Long-term fate of Trump tax moves in the air

Former President Donald Trump signed into law the COVIDrelated Tax Relief Act of 2020. The act resolves an important question about the deductibility of business expenses funded by Paycheck Protection Program loans, but goes well beyond that.

IRS caused a kerfuffle by issuing 2020 guidance that said business expenses could not be deducted if funded by PPP loan proceeds that were later forgiven. I have written about this issue, including the comments by the chairs of the two congressional tax-writing committees that they did not agree with the IRS position.

The act now says that the deductions will be allowed. But it goes beyond that and says that if paid by a passthrough entity, such as a partnership or S corporation, the owners of the entity will be allowed to increase the tax basis of their ownership interest when the loan is forgiven.

The combined effect of the deduction and allowed basis increase is to create a permanent tax benefit for an item that has no economic effect on the taxpayer. In normal times this would violate tax policy. In COVID times it is a decision to provide more benefits to suffering businesses.

Separate legislation allows for a second wave of PPP loans. The tax legislation extends the deduction and basis increase relief to these new loans.

The act extended several other tax benefits that were scheduled to expire. One allows a homeowner who experiences a foreclosure loss to avoid income when the mortgage debt is canceled. Another allows homeowners to claim a tax credit for solar energy construction for their home. The solar credit extends through 2023 and allows a 26% credit through 2022 and 22% in 2023.

Benefits for charitable giving have also been extended. For nonitemizers a $300 deduction may still be claimed through the end of 2021. This can be $600 for married filers using a joint return. For larger gifts the limit for deductions is extended to 100% of adjusted gross income for 2021.

An item that received much attention is the increase in the percentage of business meal cost that may be deducted. For 2020 only 50% of allowed expenses could be deducted. This increases to 100% for 2021 and 2022.

It remains to be seen if President Joe Biden will push any new tax legislation in 2021. I’d advise waiting to see what proposals may be put forward and not to believe what you hear might happen. Some of the stuff out there is just cray-cray.

I will say that “blue” states have advocated for eliminating the 2017 provision that capped the deduction for taxes at $10,000 per year. Many upper-middle income people find their combined state income and property taxes exceed $10,000. We might see a Democratic president push to eliminate this cap.

One other thought — some of the business tax relief measures enacted in 2017 may be at risk. One obvious target would be the 21% corporate tax rate. Another is the 20% deduction for qualified business income of non-corporate business owners.

Right now, COVID is like the dishwasher overflowing in the house — it demands all of our attention. Once we get the flooding under control we can turn to other structural problems in our house.

We will find ourselves turning to the budget deficit again. At a minimum this will occur because a Democratic president has caused Republicans to rediscover that expenditures exceed receipts. We had a fire burning before COVID hit ($1 trillion annual deficit) and COVID tossed an accelerant on the fire.

If we choose to do something about the deficit, and this is certainly not a guarantee as Congress has long enjoyed the warmth of the budget fire, it will likely involve a combination of increases in revenues and decreases in “real” expenditures.

Last I checked — and I try not to — I am getting older and I suspect that you are, too. We have a structural problem in our house because many of us are aging. We require work. This places burdens on the foundation of our federal budget.

Taxes are quite low by historical standards. No one likes to hear that they have structural problems in their house. But it’s OK, we hired Congress to fix the problems.