NEW LAW’S TAX PROVISIONS INCLUDE DIRECT-TO-TAXPAYER REBATE22 December 2020
The COVID-Related Tax Relief Act of 2020 (COVIDTRA), which is part of the Consolidated Appropriations Act of 2021, contains numerous tax-related provisions including a second direct payment to individual taxpayers which the COVIDTRA calls a recovery rebate. Here are discussions of several of the COVIDTRA provisions.
For additional COVIDTRA provisions, as well as provisions related to payroll issues, see Consolidated Appropriations Act of 2021 Contains Many COVID-19 Payroll-Related Provisions.
New recovery rebate
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136) provided for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments (EIP).
New law. The COVIDTRA contains a new program, which it refers to as “additional 2020 recovery rebates.”
The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
The term “eligible individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts.
The credit is available on the taxpayer’s 2020 return.
The provision provides for Treasury to issue advance payments based on the information on 2019 tax returns. Eligible taxpayers treated as providing returns through the nonfiler portal in with respect to their EIP, will also receive payments.
In general, taxpayers without an eligible Social Security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a Social Security Number and one spouse does not are eligible for a payment of $600, in addition to $600 per child with a Social Security Number.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. (Code Sec. 6428A, as added by COVIDTRA Sec. 272)
Amendments to CARES Act Economic Impact Payment rules
The CARES Act provided for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments (EIP).
New law. The COVIDTRA makes the following changes to the CARES Act EIP:
• The $150,000 limit on adjusted gross income before the credit amount starts to decrease, which, under the CARES Act applied to joint returns, also applies to surviving spouses. (Code Sec, 6428(c)(1), as amended by Act Sec. 273(a))
• Changes the requirement, in order to be eligible for an EIP, with respect to providing IRS with the taxpayer’s identification number, to conform to that requirement under the new rebate described above under “New Recovery Rebate.” (Code Sec. 6428(g), as amended by COVIDTRA Sec. 273(a))
$250 educator expense deduction applies to PPE
Eligible educators (i.e., kindergarten through grade 12 teachers, instructors, etc.) are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them. (Code Sec. 62(a)(2)(D)(ii))
New law. COVIDTRA provides that, not later than February 28, 2021, the IRS must, by regulation or other guidance, clarify that personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 are treated as described in Code Sec. 62(a)(2)(D)(ii). Such regulations or other guidance will apply to expenses paid or incurred after March 12, 2020. (COVIDTRA Sec. 275)
Clarification of tax treatment of covered loan forgiveness
CARES Act Sec. 1102 provides that a recipient of a PPP loan may use the loan proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations. If a PPP loan recipient uses their PPP loan to pay those costs, they can have their loan forgiven in an amount equal to those costs. PPP loan forgiveness doesn’t give rise to taxable income and the Code generally doesn’t allow a taxpayer to deduct expenses that are paid with tax exempt income.
New law. COVIDTRA clarifies taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. (CARES Act section 1102 as clarified by COVIDTRA Sec. 276)
Effective date. This provision is effective as of the date of enactment of the CARES Act. (COVIDTRA Sec. 276(a)(2))
Emergency financial aid grants
An individual taxpayer may claim the American opportunity tax credit and/or the Lifetime Learning credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses, and their dependents. (Code Sec. 25A) However, under Code Sec. 25A(g)(2) higher education expenses paid for by tax exempt income can’t be used to claim either of these credit.
New law. COVIDTRA excludes certain CARES Act emergency financial aid grants from the gross income of college and university students. This provision also holds students harmless for purposes of determining their eligibility for the American Opportunity and Lifetime Learning tax credits. (CARES Act sections 3502, 3504, and 18004 as clarified by COVIDTRA Sec. 277)
Effective date. This provision applies to qualified emergency financial aid grants made after March 26, 2020, the date of enactment of the CARES Act. (COVIDTRA Sec. 277(c))
Clarification of tax treatment of certain loan forgiveness and other business financial assistance under the CARES Act
The CARES Act expanded access to Economic Injury Disaster Loans (EIDL) and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of CARES Act loans.
New law. COVIDTRA clarifies that gross income does not include forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. (CARES Act sections 1110(e) and 1112(c) as clarified by Act Sec. 278)
Effective date. The provision is effective for tax years ending after March 26, 2020, date of enactment of the CARES Act. (COVIDTRA Sec. 278(e))
Authority to waive certain information reporting requirements
Generally, Code Sec. 6050P and Reg §1.6050P-1 and Reg §1.6050P-2 require an lender (as defined in Code Sec. 6050P(c)(1)) that discharges at least $600 of a borrower’s indebtedness to file a Form 1099-C, Cancellation of Debt, with IRS, and to furnish a payee statement to the borrower.
