(NEW YORK, NY, March 2021) - Fairly frequently, Congress passes tax legislation at the end of the year and some of those provisions are made retroactive to the beginning of the year to achieve various policy goals. The Internal Revenue Service, which has already prepared many of its forms and instructions at least in draft form to start the tax filing season on time, must go back and revise those forms and instructions and its software systems to accommodate the changes. Private tax software providers must also revise their systems.
One result is a delay in the start of the tax filing season, which this year started on February 12, 2021 and continued the recent trend of later starts to the filing season. The COVID-19 pandemic has also kept the IRS a little behind all year anyway.
The Consolidated Appropriations Act, 2021 (CAA), enacted on December 27, 2020, includes several provisions impacting 2020 tax returns, both for individuals and businesses.
Economic Stimulus Payments
The second round of economic stimulus payments have been issued by the IRS in early 2021. Even though being received in 2021, they will be treated as payments associated with the 2020 tax return. The advance payments are being sent in the form of direct deposits, debit cards or checks. The recovery rebate credit for both the first and second round is to be claimed on line 30 of Form 1040 to the extent that the credit has not already been fully received in the form of the advance payments. The IRS has sent out Notice 1444 with respect to the first round of advance payments and Notice 1444-B to taxpayers with respect to the second round of payments. Taxpayers should provide both notices to their return preparer to assist in determining whether or not the taxpayer is entitled to any additional recovery rebate credit on the 2020 tax return.
EITC and ACTC
The CAA provides an election for taxpayers claiming the Earned Income Tax Credit or the Additional Child Tax Credit to utilize 2019 income rather than 2020 income in calculating the credits on the 2020 tax return. Taxpayers may choose the income for the year that gives them the larger credits.
Educator Expenses and PPE
The CAA permits the $250 educator expense deduction to be utilized for personal protection equipment and other COVID-19-related expenses retroactive to March 12, 2020.
Emergency Financial Aid Grants
Under the CAA, emergency financial aid grants to students made under the CARES Act are not included in gross income and do not reduce education tax credits. This change is retroactive to the effective date of the CARES Act, March 28, 2020.
The CAA provides disaster relief for federal disasters other than the COVID disaster occurring during 2020 or until February 25, 2021. The relief includes penalty-free distribution of retirement funds for those affected by the disaster, additional tax breaks for disaster-related contributions, an employee retention credit for businesses in the disaster area, and expansion of the casualty loss deduction. The casualty loss deduction provision also permits treating the deduction as an additional standard deduction rather than an itemized deduction.
Employee Retention Credit
The CAA has made several significant changes to the employee retention credit (ERC). In a change from the CARES Act, the employee retention credit can now be claimed retroactively even if the business has received a Paycheck Protection Program (PPP) loan. It can be claimed, however, only for wages not covered under a forgiven PPP loan. Since it appears most businesses opted for the PPP loan, many businesses will have to go back to see if they can benefit further from the employee retention credit on the 2020 tax return. The IRS has released some guidance to help clarify how the two will work together on the 2020 tax return.
Deduction of Expenses Paid with Forgiven PPP Loan
Reversing a position taken by the IRS, the CAA permits the deduction of expenses paid for with forgiven PPP loans. While generally good news for taxpayers, there could still be issues if the PPP is not forgiven until late in 2021 and the increase in basis from the forgiveness is needed to support any additional expenses claimed by owners of pass-through businesses on the 2020 tax return.
Depreciation of Rental Real Property
A CAA provision changing the depreciation period for rental real property from 40 years to 30 years is retroactive to 2018.
Other Provisions with Potential 2020 Impact
Other CAA provisions with potential impact on 2020 and even earlier tax returns include a waiver of certain information reporting requirements, permitting COVID-19-related withdrawals from money purchase pension plans, permitting farming loss carryback elections, and permitting a temporary hold on transfers from pension plans for retiree health coverage obligations.
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