Dear Tax Constituent:
On December 27, 2020, the President signed the Consolidated Appropriations Act of 2021 (CAA or the Act) into law. This more than 5,500 page law contains many subsections, including the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). We have highlighted some major provisions affecting businesses below.
Deductions allowed for expenses paid for with forgiven PPP proceeds
The CARES Act provides that a recipient of a Paycheck Protection Program (PPP) loan may use the loan proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations. If a PPP loan recipient uses their PPP loan to pay those costs, they can have their loan forgiven up to an amount equal to those costs. PPP loan forgiveness doesn't give rise to taxable income, but the Code generally doesn't allow a taxpayer to deduct expenses that are paid with tax exempt income. The new COVIDTRA explicitly states that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
Clarification of tax treatment of certain loan forgiveness and other business financial assistance under the CARES Act
The CARES Act expanded access to Economic Injury Disaster Loans (EIDL) and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain recipients of CARES Act loans. COVIDTRA clarifies that gross income does not include forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income.
Authority to waive certain information reporting requirements
Generally, the Internal Revenue Code requires an lender that discharges at least $600 of a borrower’s indebtedness to file a Form 1099-C, Cancellation of Debt, with IRS, and to furnish a payee statement to the borrower. COVIDTRA allows the Treasury Department to waive information reporting requirements for any amount excluded from income by a) the exclusion of covered loan amount forgiveness from taxable income, b) the exclusion of emergency financial aid grants from taxable income or c) the exclusion of certain loan forgiveness and other business financial assistance under the CARES act from income.
50% limit on business meal deduction is suspended for meals provided by restaurants in 2021 and 2022
Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel. The deduction is generally limited to 50% of the otherwise allowable amount. There are some exceptions to this 50% limit. However, under pre-Act law, there was no exception for meals provided by a restaurant. Under COVIDTRA, the 50% limit won’t apply to expenses for food or beverages provided by a restaurant that are paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.
Tax Extenders
Energy Efficient Commercial Buildings Deduction
Under pre-Act law, for property placed into service before Jan. 2021, taxpayers could claim a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. This includes a $1.80 deduction per square foot for construction on qualified property. A partial $0.60 deduction per square foot is allowed if certain subsystems meet energy standards but the entire building does not, including the interior lighting systems, the heating, cooling, ventilation, and hot water systems, and the building envelope. The CAA makes this deduction permanent. The Act also added an inflation adjustment for tax years beginning after 2020.
Work Opportunity Credit
The Code provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit program. Under pre-Act law, the credit, which is based on qualified first-year wages paid to the hire, applied to hires before Jan. 1, 2021. The CAA extends the credit through 2025. The amendment applies to individuals who begin work for the employer after Dec. 31, 2020.
Employer Credit for Paid Family and Medical Leave
Under pre-Act law, for tax years beginning before Jan. 1, 2021, the Code provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year. The CAA extends this credit through 2025, applying to wages paid in tax years beginning after Dec. 31, 2020.
Families First Coronavirus Response Act paid leave credits (see link) are extended through March 31, 2021.
Exclusion for Certain Employer Payments of Student Loans
Educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250, can be excluded from the employees income. The CARES Act added to the educational payments excluded from an employee gross income, “eligible student loan repayments” (below) made after Mar. 27, 2020, and before Jan. 1, 2021. These payments are subject to the overall $5,250 per employee limit for all educational payments. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent). The CAA extends the exclusion for loan repayments through 2025.
Business Solar Credit Extension
Before amendment by the CAA, a credit of 26% of eligible solar energy property costs was available for business solar energy property, the construction of which began after 2019 and before 2021, that was placed in service before 2024. A credit of 22% of eligible solar energy property costs was available for business solar energy property, the construction of which began after 2020 and before 2022, that was placed in service before 2024.
Under the CAA, a credit of 26% of eligible solar energy property costs is available for business solar energy property, the construction of which begins after 2019 and before 2023 that is placed in service before 2026. A credit of 22% of eligible solar energy property costs is available for business solar energy property, the construction of which begins after 2022 and before 2024 that is placed in service before 2026.
If you would like more information on these topics or another tax topic of interest to you, please contact our office.
—McAvoy + Co, CPA