Good to Know
President Trump signed the COVID-19 and Tax Extenders Bill into law on December 27, 2020. This blog will focus upon the following key provisions:
- Pandemic Relief
- CARES Act Extensions and Pandemic Provisions
- Tax Provisions
- Disaster Tax Relief
- Tax Extenders
The bill provides a refundable tax credit in the amount of $600 per eligible family member by adding a new Section 6428A to the Code. The credit is $600 per taxpayer ($1,200 for married taxpayers 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 taxpayers filing jointly) at a rate of $5 per $100 of additional income. Treasury is authorized to issue advance payments of this credit (economic impact payments) in the same way it made stimulus payments under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.
CARES Act Extensions and Pandemic Provisions
Money Purchase Pension Plans: The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for Coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans.
- The bill adds Money Purchase Pension Plans to the retirement plans qualifying for these temporary rules.
- The provision applies retroactively as if included in Section 2202 of the CARES Act.
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, P.L. 116-127, 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 the CARES Act employee retention tax credit (ERTC) through June 30, 2021. It also expands the ERTC and contains technical corrections. The expansions of the credit include:
- An increase in the credit rate from 50% to 70% of qualified wages;
- An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter; and
- A reduction in the required year-over-year gross receipts decline from 50% to 20%.
The bill also (retroactive to the effective date of the CARES Act):
- 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; and
- Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.
Deferral of Employees’ Portion Of Payroll Tax: 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.
Education Expenses: The bill repeals the Section 222 deduction for qualified tuition and related expenses but, in its place, increases the phaseout limits on the Lifetime Learning Credit (so they match the phaseout limits for the American Opportunity Credit), effective for tax years beginning after December 31, 2020.
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 midyear prospective change in contribution amounts.
Disaster Tax Relief
The bill provides disaster tax relief for individuals and businesses in presidentially declared disaster areas for major disasters (other than COVID-19) declared after December 31, 2019, through 60 days after the date of enactment.
Use of Retirement Funds for Disaster Mitigation: The bill allows residents of qualified disaster areas (as defined in the bill) to take a qualified distribution of up to $100,000 from a retirement plan or Individual Retirement Account (IRA) without penalty. Amounts withdrawn are included in income over three years or may be recontributed to the plan.
The bill includes both permanent and temporary tax extenders.
- Section 213(f) 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%.
The Act provides five-year extensions to the following provisions:
- Section 45S employer credit for paid family and medical leave.
- Section 51 work opportunity credit.
- Section 108(a)(1)(E) gross income exclusion for discharge of indebtedness on a principal residence.
- Section 127(c)(1)(B) exclusion for certain employer payments of student loans.
The Act provides one-year extensions to the following provisions:
- Section 35 health coverage tax credit.
- Section 163(h) treatment of qualified mortgage insurance premiums as qualified residence interest.