The Consolidated Appropriations Act (CAA) signed into law on December 27, 2020 had an impact on several temporary COVID-19-related federal tax relief measures set to expire on December 31, 2020. This article explains the current status of seven important temporary relief measures and whether the (CAA) extended them.
1. The Suspension of Retirement Account Required Minimum Distributions (RMDs)
In normal times, you must begin taking annual 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. That meant that taxpayers could put off RMDs, not have to pay tax on them and allow their tax-deferred retirement accounts to continue growing.
Status: The CAA didn’t extend the suspension on RMDs for another year.
2. Small Employer Tax Credits to Cover Required COVID-19-Related Employee Paid Leave
The Families First Coronavirus Response Act (FFCRA), passed in March of 2020, granted a new federal tax credit to small employers (under 500 employees). It covers mandatory payments to employees who take time off under the COVID-19-related emergency sick leave and family leave law provisions.
Specifically, a small employer receives a payroll 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 law only covers leave payments made between April 1, 2020, and December 31, 2020. Equivalent tax credit relief was available to self-employed individuals who took qualified leave between those dates.
Status: The FFCRA expired on December 31, 2020. However, the CAA extends the small employer payroll tax credit to cover leave payments made between January 1, 2021, and March 31, 2021, that fall within the FFCRA framework. There is no requirement for small employers to continue to provide emergency sick leave or family leave payments after December 31, 2020. However between January 1, 2021 and March 31, 2021, employers can choose to make voluntary leave payments that fall within the FFCRA framework and receive the tax credit if they do so. An equivalent tax credit is available to self-employed individuals who take qualified leave between those dates.
The new DOL guidance informs employers that they may voluntarily provide FFCRA leave after Dec. 31, 2020. The relief package does not change the total amount of leave available (from the effective date of April 1, 2020 through March 31, 2021), the qualifying reasons for which employees may take leave, the caps on the amount of pay employees are entitled to receive, or the FFCRA’s documentation requirements. It merely permits employers to choose to provide such leave to eligible employees and seek a payroll tax credit for any such leave provided. This extension does not create a new bucket of leave time and therefore only applies to those employees who did not previously use their available leave under the FFCRA in 2020. New DOL guidance can be found HERE.
Questions about the payroll tax credits on the IRS website can be found HERE. It is important to note the IRS has not yet updated this site since the extension of the tax credits.
3. The Employee Retention Tax Credit (ERTC)
The ERTC is included in the CARES Act, provides a refundable payroll tax credit equaled to 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter. It was subject to an overall annual wage cap of $10,000 per eligible employee and was available to eligible large and small employers.
Status: The CAA extends and greatly enhances the ERTC. Here are the details.
- Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020.
- The new law extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30.
- For the first two quarters of 2021 ending on June 30, the new law: 1) increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% 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).
- Key Point: For the first two quarters of 2021 ending on June 30, 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 June 30, 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 June 30, the new law stipulates that for employers with 500 or more employees (versus 100 or more under the original CARES Act rules), the ERTC 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 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 employers who receive Paycheck Protection Program (PPP) loans in 2020 and 2021 may still qualify for the ERTC claimed on qualified wages not included in the PPP loan forgiveness calculation. This retroactive change goes back to the day the CARES Act was signed on March 27, 2020.
4. 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 March 27, 2020, and ended on December 31, 2020. Your business must then pay the deferred payroll tax amount in two installments:
- Half by December 31, 2021, and the remaining half by December 31, 2022.
This payroll tax deferral option was available to all employers, with no requirement to show any specific COVID-19-related impact.
If you’re 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 March 27, 2020, and ended on December 31, 2020. You must then pay the deferred SE tax amount in two installments:
- Half by December 31, 2021, and the remaining half by December 31, 2022.
Status: Unfortunately, the CAA doesn’t extend this deferral.
5. Employee-Side Payroll Tax Deferral Relief
For eligible wages paid between September 1, 2020, and December 31, 2020, an employer could elect to defer withholding of the 6.2% employee share of the Social Security tax on wages, under the presidential memorandum signed last summer.
Status: 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 January 1, 2021, through April 30, 2021. The CAA enlarges the window to January 1, 2021, through December 31, 2021. After that end date, interest and penalties will start accruing for employers with deferred amounts that haven’t been repaid.
6. Liberalized Business Net Operating Loss (NOL) Deduction Rules
Business activities that generate tax losses can cause you or your business 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 through 2020 to be carried back five years. 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 may result in sizeable tax refunds.
Status: The CAA does not address NOLs that arise in tax years beginning in 2021. An NOL arising in a tax year beginning in 2021 can only be carried forward to future years.
7. Suspension of the Excess Business Loss Disallowance Rule
Current deductions for so-called “excess business losses” incurred by individuals in tax years beginning in 2018 through 2025 were disallowed and carried forward as an NOL to the following year before a CARES Act relief provision became law. An “excess business loss” is one that exceeds $250,000 ($500,000 for a married couple filing jointly). The $250,000/ $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 through 2020.
Status: The CAA does not address “excess business losses” that arise in tax years beginning in 2021. An “excess business loss” arising in a tax year beginning in 2021 is effectively treated as an NOL arising in that year, and it can only be carried forward to future years. “Excess business loss” limitation is currently effective until January 1, 2026.
This article contains information about the status of some COVID-19 tax relief measures. It’s possible that additional laws may pass in the future. We’ll continue to give you updates on the provisions most likely to affect you or your business. Please contact us with any questions or concerns affecting your individual financial or business situations. We’re here to help. In the meantime, visit a special section on our website COVID-19 Tax & Business Implications.