The latest pandemic relief bill signed into law on Dec. 27, 2020 adds a few new breaks for businesses, revives a bevy of so-called “business extenders” that were scheduled to expire at the end of 2020, and even makes a few of the extenders permanent. This column covers the most important things for small business owners to know.
100% deductions for business meals provided by restaurants
In a controversial move, the Consolidated Appropriations Act (the CAA) — which combined $900 billion in pandemic relief with a $1.4 trillion omnibus spending bill — allows 100% deductions for business-related food and beverages provided by restaurants in 2021 and 2022. The “provided by” language means this break is available for take-out as well as sit-down meals.
Before the CAA, business meal deductions were generally limited to only 50% of the cost. While some have decried this change as an unwarranted tax break for those who indulge in the proverbial three-martini lunch, it’s intended to help restaurants survive COVID-19 economic fallout.
Tax impact of forgiven PPP loans
If your business takes out a Paycheck Protection Program (PPP) loan that’s forgiven, the forgiveness was always a federal-income-tax-free event. Great, but the CAA clarifies that you can also deduct expenses paid with proceeds from a forgiven PPP loan and you can obtain tax basis in assets acquired with proceeds from a forgiven PPP loan. These favorable clarifications are retroactively effective to Day One of the PPP.
Tax impact of CARES Act loan forgiveness and financial assistance
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded access to federal Economic Injury Disaster Loans (EIDLs) and allowed EIDL applicants to request $10,000 advances. The CARES Act also granted loan repayment assistance to eligible EIDL recipients. The CAA clarifies that federal-income-tax-free treatment applies to forgiven EIDLs and certain loan repayment assistance. Another clarification states that deductions and tax basis increases are allowed for expenditures paid for with forgiven amounts.
Work opportunity credit extended for five years
Employers can claim the work opportunity tax credit (WOTC) based on first-year wages paid to newly hired members of 10 targeted groups. Before the CAA, you could only claim the WOTC for first-year wages paid to qualifying employees who were hired before 2021.
New law: The CAA extends the WOTC to cover first-year wages paid to qualifying employees who are hired in 2021-2025.
Empowerment zone breaks extended for five years
Special federal income tax incentives are available for qualifying expenditures in economically distressed Census tracts designated as empowerment zones. In these zones, taxpayers are potentially eligible for 20% wage credits, generous first-year depreciation deductions, tax-exempt bond financing, and deferral of capital gains tax when qualifying assets are sold and the sales proceeds are reinvested in other qualifying assets. Before the CAA, empowerment zone designations were scheduled to expire on 12/31/20.
New law: The CAA extends through 2025 the period for which empowerment zone designations can remain in effect. However, the new law also terminates the special first-year depreciation breaks for property placed in service in tax years beginning in 2021 and beyond and terminates the capital gains tax deferral break for sales that occur in tax years beginning in 2021 and beyond.
New markets credit extended for five years
The new markets federal income tax credit can be claimed by both individual and corporate taxpayers. The credit equals 39% of your capital investment in a qualified entity that commits to the rules of the new markets tax credit program. In turn, the recipient entity must loan or invest substantially all of the invested capital in qualified businesses that operate in low-income communities. Before the CCA, a $5 billion allocation was made to the new markets tax credit program for 2020.
New law: The CAA extends $5 billion annual allocations through 2025.
Tax-free treatment for employer payments towards employee student loans extended for five years
The CARES Act allowed federal-income-tax-free treatment for eligible payments made by employer-sponsored Section 127 educational assistance plans towards student loan debts of participating employees. Between 3/28/20 and 12/31/20, up to $5,250 per-employee could be paid out (towards student loan principal or interest) with no federal income tax hit for the employee. Employers could deduct the payments.
New law: The CAA extends this tax-favored treatment to cover qualifying payments made by Section 127 plans through 2025.
Credit for alternative fuel vehicle refueling equipment extended
A business federal income tax credit can be claimed for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling equipment, such as electric recharging stations.
New law: The CAA extends this break to cover qualifying 2021 expenditures.
Credit for fuel cell vehicles extended
A federal income tax credit can be claimed for vehicles propelled by chemically combining oxygen with hydrogen to create electricity. The base credit is $4,000 for vehicles weighing 8,500 pounds or less. Heavier vehicles can qualify for bigger credits of up to $40,000. An additional $1,000 to $4,000 credit is available to cars and light trucks to the extent their fuel economy meets federal standards.
New law: The CAA extends this break to cover qualifying 2021 purchases.
Credit for energy-efficient manufactured homes extended
Manufacturers of residential homes can claim a credit of $1,000 or $2,000 for homes that meet applicable energy-efficiency standards.
New law: The CAA extends the credit to cover new homes that are acquired from manufacturers in 2021 for use as residences.
Deduction for energy-efficient commercial buildings made permanent
Commercial building owners can claim deductions for expenditures for energy-efficient improvements to lighting, heating, cooling, ventilation, and hot water systems and building envelopes. The write-off equals $1.80 per square foot or $0.60 per square foot if certain subsystems meet energy-efficiency standards but the entire building does not.
New law: The CAA makes this deduction permanent and adds an inflation-adjustment feature for tax years beginning in 2021 and beyond.
First-year expensing for entertainment productions extended for five years
Before the CAA, taxpayers could elect to claim a first-year write-off for the cost of qualified film, television, and theatrical productions commencing before 2021, subject to a $15 million per-production limit or a $20 million limit for productions in certain disadvantaged areas.
New law: The CAA extends this sweet deal to cover qualifying productions commencing through 2025.
Fast depreciation for motorsports entertainment complexes extended for five years
Before the CAA, motorsports entertainment complex property placed in service before 2021 could be quickly depreciated over a mere seven years.
New law: The CAA extends the seven-year depreciation deal to cover qualifying property placed in service in 2021-2025.
Fast depreciation for young race horses extended
The CAA extends a favorable three-year depreciation rule to cover race horses that are no more than two years old when placed in service in 2021.
The last word
You now know about some new business tax breaks and the fate of many of the so-called business extenders. Will the incoming Biden Administration sponsor some additional business tax breaks to help the COVID-19-ravaged economy? We shall see. Stay tuned.