COVID-19 Stimulus Part 2
In December 2020, the Consolidated Appropriations Act (the “Act”) passed. A nearly 6,000-page omnibus spending bill, it includes the second COVID-19 stimulus bill. The first stimulus bill, the CARES Act, was enacted in March of 2020. The following summary highlights key information about the second COVID-19 stimulus.
Direct Household Payments
Individual stimulus checks/Additional Recovery Rebate
- One-time payments of a ‘base’ credit of $600/eligible individual which includes the taxpayer(s) and their children under age 17. Income limitations are the same as the prior act with reductions at $75k for single filer ($150K married filing jointly). Phaseout: for every $100 of AGI in excess of threshold, $5 of Additional Recovery Rebate will be phased out.
- 11-week extension of ‘Regular’ and ‘Pandemic Unemployment Assistance’ benefits.
- ‘Regular’ unemployment benefits increased by $300/week for 11 weeks.
Personal Tax Changes
CARES Act Charitable Contributions modified and extended
- The above-the-line deduction of $300 in charitable contributions for single and joint filers in 2020 has changed to $300 for single filers and $600 for joint filers in 2020 and extended through 2021.
- (Rare) The 100%-of-AGI limit on cash contributions to a charity is extended into 2021
The opportunity to carry forward unused FSA (healthcare and dependent care) balances in 2021
- Unused FSA can be rolled over in and through 2021 and then rolled again into 2022. Further, FSA plans can allow participants to modify future contributions during the year for just 2021. However, employers are not required to adopt the policies.
Medical Expense Deductions hurdle reduced ‘permanently’ to 7.5%-of-AGI
Education Expense Deduction/Credit Changes
- Tuition and Related Expenses deduction for education is eliminated and replaced with an expanded/higher phaseout limit Lifetime Learning Credit. New phaseout limits, aligned with the American Opportunity Tax Credit, from $80k-$90k for single filers and $160-$180k for joint filers.
Temporary eviction moratorium extended through January 31, 2021
Earned Income calculation flexibility
- Earned Income in 2019 can be used to determine eligibility for 2020 Earned Income Tax Credit and Additional Child Tax Credit. This is an effort to allow those that may not otherwise qualify because of a lower 2020 earned income level (or higher 2020 earned income from increased unemployment benefit payments) to not lose this benefit if they previously qualified in 2019.
The Return and Enhancement of PPP (referred to as PPP2)
Other PPP/PPP2 Comments:
- Maximum loan limits are decreased to $2MM from $10MM in PPP.
- Business expenses paid for using tax-free loans made under the CARES Act’s PPP are tax-deductible. This updated treatment for the deductibility of expenses paid with PPP loan proceeds will apply both to expenses already paid with original PPP loans that were forgiven, and with any new PPP2 loan proceeds that are forgiven.
- Additional expenses that can be used by PPP and PPP2 loan proceeds; (1) Covered Operations Expenses, (2) Covered Property Damage Costs, (3) Covered Supplier Costs, (4) Covered Worker Protection Expenditures.
- PPP funds spent on any of the above expenses will be eligible for forgiveness, subject to the still-applicable limitations on non-payroll expenses (no more than 40% of the forgiven amount of a PPP loan can be attributable to non-payroll expenses).
- All PPP borrowers will have the option of choosing either an 8-week or a 24-week Covered Period. The Covered Period of a PPP loan is the period during which expenses that are “incurred” or for which there are “payments made” can be used in the calculation of determining how much of the PPP loan is forgivable.
- A Simplified Forgiveness Application for Loans Up To $150,000 – PPP borrowers of up to $150,000 who are seeking forgiveness for all or a portion of their loan. SBA must create a ONE-page version. While all applicable PPP rules must be followed, they will not be required to submit any proof in the forgiveness application. Lenders are barred from requesting substantiating documents!
- Additional Insurance Benefits count as payroll – Expenses related to group life insurance, group disability, vision, and/or group dental insurance all count towards “Payroll Expenses.”
