2021 welcomed a flurry of new tax changes, expanding certain COVID-related stimulus and making permanent some of the tax benefits that were set to expire in 2020. In addition, California voters passed Prop 19, introducing significant property tax changes to real estate inheritance in California.
Below we have highlighted some of the key changes. As with all things tax, the details of these changes are many and varied. We welcome further conversation about your specific situation and we continue to closely monitor the anticipated future tax changes under our new congress and president.
- Extension of Residential Energy Tax Credits through 2021
- Extension of Enhanced Charitable Contribution Deductions
- Permanent Reduction of Medical Expense Deduction Threshold
- CA Prop 19 Property Tax Increase for Parent-Child Transfers of Real Estate
TAX UPDATES FOR BUSINESSES
- 100% Deductions for Business Meals
- Extension of Section 181 Deductions for Production Expenses
- “Double-Dipping” Allowed on PPP Expenses (Loan Forgiveness + Tax Deductions)
- Simplified PPP Forgiveness on Loans up to $150,000
EXPANDED PANDEMIC ASSISTANCE FOR INDIVIDUALS IMPACTED BY COVID
- Second Round Stimulus Payments to Individuals with Low Income
- Extension of Supplemental Unemployment Benefits
- Extension of Deferred Student Loan Payments
EXPANDED PANDEMIC ASSITANCE FOR BUSINESSES IMPACTED BY COVID
- Renewal of the PPP Loan Program
- New “Second Draw” PPP Loan Program
- Expansion of the Employee Retention Credit (ERC)
- Extension of the Payroll Tax Credit for Paid Sick & Family Leave
EXTENSION OF RESIDENTIAL ENERGY TAX CREDITS
Taxpayers who upgrade the energy efficiency of their homes may still be eligible for tax credits to offset some of those costs:
Nonbusiness Energy Property Credits set to expire in 2020 have been extended through 2021. The credit is up to 10% of the cost of qualified energy efficiency improvements (including home insulation, exterior doors, exterior windows/skylights and certain roofing materials) and up to 100% of the cost of residential energy property (certain energy rated heating/cooling systems for air and water). This credit is worth a lifetime maximum of $500 for all years combined, from 2006 to its expiration.
Residential Renewable Energy Tax Credits also received a two-year extension. Solar/wind installations to generate electricity for a principal residence or second home can receive credits up to 26% of costs (including installation) for 2021-2022 and 22% of costs in 2023.
EXTENSION OF CHARITABLE CONTRIBUTION DEDUCTIONS
Prior to 2020, anyone who did not itemize could not deduct contributions to charity. As a result of the 2017 tax overhaul, more individuals are now claiming the standard deduction and charities have reported a decline in donations. The IRS will now extend the following CARES Act provisions into 2021:
Reduced Income Limits mean that individuals making cash gifts to charity are no longer subject to an income-based limit on charitable tax deductions for 2021. This reduction does not apply to gifts of appreciated securities, gifts to donor-advised funds, or gifts to private foundations.
Deductions for Non-Itemizers allow individuals to claim up to $300 in deductions for charitable contributions on top of their normal standard deduction. The threshold has been increased to $600 for joint filers for 2021.
PERMANENT REDUCTION OF MEDICAL EXPENSE THRESHOLD
The threshold to deduct medical expenses for tax purposes was set to increase to 10% of Adjusted Gross Income in 2025. New legislation makes the reduced 7.5% threshold permanent.
CA PROPOSITION 19 – PROPERTY TAX TRANSFERS
Parent-to-child transfers of properties located in California will have radically different property tax implications beginning February 16, 2021.
Today a child inheriting real property in California can also inherit:
- The property tax basis of a parent’s personal residence, without limit
- Plus the property tax basis of up to $1.0 million of ‘other’ real property (the $1.0 million is assessed value, not necessarily fair market value). ‘Other’ property is broadly construed and can include second homes and commercial property
As of February 16, 2021, transfers of ‘other’ property will be eliminated entirely, and personal residence transfers will only include property tax basis if at least one inheriting child subsequently lives in the property as a personal residence. In other words, the property can be transferred to multiple children and will include tax basis provided at least one of those children lives in the property as a personal residence.
This change could have material ramifications for California property owners whose properties – either principal residences or second homes/investment properties – have appreciated considerably since purchase (suggesting their property tax basis is far below market value).
