There is still time to receive tax relief for 2020 as a result of the Consolidated Appropriations Act, 2021 (CAA), passed late last year. This new Act provides tax benefits for individuals and small businesses for 2020 and 2021.
As a sendoff to 2020, the 2021 Consolidated Appropriations Act (CAA) introduced new tax laws and extensions meant to assist with pandemic relief. Unlike many developments from 2020, this law was good news, as many of the provisions contained in the CAA could result in significant tax benefits. We’ve summarized some of the most important changes below. We encourage you to reach out to your advisor about how these tax changes might affect your 2020 tax returns and 2021 tax planning.
Stimulus payments. A second round of stimulus payments went out early this year. Like the previous round of stimulus payments, the amount you received was based on your filing status and number of qualifying dependents, with maximum amounts of $600 for individuals ($1,200 for married couples) and an additional $600 per qualifying dependent. However, your stimulus payment may have been reduced or eliminated if your 2019 income was over certain income thresholds. Also, if you had a child born in 2020, your stimulus payment may not reflect this change. It may be possible to claim a credit on your 2020 tax return If you didn’t receive the maximum payment amount and/or your circumstances changed in 2020. You should receive a letter from the IRS this year that shows you how much stimulus payments you received. Share this letter with your tax advisor to see if you’re eligible for an additional credit.
Child tax credit. If you have children, you may already know that you can claim the child tax credit (CTC) based on your earned income for the year (whether from work or self-employment). The credit is worth $2,000 per qualifying child and your dependents must be under the age of 17 at the end of the year for you to claim the credit. A tax credit helps to directly reduce your taxes, while a deduction reduces the amount of income you pay taxes on. Under the CAA, it’s now possible to use your 2019 earned income to calculate the CTC (instead of your 2020 earned income), which could increase your allowable credit. This may be advantageous if your earnings were lower in 2020 compared to 2019, like many people who were impacted by the pandemic.
Flexible spending plans. The pandemic likely complicated efforts to spend your Flexible Spending Account (FSA) plan funds in allowable ways. The CAA introduced changes where FSA plans can allow you to carry forward unused benefits from last year and then into 2022 if the FSA funds still haven’t been used. Dependent care FSA funds can also be used to pay for your dependents up to 13 years old (which was previously limited to those 12 or under). These changes are optional, so not all FSA plans may implement this change. Ask your employer if your FSA plan includes these more flexible rules.
Home improvement credits. You’re also able to get a credit for energy-efficient improvements you make to your home. The residential energy-efficient property credit was extended through the end of 2022 (this was set to expire at the end of 2020), and biomass fuel property expenses are now eligible for the credit. Note that this credit is limited to $500 for all tax years combined, with lower limits for certain items, so this is a great time to consider installing energy-efficient heating and cooling systems, windows, and other qualifying property improvements. Installing a solar energy system can also generate huge tax savings, decrease your monthly energy bills, and reduce your household’s reliance on fossil fuels.
Charitable giving. You can deduct $300 of charitable giving per tax return without having to itemize deductions on your 2020 tax return. The CAA extends this $300 benefit (increasing to $600 for married couples filing jointly) for the 2021 tax year. For extremely generous donors, your cash donations can offset 100% of your Adjusted Gross Income (AGI) for 2021. Normally, cash donations can only offset up to 60% of your yearly AGI, so if you’ve been planning to make significant donations, 2021 may be a great year to do that for maximum tax benefits. Note this only applies to cash donations; non-cash donations, like stock, furniture, clothing, etc., have lower AGI limits. Here are some other giving strategies to consider that may maximize your gifts and minimize your taxes.
Paycheck Protection Program. There’s much-needed good news on the Paycheck Protection Program (PPP) loans. You and your business may qualify for a second round of PPP loans if your business’s gross receipts (revenue) declined by at least 25% in any quarter in 2020 compared to the same quarter in 2019. For example, if your business had third-quarter 2019 gross receipts of $100,000, and your third-quarter 2020 gross receipts were $75,000 or less, then you may qualify for a second PPP loan. This assumes your business already used, or will use, the first round of PPP loan proceeds and your business must have fewer than 300 employees.
If you qualify, be sure to apply for another round of potentially forgivable loans. With CAA, any expenses used to get last year’s PPP loan forgiven are now fully deductible on your 2020 tax return. This is a welcome change from previous IRS guidance that said these payroll costs would be nondeductible. As a result, you may get larger overpayments on your 2020 business tax return if you made estimated tax payments on the assumption that PPP-related expenses would be nondeductible.
There’s also good news around the PPP loan forgiveness process and possibly an increase in the loan forgiveness amount. For anyone who received $150,000 or less of PPP loans, you can use Form 3508S to apply for loan forgiveness. The Small Business Administration issued this simplified loan forgiveness application form, which doesn’t require documentation to verify your payroll expenses (though you should keep backup available for your records) and asks for less information overall than other PPP loan forgiveness forms.
If you received an Economic Injury Disaster Loan last year, you may have gotten an advance of up to $10,000 on that loan that you didn’t have to pay back. That advance no longer reduces the amount of PPP loan forgiveness you’re eligible for. When submitting your PPP loan forgiveness application, make sure you’re not relying on outdated information to receive the maximum loan forgiveness you’re able to receive. Visit our resource center to learn more about relief legislation and other market events.
Employee Retention Credit. If your business was affected by COVID-19 and your revenue declined by certain percentages compared to the same quarter of the previous year (this varies by tax year), you may be able to claim the Employee Retention Credit (ERC) for wages paid in 2020 and payable for 2021. It’s now possible to claim this credit even if you received a PPP loan, which previously wasn’t allowed. Note that if you use wages to get PPP loans forgiven, you can’t also use those same wages to claim the ERC. The IRS hasn’t issued final guidance yet on how this rule will work, but know that it’s possible to amend your business tax returns for 2020 to claim this credit after more guidance becomes available.
Business meals. You can now deduct 100% of any business meals you order from a restaurant, up from the 50% that’s normally deductible. This deduction applies for 2021 and 2022, and delivery and takeout meals are also eligible. This will hopefully help support local restaurants that may be struggling with the pandemic. You still need to meet the IRS guidelines around business meals and entertainment expenses (e.g., you must discuss business with a client during these meals and the meals cannot be lavish or extravagant).
It’s important to review your tax situation to make sure you’re taking maximum advantage of these and other benefits from last year’s coronavirus relief laws. Given the changes we’ve seen with the pandemic, now may be a good time to talk with your advisor and tax professional regarding 2021 tax planning.
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