In late December, Congress passed the Consolidated Appropriations Act, which in addition to providing COVID-19 relief provisions also included many tax provisions and extenders. The Act contained many COVID-related tax provisions, as well as a slew of extenders ranging from one year to permanent. This article will focus on the miscellaneous tax and disaster relief provisions, which are more applicable to most taxpayers.

Miscellaneous Provisions

Charitable Contributions – For tax years 2020-2022, starting in 2020 non-itemizers can deduct $300 in charitable contributions, and starting in 2021 non-itemizer can deduct $600 for married couples filing jointly.

Full Business Meals Deduction – Typically, business meals are only 50 percent deductible; however, the new tax law provides for a 100 percent deduction for restaurant meal expenses incurred in 2021 and 2022.

Low-Income Housing Tax Credit – Starting in 2021, a 4 percent rate floor is established for calculating credits related to the acquisition of and bond-financed low-income housing developments.

Minimum Interest Rate for Certain Life Insurance Contracts – The bill ties the rates going forward for section 7702 fixed interest rates for life insurance contracts to benchmark interest rates that are periodically updated.

Minimum Age for Distributions – Certain qualified pensions can make distributions to workers who are 59½ or older and still working, with a special allowance for some construction and building trade workers, where the age is lowered to 55.

Modified Charitable Contribution Limits – An extension for one year through 2021 is given for CARES Act increased limits on deductible charitable contributions for corporations and taxpayers who itemize.

Disaster Relief

Disaster tax relief provisions are available for individuals and businesses in presidentially declared disaster areas on or after Jan. 1, 2020, up through 60 days after enactment.

Use of Retirement Funds – Residents of qualified disaster areas can take up to $100k in qualified distributions from retirement plans or IRAs, penalty-free. Taxpayers have up to three years to pay the distributions back without penalty.

Disaster Zone Employee Retention Credit – A tax credit of up to 40 percent of wages (capped at $6,000 per employee) is available to employers who are actively engaged in a trade or business in a qualified disaster zone.

Disaster Relief Contributions – Corporations are allowed qualified disaster relief contributions of up to 100 percent of their taxable income for 2020.

Tax Extenders

Aside from the miscellaneous and disaster relief provisions, the act extended numerous existing tax laws anywhere from one to five years or even permanently. Below is a list of the extended provisions. Due to the number of extender provisions, only a table is provided below.

One-Year Extensions

• Sec. 25C 10% credit for qualified nonbusiness energy property.
• Sec. 30B credit for qualified fuel cell motor vehicles.
• Sec. 30C 30% credit for the cost of alternative (nonhydrogen) fuel vehicle refueling property.
• Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.
• Sec. 35 health coverage tax credit.
• Sec. 40(b)(6) credit for each gallon of qualified second-generation biofuel produced.
• Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.
• Sec. 45(d) credit for electricity produced from certain renewable resources.
• Sec. 45A Indian employment credit.
• Sec. 45L energy-efficient homes credit.
• Sec. 45N mine rescue team training credit.
• Sec. 163(h) treatment of qualified mortgage insurance premiums as qualified residence interest.
• Sec. 168(e)(3)(A) three-year recovery period for racehorses two years old or younger.
• Sec. 168(j)(9) accelerated depreciation for business property on Indian reservations.
• Sec. 4121 Black Lung Disability Trust Fund increase in excise tax on coal.
• Sec. 6426(c) excise tax credits for alternative fuels and
• Sec. 6427(e) outlay payments for alternative fuels.
• The American Samoa economic development credit (P.L. 109-432, as amended by P.L. 111-312).
  

Two-Year Extensions

• Sec. 25D residential energy-efficient property credit (the bill also makes qualified biomass fuel property expenditures eligible for the credit).
• Sec. 45Q carbon oxide sequestration credit (through 2025).
• Sec. 48 energy investment tax credit for solar and residential energy-efficient property.

