry, additional funding for programs related to vaccines and virus testing, and further expansion of federal unemployment assistance.

There are numerous tax provisions in the omnibus act, generally contained within one of four named acts. From a tax standpoint, there are not many new provisions providing new forms of stimulus and relief. However, several small changes are made to earlier COVID-19 relief provisions while also extending some beyond their initial expiration date. It does also include another round of direct payments to taxpayers, extensions of the charitable contribution provisions and employee retention credit, relief for lower income taxpayers on tax credits, and clarification of treatment of business expenses for small businesses with forgiven PPP loans. The act also includes an extension of popular individual and business tax breaks schedule to expire at the end of 2020.

Additional Recovery Rebate Credits distributed via Second EIPs; Original Recovery Rebate Credit updated.—Eligible individuals are entitled to Additional Recovery Rebate Credits for their first tax years beginning in 2020, with the IRS issuing advance refunds of the credit as quickly as possible via Second Economic Impact Payments (EIPs). The Additional Recovery Rebate Credit is modeled after the original Recovery Rebate Credit, but:

• The Additional Recovery Rebate Credit is $600 for each eligible individual and each qualifying child.

• One spouse on a joint return may be eligible for the credit even if the other spouse does not have a Social Security number.

• The credit does not apply to individuals who died before January 1, 2020.

• Refunds of the credit generally cannot be garnished.

Credit amounts and phase-outs. The maximum Additional Recovery Rebate Credit is:

• $600 for each eligible individual (so $1,200 for two eligible individuals who file a joint return), plus

• $600 for each qualifying child

• The maximum credit amount is reduced (but not below zero) by five percent of adjusted gross income (AGI) that exceeds:

• $150,000 for taxpayers who file jointly or as a surviving spouse—so the $1,200 credit phases out completely at $174,000

• $112,500 if filing as head of household—so the $600 credit phases out completely at $124,500

• $75,000 if filing as single or married filing separately—so the $600 credit phases out completely at $87,000

• The total credit is reduced by $5 for each $100 in AGI above the threshold, so each $600 credit phases out completely with each $12,000 in AGI over the applicable threshold. For example, the total credit for an unmarried eligible individual with one qualifying child is $1,200, which phases out completely once AGI hits $99,000.

COVID-19 related expenses eligible for teacher expense deduction.— The $250 above-the-line deduction for teacher classroom expenses now can include personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID–19. The deduction applies to COVID-19 related expenses paid or incurred after March 12, 2020.

Charitable contribution deduction for nonitemizers for 2021.—For tax years beginning in 2021 only, an individual who does not elect to itemize deductions may claim a deduction of up to $300 ($600 in the case of a joint return) for charitable contributions made during the year.

Medical and dental expense deduction—The 7.5 percent adjusted gross income (AGI) threshold for an individual claiming an itemized deduction of medical and dental expenses has been made permanent. Thus, for tax years beginning after 2020 the deduction may be claimed to the extent that the expenses exceed 7.5 percent AGI and not 10 percent of AGI.

Other Highlights for Individuals

• Exclusion for discharge of qualified principal residence debt extended through 2025 (but scaled-back)

• Carry forward relief for flexible spending account funds that remain unused at end of year

• The tuition and related expenses deduction is replaced by the high income phaseout Lifetime learning credit

• If your employer deferred your share of payroll taxes due to Trump’s executive order in August 2020, the deadline to repay these deferred payroll taxes is extended to December 31st, 2021

• Mortgage insurance premiums (PMI) remain deductible through 2021 (subject to the same phaseout limits)

• Certain energy-efficient home improvements credit and qualified fuel cell motor vehicle credits are extended through 2021

• Extended federally subsidized unemployment benefits

• Exclusion for employer payments of student loans extended through 2025  

Other Highlights for Businesses

• Paycheck Protection Program (PPP) – A new round of funds are allocated to the program

• Ability to apply for ‘round one’ financing will reopen and some may apply for a second loan

• Expenses paid with forgiven PPP loan funds are deductible

• Additional expenses authorized for use with PPP proceeds

• Flexibility in the selection of the PPP ‘Covered Period’ for all borrowers

• Additional changes

  • Simplified forgiveness application for loans up to $150,000

  • Additional insurance benefits count as payroll

  • Borrowers who returned funds can reapply

• Expansion and extension of the employee retention credit

• Certain business related meal expenses are 100% deductible for 2021 and 2022