The Consolidated Appropriations Act, 2021 (CAA; PL 116-260), contained numerous tax provisions. While many of those provisions impact tax years 2021 and later, some affect 2020 returns. Here’s a rundown of what you need to know about the CAA as you prepare 2020 business and individual tax returns.
Amendments to CARES Act Economic Impact Payment Rules. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136), enacted in the spring of 2020, provided for direct payments/rebates to certain individual taxpayers. These payments were referred to as economic impact payments (EIPs). Under the CARES Act, EIPs started to phase out at $75,000 of adjusted gross income (AGI) for single taxpayers and $150,000 for married taxpayers filing joint returns. Taxpayers had to have a Social Security number to qualify for EIPs. Taxpayers married and filing jointly with a spouse without a Social Security number were not entitled to an EIP under the original CARES Act rules.
The CAA makes two changes to the EIP rules:
- The $150,000 AGI limit also applies to returns of surviving spouses.
- In general, taxpayers without an eligible Social Security number are still ineligible for the payment. However, married taxpayers filing jointly where one spouse has a Social Security Number and one spouse does not are now eligible for a payment of $600, in addition to $600 per child with a Social Security number.
Additional 2020 Recovery Rebates. The CAA provides for “additional 2020 recovery rebates,” which are refundable tax credits that may be taken on the taxpayer’s 2020 return. The credits are referred to as additional recovery rebates because they are in addition to the EIPs provided by the CARES Act.
The credits are available to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
Eligible individuals do not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts.
The same rules on Social Security numbers that apply to EIPs (see above) also apply to these additional 2020 recovery rebates.
Advance payments. Advance payments of additional 2020 recovery rebates may be issued to taxpayers based on their 2019 return information. Eligible taxpayers treated as providing returns through the IRS’s nonfiler portal for purposes of the EIP may also receive advance payments.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. However, if the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors.
Educator expense deductions for PPE. Teachers are allowed a $250 above-the-line (non-itemized) deduction for classroom supplies and similar expenses.
The CAA instructs IRS to issue guidance clarifying that the deduction is available for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of coronavirus. The guidance will apply to expenses paid or incurred after March 12, 2020.
Emergency financial aid grants. The CARES Act provided that higher education institutions could use federal funds to make emergency financial aid grants to students for expenses and financial needs related to the coronavirus pandemic.
The CAA excludes these grants from the gross income of college and university students. The exclusion does not apply to the portion of any amount received that represents payment for teaching, research, or other services required as a condition for receiving the grant.
Child tax credit and earned income credit. To the extent the child tax credit (CTC) exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer’s taxable earned income for the tax year as exceeds $2,500. The earned income tax credit (EITC) equals a percentage of the taxpayer’s earned income.
The CAA provides that, in determining the refundable CTC and the EITC for 2020, taxpayers may elect to substitute the earned income for 2019 if that income is greater than the taxpayer’s earned income for 2020. For joint returns, the taxpayer’s earned income for 2019 is the sum of each spouse’s earned income for the preceding tax year.
10% early withdrawal penalty does not apply to qualified disaster distributions. Generally, a 10% early withdrawal penalty applies to a distribution from employer retirement plan to an employee who is under the age of 59½.
The CAA provides that the early withdrawal penalty does not apply to qualified disaster distributions. Qualified disaster distributions are distributions made on or after the first day of the incident period of a qualified disaster and before June 25, 2021, to an individual whose home at any time during the incident period of the qualified disaster is located in the qualified disaster area and who has sustained an economic loss by reason of the qualified disaster.
10% early withdrawal penalty does not apply to coronavirus-related distributions from both qualified and money purchase plans. The CARES Act provided for special tax treatment for a “coronavirus-related distribution” from a retirement plan. For example, there is an exception under the CARES Act to the 10% additional tax for early distributions from qualified retirement plans made to qualified individual.
The CAA provides that, in the case of a money purchase pension plan, a coronavirus-related distribution that is an in-service withdrawal (i.e., a withdrawal made while the beneficiary of the plan is still employed by the plan owner) is also exempt from the 10% additional tax.
Increased limits for net disaster losses. For individuals, losses of property not connected with a trade or business or a transaction entered into for profit are deductible as personal casualty losses if the loss arises from fire, storm, shipwreck, or other casualty to the extent the losses are attributable to a federally declared disaster. The deduction for personal casualty losses is subject to two limitations:
- The loss is allowed only to the extent the amount of the loss from each casualty, or from each theft, exceeds $100 ($100 per-casualty floor).
- If personal casualty losses for a tax year exceed personal casualty gains for that tax year, then the losses are allowed only to the extent of the sum of: (1) the amount of the personal casualty gains for the tax year, plus (2) so much of the excess as exceeds 10% of the taxpayer’s adjusted gross income (10%-of-AGI limitation).
In computing the 10%-of-AGI limitation, the amount of any personal casualty loss is determined after application of the $100 per-casualty floor.
