COVID-Related Tax Relief Act Summary
(As of December 22, 2020)
Congress passed the $900 Billion COVID-Related Tax Relief Act of 2020 (“COVIDTRA” or “the Act”) as part of the Consolidated Appropriations Act of 2021, on December 21, 2020. As of this writing, President Donald J. Trump has not yet signed the Act into law. COVIDTRA extends and modifies several provisions first enacted in the Coronavirus Aid, Relief, and Economic Security Act, as amended (“CARES Act”), Congress’ $2.2 trillion pandemic relief act that was passed in March 2020.
Below is a summary of certain provisions of COVIDTRA. Note that the portions of the Act concerning renewed funding for the Paycheck Protection Program (PPP), including the availability of second-time loans to certain businesses, is addressed in our separate blog, Update Regarding the Paycheck Protection Program.
Select Individual Provisions
Direct Payments to Individuals (Relief Rebates): COVIDTRA contains a second round of direct payments to individuals, modeled after the Recovery Rebates sent out as part of the CARES Act, but with important changes. The Relief Rebates provide a refundable tax credit of up to $600 (as of now, though a much higher figure is being bandied about by the President and Speaker of the House) per individual and qualified child, with no cap on household size.
Adult dependents are not eligible, and the credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income. In other words, the credit phases out entirely at $87,000 for single filers with no dependents.
The credit is available in the taxpayer’s 2020 federal income tax return, and the Treasury may issue advance payments based upon the information in the taxpayer’s 2019 federal income tax return. Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on a taxpayer’s 2020 federal income tax return exceeds the amount of the advance payment, the taxpayer will receive the difference as a refundable tax credit.
Advance payments are generally not subject to offset for past due federal or state tax debts and are protected from bank garnishment or levy by private creditors or debt collectors.
Extension of Unemployment Insurance (“UI”) Benefits: COVIDTRA includes an 11-week extension of the unemployment compensation benefits first provided in the CARES Act that are due to expire on December 26th. This includes the Federal Pandemic Unemployment Assistance (FPUA) that extends UI benefits to workers who are traditionally ineligible, including gig economy workers and Independent Contractors. The FPAU will provide an additional $300 per week supplement to state UI compensation.
Child Tax Credit and Earned Income Tax Credit: Many individuals eligible for these credits will have lower earned income in 2020 due to the pandemic. Therefore, these credits will be computed based upon 2019 income to determine an individual’s eligibility for these credits in 2020.
Charitable Contribution Deduction: The above-the-line charitable contribution deduction is extended through 2021 at $300 for most filers ($600 for married filing jointly). This means taxpayers will be able to take the standard deduction on their 2020 tax returns and deduct up to $300 ($600 for married filing jointly) in charitable deductions when calculating their taxable income.
Employee-Side Payroll Tax Deferral: For taxpayers electing the employee-side payroll tax deferral, the repayment deadline is extended from April 2021 until December 31, 2021 – lengthening the repayment period.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness and Reduction of Maximum Indebtedness Limits: Pre-COVIDTRA, for tax years beginning before January 1, 2021, discharge of indebtedness income from qualified principle residence debt up to a $2 million limit ($1 million for married filing separately) was excluded from gross income. COVIDTRA extends this exclusion to discharges occurring before January 1, 2026 but reduces the maximum amount of principal residence debt that qualifies for exclusion to $750,000 ($375,000 for married filing separately).
Reduction in Medical Expense Deduction Floor: For tax years beginning before January 1, 2021, individuals could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceed 7.5 percent of Adjusted Gross Income (AGI).
Prior to COVIDTRA, the floor was set to increase to 10 percent of AGI after 2020. The Act makes the 7.5 percent threshold permeant, applicable for tax years beginning after December 31, 2020.
Credit of Health Insurance Costs of Eligible Individuals: The Internal Revenue Code provides a refundable credit (the health coverage tax credit) of 72.5 percent of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance. The credit was set to expire for premiums paid after December 31, 2020. COVIDTRA extends the health coverage tax credit for one year.
Select Business Provisions
Economic Injury Disaster Loan (EIDL) Program and Small Business Administration (SBA) Debt Relief Payments: COVIDTRA provides $20 billion for new EIDL grants for businesses in low-income communities, $43.5 billion for continued Small Business Administration (SBA) debt relief payments, and $2 billion for enhancements to SBA lending. An additional $15 billion of dedicated funding is set aside for live venues, independent movie theatres, and cultural institutions.
In addition, the Act clarifies that gross income does not include forgiveness of EIDL loans, emergency EIDL grants, and certain repayment assistance. Moreover, COVIDTRA clarifies that deductions are allowed for otherwise deductible expenses paid with amounts not included in income, and that tax basis and other tax attributes will not be reduced as a result of those amounts being excluded from gross income. These clarifications are effective for tax years ending after March 26, 2020 (the date of enactment of the CARES Act).
Authority to Waive Certain Information Reporting Requirements: Generally, a lender is required to file a Form 1099-C, Cancellation of Debt, with the Internal Revenue Service when the lender discharges at least $600 of a borrower’s indebtedness. The lender is also required to provide the borrower with a payee statement. COVIDTRA allows the Treasury Department to waive reporting any amount excluded from income by (i) a covered loan amount forgiveness, (ii) an emergency financial aid grant forgiveness, or (iii) other business financial assistance under the CARES Act.
Employee Retention Tax Credit: COVIDTRA increases the refundable payroll tax credit from a maximum of $5,000 to $14,000 by changing the calculation from 50 percent of wages paid up to $10,000 to 70 percent of wages paid up to $10,000 for any quarter through July 1, 2021.
COVIDTRA clarifies that businesses will now be able to take the Employee Retention Tax Credit and participate in the PPP.
Employer Side Social Security Payroll Tax Credits: The Employer-Side Social Security Payroll Tax Credits, created in the Families First Coronavirus Response Act, which were designed to offset paid sick and family leave related to the coronavirus is extended through March 2021.
Work Opportunity Credit: An employer may claim a work opportunity credit for wages paid to hire individuals from targeted hard-to-employ groups. The work opportunity credit is part of the general business credit, but the tax liability limitation is computed separately, and the credit may be claimed against both regular and alternative minimum tax liabilities.
Wages paid or incurred to an individual who begins work after December 31, 2020 were not eligible for the credit pre-COVIDTRA. The Act extends the credit through 2025 and the amendment applies to individuals who begin work after December 31, 2020.
Employer Credit for Paid Family and Medical Leave: The employer credit for paid family and medical leave, which was set to expire at the end of 2020. COVIDTRA extends the credit through 2025.
Deduction for Business Meals: The deduction for business meals is increased from 50 percent to 100 percent for 2021 and 2022.
Other Provisions in COVIDTRA
- $82 billion in funding for colleges and schools, $10 billion in childcare assistance, and a Pell Grant expansion.
- $13 billion to increase Supplemental Nutritional Assistance Program (SNAP) and child nutrition benefits.
- A ban on surprise medical billing.
- $63 billion for vaccine distribution, testing and tracing, and other health-care initiatives.
- $25 billion in rental assistance and extension of the eviction moratorium through January 31, 2021.
- $45 billion for transit agencies, airlines, airports, state departments of transportation, the motorcoach industry, and Amtrak.
Not Included in COVIDTRA
COVIDTRA does not include liability protection for businesses reopening during the pandemic or any additional state and local aid.
Peter L. Ente is Senior Counsel in our Tax Planning Practice Group.
This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.