This past Sunday evening, President Trump signed a combined coronavirus relief and government funding bill that includes $900 billion in COVID-19 aid.
As currently written, stimulus payments are $600 per person ($1,200 per couple) including an additional $600 for each child younger than age 17. The payment will start to phase out using the same adjusted gross income (AGI) thresholds from the CARES Act: $75,000 (Single), $112,500 (Head of household) and $150,000 (Married filing jointly or surviving spouse). Payments are expected to be made using AGI from 2019 tax returns. This specific aspect of the Bill is undergoing debate and may be modified with new legislation to increase payments to individuals.
Regular Unemployment Compensation extended. Federally subsidized unemployment benefits were scheduled to end in December. They will now be extended by an additional 11 weeks, covering eligible unemployed individuals through the middle of March 2021.
Pandemic Unemployment Assistance extended. Unemployment benefits to individuals who are not normally eligible to receive such benefits, such as self-employed individuals, are also extended to provide benefits for individuals through as late as April 5, 2021.
‘Regular’ Unemployment Compensation increased. The CARES Act increased weekly unemployment benefits for individuals of $600 for four months. That four-month period ended earlier this year, but the passage of the Appropriations Act brings back a reduced version of this benefit. Specifically, individuals would receive an additional $300, on top of their ‘regular’ state-determined unemployment compensation benefit for 11 weeks.
Health Care Flexible Spending Accounts and Dependent Care Flexible Spending accounts are valuable tax-reduction benefits but suffer from a “use it or lose it” provision. The bill allows taxpayers to carry over unused amounts in their FSA from 2020 to 2021, as well as from 2021 into 2022.
In addition, just for 2021, individuals may modify future contribution amounts during the year. Normally, contribution amounts are irrevocable for the whole year. Importantly, these modifications appear to be optional for employers, and participants should proactively contact benefit departments to determine whether relief is provided.
For those who itemize deductions, the hurdle rate to deduct medical and dental expenses has swung between 7.5% of AGI and 10% of AGI in recent years. The floor is now 7.5% for all taxpayers regardless of age. This is intended to be permanent.
The CARES Act created a new above-the-line deduction for cash contributions to charity for those who do not itemize. This deduction was capped at $300 for both single and joint filers and intended for use only for the 2020 tax year. Now, this benefit is extended for the 2021 tax year. Also, for 2021, a deduction up to $600 is available for joint filers.
The 2020 tax year will be the last that the Tuition and Related Expenses above-the-line deduction can be claimed. Replacing the deduction will be a Lifetime Learning Credit with an increased phaseout range. The simpler code should make navigating education-related tax benefits easier. Taxpayers who would have used the deduction should benefit from the credit instead.
The earned income tax credit is a benefit for working people with low to moderate income. Taxpayers who have less earned income in 2020 than in 2019 can use their 2019 earned income to determine eligibility for the Earned Income Tax Credit, to receive the maximum potential credit.
No Waiver of Required Minimum Distributions (RMDs). There is no extension of the waiver of RMDs for retirement accounts that applied to 2020. Individuals should be prepared to resume RMDs, as normal, in 2021.
No Further Federal Student Loan Relief. Suspended collection efforts on defaulted loans, suspended loan payments, and interest rates set to 0% are effective through January 31, 2021. The Appropriations Act of 2021 does not further extend this relief.
The Paycheck Protection Program (PPP) established via the CARES Act closed on August 8, 2020. A recent act of Congress reopens the PPP to provide additional funding for small businesses impacted by COVID-19. Modifications have also been made to certain PPP rules for existing recipients.
The bill clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced because of the loan forgiveness. This reverses an IRS position, which previously stated that such expenses lost their deductibility when funded with forgiven PPP debt. The deductibility applies both to expenses already paid with original PPP loans that were forgiven and any new PPP loan proceeds that are forgiven. The bill also clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan.
Borrowers of up to $150,000 seeking forgiveness should encounter an easier process going forward. The bill requires the Small Business Association (SBA) to create a one-page certification for the forgiveness application.
For those businesses who did not receive a loan under the original Paycheck Protection Program, the ability to apply for financing will be reopened. The qualifications and the rules remain largely the same.
Previous PPP recipients may apply for another loan of up to $2 million, under these more stringent qualifications:
Have 300 or fewer employees
Have used or will use the full amount of the first PPP loan
Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019
The costs eligible for loan forgiveness include payroll, rent, covered mortgage interest, and utilities. PPP round two also makes the following potentially forgivable, for original loans and new loans:
Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines
Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations
Covered operating costs such as software and cloud computing services and accounting needs
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either 8 or 24 weeks — the same parameters when the program stopped accepting applications in August.
As of December 29th, the SBA website was not updated for information in the recently passed bill. Details on new applications and streamlined forgiveness are still being developed. Banks may be unable to accept new PPP loan applications until the SBA makes the program updates. Those seeking a PPP loan are advised to communicate with business banking relationships to prepare accordingly.
Ed is Director of Financial Planning of Heritage Financial Services, where he creates and shapes best practices in financial planning for the firm. In this role, he mentors the wealth advisors and consults on unusual or highly complicated client cases.