On Sunday, December 27th, President Trump signed the Consolidated Appropriations Act of 2021 into law. Included within the legislation are many tax provisions, including the extension of various expiring provisions, extensions and expansions of certain earlier pandemic tax relief provisions, and much more.
Economic impact payments. The bill provides a refundable tax credit in the amount of $600 per eligible family member. The credit phases out starting at $150,000 of modified adjusted gross income for married taxpayers filing jointly. The Treasury has already begun the process of issuing these “stimulus payments.”
PPP loan forgiveness taxability. The bill clarifies that Paycheck Protection Program (“PPP”) loan forgiveness is not taxable and that expenses paid for with PPP loan proceeds are tax-deductible.
Payroll tax credits. The bill extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, through the end of March 2021. It also modifies the payroll tax credits so that they apply as if the corresponding employer mandates were extended through March 31, 2021. The bill also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.
Employee retention tax credit modifications. The bill extends and expands the CARES Act employee retention tax credit (“ERTC”) through June 30, 2021. It also provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds.
Deferral of employees’ portion of payroll tax. In August, Trump issued a memorandum allowing employers to defer the withholding, deposit, and payment of the employee portion of the Social Security tax for any employee whose compensation during any biweekly pay period is less than $4,000. It applies to payroll taxes on wages paid from September 1 through December 31, 2020. Under the memorandum, employers are required to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. The bill extends the repayment period through December 31, 2021.
Temporary allowance of full deduction for business meals. The bill temporarily allows a 100% business expense deduction for meals (rather than the current 50%) as long as the expense is for food or beverages provided by a restaurant. This provision is effective for expenses incurred after December 31, 2020 and expires at the end of 2022.
Certain charitable contributions deductible by nonitemizers. The bill extends and modifies the $300 charitable deduction for nonitemizers for 2021 and increases the maximum amount that may be deducted to $600 for married couples filing jointly.
Modification of limitations on charitable contributions. This bill extends for one year (through 2021) the increased limit from the CARES Act on deductible charitable contributions for corporations and taxpayers who itemize.
Temporary special rules for health and dependent care flexible spending arrangements. The bill allows taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. This provision also permits employers to allow employees to make a 2021 mid-year prospective change in contribution amounts.
Use of retirement funds for disaster relief. The bill allows residents of qualified disaster areas to take a qualified distribution of up to $100,000 from a retirement plan or IRA without penalty. Amounts withdrawn are included in income over three years or may be recontributed to the plan.
Employee retention credit for disaster zones. The bill allows a tax credit of 40% of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone. The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.
Qualified disaster-related personal casualty losses. The bill permits individuals who have a net disaster loss to increase their standard deduction amount by the amount of the net disaster loss.
Medical expenses. The bill makes permanent the reduction in medical expense deduction floor, which allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income instead of 10%.