Individual Provisions
Above-the-line Charitable Contribution Deduction – Under the CARES Act, non-itemizers were allowed a $300 above-the-line deduction for qualified charitable contributions made during 2020. The Act extends this deduction into 2021 and increases the amount for married couples filing a joint return to $600.
Increased Cash Contribution Limits – The increased limit for cash contributions made to qualifying charities during 2020 implemented by the CARES Act is extended into 2021. This means that for 2020 and 2021, there is no limit to cash contributions made to qualifying charities (i.e., individuals can deduct up to 100% of their adjusted gross income).
Health and Dependent Care Flexible Spending Arrangements (FSAs) –For 2020 and 2021, sponsors of FSAs may allow a 12-month grace period after the plan year-end for spending of unused funds, and an employee that ceases to participate in the FSA may use funds through the grace period.
Rebate Checks – A second round of rebate checks will be forthcoming. The Act provides for checks in the amount of $600 per eligible family member and will have the same phase-out range as the original rebates. The phase-out starts at $75,000 for single filers, $112,500 for heads of household, and $150,000 for married couples filing jointly. Eligible family members include dependents under 17 years of age. As before, an underpayment by the Treasury will be recouped on your 2020 return, but an overpayment will not have to be repaid.
Educator Expense Deduction – The $250 educator expense deduction now includes personal protective equipment as an eligible expense.
Child Tax Credit and the Earned Income Credit – For purposes of determining the refundable amount of both of these credits, a taxpayer may elect to use their 2019 earned income if it is greater than their 2020 earned income.
Business Provisions
Clarification of Tax Treatment of Covered Loan Forgiveness – The CARES Act provided that recipients of Paycheck Protection Program (PPP) loans may use the loan proceeds to pay certain business expenses; however, there was ambiguity about whether the expenses paid with the loan proceeds were deductible for tax purposes.
The Act clarifies that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrowers’ assets will not be reduced as a result of the loan forgiveness.
Farmers’ Net Operating Loss Changes – The Act clarifies that farming net operating carrybacks remain eligible for the two-year carryback (versus the general five-year net operating loss carryback as authorized by the CARES Act). Additionally, those who previously waived the carryback period for farming net operating losses may revoke the waiver in order to file a net operating loss carryback claim.
Depreciation of Certain Residential Rental Property over a 30-year Period – The Tax Cuts and Jobs Act (TCJA) allowed real property trades or businesses to elect out of the business interest deduction limitations of Internal Revenue Code Section (“IRC Sec”) 163(j). In return, however, the electing taxpayer had to, for tax years beginning after December 31, 2017, treat 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 December 31, 2017.
For tax years beginning after December 31, 2017, the Act assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 if the property is held by an electing real property trade or business and, before January 1, 2018, wasn’t subject to the ADS.
50% Limit on Business Meal Deduction Is Suspended for 2021 and 2022 – Taxpayers may generally deduct 50% of the ordinary and necessary food and beverage expenses associated with operating a trade or business. Under the Act, the 50% limit will not apply to expenses for food or beverages provided by a restaurant that are paid or incurred after December 31, 2020, and before January 1, 2023.
Disaster Relief Provisions
10% Early Withdrawal Penalty Does Not Apply to Qualified Disaster Distributions – A 10% early distribution penalty generally applies to, among other things, a distribution from an employer retirement plan to an employee who is under the age of 59½. The Act provides that the penalty does not apply to a qualified disaster distribution. A “qualified disaster distribution” includes certain distributions from an eligible retirement plan to an individual whose principal residence is located within a Presidentially-declared disaster area other than an area for which a disaster has been declared solely by reason of COVID-19.
Corporations Can Deduct “Qualified Disaster Relief Contributions” up to 100% of Taxable Income – In general, a corporation’s charitable deduction can’t exceed 10% of its taxable income. The 10% limit has been increased to 25% for 2020 and 2021.
The Act establishes a new category of “qualified disaster relief contributions,” for which corporations are allowed a deduction up to 100% of taxable income. Again, for purposes of this provision, a qualified disaster area does not include an area for which a disaster has been declared solely by reason of COVID-19.
Pension and Health Provisions
The Act adds a new IRC section which provides that group health plans must implement procedures to prevent surprise medical bills (i.e., bills from an out-of-network medical provider that a patient receives when an emergency or other issue forces the patient to use the out-of-network provider). This section is effective for plan years beginning on or after January 1, 2022.
Tax Extenders
The following extenders were made permanent as part of the Act:
Reduction in Medical Expense Deduction Floor – The Act permanently reduces the threshold for the medical expense deduction to 7.5% of adjusted gross income. Without this provision of the Act, the 7.5% threshold was set to revert to 10% in 2021. The permanent reduction in the medical expense deduction floor means that individuals will be able to deduct medical expenses not compensated by insurance or otherwise to the extent those expenses exceed 7.5% of adjusted gross income.
Energy Efficient Commercial Building Deduction – The Act makes the $1.80 per square foot deduction for energy efficiency improvements to commercial building systems (hot water systems, heating, cooling, ventilation and lighting) permanent.
Higher Education Benefits – After 2020, the Act eliminates the deduction for higher education expenses and replaces it with a higher threshold phase-out range for both the American Opportunity Tax Credit and the Lifetime Learning Credit.
The following extenders were extended through 2025:
The New Markets Tax Credit – The Act allocates $5 billion a year to the New Markets Tax Credit that helps provide equity investments into low-income communities. The Act also extends the carryover period for unused credits through 2030.
The Work Opportunity Credit – The Act extends the Work Opportunity Credit, geared to increase hiring among over 10 targeted groups, until the end of 2025.
Qualified Principal Residence Indebtedness Discharge – The Act extends, through 2025, the exclusion from gross income for discharge of qualified principal residence indebtedness. However, the maximum amount that may be excluded from income is reduced from $2 million to $750,000.
Empowerment Zone Tax Incentives – The Act extends tax benefits for certain businesses operating in Empowerment Zones through December 31,2025.
Exclusion of Certain Employer Payments of Student Loans from Employee’s Income – The CARES Act allowed employers to contribute up to $5,250 annually toward an employee’s student loan on a tax-free basis. The Act extends this provision, which was set to expire in 2021, through 2025.
The following extenders were extended through 2021:
Treatment of Mortgage Insurance Premiums as Qualified Residence Interest – The ability to deduct qualified mortgage insurance premiums as qualified residence interest has been extended through 2021.
Classification of Certain Race Horses as Three-Year Property – The Act extends the three-year depreciation recovery period for race horses two years old or younger to horses placed in service before January 1, 2022.
Energy Provisions
Personal Residences – The credit for energy efficient improvements to personal residences has been extended to December 31, 2021. Keep in mind there is a lifetime limit on this credit of $500.
Qualified Fuel Cell Motor Vehicle Credit – The Act extends the Qualified Fuel Cell Motor Vehicle Credit through 2021. The credit ranges from $4,000 to $40,000 depending on the vehicle purchased.
Residential Energy-Efficient Property Credit – This credit for purchase 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 was scheduled to phase-out after December 31, 2021. Under the new law, the phase-out will not occur until December 31,2023, and the credit percentage for 2021 has been increased from 22% to 26%. Thereafter, the credit will be 22%.
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