To avoid the increase in property taxes, California property owners may consider transferring real estate to their children or into an irrevocable trust prior to the law change. However, these transfers can be complicated, and it is important that any such decision be made in the context of professional tax and estate planning advice. For example, gifting significantly appreciated property outside of an estate transfer may transfer future capital gains taxes to the next generation in exchange for lower property taxes. This could nullify the benefit of lower property taxes, or worse.
EXPANDED DEDUCTION FOR BUSINESS MEALS
To stimulate the restaurant industry, new legislation makes business meals 100% tax deductible for 2021 and 2022. Historically, business meals were only 50% deductible.
The immediate expensing of production costs under Section 181 has been extended through 2025. As such, qualified expenses associated with film, television, and theatrical productions can be deducted for tax purposes when incurred as opposed to when the production is placed into service (e.g. official release date). Previously Section 181 had been subject to annual renewal. As such, the hope is that the current extension will give more flexibility to the entertainment industry in terms of production planning. Note that not all states conform to this treatment, including California.
DOUBLE-DIPPING ALLOWED ON PPP EXPENSES
PPP Loans are intended to be forgivable to the extent they are used to fund eligible expenses (no less than 60% payroll). Previously, the IRS had said that you could not ‘double-dip:’ if your PPP loan was forgiven, the expenses which you used to qualify for forgiveness (payroll, rent/mortgage, utilities) could not also be deducted against income on your tax return.
Under revised legislation, business expenses paid with PPP funds are now fully deductible for federal taxes, even if used for loan forgiveness. Please note that not all states have conformed to this treatment. At present, New York will allow double-dip deductions but California does not, meaning forgiven expenses must be added back to increase California taxable income.
If you received an original PPP loan, you must apply for forgiveness within 10 months of the later of a) the date your PPP loan was exhausted or b) the end of your covered period.
Under new legislation, businesses qualify for simplified forgiveness on loans less than $150,000, up from the previous limit of $50,000. Under the simplified forgiveness program, borrowers need only certify two things:
- You have provided (or will provide) all the proper documents to the lending bank to support the claims made in their original PPP application. Generally, this means you’ve submitted Forms 940 and 941 for 2019.
- You have used the PPP loan funds only for the expenses which were approved under the PPP program.
Please check with your lender as you look to apply for loan forgiveness, as many of them have more specific requirements for supporting documents.
Special note for those who got both a PPP loan and an EIDL grant: the SBA will no longer reduce the PPP forgiveness amount by the EIDL grant. However, while forgiven PPP loans and EIDL grants are both non-taxable for federal income taxes, not all states conform to this treatment. California and New York, for example, have conformed to the non-taxability of forgiven PPP loans, but have yet to do so for EIDL grants.
SECOND ROUND STIMULUS PAYMENTS TO INDIVIDUALS
The second round of stimulus payments are capped at $600 per individual and dependent child under age 17. Individuals who earned more than $87,000 in 2019 and couples who earned more than $174,000 jointly in 2019 are not eligible.
Payments were sent out via checks, direct deposit or prepaid debit cards. By this point, all eligible individuals should have either received the payment or received correspondence about the payment.
If you received the first stimulus payment but have not received the newest $600 payment, it is possible that you may not get one. If the IRS has not yet processed your 2019 return (and they are still processing 2019 returns), it is possible that otherwise eligible taxpayers will not receive the direct payment. Instead, these taxpayers will have to claim a Recovery Rebate Credit when they file their 2020 tax returns.
Others who may be able to claim the Recovery Rebate Credit on their 2020 tax returns include:
- Those whose income exceeded the thresholds in 2019 but fell below them in 2020
- Those who meet the income thresholds and had/adopted a baby in 2020
- Those who meet the income thresholds but didn’t file a tax return in 2018 or 2019
If you believe you should have been eligible, click here to check on the status of your second stimulus payment.
Congress is currently considering a third round of stimulus that could offer higher payments to lower income individuals and families.
EXTENSION OF FEDERAL UNEMPLOYMENT BENEFITS
The CARES Act added an additional $600 per week in federal unemployment compensation, which ended in July. The new act restores a lesser federal benefit of $300 to each week (in addition to state benefits) beginning December 27, 2020 and for up to 11 weeks through March 31, 2021. This applies to regular Unemployment Insurance claims as well as Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation claims.
To apply for unemployment (federal and state), visit your state’s website.
EXTENSION OF STUDENT LOAN DEFERRALS
Under Executive Order, President Biden extended the current deferral program on government (not private) student loans through September 30, 2021. The CARES Act program was previously set to expire at the end of January. See this link for more information and be sure to check with your loan servicer to make sure your loan qualifies (most loan servicers have links on their web page for Coronavirus-related issues).
