The COVID-19 relief package that Congress agreed to last month provides many useful tax breaks, including claiming restaurant meals as 100% business deductions.
Taxpayers can take advantage of various tax credits and extenders, including the Employee Retention Tax Credit, the Work Opportunity Tax Credit, the Health Coverage Tax Credit, and the five-year extension of the New Markets Tax Credit at $5 billion per year.
The package includes a short-term extension on sick leave and family leave, but not for long. The employer credit for paid sick and family leave was set to expire in 2020, but it was extended to March 31, 2021, and then the Employee Retention Tax Credit, compensation paid to a covered employee, is through June 30, 2021. Those are part of the extensions.
Biden is scheduled to unveil his economic plans shortly, and chances are that pressing issues like getting the COVID-19 pandemic under control will take priority over tax reform. Taxpayers are afraid of retroactive tax increases. CPA’s are predicting if there’s any more tax legislation, it’s likely going to be the middle of the year, and it’s unlikely that they will make anything retroactive to Jan. 1, 2021, at that point. More likely, if there is some change, it would take effect in 2022.
A big item that affects both individuals and businesses is that they extended the change for charitable contributions, so people who don’t itemize their deductions can still take a $300 above-the-line charitable contribution deduction in 2021. Also for 2021, the AGI limitation on people who do itemize rises to 100 percent. That’s a pretty big one that’s going to affect a lot of people. People that give to charity will be able to get at least some benefit from it.
There’s also a break for people who have to dip into their retirement accounts to pay for their current needs. There’s a change to the penalty tax when people have to take money out of their retirement plans to live off their savings. If they can show it’s a qualified coronavirus-related distribution, they’re waiving the 10 percent penalty tax. They have three years to repay. If you take money out of your plan, you can either pick it up in income over three years or you can pay it back to your plan without having to pay tax on it.
A more controversial provision in the stimulus deal is allowing businesses to write off the costs of meals and entertainment, which President Trump pushed as a priority for helping the ailing restaurant industry. In 2021 and 2022 we’re going back to 100 percent allowance for deductions for business meals, but they have to be served by a restaurant.