Update: COVID-19 Tax Relief Measures after the New Law

On December 27, 2020, the new Consolidated Appropriations Act (CAA) became law.

Until then, several temporary COVID-19-related federal tax relief measures were set to expire on December 31,2020. This article covers other changes and further explains one of the changes discussed in the linked article.

Note that the tax changes explained here are found in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) and the COVID-Related Tax Relief Act of 2020 (COVIDTRA). Both acts are folded into the massive 5,593-page CAA.

Borrow $100,000 from Your IRA and Pay It Back Within Three Years with No Tax Consequences

Thanks to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), IRA owners who were adversely affected by the COVID-19 pandemic were eligible to take tax-favored coronavirus-related distributions (CRDs) from their IRAs during 2020—but only during 2020.

You could take as much as $100,000. You can then recontribute a CRD back into your IRA within three years of the withdrawal date and treat the withdrawal and later recontribution as a federal-income-tax-free rollover.

In effect, the CRD drill allowed you to borrow up to $100,000 from your IRA(s) and then recontribute (repay) the amount(s) at any time up to three years later, with no federal income tax consequences when all is said and done.

There are no limitations on what you can use CRD funds for during the three years.

Status report. The CAA does not extend the CRD deal beyond 2020, but it clarifies that similar tax rules can apply to IRA distributions taken by folks who are affected by specified future disasters.

Suspension of Retirement Account Required Minimum Distributions (RMDs)

In normal times, you must begin taking annual required minimum distributions (RMDs) from traditional IRAs and tax-deferred retirement plan accounts after you reach age 72 (or age 70 1/2 if you turned 70 1/2 before 2020). The CARES Act suspended RMDs for calendar year 2020 as a COVID-19 tax relief measure, but only for that one year.

Status report. So far, lawmakers have not extended this deal.

Small-Employer Tax Credits to Cover Required COVID-19-Related Employee Paid Leave

The Families First Coronavirus Response Act (FFCRA) granted a federal tax credit to small employers to cover mandatory payments to employees who take time off under the FFCRA’s COVID-19-related emergency sick-leave and family-leave provisions.

Specifically, a small employer could collect a tax credit equal to 100 percent of qualified emergency sick-leave and family-leave payments made by the employer pursuant to the FFCRA. But the credit under the FFCRA covers only leave payments made between April 1, 2020, and December 31, 2020. Equivalent tax credit relief was available to self-employed individuals who took qualified leave between those dates.

Status report. The FFCRA expired by its terms on December 31, 2020. But the COVIDTRA extends the smallemployer credit to cover leave payments made between January 1, 2021, and March 31, 2021, that fall within the FFCRA framework.

There is no requirement for small employers to provide emergency sick-leave or family-leave payments after December 31, 2020. But between January 1, 2021, and March 31, 2021, employers can choose to make voluntary leave payments that fall within the FFCRA framework and can collect the credit if they do so.

Equivalent tax credit relief is available to self-employed individuals who take qualified leave between January 1, 2021, and March 31, 2021.

Payroll Tax Deferral Relief

Under payroll tax deferral relief offered by the CARES Act, your business could defer the 6.2 percent employer portion of the Social Security tax component of FICA tax owed on the first $137,700 of an employee’s 2020 wages—for wages paid during the deferral period. The deferral period began on March 27, 2020, and ended on December 31, 2020.

If you took advantage of this deferral, your business must pay the deferred payroll tax amount in two installments:

• Half by December 31, 2021
• The remaining half by December 31, 2022

This payroll tax deferral deal was available to all employers, with no requirement to show any specific COVID-19-related impact.

If you are self-employed, you could defer half of your liability for the 12.4 percent Social Security tax component of the self-employment tax for the deferral period.

Your self-employed deferral period began on March 27, 2020, and ended on December 31, 2020. You must then pay the deferred self-employment tax amount in two installments:

• Half by December 31, 2021
• The remaining half by December 31, 2022

Status report. So far, lawmakers have not extended this deal.

Employee Payroll Tax Deferral Relief

For eligible wages paid between September 1, 2020, and December 31, 2020, an employer could elect to allow an employee to defer withholding his or her 6.2 percent employee share of the Social Security tax on wages under President Trump’s memorandum of August 8, 2020.

Status report. The COVIDTRA extends the deadline for an electing employer to pay in deferred Social Security tax amounts via wage withholding. The original wage withholding repayment window was from January 1, 2021, to April 30, 2021. The COVIDTRA extends the window from January 1, 2021, through December 31, 2021. After December 31, 2021, interest and penalties will start accruing for employers with deferred amounts that they have not repaid to the government.

Liberalized Business Net Operating Loss Deduction Rules

Business activities that generate tax losses can cause you or your business entity to have a net operating loss (NOL) for the year. The CARES Act significantly loosened the NOL deduction rules and allows a five-year carryback for NOLs that arose in tax years 2018-2020.

So, an NOL that arose in 2020 can be carried back to 2015. NOL carrybacks allow you to claim refunds for taxes paid in the carryback years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can result in hefty tax refunds.

Status report. The CAA does nothing for NOLs that arise in tax years beginning in 2021—you can carry them forward only.

Suspension of Excess Business Loss Disallowance Rule

Before the CARES Act relief, the Tax Cuts and Jobs Act (TCJA) disallowed so-called excess business losses incurred by individuals in tax years beginning in 2018-2025. The TCJA defined an excess business loss as a loss that exceeds $250,000, or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation.

The CARES Act suspended the excess business loss disallowance rule for losses that arose in tax years beginning in 2018-2020.

Status report. The CAA does nothing for excess business losses that arise in tax years beginning in 2021. As things stand, you effectively treat a 2021 excess business loss as an NOL that you can carry forward to future years.

Takeaways

The CAA has some good news in the form of extended COVID-19 federal tax relief provisions and some bad news where it did not extend relief.

The most important good news in the CAA is the extension and liberalization of the employee retention credit. 

But from this article, you have to like the extensions to the COVID-19 paid sick and family leave credits and the employer extraction of monies from those employees who were allowed to defer their employee Social Security taxes.

And it’s good to know what COVID-19-related changes ended on December 31, 2020, such as

• the ability to borrow $100,000 from your IRA and pay it back within three years;
• no required RMDs;
• payroll tax deferrals;
• five-year carrybacks for NOLs; and
• suspension of the ugly excess business loss disallowance rule.

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