New law. The COVIDTRA provision allows the Treasury Department to waive information reporting requirements for any amount excluded from income by the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income or the exclusion of certain loan forgiveness and other business financial assistance under the CARES act from income. (COVIDTRA Sec. 279)
Money purchase plan distributions can qualify as coronavirus-related distributions
The CARES Act provides for special tax treatment for a “coronavirus-related distribution” from a retirement plan. For example, CARES Act Sec. 2202(a) provides an exception to the 10% additional tax under Code Sec. 72(t) for early distributions from qualified retirement plans made to qualified individual.
CARES Act Sec. 2202(a)(6)(B) provides that coronavirus-related distributions meet various Code requirements.
Code Sec. 401(a) provides the requirements for a trust, created or organized in the US and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries, to be constituted as a qualified trust. Under Code Sec. 501(a), a qualified trust is exempt from tax.
New Law. COVIDTRA provides that, in the case of a money purchase pension plan, a coronavirus-related distribution which is an in-service withdrawal (i.e., a withdrawal made by while the beneficiary of the plan is still employed by the plan owner) is treated as meeting the distribution rules of Code Sec. 401(a). (CARES Act Sec. 2202(a)(6)(B), as amended by COVIDTRA Sec. 280(a))
Effective date. This provision applies retroactively as if included in Section 2202 of the CARES Act, i.e., as of March 27, 2020. (CARES Act Sec. 2202, as amended by COVIDTRA Sec. 280(b))
Farmers’ net operating loss changes
Before the enactment of the CARES Act, farmers were allowed to carry back net operating losses (NOLs) to each of the two preceding years. They were also allowed to waive the carryback and carry forward the NOL. (Code Sec. 172(b)(1)(B))
The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2017 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. (Code Sec. 172(b)(1)(D) as amended by Act Sec. 2303(b)(1))
New law. The COVIDTRA allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. It also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver.
These provisions apply retroactively as if included in Section 2303 of the CARES Act. (CARES Act Sec. 2303, as amended by COVIDTRA Sec. 281)
Disclosures to prevent certain taxpayers from being subject to private tax collection
Code Sec. 6306(d)(3) excludes supplemental social security (SSI) and social security disability insurance (SSDI) beneficiaries from the IRS private debt collection program beginning on January 1, 2021.
New law. The IRS and Social Security Administration need statutory authority to share information to determine which taxpayers are SSI or SSDI beneficiaries and eligible for exclusion from the IRS program. The provision provides the authority needed to share such information and make Code Sec. 6306(d)(3) work as intended. (Code Sec. 6103(k)(15) and Section 1106 of the Social Security Act, as amended by COVIDTRA Sec. 283)
Disclosure of tax return information related to education institutions
Code Sec. 6103(l)(13) allows disclosure of return information to carry out the Higher Education Act of 1965.
New law. COVIDTRA allows the IRS to share tax return information of student aid applicants, their parents, students, and borrowers with the Department of Education and further allows that tax return information be redisclosed to colleges and universities (and certain scholarship organizations) with the taxpayer confidentiality protections afforded under section 6103 of the Code. (Code Sec. 6103(l)(13), as amended by COVIDTRA Sec. 284)
Many of these provisons had been in Code Sec. 6103(l)(13) at one time, but were deleted by the CARES Act.
Transfers of excess pension assets to retiree health or life insurance accounts
Under Code Sec. 420, certain “qualified future transfers” are permitted, under which up to 10 years of retiree health and life insurance costs may be transferred from a defined benefit pension plan to a retiree health benefits account and/or a retiree life insurance account within the pension plan. Those transfers must meet a number of requirements: the plan must be 120% funded at the outset, it must be 120% funded throughout the transfer period, all unused amounts must be transferred back, and the plan is subject to a maintenance of effort requirement. Applying those requirements during the market volatility related to the coronavirus pandemic has caused plans that have been historically over 120% funded, to fall below 120%, and as a result those plans are then required to immediately restore the large market losses in order to restore 120% funding.
New law. For tax years beginning after Dec. 31, 2019, a one-time election is allowed—not later than Dec. 31, 2021—to end any existing transfer period for any tax year beginning after the date of election, provided
1. The maintenance of effort continues to apply as if the transfer period were not shortened,
2. The employer ensures the plan stays at least 100% funded throughout the original transfer period,
3. The plan has funding targets for the first five years after the original transfer period, and
4. All amounts left in the retiree benefits account at the end of the shortened transfer period are returned to the plan (without application of an excise tax to those amounts).(Code Sec. 420(f)(7), as amended by COVIDTRA Sec. 285(a))