Article by: Jeff Skolnick, CPA, M.S. Taxation
TAX PROVISIONS OF CONSOLIDTAED APPROPRIATIONS ACT, 2021
Last week I covered the following provisions of the recently adopted stimulus legislation:
- Unemployment Benefits
- Recovery Rebates
- Payroll Protection Program
- Economic Injury Disaster Loans and;
- Payroll sick and family leave
This writing covers what I believe to be the more important income tax provisions contained in the new law.
EXTENSIONS OF EXPIRING PROVISIONS
EXTENSIONS MADE PERMANENT
Reduction in Medical Expense Deduction Floor. The new law permanently changes the floor from 10% to 7.5%. In order to count medical expenses as itemized deduction they must exceed 7.5% of your Adjusted Gross Income (AGI).
Energy Efficient Commercial Buildings Deduction. Commercial buildings are allowed a deduction of up to $1.80 per square foot for energy efficient improvements. Energy efficient envelope, HVAC or lighting system can qualify for this deduction. In order to obtain the full $1.80per square foot deduction a building’s total energy and power cost must be reduced by 50% or more in comparison to the minimum standards. If a 50% standard is not reached there may be deductions of up to $0.60 per square foot if there is a 10% reduction in energy and power based on the envelope, 15% reduction based on HVAC or 25% reduction based on lighting.
Benefits provided to Volunteer Firefighters and Emergency Medical Responders. Any reduction in state, local and foreign real property taxes, personal property taxes or income taxes are not counted as taxable income for these workers. Additionally, payments of up to $50 per month are also allowed tax free.
Qualified tuition and related expenses deduction has been eliminated. Although the qualified tuition and related expenses deduction is eliminated the American Opportunity Tax Credit and the Lifetime Learning Credit now both have the same phase-outs. These benefits phase-out for Single, Head of household and Qualifying widowers between $80,000 and $90,000 of Modified Adjusted Gross Income ($160,000 – $180,000 for those married filing jointly). There is no credit allowed for married taxpayers filing separately.
Railroad Track and Maintenance Credit. Allows a 40% credit (formerly 50%) for qualified railroad track maintenance expenditures.
Reduced excise tax rates for beer, wine, and distilled spirits.
PROVISIONS SET TO EXPIRE DECEMBER 31, 2020 EXTENDED THROUGH 2025
New Markets Tax Credit. This is a credit designed to encourage investment in low-income communities. It allows investors to claim credits against their Federal income tax. The credits are 5% of the investment for each of the first 3 years and 6% of the investment for each of the next 4 years.
Work Opportunity Credit. This allows employers a 40% credit on first year wages paid members of a targeted group. Targeted group members are as follows:
(A) a qualified IV–A recipient,(someone receiving Temporary Assistance for Needy Families under the Social Security Act for any 9-month period during the 18-month period ending on the hire date.
(B)a qualified veteran,
(C)a qualified ex-felon,
(D)a designated community resident,
(E)a vocational rehabilitation referral,
(F)a qualified summer youth employee,
(G)a qualified supplemental nutrition assistance program benefits recipient,
(H)a qualified SSI recipient,
(I)a long-term family assistance recipient, or
(J)a qualified long-term unemployment recipient.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness. In most instances when a taxpayer discharges indebtedness for less than the full amount of the debt, the taxpayer must report taxable income. If, for example, a taxpayer owes a credit card company $20,000 and settles their debt for $8,000, the taxpayer would have $12,000 of discharge of indebtedness income. There is an exception for Qualified principal residence indebtedness discharged before January 1, 2026. The maximum allowed for discharge is $750,000 ($375,000 for married taxpayers filing separately).
Employer Credit for Paid Family and Medical Leave. Per the IRS website, “the credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%. In certain cases, an additional limit may apply.”
Exclusion for Certain Employer Payments of Student Loans. Employers may pay up to $5,250 to an employee or to a lender of principal or interest of any qualified education loan and it is not considered to be taxable income to the employee.
