Newsletters

Jan. 6 2021

On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.  The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).  In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the CAA also contains numerous tax provisions and extenders as follows:

Do note that any of the below provisions that are applicable to income tax at the state level, California may not conform.

Individual Provisions

Increased deduction for medical expenses – The CAA permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income (“AGI”).  Previous law only allowed for a deduction of medical expenses in excess of 10% of AGI.

Child Tax Credit & Earned Income Credit (“CTC” & “EIC”) – The CAA allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.

Charitable contributions for taxpayers who do not itemize deductions – The CARES act, passed earlier in 2020, created a new above-the-line deduction for charitable contributions made in 2020 for taxpayers who do not itemize deductions.  The maximum allowable deduction is $300 ($600 for a married couple).  The CAA extends this rule through 2021.

Income limitations for charitable contributions – Under previous law, charitable contributions to qualified organizations were generally limited to 60% of a taxpayer’s AGI.  The CARES act removed the limitation for 2020; the new Act also removes the limitation for 2021.

Education credits – The CAA removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit.  This applies to tax years 2021 and beyond.

Exclusion from income for forgiveness of qualified principal residence indebtedness – Forgiveness of debt is generally included in taxable income.  An exception applied for forgiveness of debt that was used to acquire a personal residence.  The maximum which could be excluded was $2 million for a married couple.  This provision was set to expire in 2020.  The CAA extends this exclusion through 2025, but at a reduced amount of $750,000.

Mortgage insurance premiums – The CAA extends the deduction for qualified mortgage insurance premiums through 2021.

Retirement plan distributions – The CAA allows for distributions from retirement plans of up to $100,000 without being subject to the 10% penalty that applies to early retirement distributions.  The distribution, however, will be subject to income tax over a 3-year period.  This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.

Payroll Provisions

FSA Plans – Employers may choose to allow a carryover of unused funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year.

Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – The FFCRA, passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19.  The Act extends this credit through March 31, 2021.

Employer tax credit for paid family and medical leave – Earlier tax law allowed businesses to claim a general business credit for paid family and medical leave up to 12 weeks per year.  The provision was set to expire at the end of 2020; the Act extends this credit through 2025.

Work opportunity credit – The work opportunity credit is available to employers for hiring individuals from certain targeted groups.  The credit was set to expire at the end of 2020.  The CAA extends the credit through 2025.

Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown.  The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.

Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020.  The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021.  The CAA extends the required repayment period to December 31, 2021.

Employer payment of student loans – The CAA extends the current CARES act provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020.  The CAA extends the provision to 2025.  The maximum annual payment is $5,250.

Business Tax Provisions

Deductions for expenses paid using PPP loan proceeds – The CAA clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds.

Bringing back the business lunch – The CAA temporarily allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022.

Qualified disaster relief contributions – The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions made to organizations for disaster relief efforts.  Contributions must be made between January 1, 2020 and 60 days after passage of the Act.  Corporations could receive a deduction of up to 100% of taxable income.

Accelerated depreciation of residential rental property for electing real property trade or business – Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election.  Under the election, the interest limitations will not apply; however, the taxpayer must use ADS depreciation rules resulting in a longer useful life and lower depreciation expense each year.  Under prior law, residential rental property placed in service prior to January 1, 2018 was subject to a 40-year ADS useful life.  The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to January 1, 2018.

December 27, 2020

 

On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.  The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).  In addition to providing for stimulus payments of $600 per taxpayer and qualifying child, the CAA also contains numerous tax provisions and extenders as follows:

Do note that any of the below provisions that are applicable to income tax at the state level, California may not conform.

Individual Provisions

Increased deduction for medical expenses – The CAA permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income (“AGI”).  Previous law only allowed for a deduction of medical expenses in excess of 10% of AGI.

Child Tax Credit & Earned Income Credit (“CTC” & “EIC”) – The CAA allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.

Charitable contributions for taxpayers who do not itemize deductions – The CARES act, passed earlier in 2020, created a new above-the-line deduction for charitable contributions made in 2020 for taxpayers who do not itemize deductions.  The maximum allowable deduction is $300 ($600 for a married couple).  The CAA extends this rule through 2021.

Income limitations for charitable contributions – Under previous law, charitable contributions to qualified organizations were generally limited to 60% of a taxpayer’s AGI.  The CARES act removed the limitation for 2020; the new Act also removes the limitation for 2021.

Education credits – The CAA removes the above the line deduction for tuition and fees in exchange for an expanded application of the Lifetime Learning credit.  This applies to tax years 2021 and beyond.

Exclusion from income for forgiveness of qualified principal residence indebtedness – Forgiveness of debt is generally included in taxable income.  An exception applied for forgiveness of debt that was used to acquire a personal residence.  The maximum which could be excluded was $2 million for a married couple.  This provision was set to expire in 2020.  The CAA extends this exclusion through 2025, but at a reduced amount of $750,000.

Mortgage insurance premiums – The CAA extends the deduction for qualified mortgage insurance premiums through 2021.

Retirement plan distributions – The CAA allows for distributions from retirement plans of up to $100,000 without being subject to the 10% penalty that applies to early retirement distributions.  The distribution, however, will be subject to income tax over a 3-year period.  This extends the relief provided in the CARES Act & expands the eligibility to all taxpayers.

Payroll Provisions

FSA Plans – Employers may choose to allow a carryover of unused funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year.

Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – The FFCRA, passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19.  The Act extends this credit through March 31, 2021.

Employer tax credit for paid family and medical leave – Earlier tax law allowed businesses to claim a general business credit for paid family and medical leave up to 12 weeks per year.  The provision was set to expire at the end of 2020; the Act extends this credit through 2025.

Work opportunity credit – The work opportunity credit is available to employers for hiring individuals from certain targeted groups.  The credit was set to expire at the end of 2020.  The CAA extends the credit through 2025.

Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown.  The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.

Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020.  The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021.  The CAA extends the required repayment period to December 31, 2021.

Employer payment of student loans – The CAA extends the current CARES act provision which allows employers to repay education loans incurred by their employees, which was set to expire at the end of 2020.  The CAA extends the provision to 2025.  The maximum annual payment is $5,250.

Business Tax Provisions

Deductions for expenses paid using PPP loan proceeds – The CAA clarifies the original intention of the PPP loan program and allows for full deduction of any expense paid for using PPP loan proceeds.

Bringing back the business lunch – The CAA temporarily allows for a full 100% deduction for meals provided by restaurants that are paid or incurred in 2021 or 2022.

Qualified disaster relief contributions – The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions made to organizations for disaster relief efforts.  Contributions must be made between January 1, 2020 and 60 days after passage of the Act.  Corporations could receive a deduction of up to 100% of taxable income.

Accelerated depreciation of residential rental property for electing real property trade or business – Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election.  Under the election, the interest limitations will not apply; however, the taxpayer must use ADS depreciation rules resulting in a longer useful life and lower depreciation expense each year.  Under prior law, residential rental property placed in service prior to January 1, 2018 was subject to a 40-year ADS useful life.  The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to January 1, 2018.

Tax Alerts
Tax Briefing(s)

  Rental Real Estate as Qualified Business Income Deduction effective to December 31, 2025

 If you operate a rental real estate business, you may qualify to claim the business income deduction under Section 199A in one of two ways- details in our article detail.

 


For years 2021 and 2022 only,  Meals and entertainment 100% deductible  under certain conditions.  California does not conform and will limit deduction to 50%.

 


Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.


The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERCclaims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny. 


The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.


The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.

This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.


The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims. 


The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN


The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.


The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.


As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use


The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.