The $2.3 trillion federal spending bill signed into law on Dec. 27, 2020, formally known as the Consolidated Appropriations Act, 2021, included $900 billion in stimulus relief for the COVID-19 pandemic, and a long list of other government spending measures.

However, the law also includes a number of provisions that may be very important for your personal and business tax planning. As outlined below, these include new tax credits, extensions of credits that were set to expire, more generous rules about Payroll Protection Program (PPP) loans, and many others.

The changes that affect individuals and businesses are found mainly in two sections of the 5,593-page bill: the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the TCDTR), and the COVID-related Tax Relief Act of 2020 (the COVIDTRA). Both sections extend or modify provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March of 2020.

The new law clarifies what had been widespread confusion about the tax consequences of forgiveness of Payroll Protection Program (PPP) loans.

The COVIDTRA specifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations.

Companies are allowed to claim deductions for otherwise deductible expenses paid with PPP, and the tax basis of the borrower’s assets won’t be reduced as a result of the forgiveness.
The COVIDTRA also allows the IRS to waive information reporting requirements for any amount excluded from income for forgiveness of PPP loans.

Extended credits

The TCDTR extends, without any other changes, the following provisions of the tax law which would have otherwise expired: 

  • The exclusion from employee income of employer payments of student loans.
  • Expensing for film, television and live theatrical productions.
  • Empowerment zone tax incentives (except for adding more favorable treatment of some expenses and capital gains.)
  • The exclusion from personal holding company income for some payments or accruals of dividends, interest, rents, and royalties.

It also extends the following tax credits, again without changes:

  • The new-markets tax credit, which aims to attract private capital into low-income communities.
  • The work opportunity credit, which incentivizes employers to hire veterans, the disabled, those receiving government assistance, ex-felons and other specified group.
  • An employer credit for paid family and medical leave.
  • A carbon sequestration credit,
  • The business energy credit, widely used for solar and renewable energy projects, and a related tax credit for electricity produced from renewable resources.
  • A credit for energy efficient homes.  

Energy provisions

The TCDTR makes some significant changes to energy-related tax rules, including:

  • The tax deduction for energy-efficient commercial buildings is made permanent by the TCDTR and the amount is indexed to inflation.
  • ‘‘Waste energy recovery property,’’ which generates electricity with energy captured from building heat, is added to the types of property that qualify for the business energy credit mentioned above, with a 30% credit.
  • Credits for offshore windmills now apply to a wider range of facilities.

Extensions and modifications of earlier payroll tax relief

The TCDTR extends the CARES Act credit allowed against the employer portion of the Social Security payroll tax for qualified wages paid to employees during the COVID-19 crisis.  Now, these wages must be paid before July 1, 2021, instead of January 1, 2021.

Additionally, the credit is increased to 70% from 50% of qualified wages beginning on January 1, 2021, Qualified wages are increased to $10,000 per quarter from the former level of $10,000 for the year. Many other rules are also relaxed.

The law extends the credits for sick and family paid leave, and the credits self-employed individuals can take against the self-employment tax.

Employer credits apply to wages paid before April 1, 2021, rather than the former deadline of  January 1, 2021. For the self-employed, the days taken into account are those before April 1, 2021, rather than January 1, 2021.

The COVIDTRA also extends the deferral of the employee’s share of Social Security to all of 2021, instead of the four-month period ending on April 30, 2021.

Employee benefits and deferred compensation

The TCDTR makes expenses for business-related food and beverages provided by a restaurant fully deductible if incurred in 2021 or 2022, instead of being subject to the 50% limit that generally applies to business meals.

The law temporarily allows carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts in a health or dependent care FSA. It also raises the eligibility age of a dependent under a dependent care FSA to 13 from 12.

With a view to layoffs in the current economic climate, the TCDTR relaxes rules that would otherwise cause a partial termination of a qualified retirement plan if the number of active participants decreases.

The COVIDTRA relaxes the funding standards that allow a defined benefit pension plan to transfer funds to a retiree health benefits account or a retiree life insurance account in the plan.

The relaxed rules for ‘‘coronavirus-related distributions’’ that were established under the CARES Act are retroactively amended to apply to coronavirus-related distributions from certain pension plans.

Life insurance

The TCDTR changes the interest rate assumptions that determine whether a life insurance contract meets certain cash value and premium caps. The change is to floating rates from the 4% and 6% rates fixed by prior law.

Residential real estate depreciation

For tax years beginning after December 31, 2017, the TCDTR assigns a 30-year ADS (Alternative Depreciation System) depreciation period to residential rental property.

This applies even if the property was placed in service before January 1, 2018 (when the 2017 Tax Act first applied the more-favorable 30-year period) if the property is owned by a real property business that elects out of the limitation on business interest deductions, and it wasn’t subject to the ADS before January 1, 2018.

Farmers’ net operating losses

The COVIDTRA allows farmers who had a two-year net operating loss carryback in place before the CARES Act to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act.

It also allows farmers who waived the carryback of a net operating loss before the CARES Act to revoke the waiver.

Disaster relief

The TCDTR includes several provisions for individuals and businesses in ‘‘qualified disaster areas’’ for which a major disaster was declared between January 1, 2020 and February 25, 2021.

These rules don’t apply for a declared disaster related only to COVID-19.

Disaster relief affecting retirement funds includes: (1) waiver of the 10% early withdrawal penalty for up to $100,000 by individuals in a qualified disaster area who have suffered economic loss because of the disaster; (2) the right to re-contribute to a plan any distributions that were intended for home purchase but not used because of a disaster; and (3) relaxed rules on loans from retirement plans.

Employers in a disaster area may qualify for an employee retention credit of up to $2,400 per worker. Tax-exempt organizations can take this as a credit against FICA taxes.

Corporations are granted relaxed charitable deduction rules for disaster-related contributions, and individuals are provided with relaxed loss-allowance rules for disaster-related casualties.

The low-income housing credit is expanded for harder-hit parts of qualified disaster areas.

There are just highlights of some key provisions of this complex and voluminous law – the longest ever passed by Congress. If you have questions about how the new rules may affect you or your business, we would welcome the opportunity to discuss your individual situation.