Now known as “First Draw” loans, the original PPP program is once again available for businesses that did not apply for the loan prior to August 8, 2020, when the initial application window closed. These loans are only available until March 31, 2021.
The qualification requirements and application process remain largely the same. You must have been in business on February 15, 2020 and have had payroll in either 2019 or 2020. First Draw loans are capped at 2.5 months’ salary. Depending on the structure of the business seeking the loan, there are special caps for owners and limitations on whether pension and healthcare benefits can be considered in calculating the loan amount.
One major change from the original program: you can now choose the length of your ‘covered period’ to apply for forgiveness, so long as the period is no less than 8 weeks and no more than 24 weeks following the disbursement of the loan.
A second round of PPP loans, termed “Second Draw” loans, are only available to those who can meet ALL of the following requirements:
- Have already received a First Draw PPP loan;
- Have either (i) filed for forgiveness of the original loan and been accepted, or (ii) exhausted their initial PPP allocation but have not filed for forgiveness;
- Have less than 300 employees; and
- Can show more than 25% decline in revenues from 2019 to the same period in 2020 (same quarter, or year-over-year)
As with the first draw loans, you must attest that current economic uncertainty makes this loan request necessary to support the ongoing operations of your business. The loan is forgivable if you use at least 60% for payroll. Other eligible expenses include: rent, utilities, mortgage interest, transportation costs, operations expenses such business software, and a few others.
It is possible to apply for both First and Second Draw loans, provided you meet all qualifications. Your Second Draw funds will not be released until you have exhausted your First Draw funds.
EXPANSION OF THE EMPLOYEE RETENTION CREDIT
Originally, employers had a choice: take the ERC, or apply for a PPP loan – you could not do both. The new act now allows employers to take both, and employers who could have taken the ERC in 2020 can still do so, as the change was made retroactive. The ERC can be claimed on the employment tax return (Form 941) or on an amended Form 941 if the return has already been filed. In addition, the credit is now available with respect to qualified wages paid through June 30th, 2021.
To qualify for the credit, employers must have experienced a full or partial shutdown of their business due to COVID-19 or a significant decline in gross receipts (at least 50% when compared to the same quarter of the previous year). The credit is equal to 70% of qualified wages paid to employees subject to limit of $10,000 per employee per quarter. Unfortunately, wages paid to “related individuals” are not “qualified wages” for purposes of the Employee Retention Credit. Accordingly, wages paid to a loan-out’s owner/employee do not qualify for the ERC.
EXTENSION OF THE PAYROLL TAX CREDIT FOR PAID SICK & FAMILY LEAVE
Employers are allowed to receive a tax credit for payroll taxes withheld from wages paid to employees on sick or family leave. The credit was initially authorized under Families First Coronavirus Response Act and was set to expire on 12/31/20. Eligible employers may now claim the credit through March 2021.
We are keeping a close eye on the key proposed changes under President Biden’s tax plan. Those include:
- Maximum Individual Income Tax Rate increase to 39.6% for taxpayers with income in excess of $400,000
- Capital Gains Tax increase to 39.6% (ordinary income rate) on qualified dividends and capital gains for taxpayers with incomes in excess of $1,000,000 + 3.8% ACA surtax on capital gains
- Qualified Business Income (QBI) Deduction phase-out for those making over $400,000
- Social Security payroll taxes will continue to phaseout at $137,700 of wages but will resume on wages in excess of $400,000
- Corporate Tax rate increase to 28% (currently 21%)
- Estate Tax Lifetime Exemption reduced to $3,500,000 per person (currently $11,700,700 per person)
- No tax basis step-up at death
- Unrealized capital gains tax assessed at death on all property not passed to spouse or charity
- Gift Tax Lifetime Exclusion decreased to $1,000,000 per person (currently unified with estate tax)
- Estate Tax transfer tax increased from 40% to 45%
In California, a couple of significant tax increases that did not go through in 2020 may be reintroduced in 2021. One of those proposals is Assembly Bill 1253, which would have raised California’s top marginal income tax rate from 13.3% to 16.8%.
Similarly, Governor Cuomo’s 2022 budget proposal includes a provision to increase New York’s top tax rate from 8.82% to 10.86% to cover budget shortfalls from the COVID-19 pandemic. This would take the top tax rates for New York City residents to a combined 14.7%.