Buried within the Consolidated Appropriations Act, 2021, signed into law on Dec. 27, 2020, are a number of important tax extensions, improvements, and corrections. Here are the 10 tax updates that may bring businesses and individuals some additional relief from the COVID-19 pandemic.
1. You can deduct eligible expenses paid with your Paycheck Protection Program (PPP) loan on your tax return.
This Act reverses the IRS Revenue Ruling from November 2020 that stated expenses weren’t deductible. If you received a loan, are granted forgiveness, and can deduct expenses paid with loan funds, you’ll experience significant tax savings.
You shouldn’t include your PPP loan amount in your gross income on your 2020 tax return. Your PPP loan shouldn’t affect your tax return or your eligibility for certain deductions or credits. Read our blog, “Here’s How The December 2020 Aid Package Impacts PPP Loans,” for more information.
2. You can receive a PPP loan and claim the Employee Retention Credit.
This is a big change. Previously, if you received a PPP loan, you couldn’t claim the Employee Retention Credit. You had to choose one or the other. This bill allows you to claim the credit even if you received a PPP loan. However, you can’t claim the credit for wages paid with the PPP loan if it’s forgiven.
To qualify for the credit, your business will have to meet one of two requirements: 1) experience a partial or full shutdown due to a government order or 2) suffer a decline in gross receipts during a 2020 calendar quarter. The Act also increases the credit amount to $7,000 for each employee. Read our blog post on the Employee Retention Credit to learn more.
3. Food and beverages provided by a restaurant are 100% deductible.
If you purchase food and beverages for your employees from a restaurant, you can now deduct 100% of those expenses on your company’s tax return. Previously, this deduction was limited to 50%. The 100% deduction applies to any meals paid or incurred between Dec. 31, 2020, and Jan. 1, 2023.
4. Charitable contribution limits are extended into 2021.
First, the CARES Act suspended the existing limits on charitable contributions for 2020. Now, the Consolidated Appropriations Act, 2021 extends the limits into 2021. What does this mean?
You can deduct any cash contribution made to a qualified organization in 2020 and 2021 up to 100% of your adjusted gross income (AGI). If you don’t itemize your deductions, you can claim a deduction of up to $300 for your qualified contributions.
C corporations can continue to give up to 25% of their taxable income for a deduction in 2021. And the limitation on food inventory contributions stays at 25% for 2020 and 2021. These limits apply to any contributions made by Dec. 31, 2021. Learn more.
5. The payroll tax credit for paying sick and family leave wages is extended.
If you pay sick leave and family leave wages, you’re eligible for a 100% refundable tax credit on those wages. This credit now applies to wages paid through March 31, 2021.
6. Don’t include your COVID-19 financial assistance in your gross income.
This applies to loans and grants issued from the Treasury Department, including grants for shuttered venue operators, economic injury disaster loans (EIDLs), etc. If you received financial assistance from the Treasury Department, don’t include it in your gross income on your tax return.
A similar law applies to students who applied for and received an emergency financial aid grant. These grants were funded via the CARES Act and distributed by schools. If you received such a grant, don’t include it in your income on your 2020 tax return.
7. Employers have more time to pay deferred Social Security taxes.
Building on President Trump’s executive order, businesses have more time to repay Social Security taxes if they chose not to withhold employee Social Security taxes. Deferred taxes are now due between Jan. 1, 2021, and Dec. 31, 2021. Before this Act, the deadline to pay was April 21, 2021.
8. Individuals can use 2019 information to claim certain credits.
Taxpayers can use their 2019 tax information to claim the Earned Income Tax Credit and Child Tax Credit. These are refundable credits that require taxpayers to show the income they earned in the year they claim the credits. Given that many people lost employment in 2020, this bill allows you to use 2019 income to support your claim.
9. Teachers can deduct COVID-19 related expenses.
Elementary and secondary school teachers can deduct PPE, disinfectant, and other supplies used to prevent the spread of COVID-19 on their 2020 tax return. This applies to any expenses paid or incurred after March 12, 2020. The deduction is limited to $250 and doesn’t apply to expenses that your school already reimbursed.
10. Claim a credit if you didn’t receive your economic impact payments.
If you didn’t receive the full amount of your economic impact payments, you can claim a Recovery Rebate Credit on your individual 2020 tax return. Two payments were issued – $1,200 in the spring of 2020 (plus $500 per child) and $600 in January 2021 (plus $600 per child). You should only claim this credit if you didn’t receive these payments or didn’t receive the right amount.
These 10 tax updates may have received less attention than other items in the relief bill, but they could equate to substantial savings. Take some time to review these laws, if they apply to you, and determine how to adjust your tax strategy to maximize their impact.
If you need help understanding any of the 10 tax updates in this relief bill, let’s talk!