- Borrowers Who Returned Funds Can Reapply – Some borrowers who took PPP loans gave back some or all of their loans due to uncertainty regarding qualification, calculation, etc. are now allowed to reapply for the maximum allowable loan amount. In addition, lenders can recalculate loan amounts due to changes in regulations that have occurred since a borrower’s loan was initially funded.
Business Tax Credits
- Greatly expanded Employee Retention Tax Credit (potentially up to $7,000/employee/quarter) if the business experienced at least a 20% decline in quarterly revenue. Businesses can now benefit from both a PPP loan and the Employee Retention Credit, though the same wages cannot be used to qualify for both the credit and for forgiveness.
- Certain Meal expenses are 100% deductible for 2021 and 2022 (sole proprietors and other business owners):
- In an effort to encourage business spending at restaurants, the Act allows for a full (100%) deduction for such expenses in 2021 and 2022 (but not retroactively for 2020). Notably, the 100% deduction is allowed only to the extent that the expenses incurred “for food or beverages provided by a restaurant.” While this certainly appears to refer to take-out and dine in, there is some gray area yet to be addressed (privately hosted venues, catered food at private events, room-service, alcohol sales, etc.)
- Exclusion of Employer payments of Student Loans extended through 2025
- First authorized by the CARES Act earlier this year for 2020 only, the ability for an employer to provide up to $5,250 of annual tax-free education assistance used to pay the principal or interest on an employee’s qualified student debt is extended through 2025. Such payments may be made directly to a lender, or they can also be made to the employee, who can then use the payments to pay down their own student debt.
What was noticeably missing?
No waiver on future Required Minimum Distributions (RMDs)
- There is no extension of the temporary waiver of RMDs for defined contribution accounts that applied to 2020. Additionally, no additional relief for unwanted 2020 RMDs.
No further relief on student loan deferrals
- The suspended loan payments and 0% interest rate payments are set to expire on 1/31/2021.
Less Common Provisions
Exclusion for discharge of qualified principal residence debt extended through 2025 but scaled-back
- The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief. For those who go through a short sale and end out resolving their outstanding mortgage balance with a foreclosure/sale of the home for less than the remaining balance, the Act extends the period for which forgiven debt attributable to a primary residence may be excluded from income through 2025. However, beginning in 2021, the maximum amount of debt that can be discharged is reduced to $750k for joint filers, and to $375k for single filers.
Deadline to repay Deferred Payroll taxes (EE SS tax) extended to 12/31/2021.
- (Rare but common for federal employees) If your employer suspended your employee Social Security taxes from 9/1/2020-12/31/2020, that delay in payment will be made up from 1/1/2021 through 12/31/2021.
Paid sick time and paid family leave as it relates to COVID-19, Employer Tax Credit extension
- While employers are no longer required to provide Families First Coronavirus Response Act (FFCRA) paid sick time and/or paid family leave to employees after December 31, 2020, employers who choose to provide FFCRA paid sick time/family leave benefits to employees continue to be eligible for a tax credit through March 31, 2021.
Other notable changes and extensions include:
- Educator Expense include COVID-19 related supplies.
- Qualified Disaster Distributions and Enhance Plan Loans for non-COVID-19-related Federal Disaster Areas
- Mortgage insurance premiums remain deductible through 2021 (subject to phaseout limits).
- Energy-Efficient Homes Credit and Qualified Fuel Cell Motor Vehicle Credits are extended through 2021.
- A Simplified FAFSA And the Student Aid Index: The phrase Expected Family Contribution will be eliminated and replaced with the Student Aid Index (SAI). In general, students will calculate their SAI by adding together the sum of their parents’ adjusted available income, plus the sum of their own available income, plus their available assets, in what should hopefully be a simplified formula.
Disclaimer: We have compiled this information from sources we believe to be reputable. Charts and data presented directly by governmental agencies are used as frequently as possible. We hope that you will use this information as a guide, but continue to consult with your tax, legal and other advisory professionals for how each of these opportunities apply to your situation.