In an especially important step to aiding Americas economy due to the pandemic, congress and the senate have passed a new $900 Billion relief bill. The most talked about item is the $600 stimulus checks to qualifying citizens (single files with under $87,000 in income on their 2019 tax returns and $174,000 for those married filing jointly), but this is a large bill with nearly 6,000 pages of new legislation. While this large bill has many different items, this article will focus on some of the more impactful changes to the tax rules.
Deductibility of Expenses Paid by PPP Loans
While the balance of a forgiven loan is typically required to be included in gross income, the first stimulus bill, the CARES Act, removed PPP loans from that requirement. What was unclear was the deductibility of normally deductible expenses if PPP loan proceeds were used to cover those expenses. The Second stimulus bill now clarifies that those normal business deductions will in fact continue to be deductible regardless if the PPP loan was used to pay for that expense. For those businesses that received substantial PPP loans to keep their business moving, this is an important addition to maximize the impact of the loans. Along similar lines, the second stimulus also clarifies that the forgiveness of loans such as the Emergency Disaster Loan Grants will not be reported in gross income for 2020 taxes.
Educators Personal Protective Equipment
Educators can now include any PPE (personal protective equipment) purchased as a deductible expense. This rule allows the inclusion of masks, face shields, cleaners and anything else paid for by an educator to slow the spread of the corona virus within the classroom. This deduction will be a part of the current supply deduction available to educators for the purchase of school supplies not provided by the school.
Extension of Payroll Tax Repayment
Starting September 1st employers could withhold paying the employee portion of old-age, survivors, and disability insurance (OASDI) for any employee receiving less than $4,000 in a bi-weekly pay period. Starting Jan 1st, 2021 employers are required to begin withholding and paying OASDI taxes for all employees including repayment of those funds not paid from Sept 1st through Dec 31st, 2020. The original memorandum required the repayment of those funds to be taken out ratably from January 1st to April 30th, 2021. The second stimulus bill has increased the payback period to Dec. 31st, 2021.
Temporary Increase to Business Meal Deduction
Included to increase spending at restaurants, the second stimulus bill includes 100% deduction for business meals from Jan 1st, 2021 to the end of 2022. Currently only a 50% deduction is allowed.
Effective for tax years 2021 and beyond the new stimulus bill increases the phase out limits on the Lifetime Learning Credit. This credit’s phase out limit will now match the American Opportunity Credit.
Residential Rental Property
The depreciation time frame on certain residential rental property placed into service after Jan 1st, 2018 will now be set at 30 years. This allows the depreciation to be stretched out over a longer period.
Special rules on Earned Income and Child Tax Credits
For the purpose of qualifying for the Earned Income and Child Tax Credits the new stimulus bill will allow income from tax year 2019 to be used instead of 2020. This is a one-year exception, and the lookback is limited to tax year 2019.
As more information is brought forth, we will continue to update our blog with our findings.