The Consolidated Appropriations Act of 2021 includes a number of provisions beneficial to individuals and business owners, particularly in light of ongoing economic turmoil in the wake of the coronavirus pandemic. In addition to the extension of the Paycheck Protection Program, the CAA contains another round of direct payments to individuals, extended unemployment insurance and other relevant tax provisions. Below is a snapshot of some of those provisions:
Individual taxpayers will receive a refundable tax credit of $600 per eligible taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out for individuals earning more than $75,000 a year ($150,000 for married filing jointly) at a rate of $5 per $100 of additional income. The credit is available on the taxpayer’s 2020 return.
Eligibility for the payments will be based on individuals’ 2019 tax returns. Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. 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.
Extension of Unemployment Insurance
The relief bill provides an 11-week extension of unemployment insurance compensation benefits that were set to expire December 26, 2020. The additional $300 per week supplement to state unemployment insurance compensation will expire on March 14, 2021.
Expansion of the Deduction for Business Meals to 100% for 2021 and 2022
Under the CAA, the deduction for business meals has been expanded to 100% for 2021 and 2022.
Depreciation of Certain Residential Rental Property over 30-Year Period
For tax years beginning after Dec. 31, 2017, the CAA assigns a 30-year alternative depreciation system (ADS) depreciation period to residential rental property even though it was placed in service before Jan. 1, 2018 if the property is held by an electing real property trade or business and, before Jan. 1, 2018, was not subject to the ADS.
Previously, the Tax Cuts and Jobs Act allowed real property trade or businesses to elect out of the Section 168 business interest deduction limitations. In return however, the electing taxpayer had to, for tax years ending after Dec. 31, 2017, treat the elected-for nonresidential real property, qualified improvement property and residential rental property as subject to the alternative depreciation system (the 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 Dec. 31, 2017.
Individuals May Elect to Base 2020 Refundable CTC & EIC on Preceding Year’s Earned Income
Taxpayers applying for a child tax credit and earned income tax credit are 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, in the event the tax credit exceeds the taxpayer’s tax liability.
Under the new law, in determining the refundable CTC and the EIC for 2020, taxpayers may elect to substitute the earned income for the preceding tax year if that is greater than the taxpayer’s earned income for 2020.
Certain Charitable Contributions Deductible by Non-Itemizers
Individuals who normally do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions ($600 for married filers) to qualified charitable organizations through 2021 An increased penalty of 50% applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.
Modification of Limitations on Charitable Contributions
Under pre-Act law, individuals can’t take an itemized deduction of more than 60% of their contribution base on charitable contributions, of cash, made to 50% charities.
Under the new law, tor 2020 and 2021, the percentage limitation rules for individuals making qualified charitable contributions, in cash, to 50% charities do not apply.
Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements
A cafeteria plan may permit the carryover of unused amounts remaining in a health FSA as of the end of a plan year to pay or reimburse a participant for medical care expenses incurred during the following plan year, subject to the carryover limit (currently $550). This is sometimes referred to as the carryover rule.
The CAA expands the carryover period for 2020, and 2021. The provision also allows employers to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of such plan year for unused benefits and contributions to health flexible spending and dependent care flexible spending arrangements.
In addition, an employer may allow an employee who ceases to participate in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which the employee’s participation ceased, including any extended grace period.
The Act also provides a special carry forward rule for dependent care flexible spending arrangements where the dependent aged out during the pandemic.