The Top Tax Implications of the Latest COVID-19 Relief

The Top Tax Implications of the Latest COVID-19 Relief

It’s hard to ignore the impact COVID-19 legislation has on our tax returns. In our recent webinar, James Moore tax partner John VanDuzer gave a rundown on the tax provisions in the Consolidated Appropriations Act (CAA) passed on Dec. 21, 2020.

While the CAA was broad in coverage, there are several main areas of savings that could help you.

Additional Economic Stimulus Payments

The CAA called for a $600 payment per qualified family member if you make $75,000/year or less ($150,000/year per married couple filing jointly, or $112,500 if head of household). As with the CARES Act stimulus payment, that amount decreases as income increases. Qualification is based on your 2019 income levels.

“In the event that you received the payment, or didn’t receive payment and should have, when you go to file your 2020 tax return, there’s a calculation there that can be made and you can actually claim that as a credit,” VanDuzer said.

Meal Deductions

Back in 2018, the Tax Cuts and Jobs Act (TCJA) removed deductions for entertainment but allowed meal deductions at 50%. The CAA increases meal deductions (as long as the meals were provided by a restaurant) to 100% effective Jan. 1, 2021 through Dec. 31, 2023. The goal is to help stimulate the restaurant industry, which is one of the hardest hit by the pandemic.

There’s no current definition of what “restaurant” means; we are not sure whether a food truck, catering, takeout, etc. would fall under the definition. That could lead to accounting dilemmas if further guidance is issued on this deduction. Plan accordingly by sorting your receipts now to make it easier if you have to differentiate between these venues. Also note that meal expenditures from 2020 are not eligible for this increased deduction.

Alternative Depreciation System (ADS)

The TCJA also threw a wrench in the works when it came to assets placed in service for residential real estate.

“The 2018 tax reform put in an interest limitation when you meet certain guidelines, and then real estate companies could make a special election to modify their depreciation and be able to have no limitation on their interest expense,” said VanDuzer. “One of the weird quirks with that law was an asset that was placed in service for residential real estate prior to 2018, had a 40-year ADS life and then an asset that was placed in the service after 2018 out of 30-year ADS life”.

The CAA has made the ADS changes retroactive, regardless of when the property is placed in service. So assets previously classified as 40-year assets can be changed to 30, allowing for consistency.

Tuition

This provision covers two education-related tax benefits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. If your adjusted gross income is less than $80,000 ($160,000 for married filing jointly), you’re eligible for education credits for tuition and fees.

These provisions had different phaseout rules; the CAA has replaced them with a single phaseout effective beginning with the 2021 tax year. The CAA also eliminated the tuition and fees deduction transitioning to only tax credits for claiming education benefits.

Charitable Contribution Deduction for Non-Itemizers

The CAA extended some CARES Act provisions, including charitable deductions for filers who don’t itemize. With the higher standard deduction and other restrictions introduced by the TCJA, fewer people itemize returns.

The CARES Act allows tax deductions for up to $300 for cash contributions made in 2020 to qualifying organizations. The CAA extended this provision through 2021; additionally, married filers now can deduct up to $600 for such contributions. However, VanDuzer offers a word of caution.

“There are really steep penalties if you can’t substantiate that charitable contribution—and also, the charitable contribution has to be in cash,” he said. “This is definitely one that you want to make sure that you can substantiate and that you’ve actually made a valid cash contribution to a public charity. But is a good benefit, especially for those who aren’t able to itemize.”

Expansion of Employee Retention Credit

The CARES Act allowed employers to take a refundable tax credit of 50% of up to $10,000 per year in wages paid if their business operations were fully or partially suspended due to COVID-19. Specifically, this had to be the result of a government order limiting commerce, travel, group meetings, etc. However, there were limits on the number of employees the business could have. Additionally, those that took Paycheck Protection Program (PPP) funds were not eligible for the employee retention credit.

The CAA deleted the PPP exclusion as long as you don’t count the same payroll twice. “If you have payroll that you’re using for PPP, you can’t also count that for the employee retention credit, but if you did borrow PPP funds and that money has run out, now you can claim a retention credit on other wages going forward,” John explained.

The wage percentage has also been raised to 70%, and the $10,000 limit is now per quarter instead of per year.

Paid Sick and Family Leave Credit Extension

The TCJA introduced a tax credit employers could claim to help offset wages they paid toward time off under the Family Medical Leave Act (FMLA). This was followed by the CARES Act, which took two steps:

• Mandated paid leave for certain employers whose employees required coronavirus-related leave through Dec. 31, 2020
• Allowed a tax credit to help offset these wages

The CCA has extended the tax credit through March of 2021 for those employers offering paid COVID-19 leave. However, the requirement to pay this leave has been lifted.

Extension of the Modification of Charitable Contributions

Under normal tax law, large contributions to charity could be deducted at a maximum of 60% of your gross income. For example, if you made $1 million in a year and donated $1 million to charity that same year, you could only deduct $600,000 for that donation. The remainder is not lost but would be carried forward for up to five years.

The CARES Act raised that limitation to 100%, which means you could deduct the full amount of such a contribution. The CAA has extended this provision for all of 2021. As with the non-itemizer charitable contribution provision stated above, this was also geared toward helping nonprofits as they grapple with the effects of the pandemic.

Extension/Permanence of Other Provisions

Several other provisions that traditionally require renewal every few years have either been extended or made permanent.

• 179D deduction: Allows for a deduction of $1.80/square foot for the construction of a commercial building that meets certain energy efficiency guidelines. This has been made permanent.
• 7.5% floor for medical expenses: The TCJA required that if you want to deduct medical expenses on your return, those expenses must equal at least 10% of your income. (It had previously been 7.5%.) The CARES Act lowered it back to 7.5% and made this level permanent.
• Work opportunity tax credit: If you hire certain targeted groups of employees, you can get a credit for a percentage of their wages paid for a set period of time. The CAA placed a five-year extension on this credit, which was set to expire at the end of 2020. (Note: You must get certification from the state within a certain number of days of the employee’s hiring date to claim this credit.)
• $2,000 credit for construction of energy-efficient homes: This credit is available for contractors who build single family homes, condominiums and apartments under three stories high. These projects must be certified to receive the credit. The CAA provides a one-year extension on this credit.
• Energy credit extensions: The phase out of the 30% credit on installation of solar panels (set to begin in 2020 per the TCJA) has been pushed back to 2023. Additionally, if you made improvements to energy efficiency on your property (such as replacing the windows or air conditioning), you can claim a credit up to 10% of the cost of that replacement. This credit is subject to a lifetime cap.

While this is an exhaustive list of tax provisions, there are important additional details regarding their use and availability. We recommend working closely with your tax CPA to determine your eligibility and find their place in your tax strategy.

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