As we start the New Year, hopefully fresh from all the tax drama, we can at least take a deep breath and rejoice about some COVID-19 tax relief. On Sunday, December 27, 2020, the President signed into law, what is called, the Consolidated Appropriations Act (CAA), a combination of COVID-19 relief along with many other provisions amongst the 5,593 pages.
It seems that with all new tax law, it boils down to some basic chunks of data:
This last “everything else” category is where all the fun begins...the never ending search to find those buried treasures in the new law. Let’s briefly discuss the first three categories and then spend most of our time discovering some of those “everything else” hidden gems!
The Headliner Provisions – The $600 payment per person, expansion of the PPP loans, and unemployment benefits.
The Extender Provisions – Five year extensions for the Work Opportunity, New Markets and Empowerment Zone credits, and the exclusion of income for the employee on up to $5,250 of student loans paid by the employer.
The Esoteric Provisions – Tax reductions for wine, liquor, spirits and beer, and of course, we can’t forget about the three-year recovery period for race horses.
The EVERYTHING ELSE Provisions:
Let’s jump into a few that I would consider to be gems, worthy of discovery:
Employee Retention Credit
This is huge! Previously in the original CARES ACT, the employee retention credit was the lost sheep. With some new changes, employers could get a big payroll tax credit for keeping their employees on the payroll!
This is now a 70% credit on up to $10,000 of qualified wages per employee, PER QUARTER, for the first two quarters in 2021, through June 30, 2021. Thus, if employers qualify, they can claim up to $14,000 credit per employee in 2021.
Plus, this even works with employers with up to 500 employees! Note, that this is a refundable payroll tax credit offsetting the employer’s portion of payroll taxes. So, if these credits exceed payroll taxes, you could get a refund!
To qualify, the employer’s gross receipts for the first two 2021 calendar quarters must be at least 20% less than the 2019 quarter. Alternatively, employers can elect to use the prior quarter’s gross receipts to qualify.
There are various complexities and unanswered questions about how the Employee Retention Credit will impact other wage based credits in the tax law and how to best optimize utilization of all available credits. A detailed and thorough analysis needs to be done with each taxpayer’s facts and circumstances. Also, there will need to be further guidance from the IRS and Treasury. We continue to be in discussions with current and former members of Congress and high level IRS Officials to gain clarity, insight, and Congressional intent on this very special and potentially valuable credit.
PPP (Payroll Protection Program) Loans and Expense Deduction
The new law clarifies that business expenses paid with forgiven PPP loans are tax deductible.
Section 179D Made Permanent
If you are an architect, engineer, or contractor, or a CPA with any of these clients, this is a huge opportunity for them to claim this, now permanent deduction. This deduction applies if they are encouraging green, energy efficient design of public buildings. This would include improvements to the building envelope, lighting, heating, cooling, ventilation, and hot water systems.
The deduction could be up to $1.80 per square foot. Although the architect, engineer, or contractor doesn’t own the public building, they could be allocated this deduction from the government entity. It’s like a free deduction! Since it is calculated based on square footage, a large high school, elementary school, or public library could yield a sizable deduction to the architect, engineer or contractor. This concept also applies to owners of commercial buildings.
Section 179D encourages energy efficient designs while reducing energy costs for all. It’s a win-win for architects, engineers, contractors, the government, taxpayers, and commercial building owners!
For 2021 and 2022, the 100% deduction for business meal food and beverage is back! This includes carry-out and delivery meals.
The non-itemizer, above-the-line deduction for cash charitable contributions increases to $600 for married taxpayers filing jointly (non-married filers or married filing separately are limited to $300).
Relief for FSA (Flexible Spending Account)
Remember the “use it or lose it” rule requiring employees to spend money in their FSA account for health or dependent care by year end, or lose this money? The old rules did allow a carryover of unused funds of $560 to 2021.
Well, my daughter has been frantically calling me since June of 2020. She had over $2,000 contributed to her dependent care FSA. Then, her daycare center closed in June, 2020 due to Covid. How could she get this money back? She had no other daycare expenses since the family was volunteering to watch the kids for free. Would she lose over $2,000 of her hard earned money?
Well, this little gem of a law eliminates the health and dependent care carryover limit. Now, employees could carryover any unused amount from either the 2020 or 2021 plan year to the next year.
Buried within the 5,593 pages are many other provisions and hidden gems that will need to be discovered, understood, and put to use. We teased you here with just a few. Be prepared to read and find more buried treasures that could help you or your clients. Whoever said that Congress is trying to simplify the Tax Code? Hang in there, get your fingernails dirty and get digging!
Rick Meyer, CPA, MBA, MST is a long time member of the Illinois CPA Society and has served on various tax committees over the past 40+ years. He is a Director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful governmentsponsored tax credits and incentives. He could be contacted at firstname.lastname@example.org.