What Was in the Tax Relief Act of 2020?

In late December 2020, the federal government enacted the Consolidated Appropriations Act, 2021, which included the Tax Relief Act of 2020. This legislation was designed to deliver further economic support to individuals and businesses navigating the financial challenges of the COVID-19 pandemic. As a follow-up to earlier relief packages, the act continued and modified programs, providing a broad range of support from direct aid for families to financial lifelines for businesses.

Direct Payments and Individual Relief

A central component of the Tax Relief Act of 2020 was the authorization of a second round of Economic Impact Payments to provide immediate financial assistance. The payment amount was set at $600 for each eligible individual and an additional $600 for each qualifying child dependent. This was half the amount of the initial stimulus payments distributed earlier in the year under the CARES Act.

Eligibility for the full payment was determined by adjusted gross income (AGI) as reported on 2019 tax returns. The payments began to phase out for individuals with an AGI above $75,000 and for married couples filing jointly with an AGI above $150,000. For every $100 of income above these thresholds, the payment was reduced by $5. These payments were advance distributions of the Recovery Rebate Credit, which individuals could claim on their 2020 tax returns if they did not receive the full amount.

The act also extended federal unemployment insurance programs and reintroduced a supplemental payment. The legislation provided an additional $300 per week in Federal Pandemic Unemployment Compensation (FPUC) on top of regular state benefits. This supplemental payment was available for 11 weeks, from late December 2020 through mid-March 2021.

Furthermore, the act extended the Pandemic Unemployment Assistance (PUA) program, which covered self-employed individuals and gig workers not typically eligible for unemployment benefits. It also extended the Pandemic Emergency Unemployment Compensation (PEUC) program, which provided additional weeks of benefits to individuals who had exhausted their regular state benefits. These extensions were designed to prevent a lapse in support for many Americans.

Business Tax Relief and Credits

The legislation provided tax relief for businesses by clarifying the treatment of Paycheck Protection Program (PPP) loans. The IRS had previously issued guidance stating that business expenses paid with the proceeds of a forgiven PPP loan were not tax-deductible. The Tax Relief Act of 2020 explicitly overrode this IRS position.

The act affirmed that no deduction would be denied because of the loan forgiveness. This allowed businesses to both receive tax-free loan forgiveness and deduct the ordinary and necessary business expenses paid for with those loan funds, such as payroll and rent. This change applied to both existing and future PPP loans.

The act also expanded and extended the Employee Retention Credit (ERC). Originally, businesses that received a PPP loan were ineligible for the ERC. The new law retroactively eliminated this restriction, allowing employers who received PPP loans to also claim the ERC for qualified wages not paid with forgiven PPP loan proceeds.

For the first half of 2021, the ERC was enhanced. The credit rate was increased from 50% to 70% of qualified wages, and the per-employee wage cap was raised from $10,000 for the year to $10,000 per quarter. The definition of a “large employer” was also changed from more than 100 employees to more than 500, allowing more businesses to claim the credit for all employee wages.

Charitable Giving and Flexible Spending Accounts

The act included provisions to encourage charitable giving. It extended a benefit for individuals who do not itemize their deductions, allowing an “above-the-line” deduction for cash contributions. For the 2021 tax year, this deduction was $300 for single filers and $600 for married couples filing a joint return.

For individuals who do itemize, the law extended a provision that increased the limit on deductions for cash contributions to public charities. The legislation extended the 100% of adjusted gross income (AGI) limit through 2021, allowing donors to potentially offset their entire income tax liability.

Temporary relief was also provided for health and dependent care Flexible Spending Accounts (FSAs). The act gave employers the option to amend their plans to allow participants to carry over all unused amounts from 2020 to 2021, and from 2021 to 2022. This flexibility applied to both health and dependent care FSAs.

As an alternative to the carryover, employers could also choose to extend the grace period for incurring expenses for plan years ending in 2020 and 2021 to 12 months. The law also allowed a special rule for dependent care FSAs, permitting employees to receive reimbursements for children who turned 13 during the pandemic until they reached age 14.