Individual and Business CARES Act Tax Provisions Due to Expire on December 31

Congress is having an unusually busy week as policymakers seek to simultaneously fund the federal government beyond the expiration of the continuing resolution on Friday and provide a second round of economic relief to individuals and businesses after passing the $2.6 trillion CARES Act last March. Lining up closely with the need to fund the government and consider additional economic relief is the upcoming expiration of many tax provisions in the CARES Act that aided individuals and businesses.

Several provisions within the CARES Act have already expired. For example, at the end of July, Federal Pandemic Unemployment Compensation providing $600 per week of additional unemployment insurance (UI) benefits expired. At the end of this month, a larger set of provisions is also set to expire, which is playing a role in the negotiations for a second round of relief.

Individual provisions that are set to expire on December 31 include:

• Many of the remaining UI provisions, including Pandemic Unemployment Assistance (PUA), allowing gig economy and contract workers to access UI, and the extension of UI benefits for an additional 13 weeks. Additionally, the one-week waiting period that is often required before obtaining UI compensation was waived for residents of states that opted in, which will also expire at the end of the year.
• The 10 percent early withdrawal penalty waiver on retirement account distributions of up to $100,000 for individuals needing supplementary income from retirement accounts. Additionally, required minimum distribution (RMD) rules will be reinstated for 2021. Taxpayers will be permitted to repay qualified early distributions back into retirement accounts over the next two years.
• The $300 above-the-line charitable deduction, which allows taxpayers taking the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. to also deduct up to $300 in charitable contributions from adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” in 2020.

Business provisions that will also be expiring on December 31 include:

• The Employee Retention Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (ERTC), which provided a refundable payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. credit of up to 50 percent on wages paid up to $10,000 to qualifying employers, which aimed to keep workers on payroll during the economic downturn.
• The loosened net interest tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. limitation, which went from a limit of 30 percent of earnings before interest, taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , and amortization (EBITDA) up to 50 percent for this tax year.
• Delayed employer-side Social Security payroll tax payments. Firms electing to delay these payments in 2020 will have to repay the tax over the next two years, with half due on December 31, 2021 and the other half due on December 31, 2022.
• Net operating loss (NOL) carrybacks for firms with losses during the economic crisis this year (also applying for the 2018 and 2019 tax years). Similarly, the limitation for taking NOL deductions to 80 percent of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. will be reinstated in 2021.
• Many suspended business taxes, including the alcohol excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on alcohol used as an input for producing hand sanitizer and the suspended aviation excise taxes.

Additionally, a wide array of temporary relief measures in the CARES Act is also due to expire at the end of this month, including support for medical equipment to combat the pandemic, housing protections, and relief for community banks and financial institutions.

Other relief measures outside of the CARES Act also expire at the end of the year. This includes the White House’s deferred employee-side payroll taxes for employers who opted in on behalf of their employees. Employees will have to repay deferred payroll tax between January 1 and April 30, 2021, resulting in a lower net income during that period.

There is an opportunity for policymakers to consider lessons learned for how these relief measures helped individuals and businesses during the pandemic and apply them when finalizing a second round of economic relief and when responding to future crises.

As we have argued, any additional relief to address a temporary economic crisis should be temporary, targeted toward those most in need, and consistent with good long-term tax policy.

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