Tax and financial advice from the Silicon Valley expert.

Tax highlights of the Consolidated Appropriations Act, 2021

President Trump changed his mind and signed The Consolidated Appropriations Act, 2021 (H.R. 133) on December 27, 2020.  The Act is more than 5,000 pages.  There were not very many tax law changes in the Act compared to the CARES Act enacted during March 2020.

Here are a few highlights:

  • $600 economic impact payments to be paid in advance to most taxpayers and qualified children.  Although taxpayers without an eligible social security number aren’t eligible for the payment, spouses with an eligible social security number are, even if a joint income tax return was filed for 2019.  The payments are phased out when adjusted gross income for 2019 exceeded $75,000, or $150,000 for joint filers.
  • Coronavirus-related unemployment income payments of $300 per week were extended for 11 week, starting after December 26, 2020 and ending March 14, 2021..
  • Congress approved additional funding for Paycheck Protection Program loans.  Additional requirements apply for second loans, including not more than 300 employees, a 25% reduction in gross income in any quarter during 2020 and publicly-traded companies aren’t eligible.  Some additional expenses now qualify for the loan and loan forgiveness.  Total Paycheck Protection loans are limited to $2 million.  The 60/40 ratio for employee-related costs continues to apply.
  • The period for credits for emergency paid sick leave and family leave is extended until March 31, 2021.
  • Under the Act, cancellation of a Paycheck Protection Program loan or an Economic Injury Disaster Loan is exempt for taxable income and qualified expenses paid using forgiven loan proceeds that would otherwise be tax deductible continue to be tax deductible.  (Note that California has enacted legislation specifically disallowing tax deductions in this situation.)
  • Coronavirus-related distributions from a money-purchase pension plan that are in-service withdrawals qualify for the special rules relating to avoiding penalties and repayment to the plan that apply to other retirement plan distributions.
  • Employers may elect to defer depositing the employee’s share of payroll taxes from the period beginning September 1, 2020 through December 31, 2020.  The payback period under the Act is extended from April 30, 2021 to December 31, 2021.  Penalties and interest will begin to accrue on the deferred taxes on January 1, 2022.
  • Payments by K-12 teachers for personal protective equipment and other supplies used to prevent the spread of COVID-19 are eligible for the $250 above-the-line educator expense deduction.
  • The Tax Cuts and Jobs Act of 2017 changed the alternative depreciation system (ADS) recovery period for residential rental property from 40 years to 30 years for property placed in service after December 31, 2017.  The change was important because real property trades and businesses could elect out of the limitation on deducting business interest by using the ADS method.  The CCA assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 if the property is held by an electing real property trade or business and, before January 1, 2018, wasn’t subject to the ADS.
  • The 50% limit for deducting for business meals provided at a restaurant during 2021 or 2022 is suspended, so they are 100% tax deductible.
  • The exclusion from gross income of the discharge of up to $2 million of qualified principal residence indebtedness ($1 million for married persons filing a separate income tax return) was previously scheduled to expire after December 31, 2020.  It has been extended to discharges of indebtedness before January 1, 2026 and the maximum acquisition indebtedness qualifying for the exclusion is reduced to $750,000, or $375,000 for married persons filing  separate income tax return.
  • The medical deduction floor for taxable years ended after December 31, 2020 is permanently reduced from 10% to 7.5% of adjusted gross income.
  • The treatment of mortgage insurance premiums as qualified residence interest, which expired on December 31, 2020, has been extended through 2021.  The deduction is phased out ratably by 10% for each $1,000 by which a taxpayer’s adjusted gross income exceeds $100,000, or $50,000 for a married person filing a separate income tax return.
  • The $300 federal income tax deduction for charitable contributions for taxpayers who do not itemize deductions is extended to 2021.
  • The itemized deduction limitation for qualified cash charitable contributions allowed up to 100% of adjusted gross income is extended to 2021.

See your tax advisor for more details.

Tax and financial advice from the Silicon Valley expert.