A monthly roundup of recent important tax developments affecting practitioners.

• Author: Bonner, Paul
• Position: NEWS NOTES

From the IRS

ARPA-adjusted 2021 individual credit amounts set

The IRS issued adjusted amounts for the child tax credit, the earned income tax credit (EITC), and the premium tax credit (PTC) for 2021, to reflect changes enacted in the American Rescue Plan Act (ARPA), P.L. 117-2 (Rev. Proc. 2021-23).

Child tax credit

Only for tax years beginning in 2021, Section 9611 of ARPA increases the refundable portion of the child tax credit to $3,000 for qualifying children who have attained age 6 but not 18 by the end of the 2021 tax year (the latter age an increase from 17), and $3,600 for qualifying children who have not attained age 6. The partial refundability provisions under Sec. 24(d) do not apply to this temporary provision, making the credit fully refundable (for more, see Ad-kins and Henderson, "ARPA Expands Tax Credits for Families," p. 448).

EITC

In another change that applies only to tax years beginning in 2021, Section 9621 of ARPA temporarily modifies the EITC with, for example, special rules for eligible individuals with no qualifying children and higher applicable phaseout amounts. The revised numbers appear in Section 4.01 of the revenue procedure.

In a permanent provision, for tax years beginning in or after 2021, Section 9624 of ARPA modifies Sec. 32(i) to provide that the EITC is not available to taxpayers whose aggregate disqualified investment income exceeds $10,000, an increase from S3,650. The new, larger amount will be adjusted for inflation for tax years beginning after Dec. 31, 2021.

PTC

For the 2021 and 2022 tax years, Section 9661 of ARPA amends the applicable percentage table in Sec. 36B(b)(3)(A) to provide temporary percentages that are listed in the revenue procedure. Taxpayers use the applicable percentages to determine the amount of the PTC they may claim for the tax year.

ARPA does not amend the required contribution percentage by which a taxpayer determines whether the taxpayer and family members are eligible for employer-sponsored minimum essential coverage. Therefore, the required contribution percentage of 9.83% for 2021 is unchanged.

The revenue procedure modifies and supersedes Sections 3.05 and 3.07 of Rev. Proc. 2020-45 and Section 2.01 of Rev. Proc. 2020-36.

From Sally P. Schreiber, J.D.

Safe harbor allows 2020 PPP expenses to be deducted in 2021

The IRS announced in Rev. Proc. 2021-20 a safe harbor for certain businesses that received first-draw Paycheck Protection Program (PPP) loans but did not deduct certain original eligible expenses because they relied on guidance issued before the enactment of the Consolidated Appropriations Act, 2021 (CAA), P.L. 116-260, in December 2020.

In Notice 2020-32 and Rev. Rul. 2020-27 (which were obsoleted by Rev. Rul. 2021-2) the IRS provided that a taxpayer that received a loan through the PPP was not permitted to deduct expenses that are normally deductible under the Code, to the extent the payment of those expenses resulted in PPP loan forgiveness. In reliance on that guidance, many taxpayers did not deduct expenses paid with PPP loan proceeds on their 2020 tax returns. Congress later clarified in the CAA that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower's assets are not reduced as a result of the loan forgiveness.

The safe harbor in Rev. Proc. 2021-20 allows taxpayers who filed a tax year 2020 return on or before Dec. 27,2020, to deduct those expenses on their 2021 tax return rather than file amended returns or administrative adjustment requests.

Under the safe harbor, subject to limitations permitting the IRS to examine those expenses on audit or request additional information or documentation, a taxpayer may elect to deduct otherwise deductible original eligible expenses on the taxpayer's timely filed, including extensions, original federal income tax return or information return for the taxpayer's immediately subsequent tax year, rather than on an amended return or administrative adjustment request for the taxpayer's 2020 tax year in which the expenses were...