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, direct payments and other tax provisions, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which is part of the CAA, contains numerous tax extenders. The following are a few of the more relevant extenders:
Payroll Tax Provisions
The CAA contains numerous provisions related to payroll tax, including an extension of the payback period for certain deferred payroll taxes and an expansion and extension of the employee retention credit. The bill also includes an extension of paid sick and family leave.
Work Opportunity Credit
The Work Opportunity Tax Credit, which provides a credit on qualified first-year wages paid to individuals who are members of one of more of 10 targeted groups, was set to expire at the end of 2020. The WOTC has now been extended through 2025 to individuals who begin work for the employer after Dec. 31, 2020.
Empowerment Zone Tax Incentives
Empowerment Zone tax incentives were also set to expire Dec. 31, 2020. These have now been extended through Dec. 31, 2025. Empowerment Zone credits are available to businesses that are located in and hire individuals who reside in economically depressed census tracts designated “empowerment zones.” The tax incentives available include the 20% wage credit.
New Markets Tax Credit
A $5 billion allocation for the New Markets Tax Credit was set to expire at the end of 2020. The new law extends the $5 billion allocation through 2025, with a five-year carryover period for unused New Markets Tax Credits through 2030. These credits are available to both individual and corporate taxpayers and are equal to 39% of the capital invested in a qualified community development entity, a for-profit or nonprofit entity that commits to the rules of the program, which in turn must loan to or invest substantially all of such capital in qualified businesses operating in low-income communities.
Employer Credit for Paid Family and Medical Leave
An employer credit in which employers could receive an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave has now been extended through 2025, applying to wages paid in tax years beginning after Dec. 31, 2020.
The employer credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.
Credit for Health Insurance Costs of Eligible Individuals
The health coverage tax credit, which is a refundable credit equal to 72.5% of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance, has been extended for one year, through 2022.
Treatment of Mortgage Insurance Premiums as Qualified Residence Interest
Mortgage insurance premiums paid or accrued before Jan. 1, 2021 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence were treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The amount allowable as a deduction was phased out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income exceeded $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction wasn’t allowed if the taxpayer’s AGI exceeded $110,000 ($55,000 in the case of married individual filing a separate return). The CAA extends this treatment through 2021 for amounts paid or incurred after Dec. 31, 2020.
Reduction in Medical Expense Deduction Floor
The new CAA makes permanent an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI, applicable for tax years beginning after Dec. 31, 2020.
Transition from Deduction for Qualified Tuition and Related Expenses to Increased Income Limitation on Lifetime Learning Credit
The new law removes the different phaseout rules for the American Opportunity Tax Credit and Lifetime Learning Credit and replaces them with a single phaseout, effective for tax years beginning after Dec. 31, 2020. The CAA also repeals the higher education expense deduction for qualified tuition and related expenses tor tax years beginning after Dec. 31, 2020.
Energy Efficient Commercial Buildings Deduction
The deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings is made permanent with the new law. The Act also added an inflation adjustment for tax years beginning after 2020.
Residential Energy-Efficient Property Credit Extended, Bio-Mass Fuel Property Expenditures Included
For property placed in service after Dec. 31, 2020, the Act extends the phasedown of the personal tax credit, known as the residential energy efficient property (REEP) credit by two years for expenditures of qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property.
The 26% rate applies to property placed in service before Jan. 1, 2023, and the 22% rate applies to property placed in service after Dec. 31, 2022, and before Jan. 1, 2024. Therefore, the REEP credit will no longer apply for property placed in service after Dec. 31, 2023.