Major changes in tax policy in the Consolidated Appropriations Act

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Abstract

  • On December 21, Congress passed the Consolidated Appropriations Act, 2021 (CAA) – a single legislative vehicle for long-awaited COVID-related tax relief, an omnibus credit law, and a set of tax extensions.
  • Among the many provisions in the legislation are tax policies designed to mitigate the economic fallout from the COVID-19 pandemic.
  • The most obvious and costly of the tax provisions in the law is a second round of recovery rebates of $ 600 per taxpayer.
  • In total, the CAA contains 72 separate tax provisions, although most are somewhat routine extensions or clarifications.
  • Combined with other pieces of the law, direct payments provide a substantial fiscal boost as the United States enters a difficult vacation period.

introduction

On December 21, Congress passed the Consolidated Appropriations Act, 2021 (CAA) – a single legislative vehicle for long-awaited tax relief, an omnibus credit law, and a set of tax extensions. Among the main federal policies of the legislation are changes in tax policy. Perhaps the most obvious and certainly the most costly tax policy in the law is a second round of direct payments to eligible individuals of $ 600 per taxpayer, at a cost of $ 164 billion. The legislation also clarifies the tax treatment of PPP loans and improves and expands several tax provisions of the CARES (Coronavirus Aid, Relief, and Economic Security) law. Together, the CAA contains 72 new tax policies, a myriad of extensions, improvements, and other tax law clarifications at a combined cost of $ 328 billion. While the majority of that cost is spent on COVID-related tax breaks, this total reflects the inclusion of a set of tax extensions that includes tax policies that are mostly unrelated, or only proximally linked. This analysis examines the most important new tax policies of the CAA.

Direct payments

CAA offers direct payment to individuals and families. For people with incomes of $ 75,000 or less, the law provides for a payment of $ 600, phased out at a rate of $ 5 for every $ 100 of income over $ 75,000. The payment is therefore entirely waived for an individual earning $ 87,000. Married couples with combined incomes of $ 150,000 or less would receive $ 1,200, subject to the same phase-out as that which applies to individuals. Thus, for married couples earning $ 174,000, the payment would be phased out. The provision also provides for an additional $ 600 per child, but also subject to phase-out. Eligibility and benefit levels would be based on 2019 tax returns. Individuals will not be required to repay any overpayments when filing their 2020 taxes next year.

According to Kyle Pomerleau’s analysis of the American Institute of Business84 percent of US households are expected to receive the full refund, while 5 percent are expected to receive a reduced refund. The Joint Tax Commission (JCT) estimated that this provision would cost 164 billion dollars, down significantly from the $ 293 billion cost of the $ 1,200 CARES Act rebates.

Clarification of the tax treatment of PPP loans

The CAA has clarified the tax treatment of expenses otherwise deductible for forgivable loan recipients under the Paycheque Protection Program (PPP). Typically, when companies calculate their tax obligations, they deduct business expenses such as costs from their payroll. The difference between a company’s deductible expenses and its income is of course its income, on which the company pays applicable tax. When Congress established the PPP, largely to fund the payroll of qualifying businesses, Congress made it clear that loans should not be taxable. Congress was less explicit, however, in clarifying that expenses financed by PPP loans would also remain deductible. When Congressional budget agencies assessed the cost of the CARES Act, they assumed Congress’ intention was to allow these expenses to remain deductible. The IRS, however, has issued guidelines prohibiting the deduction of these expenses, with the express approval of Secretary Mnuchin. Since the budget agencies have assumed the cost of these deductions in the cost estimate of the CARES law, this clarification will not add costs beyond those initially estimated, but the legislative clarification will allow deduction, by a estimate, $ 120 billion be granted.

Enhanced retention credit

The CARES law created a new tax credit to encourage companies to keep their workforce, available until the end of the year. The provision gave eligible employers a refundable tax credit equal to 50 percent of employee compensation (including health insurance) up to $ 10,000 per employee. The CAA dramatically improves the eligibility and generosity of the CARES Act credit by increasing the credit percentage to 70 percent of eligible wages, expanding the salary base to $ 10,000 per employee per quarter (as opposed to per year) and reducing the loss thresholds which the business must meet to be eligible for credit. The law also extends credit to include publicly chartered entities, such as credit unions and public universities and hospitals. The use of credit has been a little modest, in part because companies couldn’t simultaneously claim the retention credit and participation in the most popular P3 program. The CAA also provides that companies receiving PPP loans can apply for the new and improved retention credit to pay any salary expense not covered by the PPP. The credit is due to expire four quarters after June 30, 2021. JCT estimated that these provisions would cost $ 20.5 billion.

Deduction for business meals

Under current law, businesses can deduct 50% of the cost of business meals. Typically – and as part of an income tax, and rightly so – businesses can deduct the full cost of regular expenses. According to this logic, business meals should be fully deductible. However, since people must eat regardless of the tax code, a portion of fully deductible business meals would simply subsidize individual consumption. In 1993, Congress limited this deduction to 50%. The CAA temporarily increases this deduction to 100 percent until the end of 2022 at a cost of $ 6.3 billion.

Temporary retrospective for the earned income tax credit and the child tax credit

The Working Income Tax Credit (EITC) and Child Tax Credit (CTC) are two of the strongest income support programs offered by the federal government. Run by the tax code, these programs offer refundable tax credits to American workers. These programs, however, require taxpayers to submit “earned” income for the year in which they claim the credits. The EITC offers a credit as a percentage of their income up to a certain maximum, while the CTC offers a credit of a fixed amount (again subject to phase-out) for taxpayers whose earned income exceeds 2,500 $. Thus, taxpayers who lost their jobs in 2020 could benefit from reduced income support through these programs. The CAA allows taxpayers to use 2019 tax information for the purpose of claiming these credits. JCT estimated that this policy would cost $ 4.1 billion.

Improved charitable deduction

The CARES Act created a new tax incentive for charitable donations by offering individuals a new top deduction of $ 300 on charitable donations and increasing previously enacted limitations on charitable deductions. As an above-the-line deduction, this provision allows taxpayers who do not normally claim itemized deductions to deduct contributions up to $ 300. The CAA is extending this policy for one year and increasing the limit to $ 600 for married couples. JCT estimated that this policy would cost $ 2.9 billion.

Extension of sick leave and paid family leave credits

The Families First Coronavirus Act established refundable wage tax credits to compensate employers for costs associated with paid sick leave as well as family and medical leave mandated separately in the law. The CBO estimated the cost of these credits at $ 95 billion over 2020-2021. These credits were subject to forfeiture at the end of the year. CAA extends these credits for an additional three months at the cost of $ 1.6 billion.

Payroll tax deferral

In August, the president issued a memorandum allowing employers to choose to defer paying taxes to the employee roll until January of next year, offering employees essentially an interest-free loan. Under previous provisions, employers would be required to increase withholding tax and pay deferred amounts between January 1, 2021 and April 31, 2021, after which penalties and interest on unpaid deferred taxes would begin to accrue. accumulate. The CAA extends the repayment period until December 31, 2021. Although the policy assumes that taxpayers reimburse the deferral, the JCT ruled that this policy would lose $ 16 million.

Conclusion

CAA is providing the next phase of Congressional budget response to the COVID-19 pandemic. In addition to other major interventions, the bill contains 72 tax provisions aimed at relieving individuals and businesses, including $ 164 billion in payments to individuals and families.


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