The past few years have been a whirlwind of tax law changes in response to the pandemic – both for individuals and businesses. PPP, EIDL, the CARES Act, the TCJA…we’ve learned more acronyms than we ever could have imagined. But many of the tax changes surrounding the pandemic were temporary, meaning we now have to “face the music” of newly revised rules and (sometimes vague) guidance as we begin working on your 2021 tax return.
Here’s a quick rundown of the pandemic tax changes we’re now facing.
For Businesses
Grants and debt cancellation
In a normal tax year, cancellation of debt and outright grants would be included in gross income, but the pandemic changed that. PPP loans, Restaurant Revitalization Fund grants, EIDLs, and even Shuttered Venue Operators Programs not taxable as income. However, they are still treated as gross receipts, which means they count toward the gross receipts test used for determining whether a business is “small” and eligible to use the cash method of accounting.
Net operating losses
NOL rules created by the Tax Cuts and Jobs Act (TCJA) take effect in 2021. Unless you’re in farming, this means no carrybacks. There is an unlimited carryforward, but it can only be used to offset up to 80% of taxable income.
Previously, NOLs were subject to a 5-year carryback and unlimited carryforward.
Business-related meals
In 2020, the deduction for business meals was limited to 50% of the cost. For 2021 and 2022, the deduction is 100% for business meals provided at restaurants. The 100% limit may also be used to substantiate the cost of business meals under a per diem allowance.
Qualified business income (QBI)
While the basic rules for the QBI deduction for owners of pass-through entities have not changed since 2020, there are two important points to note. First, the taxable income thresholds at which the deduction may be reduced or eliminated have been adjusted for inflation in 2021. And second, if 2020 was a loss year, that loss adversely impacts the amount of the QBI deduction for 2021.
Business Interest Expense Deduction
The CARES Act set the business interest expense deduction limit at the sum of a company’s total interest income, plus 50% of adjusted taxable income (ATI), plus floorplan interest financing expense. For 2021, the limit returns to 30% of ATI.
Employee Retention Credit
The recently signed Infrastructure Investment and Jobs Act (IIJA) eliminates the employee retention credit (ERC) for wages paid after September 30, 2021. ERCs were part of the CARES Act and gave employers a 50% payroll tax credit on qualified wages of up to $10,000 per employee in 2020 and 70% credit on qualified wages of up to $10,000 per employee per quarter in 2021. Eliminating ERC during the last three months of the year reduces the maximum available payroll credit by up to $6,000 per employee.
For Individuals
Economic Impact (stimulus) Payments
The final round of stimulus checks was sent to eligible individuals early in 2021. If you received less than you should have you can figure a recovery rebate credit using 2021 information and obtain a refund.
Qualified Coronavirus Distributions
In 2020, individuals needing financial relief were permitted tap their qualified retirement plans and IRS and take qualified coronavirus distributions up to $100,000 (and repay it within 3 years). The resulting income from the distribution was to be spread over three years unless the person opted to report it all in 2020.
If there is a repayment in 2021 of some or all of the distribution that was taken in 2020, an amended return needs to be filed for 2020 to claim a refund of taxes paid on the distribution last year.
Required Minimum Distributions (RMDs)
RMDs were suspended for 2020 but not 2021, so RMDs for 2021 must be taken as they always have, starting at age 72.
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If you’re turning 72 this year and taking your first RMD, you have until April 1, 2022, to do so. For each subsequent year, your RMD must be taken by December 31. Keep in mind, if you delay your initial RMD until April 1, you’ll be responsible for 2 withdrawals that year (one by April 1 and one by December 31), which could result in a larger tax liability.
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If you’re older than 72, you must take your RMD by December 31 each year.
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Employees who are not more than 5% owners may defer RMDs from their 401K (but not their IRAs) until they retire.
If you inherited retirement accounts from someone who died after 2019, you’re subject to a new 10-year rule that prevents you from spreading out distributions over your life expectancy unless you are the deceased’s spouse, minor child, or more than 10 years younger than the account owner.
Cancellation of Home Mortgage Debt
The exclusion from income for cancellation of home mortgage debt, initially set to expire at the end of 2020, was extended through 2025. However, the limit on the exclusion is reduced to $750,000 for 2021 through 2025 (down from $2 million). Half that limit applies to married persons filing separately.
Unemployment Benefits
In 2020, unemployment benefits up to $10,200 were excluded from gross income. In 2021, there is no exclusion, meaning all unemployment benefits will be included in income.
Charitable deductions
Normally, you must itemize to deduct charitable contributions. But for 2021, you can deduct up to $300 for cash donations to qualifying charities (up to $600 combined for married filers) whether you itemize or take the standard deduction for 2021.
For those who do itemize, you can claim cash contributions made to qualifying organizations up to 100% of your adjusted gross income (AGI) for the 2021 tax year only (generally limited to 60% of the taxpayer’s AGI).
It is important to remember that the temporary increase of the 100% limit isn’t automatic. Taxpayers must opt for increased limitations by making the election on their federal tax return for 2021. Otherwise, the usual limitation of up to 60% applies.
Other COVID-19-related payments and credits
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Paid sick leave and paid family leave: Payments made from Jan. 1, 2021, through Sept. 30, 2021, to eligible employees—those with certain COVID-19-related issues—are treated as taxable compensation. Eligible self-employed individuals may claim a tax credit that essentially equates to these payments.
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COBRA premium assistance: If employers were subject to COBRA, then involuntarily terminated employees as well as those with reduced hours received COBRA premium assistance from employers from April 1, 2021, through Sept. 30, 2021. These payments are not includible in gross income.
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Child Tax Credit: One-half was payable in advance via monthly checks or direct deposit to qualifying individuals, and the rest fully refundable in 2021. As of this writing, it will not be extended. Those advance payments qualify as income, so don’t be surprised if they affect your refund.
The 2022 tax season starts Monday, January 24, 2022 and ends Monday, April 18th. Be sure to keep a close eye on any correspondence you receive from us regarding the preparation of your 2021 return. This season always goes quickly!
