On December 27, President Donald Trump signed the new pandemic relief bills — the Consolidated Appropriations Act, 2021 (the CAA) — into law. Before the new law, several temporary COVID-19 federal tax relief measures were set to expire on Dec. 31, 2020. In this column, I update you on the current status of the most important temporary relief measures. Here goes.
Borrow up to $100,000 from your IRA and get tax-free treatment
Thanks to the Coronavirus Aid, Relief, and Economic Security Act
(the CARES Act), IRA owners who were adversely affected by the
COVID-19 pandemic were eligible to take tax-favored coronavirus
related distributions from their IRAs during 2020, but only
during 2020. Let’s call these distributions CVDs. They can add
up to as much as $100,000. You can then recontribute a CVD back
into your IRA within three years of the withdrawal date and
treat the withdrawal and later recontribution as a federal-
income-tax-free rollover.
In effect, the CVD drill allows you to borrow up to $100,000
from your IRA(s) and recontribute (repay) the amount(s) any time
up to three years later with no federal income tax consequences
when all is said and done. There are no limitations on what you
can use CVD funds for during the three-year period. For details,
see this.
Status update: The CAA does not extend the CVD deal beyond 2020, but it stipulates that similar tax rules can apply to IRA distributions taken by folks who are affected by specified future disasters.
Suspension of retirement account required minimum distributions
In normal times, you must begin taking annual required minimum distributions (RMDs) from traditional IRAs and tax-deferred retirement plan accounts after you reach age 72 (or age 70½ if you turned 70½ before 2020). As a COVID-19 tax relief measure, the CARES Act suspended RMDs for calendar year 2020 but only for that one year.
Status update: I had hoped that RMD relief would be extended into 2021 to help seniors who will only be getting a paltry 1.3% increase in their 2021 Social Security benefits. So far, no dice.
Small employer tax credits to cover COVID-19-related paid employee leave
The Families First Coronavirus Response Act (FFCRA) granted
a new federal tax credit to small employers to cover mandatory payments to
employees who take time off under the FFCRA’s COVID-19-related emergency
sick-leave and family-leave provisions.
Specifically, a small employer could collect a tax credit equal to 100% of qualified emergency sick-leave and family-leave payments made by the employer pursuant to the FFCRA. However, the credit under the FFCRA only covers leave payments made between 4/1/20 and 12/31/20.
Equivalent tax credit relief was available to self-employed individuals who took qualified leave between those dates. For details, see this.
Status update: The FFCRA and all its provisions expired on 12/31/20. However, the CAA extends the small employer credit to cover leave payments made between 1/1/21 and 3/31/21 that fall within the FFCRA framework. There is apparently no requirement for small employers to continue to provide emergency sick leave or family leave payments after 12/31/20. But between 1/1/21 and 3/31/21, employers can choose to make voluntary leave payments that fall within the FFCRA framework and collect the credit if they do so. Equivalent tax credit relief is available to self-employed individuals who take qualified leave between 1/1/21 and 3/31/21.
Employee retention tax credit
The CARES Act granted the so-called employee retention credit. The credit amount equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter. The credit was subject to an overall wage cap of $10,000 per eligible employee. The credit was available to eligible large and small employers alike. For details, see this.
Status update: The CAA extends and greatly enhances the employee retention credit. Here are the changes.
- Under the original CARES Act rules, the credit only covered wages paid between 3/13/20 and 12/31/20.
- The new law extends the covered wage period to include the first two calendar quarters of 2021, ending on 6/30/21.
- For the first two quarters of 2021 ending on 6/30/21, the new law: (1) increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus a 50% ceiling under the original CARES Act rules) and (2) increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original CARES Act rules). For the first two quarters of 2021 ending on 6/30/21, these changes effectively increase the maximum per-employee credit from $5,000 (50% x $10,000 of qualified wages) to $14,000 (70% x $10,000 of qualified wages x 2 quarters).
- For the first two quarters of 2021 ending on 6/30/21, the new law includes a liberalized employer eligibility rule based on a required more-than-20% decline in gross receipts, compared to the corresponding 2019 quarter (versus a required more-than-50% decline under the original CARES Act rules).
- For the first two quarters of 2021 ending on 6/30/21, the new law stipulates that for employers with 500 or more employees (versus 100 or more under the original CARES Act rules), the employee retention credit can only be claimed for qualified wages paid to employees who are unable to work due to a suspension of the employer’s business or due to a lack of business. This change will allow more medium-sized employers to claim the credit in 2021.
- In a retroactive change, the new law stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from PPP loans that are not forgiven. This retroactive change goes back to Day One of the CARES Act.
Payroll tax deferral relief
Under payroll tax deferral relief offered by the CARES Act, your business could defer the 6.2% employer portion of the Social Security tax component of FICA tax owed on the first $137,700 of an employee’s 2020 wages — for wages paid during the deferral period. The deferral period began on the 3/27/20 and ended on 12/31/20. Your business must then pay the deferred payroll tax amount in two installments:
- Half by 12/31/21
- The remaining half by 12/31/22.
This payroll
tax deferral deal was available to all employers, with no requirement to show
any specific COVID-19-related impact.
If you are self-employed, you could defer half of your liability for the 12.4% Social Security tax component of the self-employment (SE) tax for the deferral period. The deferral period began on 3/27/20 and ended 12/31/20. You must then pay the deferred SE tax amount in two installments:
- Half by 12/31/21
- The remaining half by 12/31/22.
Status update: The CAA does not extend this deal.
President Trump’s employee-side payroll tax deferral deal
For eligible wages paid between 9/1/20 and 12/31/20, an employer could elect to defer withholding of the 6.2% employee share of the Social Security tax on wages, under President Trump’s 8/8/20 presidential memorandum.
Status update: The CAA extends the deadline for an electing employer to pay in deferred Social Security tax amounts via wage withholding. The original wage withholding repayment window was 1/1/21-4/30/21. The new law enlarges the window to 1/1/21-12/31/21. After 12/31/21, interest and penalties will start accruing for employers with deferred amounts that have not been repaid.
Liberalized business net operating loss deduction rules
Business activities that generate tax losses can cause you or your business entity to have a net operating loss (NOL) for the year. The CARES Act significantly liberalized the NOL deduction rules and allows NOLs that arose in tax years beginning in 2018-2020 to be carried back five years. So, an NOL that arose in 2020 can be carried back to 2015. NOL carry-backs allow you to claim refunds for taxes paid in the carry-back years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can result in hefty tax refunds.
Status update: The CAA does nothing for NOLs that arise in tax years beginning in 2021. As things currently stand, an NOL arising in a 2021 tax year can only be carried forward to future years.
Suspension of excess business loss disallowance rule
Current deductions for so-called excess business losses incurred by individuals in tax years beginning in 2018-2025 were disallowed before a CARES Act relief provision became law. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation. The CARES Act suspended the excess business loss disallowance rule for losses that arose in tax years beginning in 2018-2020.
Status update: The CAA does nothing for excess business losses that arise in tax years beginning in 2021. As things currently stand, an excess business loss arising in a 2021 tax year is effectively treated as an NOL arising in that year, and it can only be carried forward to future years.
The bottom line
There you have it: updated information of the status of the most-important COVID-19 tax relief measures. However, stay tuned for possible further developments. This subject may be a moving target. We will keep you informed.
