According to the Senate Historical Office, the Consolidated Appropriations Act (CAA), at 5,593 pages, is the largest bill in terms of text ever passed by Congress.
It was signed into law December 27, 2020 after being approved by both houses of Congress on December 21. The bill combines a $1.4 trillion spending package with $900 billion in COVID-19 stimulus relief and aid. Contained in this omnibus package are more than 70 tax-related provisions, including many extensions of existing law, but also several new provisions. We’ve prepared a summary of the tax provisions contained in the bill, but there are a few provisions that you may want to take immediate action on to determine if you are optimizing the benefits available to you.
1. Determine if you qualify for the enhanced Employee Retention Credit (ERC).
The ERC’s new expansive provisions provide qualifying employers with the opportunity to claim up to a total of $19,000 (depending upon specific facts and circumstances) in refundable credits per employee during 2020 and 2021. This credit now applies to taxpayers previously shut out of the ERC program by participating in the Payroll Protection Program (PPP). Our analysis is showing that with the enhanced provisions, more taxpayers are qualifying for significant credits.
2. Optimize the deductibility of expenses paid for with PPP loan proceeds.
For taxpayers qualifying for loan forgiveness, which should be many to most taxpayers, make sure you coordinate the types of deductions claimed for forgiveness with similar expenses allowed for other tax benefits, such as the employee retention credit, research and development credit and work opportunity credit. Since some of these expenses may qualify for use in more than one calculation, you’ll want to be diligent in identifying expenses to optimize your benefits, as expenses generally cannot be used more than one time in any of the calculations.
This may also be an opportunity for you to consider (or reconsider) whether changes to your operations can generate popular credits, such as the research and development credit, that were not claimed in the past.
3. Determine if by “going green,” you can save some green.
Section 179D, now made permanent as part of the CAA, provides immediate tax benefits in the form of deductions for the installation of energy-efficient interior lighting, HVAC and building envelope systems. It’s available to building owners and lessees that make energy-efficient improvements to their commercial buildings located in the United States. By reviewing your plans for 2020 and 2021, you may be able to reduce estimated tax payment obligations in the short-term.
4. Residential real estate owners may be able to improve business interest limitation.
The CAA retroactively changed depreciation rules for residential real estate to now allow for a 30-year alternative depreciation system (ADS) recovery period for all residential rental real estate, including property placed in service before 2018.
For taxpayers desiring real property trade or business treatment enabling them to deduct 100% of business interest, an election was necessary, and they were required to use depreciable lives over 40 years (rather than over 30 years). Depending upon facts and circumstances, taxpayers may have decided that the depreciation deductions over a shorter life were more valuable than being able to claim 100% of interest expense incurred.
Taxpayers may be able to amend prior-year returns; however, additional guidance from the government is likely needed to allow for late elections.
With the change in law, it is critical that taxpayers review their current and prior elections and analyze their options to choose the best course of action.
5. Determine if you qualify for the General Business Employee Retention Credit Related to Other Types of Natural Disasters.
In addition to the COVID-19 pandemic, 2020 seemed to be quite the year for natural disasters, including hurricanes, tropical storms, tornados, wildfires, straight-line winds and severe thunderstorms. If your business or organization is located in a qualified disaster zone and incurred a shutdown, it may qualify for the 2020 qualified disaster employee retention credit up to $2,400 per eligible employee. (NOTE: this is a separate credit apart from the credit discussed in item 1. above.) More information regarding declared disasters is provided by the Federal Emergency Management Agency: https://www.fema.gov/disasters
6. Modify accounting procedures to separately track restaurant business meals in 2021 and 2022.
The ACA provides a short-term opportunity to deduct 100% of business meals paid or incurred in a restaurant during 2021 and 2022. This is a change from the long-standing limitation of 50% for such business meals. Consider reviewing your expense tracking systems to ensure you can separately capture these expenses when material.
7. Charitable contribution limitation increase to 100% of AGI provides opportunity to give more.
For individuals who itemize their deductions and have the resources and desire to contribute to charitable organizations they support, for 2021 (in addition to 2020) an individual may deduct any qualified cash contribution so long as the contribution does not exceed 100% of the individual’s adjusted gross income. Qualified cash contributions are those paid during 2021 in response to the COVID-19 (coronavirus) crisis, but there is no requirement that they must have been specifically made for relief efforts.
8. Individuals suffering from a natural disaster may find additional tax relief.
As noted in item 5. above, there were many types of disasters that occurred in 2020. The CAA permits individuals who suffer a qualified disaster-related loss (other than the COVID-19 disaster) during 2020 to increase their standard deduction amount by the amount of the net disaster loss. In the past, the loss needed to exceed 10% of adjusted gross income, preventing many taxpayers from being eligible. Review locations of second homes to determine if you qualify and begin gathering information necessary to document your loss.
Our team of professionals are available to help you optimize the above tax benefits, and others, provided by Congress. Please don’t hesitate to reach out to your Schneider Downs professional or contact us at [email protected] for additional information.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.