Phaseout of Energy Credit. The Federal credit that exists for solar power will remain at 26% for projects started in 2021 and 2022 and placed in service before January 1, 2024. Originally the credit was scheduled to drop to 22%. For projects started after December 31, 2022 and placed in service before January 1, 2024 the percentage drops to 22%. For projects after 2023 the credit drops to 10%.
Treatment of Mortgage Insurance Premiums as Qualified Residence Interest. Mortgage insurance premiums paid by a taxpayer in connection with acquisition indebtedness of a qualified residence is treated as qualified mortgage interest. This deduction phases out 10% for each $1,000 the taxpayer’s Adjusted Gross Income (AGI) exceeds $100,000 ($50,000 for married individuals filing separately).
Credit of Health Insurance Costs of Eligible Individuals. Internal Revenue Code provides a refundable credit (the health coverage tax credit) of 72.5 percent of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance. The credit was set to expire December 31, 2020 but has been extended for 1 year until December 31, 2021.
Extension and modification of employee retention and rehiring credit. The CARES Act contained a provision that an eligible employer would be allowed a 50% credit against the payroll taxes of eligible wages. An eligible employer was one that had its operations fully or partially suspended during the calendar quarter due to a governmental order related to COVID-19 (the “suspension test”) or (ii) during the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019 (the “gross receipts test”). The provision was changed to a 70% credit and qualified wages originally were not to exceed $10,000 per employee for the year. The $10,000 figure has been changed to $10,000 each quarter. The credit which originally was set to end with wages paid before January 1, 2021. This has been extended to wages before July 1, 2021.
Temporary Allowance of Full Deduction for Business Meals. As a general rule meal expenses are normally 50% deductible. For 2021 and 2022 if food or beverages are provided by a restaurant, they may be deducted at 100%.
Depreciation of certain residential rental property over 30-year period: The law provides that the recovery period applicable to residential rental property placed in service before Jan. 1, 2018 and held by an electing real property trade or business is 30 years if the entity elects out of the limitation on the deductibility of business interest. The business interest limit is 30% of adjusted taxable income (50% in 2019 and 2020) if gross receipts exceed $26 million. Entities with gross receipts under $26 million are not subject to this provision. Normally the depreciable life is 27.5 years.
Temporary Special Rule for Determination of Earned Income. The law allows taxpayers to substitute their 2019 earned income for their 2020 earned income when calculating the earned income tax credit and additional child tax credit for 2020 if it is more beneficial.
Charitable Contributions Deduction by Non-Itemizers. Beginning in 2021 taxpayers are allowed a $300 charitable contribution even if they do not itemize. For married taxpayers filing jointly the limit is $600.
Disaster Tax Relief
The law provides that Presidentially declared disaster areas (not including COVID-19) which were declared disaster areas after December 31, 2019 and before 60 days after the date of the enactment of this law qualify for relief.
Disaster-Related Rules for Use of Retirement Funds. Taxpayers eligible for disaster relief may withdraw up to $100,000 of funds from either an IRA or other retirement plan without incurring a 10% early withdrawal penalty. The income is spread over 3 years for income tax purposes and may be partially or fully repaid within the 3-year time frame.
Increased Loan Amounts from Retirement Plans. The law allows taxpayers qualifying for disaster relief (Non COVID-19 related) are able to borrow $100,000 (normally this figure is $50,000) if the money is borrowed within 180 days of the law’s enactment.
In addition, eligible participants eligible with outstanding loans with a repayment due from the first day of the disaster incident period through the date that is 180 days after the last day of such incident period can delay the loan repayment for up to one year or, if later, until the date that is 180 days after the date of enactment.
Employee Retention Credit for Employers Affected by Qualified Disasters. An employer that conducted an active trade or business in a qualified disaster zone at any time during the declared disaster may take a credit of 40% of wages for up to $6,000 per employee.
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Hang in there and stay safe,
Jeff Skolnick, CPA, M.S. Taxation