By C. Robert Holcomb, EA, Extension educator
With passage of the COVID-19 relief package by Congress, hereafter known as the Consolidated Appropriations Act (CAA), 2021, many new tax changes go into effect. This mammoth piece of legislation in written bill form is over 5,500 pages long. The new legislation extends many COVID-19 provisions, provides an extension of unemployment benefits, an additional round of stimulus checks, and funds the government through next September. In addition to funding the government, the CAC also contains multiple tax law changes. The contents of this blog post are not intended to include all the tax changes in the CAA, but the author will attempt to hit some of the most impactful issues. A more in-depth analysis will unfold in the coming weeks.
Please see the post from Megan Roberts for an in-depth discussion on changes the CAA makes to PPP and EIDL loans.
Extension of COVID-19 credits
The CAA extends the refundable payroll tax credits for paid sick and family leave, enacted in the Family’s First Coronavirus Response Act (FFCRA), through the end of March 2021. It also modifies the tax credits, so they apply as if the corresponding employer mandates were extended through the end of March 2021. This provision is effective as if included in FFCRA.
The CAA also extends the Employee Retention Credit (originally scheduled to expire December 31, 2020) until July 1, 2021.
Please note: It is unclear how COVID-19 payroll credits will be reconciled on the 2020 and 2021 income tax returns. The Internal Revenue Service posted FAQs indicating tax treatment FFCRA and Employee Retention Credit prior to the passage of the CAA. Additional guidance from the Treasury will need to be issued on reconciliation of COVID credits.
Extension of deferral of employee payroll tax
On August 8, 2020, President Trump, by executive order, issued a moratorium to allow employers to defer withholding employee shares of Social Security taxes or railroad retirement tax-equivalent from September 1, 2020, through December 31, 2020, and required employers to increase withholding and pay the deferred amounts ratably from wages and compensation paid between January 1, 2021, and April 31, 2021. Beginning on May 1, 2021, penalties and interest on deferred unpaid tax liability will begin to accrue.
The new provision extends the repayment period through December 31, 2021. Penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.
Net Operating Loss (NOL) changes
This section allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. This section also allows farmers who previously waived the election to carry back a net operating loss to revoke the waiver. These clarifications eliminate unnecessary compliance burdens for farmers. The provision applies retroactively as if included in Section 2303 of the CARES Act.
This fixes two dilemmas facing farmers with net operating losses. First of all, if the producer did a two-year carryback, they can leave the two-year carryback in place. The CARES Act basically did away with the two-year carryback, and producers that had a two-year carryback were not sure what they could or could not do. The other option now available is that the producer can waive the NOL carryback option. Some producers may have opted not to do a two-year carryback. However, the five-year carryback would have been advantageous. Now producers have the option to waive the carryback and do a five-year carryback.
Changes to the deductibility of business meals (a clarification)
The Tax Cuts and Jobs Act (TCJA) limited the deductibility of business meals. In 2020, the IRS issued both proposed and final regulations addressing the deductibility of business meals. As part of this guidance, in most cases, business meals were limited to 50 percent deductibility until 2025, when the business meal deduction will go away.
In earlier summaries of this new legislation, it was incorrectly reported that all meal expenses would now be 100% deductible. That was incorrect. The 100% deductibility for meals is attributable only to meals provided by a restaurant. This change is temporary for amounts paid or incurred after December 31, 2020, and before January 1, 2023.
The author expects additional guidance from the IRS sometime in the calendar year 2021.
Source information used for this post included The House Committee on Appropriations H.R. 133 – Division-by-division summary of COVID-19 relief provisions, as well as the final H.R. 133 text as passed.
This information is educational in nature and is not tax or legal advice.
