The Individual and Business Tax Provisions in the Consolidated Appropriations Act of 2020
The Consolidated Appropriations Act of 2020 (CAA) marks the culmination of months of negotiation around bringing aid to Americans affected by COVID. The tax-related portion of this legislation accomplished three things:
- Made certain existing provisions permanent;
- Extended temporarily provisions that were set to expire; and
- Added new provisions to existing tax laws.
In addition to the highly publicized direct stimulus payments, this legislation includes many extensions to expiring taxpayer favorable provisions, both permanent and temporary.
Direct Stimulus Payments
The current legislation includes a $600 direct payment to individuals. At the time of writing, Congress is considering a measure to increase the direct payment to $2,000 per taxpayer.
The direct payments are designed like the CARES Act payments, with phase outs for individuals based on 2019 adjusted gross income of $75,000 for single taxpayers and $150,000 for married taxpayers. However, in contrast to the first round of payments, only 2019 adjusted gross income will be considered.
Several smaller changes were also implemented. One notable difference between the CARES Act is that the CAA allows joint filers where one of the spouses is a nonresident alien to be eligible for the CAA direct payment and retroactively eligible for the CARES Act stimulus payment.
The IRS has indicated that they have the infrastructure in place to begin issuing the payments shortly after the legislation is signed by the president, meaning that taxpayers could begin to receive payments in early January.
Extenders and Modifications
The key takeaways related to other individual tax provisions are as follows:
- Medical Expense Deductions – Beginning in 2021, the medical expense deduction floor will be 7.5%. This floor was slated to be 10% beginning next year. This may allow taxpayers that itemize deduction to claim or increase their medical deduction.
- American Opportunity and the Lifetime Learning credits – The income phase outs for the American Opportunity and the Lifetime Learning credits will be the same beginning in 2021 (Single $80,00 and joint filers $160,000). Currently, separate income phase-outs are used, complicating the process of optimizing education credits for some taxpayers. This will simplify some of the decision making when claiming a federal education credit and will allow more taxpayers to claim the Lifetime Learning Credit. In addition, the deduction for qualified tuition and related expenses will sunset at the end of this year.
Extended through 2025
- The exclusion of gross income from discharge of qualified home debt – The exclusion of gross income from the discharge of debt on a qualified home has been extended through 2025. However, beginning in 2021, the exclusion amount has been reduced to $750,000 (married filing joint) or $375,000 (other taxpayers). Prior thresholds were $2,000,000 (married filing joint) or $1,000,000 (other taxpayers). The 2021 limits conform to the mortgage principal limitations on the deductibility of home mortgage interest expense.
- Mortgage premium deduction: The deduction for mortgage insurance premiums paid on a principal residence and the non-business energy property credit have been extended through December 31, 2021.
- Energy-efficient property credit: The residential energy-efficient property credit has been extended through December 31, 2023 and enhanced to include biomass fueled property expenditures.
- Non-itemized charitable deduction: The non-itemized charitable deduction of $300 for 2020 has been extended through the end of 2021. The non-itemized deduction has been enhanced in 2021 by allowing taxpayers filing a joint return to claim a $600 deduction.
- Itemized deductions: For taxpayers itemizing deductions in 2020 and 2021, the adjusted gross income limitation on cash charitable contributions has been removed, leaving the limitation at 100% of adjusted gross income.
- Health FSAs and dependent care plans: For health FSA and dependent care plans, up to $550 of unused amounts remaining at the end of a plan year can be carried forward to the next tax year. The legislation expands the carryover period for 2020 and 2021 which will allow taxpayers to recover more of their unused benefits. In addition, for former employees, an employer may allow the employee to utilize unused benefits until the end of the year of termination. Employers may also extend their grace periods to 12 months for 2020 and 2021.
- Qualified disaster area distributions: A taxpayer living in a qualified disaster area may receive a distribution from a qualified plan that will not be subject to the 10% “penalty” for early withdrawal. This exempt withdrawal is limited to $100,000 for each declared disaster. At the taxpayer’s election, the distribution may be ratably included in taxable income over 3 years. In addition, a taxpayer may repay the distributions to a qualified plan at any time during the 3-year period following the distribution to reduce their tax liability.
A number of business items were extended, made permanent, or added.
Here are five key takeaways:
- 179D made permanent: First introduced in 2005 and extended numerous times since, this section provides deductions related to certain energy efficiency improvements made to building envelopes, lighting systems, heating, cooling, ventilation, and hot water systems. This deduction is in addition to the traditional 179 deduction allowed for machinery and other equipment placed in service during the year.
- Extension of Employer Credit for Family and Medical Leave: This provision was first introduced in the 2018 tax year and has now been extended through the end of 2025. It provides a credit to companies that implement policies where employees continue to be paid for up to 12 weeks while on family and medical leave.
- Extension of Exclusion for Certain Employer Payments of Student Loan: Set to expire at the end of 2020, this exclusion has now been extended through the end of 2025. This provision allows employers to exclude up to $5,250 for interest and principal on student loans from employee taxable compensation payments. The payments must be made as part of a written employee benefit plan that is available to all employees and does not favor owners, shareholders, or other highly compensated employees.
- Full Deduction of Business Meals: This is a temporary provision put in place for 2021 through the end of 2022. By allowing companies to deduct 100% of amounts for food and beverages provided by a restaurant, it also provides indirect relief to the ailing restaurant industry.
The legislation also contains several taxpayer-favorable provisions related to the CARES Act, including:
- PPP loan expenses: The deduction of expenses paid for with Paycheck Protection Program (PPP) loans is now allowed. While not specifically stated in the original CARES legislation, the IRS had provided guidance that if a PPP loan is forgiven, the expenses paid with the loan proceeds would not be deductible. This update overrides the previously issued IRS guidance.
- Employer Retention Credit (ERC) eligibility: Now companies who claimed a PPP loan can also claim an Employer Retention Credit (ERC). Under the original CARES legislation, companies who claimed a PPP loan could not also claim an Employer Retention Credit
The Bottom Line
With the tax legislation becoming law so shortly before year-end, taxpayers will need to act swiftly on the changes impacting 2020. Aprio is continuously monitoring new guidance from the SBA, as well as the Treasury, Congress and the IRS to ensure we have the latest information when advising our clients. Aprio’s tax advisors are ready and available to guide you through the changes. Connect with your Aprio advisor or schedule a meeting with us for more information on how we can help.