Previous laws provided for increased limits for personal casualty losses incurred in specific federally declared disasters—including Hurricanes Harvey, Irma, and Maria; California wildfires in 2017; and federally declared disasters during 2018 and 2019.
The CAA provides special rules for individuals who have a net disaster loss for any tax year. Net disaster losses are the excess of qualified disaster-related personal casualty losses over personal casualty gains. Qualified disaster-related personal casualty losses are personal casualty losses that arise in a qualified disaster area on or after the first day of the incident period of the qualified disaster to which the area relates, and that are attributable to the qualified disaster.
The CAA increases the per-casualty floor for qualified disaster-related personal casualty losses from $100 to $500. In addition, the 10%-of-AGI limitation doesn’t apply to the net disaster loss. The 10%-of-AGI limitation applies only to the excess of the taxpayer’s personal casualty losses over personal casualty gains reduced by the net disaster loss amount.
The net disaster loss is allowed as an addition to the individual’s standard deduction, rather than as an itemized deduction. Net disaster losses are also allowed for alternative minimum tax (AMT) purposes.
Paycheck Protection Program (PPP). The CARES Act established the Paycheck Protection Program (PPP), which extends the Small Business Administration 7(a) loan program to provide partial or fully forgivable loans to eligible small businesses to cover payroll and certain other operational costs during the COVID-19 pandemic. The CARES Act provided that a PPP loan recipient that uses its loan proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, and utilities could have its PPP loan forgiven in an amount equal to those costs. IRS took the position that expenses paid with PPP loan proceeds were nondeductible.
The CAA expands the list of eligible expenses to include certain operations expenditures, property damage costs, supplier costs, and worker protection expenditures. The CAA also provides that taxpayers whose PPP loans are forgiven may deduct otherwise deductible expenses paid with the proceeds of a PPP loan and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
Economic Injury Disaster Loans (EIDLs) and SBA Loan Payment Assistance. Economic Injury Disaster Loans (EIDLs) provide economic relief to small businesses and nonprofit organizations that are experiencing a temporary revenue loss. The CARES Act expanded access to EIDLs and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of Small Business Administration loans.
The CAA provides that forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance does not give rise to taxable income. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of these loans and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income.
The CAA provides that IRS may waive information reporting requirements for any amount excluded from income by the exclusion of covered loan amount forgiveness, the exclusion of emergency financial aid grants or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act.
Farmers’ net operating losses. Under the CARES Act, farmers can carry back net operating losses (NOLs) arising in a tax year beginning after December 31, 2017, and before January 1, 2021, to each of the five tax years preceding the tax year of such loss. Before the CARES Act, taxpayers could elect a two-year carryback for farming NOLs. The CAA allows farmers who had in place a two-year NOL carryback before the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. It also allows farmers who, before the CARES Act, waived the carryback of a net operating loss, to revoke the waiver.
Alternative depreciation system cost-recovery of certain residential rental property. The Tax Cuts and Jobs Act (TCJA, P.L. 115-97) allowed real property trade or businesses to elect out of the new business interest deduction limitations of Code Sec. 163(j). In return, the electing taxpayer had to, for tax years beginning after December 31, 2017, treat the elected-for nonresidential real property, qualified improvement property, and residential rental property, as subject to the alternative depreciation system (ADS). Also, the TCJA changed the ADS recovery period for residential rental property from 40 years to 30 years for property placed in service after December 31, 2017.
For tax years beginning after December 31, 2017, the 2021 CAA assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018, if the property is held by an electing real property trade or business and, before January 1, 2018, wasn’t subject to the ADS. In other words, the reduced 30-year ADS recovery period now applies to the residential rental property of taxpayers who elected out of Code Sec. 163(j) and instead agreed to depreciate the property under ADS.
100% corporate taxable income limit for qualified disaster relief contributions. In general, a corporation’s charitable deduction can’t exceed 10% of its taxable income, computed with certain modifications, with any excess carried over for up to the five succeeding years.
Under the CARES Act, “qualified contributions”—i.e., certain cash or check contributions made during 2020 to a 50% charity—are disregarded in applying the 10% limit on charitable contributions of corporations and the rules on carryovers of excess contributions. Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% of the corporation’s taxable income over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year. If the aggregate amount of qualified contributions exceeds this limitation, the excess is carried over for up to the five succeeding years.
The CAA, 2021 establishes a new category of “qualified disaster relief contributions,” for which corporations are allowed a deduction up to 100% of taxable income. A “qualified disaster relief contribution” is any qualified contribution if the contribution is paid during the period beginning on January 1, 2020, and ending on February 25, 2021, and is made for relief efforts in one or more qualified disaster areas. The taxpayer must elect to have the qualified disaster relief contribution provision apply and must obtain a contemporaneous written acknowledgment from the donee organization that the contribution was or will be used for those disaster relief efforts.