In late-December 2020, while the country was in the throes of a worsening Coronavirus pandemic and widespread political angst, then-President Donald Trump signed into law a $900 billion stimulus bill. It was included in the 5,000+ page Consolidated Appropriations Act. The relief package provided stimulus checks to qualified taxpayers, additional jobless benefits and assistance for struggling businesses. Additionally, it provided much-needed funding for vaccine distribution and a variety of tax changes.
$600 Stimulus Checks
Taxpayers with income below applicable thresholds received payments for themselves and for children that are eligible for a Child Tax Credit (under age 17). The adjusted gross income thresholds, which is where payments begin to phase out are the same as they were under the CARES Act (Single Filer: $75,000, Joint Filer: $150,000). Returns for the 2019 tax year were used to determine eligibility.
Additional Unemployment Benefits
Acknowledging the continuing impacts of high unemployment on the economy and the mood of the country, the bill expands unemployment benefits for people in a variety of circumstances. Normal federally subsidized benefits were extended eleven weeks. The Pandemic Unemployment Assistance program, which provided benefits to taxpayers that would not normally be eligible for unemployment benefits (i.e., self-employed individuals, part-time employees), was also extended eleven weeks.
One of the most controversial pieces of the CARES Act was the $600 of additional weekly benefits paid to unemployed individuals on top of their state-determined benefits. The new bill provides for additional weekly benefits of $300. Nationally, the average unemployment benefit paid to individuals is just under $400. While it is not as impactful as the $600 supplement, the change increases benefits by nearly 75% for most.
Assistance for Businesses
Small businesses, nonprofit organizations and news outlets welcomed the news that the bill includes over $284 billion for a new and improved version of the Paycheck Protection Program. The Paycheck Protection Program Part 2 is an enhancement of the original program put into place by the CARES Act. The new legislation also expanded the Employee Retention Credit program.
Paycheck Protection Program Part 2 (PPP2) was crafted to provide additional funding to businesses that received and spent forgivable loans under the Paycheck Protection Program (PPP). The pool of eligible businesses is smaller this time around as it applies only to businesses with 300 or fewer employees (Accommodation and Food Services companies are exempt from this limitation.).
In addition to providing additional funds to businesses that participated in PPP, businesses that did not participate in the original program are again being granted the opportunity to apply for these forgivable loans.
PPP2 has noteworthy tax implications for businesses. Like PPP, forgiveness of debt will not result in income to the business. Ordinarily, when a taxpayer has debt forgiven the amount of debt forgiven must be reported as ordinary income. Unlike PPP, the bill clearly states that expenses paid with PPP2 funds will be deductible on the business’s tax return. In addition, PPP2 expands the types of expenses that may be incurred when spending unused loan proceeds from the original PPP or new loans.
Additional benefits to businesses under PPP2 include a simplified forgiveness application for loans of $150,000 or less. Businesses may now apply for loan forgiveness on a one-page document. Businesses will be able to treat additional insurance costs as payroll expenses, which is important because no less than 60% of the forgivable amount of these loans must be attributable to payroll expenses—this is about protecting jobs, after all. Finally, businesses that returned PPP loans due to uncertainty over qualification requirements may apply again.
The Employee Retention Credit was extended and expanded by the Appropriations Act. One significant change is businesses may now apply for both PPP forgivable loans and the Employee Retention Credit (ERC) (provided they do not use the same payroll expenses to qualify). Significant changes were made to eligibility and benefits, which apply through December 2021. Employers are eligible to receive a tax credit of as much as $7,000 per employee per quarter (contrast with $5,000 for the entirety of 2020 under the CARES Act). Qualification for the credit is based on a drop in revenue of 20% or more in a 2021 quarter when compared to 2019 revenues (or the revenues in the immediately preceding quarter). This compares most favorably to the 50% requirement contained in the CARES Act.
The upward adjustment of the AGI limit on cash contributions to charity from 50% to 100% as part of the CARES Act was extended for 2021. Contributions to Donor Advised Funds are excluded from this temporary rule change because legislators want cash in the hands of struggling charities this year.
The above-the-line deduction for charitable contributions was extended for 2021. The maximum deduction was $300 for all tax filers, regardless of filing status, in 2020. The Appropriations Act extended this deduction for 2021 and made the maximum deduction contingent on filing status (Single Filer: $300, Joint Filer: $600). This deduction applies to taxpayers that do not itemize deductions.
Employees may carry forward unused Flexible Spending Account balances for 2021.
The limitation on medical expense deductions was permanently eased from 10% of adjusted gross income for most taxpayers to 7.5%.
The above-the-line tuition and related expenses deduction for education was replaced by a more generous Lifetime Learning Credit. These changes are permanent.
Taxpayers will continue to escape tax on forgiveness of qualified principal residence indebtedness. The bill extended this through 2025, but the amount that may be excluded from income falls to $750,000 from $2 million.
The three-martini lunch is back! Businesses will be allowed to deduct 100% of meal and entertainment expenses incurred at restaurants in 2021 and 2022.
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