Expiring Tax Provisions
During the COVID-19 pandemic, Congress enacted several stimulus laws, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act; the Consolidated Appropriations Act, 2021 (CAA); and the American Rescue Plan Act (ARPA). Each law contained targeted tax modifications to help relieve the economic burden caused by COVID-19. Many changes delayed the implementation of Tax Cuts and Jobs Act (TCJA) provisions, while others granted temporary relief from long-standing tax statutes.
As the end of 2021 nears, it’s important to incorporate the impact of changing or expired provisions in the year-end tax planning process. Some provisions covered below would be impacted by the currently proposed Democratic reconciliation bill.
Business interest limitation
The TCJA significantly altered IRC Sec 163(j), creating the business interest expense deduction limitation, arguably among the most complicated provisions of recent tax law reform. The limitation caps business interest deductions for affected businesses at the sum of the taxpayer’s business interest income, plus 30% of adjusted taxable income (ATI), plus floor plan interest financing expense.
The CARES Act provided temporary and retroactive relief for 2019 and 2020 in several ways:
– Increasing the ATI limitation from 30% to 50% for all businesses in 2020 and all businesses other than partnerships in 2019.
– Partners allocated excess business interest expense from a partnership in 2019 were able to deduct 50% of that amount as an interest deduction on their 2020 return, without limitation.
– Allowing taxpayers to elect to use 2019 ATI when calculating the 2020 limitation
In addition, a set of final regulations provided manufacturers and other taxpayers subject to UNICAP rules a temporary reprieve, allowing capitalized depreciation and amortization to be added back when computing ATI for 2020 and 2021 only.
Net operating loss changes
The TCJA made considerable changes to the treatment of net operating losses (NOLs), the implementation of which was retroactively delayed by the CARES Act.
Beginning in 2021, all taxpayers are subject to the TCJA’s NOL rules. The changes are generally unfavorable – removing the two-year carryback option and allowing NOLs to offset only 80% of taxable income when carried forward; however, the 20-year limit on NOL carryovers was removed, making them indefinite.
The CARES Act temporarily reinstated pre-TCJA NOL rules to help affected taxpayers access cash. NOLs generated in tax years 2018 through 2020 were permitted to be carried back five years and could offset 100% of taxable income.
Payroll tax deferral
The CARES Act allowed employers and self-employed taxpayers to defer deposit of the employer’s portion of Social Security taxes due between March 27, 2020 and Dec. 31, 2020. Deferred deposits must be made by the following dates to be treated as timely:
– 50% due Dec. 31, 2021
– Balance due Dec. 31, 2022
It is important to note that the IRS recently determined that a failure to deposit any portion of the deferred taxes by the installment date would result in a failure to deposit taxes penalty on the entire deferred amount going back to the original due date. To avoid costly penalties, businesses with deferred payroll deposits should pay a minimum of 50% no later than Dec. 31, 2021.
Excess business loss limitation
The CARES Act retroactively delayed the implementation of Sec 461(l) excess business loss limitation, a TCJA provision which limits the amount of trade or business deductions that can offset non-business income. In 2021, taxpayers may only offset $262,000 ($524,000 for joint filers) of other income with net business losses. Sec. 461(l) will remain in effect through 2025 with amounts indexed for inflation annually.
Employee retention credit
The employee retention credit (ERC), a hallmark provision of the CARES Act, has been available to eligible trades or businesses as follows:
– 2020: ERC of 50% of qualified wages of up to $10,000 per employee (for the year)
– 2021: ERC of 70% of qualified wages of up to $10,000 per employee per quarter
– Fourth quarter eligibility was removed by the Infrastructure Investment and Jobs Act for most taxpayers
Recovery startup businesses (RSBs): generally defined as employers that began operating a trade or business after Feb 15, 2020, and meet additional requirements are eligible for the 2021 ERC in Q3 and Q4 of 2021 only (notwithstanding the above-mentioned Infrastructure Act), subject to a limit of $50,000 per quarter.
Businesses that experienced a full or partial suspension or modification of operations due to a governmental order or experienced a significant decline in gross receipts may still be eligible for the ERC in a prior quarter.
Retirement plan changes
The CARES Act brought about two retirement plan changes, both of which expired at the end of 2020:
– Required minimum distributions (RMDs): RMDs were waived in 2020 but are compulsory in 2021 for taxpayers age 72 and older.
– Retirement account hardship withdrawals: Participants could take hardship withdrawals from eligible retirement accounts of up to $100,000 without penalty. Taxpayers could choose to take the distribution as taxable income or repay the distribution over a three-year period.
Expanded child tax credit and child and dependent care credit
ARPA increased several child related tax credits, for 2021 only:
– Expanded child tax credit: increased from $2,000 to $3,000 ($3,600 for children 5 and under) per child, with an option for monthly payments. Taxpayers who are phased out of the expanded credit can still claim the existing (non-expanded) child tax credit (CTC).
– Child and dependent care credit: expanded qualifying expenses from $3,000 to $8,000 for one child and from $6,000 to $16,000 for two or more children. Reimbursement rate range was also expanded.
Pending tax legislation
Several provisions discussed above may be further altered if Congress successfully enacts the House version of President Biden’s Build Back Better agenda, including:
– Changes to the application of Sec. 163(j) at the shareholder and partner level
– Making the excess business in Sec. 461(l) permanent
– Extension of the expanded CTC for one additional year