Five-Year Extensions

• Sec. 45D new markets tax credit.
• Sec. 45S employer credit for paid family and medical leave.
• Sec. 51 work opportunity credit.
• Sec. 108(a)(1)(E) gross income exclusion for discharge of indebtedness on a principal residence.
• Sec. 127(c)(1)(B) exclusion for certain employer payments of student loans.
• Sec. 168(e)(3)(C)(ii) seven-year recovery period for motorsports entertainment complexes.
• Sec. 181 special expensing rules for certain film, television, and live theatrical productions.
• Sec. 954(c)(6) lookthrough treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.
• Sec. 1391(d) empowerment zone designation.
• Sec. 4611 Oil Spill Liability Trust Fund financing rate.
• Sec. 1397A increased expensing under Sec. 179 and Sec. 1397B nonrecognition of gain on rollover of empowerment zone investments are both terminated for property placed in service in tax years beginning after Dec. 31, 2020.
• The Sec. 1394 empowerment zone tax-exempt bonds and Sec. 1396 empowerment zone employment credit, which expire Dec. 31, 2020, were not extended.

Permanent Extensions

• Sec. 213(f) reduction in medical expense deduction floor, which allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income instead of 10%.
• Sec. 179D deduction for energy-efficient commercial buildings (the amount will be inflation-adjusted after 2020).
• Sec. 139B gross income exclusion for certain benefits provided to volunteer firefighters and emergency medical responders.
• Sec. 45G railroad track maintenance credit; however, the credit rate is reduced from 50% to 40%.

Conclusion

The Consolidated Appropriations Act passed in December 2020 not only extended many existing tax laws and instituted COVID-19 relief, but it also changes many typical tax laws (at least temporarily). Taxpayers should pay attention to these year-end tax law changes as they can significantly impact their tax situations.

While excise or vice taxes have long been a part of the American tax landscape related to alcohol and cigarettes, the recent invention of vaping and legalization of marijuana and other substances is changing the landscape.

What Are Excise Taxes?

Excise taxes are taxes on specific types of consumable products such as alcohol or tobacco for one of two reasons. First, as vice taxes in order to raise revenue to cover the costs related to consumption; and second, to deter consumption itself. Unlike other types of consumption taxes such as sales tax, these are specific to certain products.

Do They Change Behavior?

Theoretically, when you increase the price of a product such as alcohol through the addition of excise taxes, demand should go down. While this may be a deterrent and limit demand, excise taxes certainly haven’t proven to be a feasible way to eliminate behaviors. A pack of cigarettes can cost upward of $15 in major cities, but there are still people smoking. It’s a similar situation with drinking and gambling.

It’s All About the Benjamins

While we think of excise taxes as vice taxes today in many respects, the main point isn’t to change behavior – it is to raise revenue. Excise taxes pre-date the United States and were one of the main forms of government funding in America before income tax was created. Alcohol taxation goes back to George Washington’s presidency and incited the infamous Whiskey Rebellions. Cigarette taxes were introduced as a way to pay for the Civil War. In the end, it’s about the money generated as there are easier and more effective ways to regulate behavior.

New Products Equal New Taxes

The legalization of marijuana by states raises the issue of excise taxes on this product. Unlike tobacco, where one of the goals is to decrease consumption, the situation here is more one of legalizing something to raise consumption and generate revenue as a result.

Marijuana taxation is more akin to alcohol in the years following prohibition. In both cases, you have large-scale illegal operations and illicit consumption with the aim of moving them to legitimate status. In this sense, it’s different than other vice taxes. 

Initially, at least, the authorized market will have to operate in parallel with the black market for the same product, limiting the amount of taxes that can be raised when there is still an unregulated and untaxed alternative.

Beyond Marijuana

Aside from marijuana, there are other new products that could be taxed and generate revenue, the most notable being vapor products. While vaping products are not really that new, the market is just growing to a substantial size.

Taxing vaping products is more complicated and problematic. Some consider these products to be just as harmful as cigarettes, while others not so much. There is evidence that nicotine consumed via vaping is less harmful than through smoking cigarettes.

Theoretically then, the government should apply less taxes as a result if the harm and therefore cost to society is less.  The problem with this is that less revenue is raised. As noted before, we come back to the issue that vice taxes are often revenue-raising tools disguised as public safety measures.

Too Successful For Its Own Good

Vice taxes can be too successful, with tobacco as the best example. While people may stop buying cigarettes, they don’t stop consuming cigarettes; instead, they buy them elsewhere.

For example, more than 50 percent of cigarettes consumed in New York are purchased out of state. If you push too far, people will react.

Conclusion

Excise and vice taxes are here to stay. While varying arguments can be made that they benefit society by shaping behaviors, it is undeniable that state, local and the federal government are addicted to the revenue generated.