The Consolidated Appropriations Act, also known as CAA or the “Act”, was signed into law on December 27th to give critical aid to individuals and businesses affected by the pandemic. The new $900 stimulus package provides direct payments to individuals, enhanced unemployment, rental assistance, targeted aid for small businesses, and much more. Here we take a look at some of the highlights from the new legislation.
Direct economic impact payments to individuals
The IRS is delivering the second round of stimulus checks. Both U.S. citizens and legal permanent residents are eligible. The stimulus check amount will be based on the taxpayers 2019 tax return adjusted gross income and filing status.
- $600 for individuals who filed single with an AGI of $75,000 or less
- $1,200 for married couples that filed jointly with an AGI $150,000 or less
- $600 for individuals who filed head of household with an AGI $112,500 or less
The stimulus payments will be decreased by $5 for every $100 above the threshold. Taxpayers also receive an extra $600 for dependent children that are under the age of 17. Married taxpayers filing jointly where only one spouse has a Social Security Number will only be eligible for a stimulus check of $600.
Charitable contributions (non-itemized deduction)
Under the CARES Act individuals are allowed to take a $300 above-the-line deduction for cash contributions given to a qualified charitable organization on their 2020 tax return. This rule is extended through 2021 and increases to $600 for married taxpayers filing joint returns. In 2020, the maximum amount was $300.
Charitable contributions – (itemized deduction)
The increased contribution limit to qualified charities that was specified in the CARES Act is extended through 2021 and applies to individuals and corporations. Amounts of up to 100 percent of adjusted gross income (AGI) are allowed as deductions (same as 2020). In 2019, the limit for the deduction for cash contributions was 60% of AGI.
The Act provides $120 billion in unemployment insurance and extends three unemployment programs:
- The Federal Pandemic Unemployment Assistance Program (PUA)- provides benefits to people who don’t normally qualify for benefits, such as self-employed and gig workers. The maximum number of weeks individuals could receive benefits was increased to 50 weeks.
- The Pandemic Emergency Unemployment Compensation Program (PEUC) provides unemployment benefits to those who have exhausted UI benefits provided by the state. The program now extends benefits for up to an additional 24 weeks.
- The Federal Pandemic Unemployment Compensation Program (FPUC) provides an additional $300 in benefits per week until March 14th , 2021.
The bill provides $25 billion to eligible renters to receive assistance to pay for rent and utility payments for up to 12 months. It also extends the federal eviction moratorium until Jan. 31, 2021.
Flexible Spending Arrangements
Taxpayers can rollover unused amounts from 2020 to 2021 and from 2021 to 2022 and employers may allow employees to make a contribution change mid-year in 2021.
Money Purchase Pension Plans
The new legislation also allows money purchase pension plans to be included as a qualified retirement plan, retroactive to the CARES Act. The CARES Act allowed taxpayers to make penalty-free withdrawals of up to $100,000 from certain retirement plans for coronavirus-related expenses, with the option to pay tax on that income over a three-year period or recontribute withdrawn funds.
Extension of Credits for Paid and Family Sick Leave
The new bill also extends the refundable tax credits for paid sick and family leave provided by the Families First Response Act (FFCRA) for business with less than 500 employees.
- The new bill does not mandate that employers provide paid leave after December 31st , 2021.
- The provision only extends the refundable payroll tax credits that is available to employers that provide paid leave, until March 31st, 2021.
- The employer can choose to voluntarily provide sick leave benefits to their employers to claim the payroll tax credits.
- The employer can’t take an additional tax credit for an employee paid leave in 2021, if they already claimed the tax credit for paid leave in 2020.
Employee retention tax credits
The new law expands the employee retention (refundable) tax credit (ERTC) and extends it through June 30, 2021.
- For wages paid between January 1, 2021 and before July 1, 2021 the credit rate is increased from 50 to 70 percent of qualified wages.
- The limit on per-employee allowable wages is increased from $10,000 for the year to $10,000 for each quarter.
- The maximum payroll tax credit was increased to $14,000 from $5,000.
- Group health plan expenses can be considered qualified wages even if no other wages are paid to an employee.
Updated eligibility requirements:
- The business must demonstrate that it had a decline in gross receipts on a quarterly basis of 20% (instead of the previously required 50% decline)
- The employee cap has been increased from 100 to 500 employees.
- Safe harbor allows employers to use prior-quarter gross receipts to figure eligibility.
- New employers in 2020 (i.e., those not in existence in 2019) can claim the credit.
- Employers who receive PPP loans can now qualify for the credit for wages not paid with PPP loan.
Employee Social Security Tax Deferral
In August executive orders permitted a payroll tax deferral of the employee portion of Social Security taxes. The optional tax deferral only applied to wages from September 1, 2020 to December 31, 2020. The program has expired but the time for repayment has been extended to give employees more time to pay the government back. Before the new bill was passed employers were required to withhold and pay back the deferred tax between Jan 1, 2021, to April 30, 2021. The repayment period for deferred payroll tax has been extended until December 31, 2021.
Paycheck Protection Program (PPP) Loans
The new bill states that deductions are allowed for deductible expenses paid for with the proceeds of a forgiven PPP loan. This reverses earlier IRS guidance that stated no deduction would be allowed. This tax provision applies to the second round of PPP loans as well. It also clarifies that the tax basis of the borrower’s assets will not be reduced because of forgiveness. Additionally, the CAA re-opens the program through March 31st.