The $900 billion coronavirus relief deal that Congress passed and President Trump signed into law on December 27, 2020 (H.R. 133 – Consolidated Appropriations Act, 2021) (the “Act”) and the $1.4 trillion omnibus spending legislation to fund the government include important tax breaks for Americans for 2020 and beyond.

Stimulus checks
The biggest tax benefit for individuals under the Act is the direct payments to Americans that are advanced tax credits, just like the first round of payments under the CARES Act. These payments of up to $600 per adult and $600 per child are available for individuals and married couples who meet certain income thresholds.

If you were supposed to get a larger sum based on your 2020 income but got a reduced amount because of your 2019 income, then the government will pay you the difference when you file your taxes for 2020. If your payment is too high based on your 2020 income, you’re not responsible for paying back the difference.

Employee retention credit
Perhaps the biggest tax benefit for small businesses under the Act is the extension of the employee retention tax credit through June 30, 2021 and eliminating the requirement that it may only be used if the business did not receive a PPP loan. Under the CARES Act, the employee retention credit (ERC) provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee for wages paid through December 31, 2020. The ERC was not available to employers who received a PPP loan.

The CCA, however, extends the ERC through June 30, 2021 and: (1) increases the ERC rate from 50% to 70% of qualified wages (up to $7,000 per employee); (2) eases the requirements to qualify for the ERC by reducing the required “gross receipts decline” test from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility; (3) allows the credit for each quarter in which as employer qualifies instead one credit per year; (4) expands eligibility to larger employers with 500 or fewer employees; (5) allows certain public instrumentalities to claim the credit; (6) removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers; (6) allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year; and (7) provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.

Second draw PPP loans
The Act creates a “Second Draw” PPP loan for smaller and harder-hit businesses, with a maximum loan amount of $2 million. In order to receive a second draw PPP loan under the Act, eligible entities must:
Employ not more than 300 employees (as opposed to 500 employees in the first round of PPP). Unless subject to an exemption, e.g., hospitality (NAICS code 72), the SBA affiliation rules apply in determining the number of employees;

Have used or will use the full amount of their first PPP loan; and
Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same quarter in 2019.
Eligible entities must be businesses, certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Expenses paid with PPP loan proceeds are fully deductible
The new Act clarifies that taxpayers whose PPP loans or other obligations are forgiven are allowed deductions for otherwise tax-deductible expenses paid with the PPP loan proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.

Earned Income Tax Credit and Child Tax Credit
The stimulus bill also adjusts how the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) will be calculated for the 2020 tax year. A taxpayer can choose either their 2019 or 2020 income to determine credit eligibility, whichever is most advantageous for them.

Without the change, millions of families were at risk of receiving tax refunds that were significantly less than the ones they received for the previous year due to the way the credits are calculated.

Payroll tax deferral
As part of a flurry of executive actions to address the pandemic, President Trump signed a memorandum in August allowing employers to defer the employee portion of the Social Security tax in their paychecks for the rest of the year. By doing so, workers saw higher paychecks for the remainder of 2020.

But these deferred amounts had to be paid back by the end of April 2021, meaning employers would withhold more in taxes in the first paychecks of the year. The stimulus bill extends the repayment deadline to December 31, 2021.

That lengthens the repayment period across the entire year, so the deferral amount is paid in smaller chunks at a time.

Charitable donations
Under the CARES Act, taxpayers could deduct up to $300 for charitable donations in 2020 and still take the standard deduction. Typically, charitable donations can only be deducted if you itemize your taxes.

The new stimulus deal extends that above-the-line deduction and improves it. For 2021, individuals can deduct up to $300 and joint filers can deduct up to $600 in charitable contributions.

Business meals deduction
The new Act raises the deduction for business meals (not entertainment) from 50% to 100% for business meals paid or incurred between December 31, 2020 and January 1, 2023.

Flexible spending accounts
Any leftover balances in health care or dependent care flexible spending accounts, or FSAs, can be rolled over to 2021 from 2020 under the new bill. Additionally, any unused funds at the end of 2021 can also be rolled over into 2022. Typically, these are use-it-or-lose-it funds.

Medical expense deduction
Medical expenses typically have to exceed 10% of adjusted gross income to take this itemized deduction. That threshold is now 7.5% permanently.

Student loans
Under the CARES Act, employer payments for an employee’s student loans — up to $5,250 — would not be counted as the employee’s taxable income. That exclusion has been extended through 2025.

Increased income threshold for the Lifetime Learning Credit
While the “above-the-line” deduction for qualified tuition and related expenses was eliminated, the income threshold for the lifetime learning credit (LLC) was increased. As of 2020, the LLTC is available for individuals with modified adjusted gross income (MAGI) of between $80,000 and $90,000 for single taxpayers and between $160,000 and $180,000 for married filing jointly taxpayers.

The Lifetime Learning Tax Credit provides a credit of up to 20 percent of the cost of qualified educational expenses, which are generally limited to tuition and fees for the taxpayer, a spouse, or a dependent. Books, supplies and equipment are included only if they are necessary for enrollment. Other expenses, such as room and board, transportation and nonacademic costs are not eligible for this credit. The maximum credit per year is $2,000, based on $10,000 of qualifying expenses.