Tax Takeaways from the Recent Federal Spending Bill for 2020 Returns and Beyond

By SBE Council at 7 January, 2021, 8:52 pm

By Barbara Weltman–

The Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020, contains financial assistance to businesses as well as various tax breaks.

Financial assistance is in the form of an extension of the Paycheck Protection Program (PPP) through March 31, 2021 (including “second draw loans”), Economic Injury Disaster Loans (EIDLs) that will continue through the end of 2021 (or when the money runs out), and direct payments to “shuttered venue operators” (live entertainment venues, independent movie theaters, talent representatives, and museums that have been forced to close due to government-mandated shutdowns). Guidance regarding PPP and its various changes has been released by Small Business Administration (SBA). The PPP loan program is expected to relaunch in the next week or so.

From a tax perspective, there are clarifications in certain tax rules as well as certain extensions of expiring provisions. The following is an overview of key provisions, which does not cover every tax provision in the new law.

Tax-free treatment of certain government programs

The new law makes it clear that various government assistance is tax free. This includes:

●  Forgiven amounts for PPP loans

●  $10,000 EIDL grants

●  Grants to shuttered venue operators

Deductibility of expenses covered by tax-free government assistance

Even though businesses aren’t taxed on forgiveness of PPP loans, EIDL grants, and grants to shuttered venue operators, expenses covered by this assistance are still deductible to the extent they would be if no assistance had been received.

These expenses include employee compensation (including health coverage), rent, utilities, cloud-based services, PPE and other specified costs that have been expanded by the new legislation.

Deduction for business meals

Usually, business meals are deductible only up to 50% of costs. This is so even though the meals are legitimate business expenses. However, to help the ailing restaurant industry, for 2021 and 2022 (not 2020), the cost of business meals is fully deductible.

This 100% deduction rule applies only to meals furnished at restaurants. The tax law doesn’t define the term “restaurants,” so we’ll have to see what the IRS says about this perhaps in forthcoming guidance.

Extensions and permanency of expiring provisions

Various business-related tax rules, including some created in response to COVID-19, expired at the end of 2020. Some rules have been made permanent, while others enjoy a limited extension. A few breaks have been allowed to expire; they have not been extended.

Tax breaks made permanent: For businesses, the deduction for energy-efficient commercial buildings of up to $1.80 per square foot is not a permanent rule. What’s more, the dollar amount is now adjusted for inflation. The excise tax rates for small brewers and distillers have also been reduced. Moreover, the reduction in the medical expense deduction floor (from 10% to 7.5% of AGI) has been made permanent.

Tax rules extended for 5 years:

●  New markets credit.

●  Paid family and medical leave credit (not the mandatory COVID-related paid sick leave and paid family leave credits – see below).

●  Work opportunity credit.

●  7-year recovery period for depreciating the cost of motorsports entertainment complexes.

●  Expensing for certain film, television, and live theatrical productions (although costs for these activities qualify for bonus depreciation, so the extension does not become significant until 2023, when bonus depreciation begins to phase out).

●  Exclusion for certain employer payments of student loans.

Tax rules extended for 2 years: The energy investment tax credit for solar property can be claimed through 2022. Certain other tax credits applicable only to large corporations also have a 2-year extension.

Tax rules extended for 1 year:  Some deductions, tax credits, and other rules are extended only through 2021:

●  Increased limits for cash contributions to charity by corporations and individuals (including small business owners who have the business’s contributions passed through to them and claimed on their personal returns).

●  3-year recovery period for depreciating the cost of racehorses.

●  Tax credits, including:

◦ Alternative fuel vehicle refueling property

◦ Plug-in electric powered two-wheeled vehicles

◦ Indian employment

◦ Energy-efficient homes

Tax rules extended for less than 1 year: Two COVID-19-related breaks have been extended for part of 2021:

Paid sick leave and paid family leave credits through March 31, 2021. Small employers may (but are not required) to offer these benefits, and can claim employment tax credits for them, through the end of the first quarter of 2021. Self-employed individuals can claim income tax credits equivalent to the credits employment tax credits employers use to pay these benefits to employees. Self-employed individuals can elect to use 2019 net earnings to figure their 2020 credits.

Employee retention tax credit (ERTC) through June 30, 2021. This credit is expanded and enhanced for 2021 by increasing the amount of qualified wages to 70% (up from 50%) of up to $10,000 per employee per quarter (rather than per year). What’s more, the law makes it clear that this credit can be claimed on wages that are not forgiven under a PPP loan, which is retroactive to the beginning of the CARES Act. Other ERTC modifications include:

● The required year-over-year gross receipts decline has been reduced from 50% to 20%.

● There is a safe harbor that allows employers to use prior-quarter gross receipts to determine eligibility.

● The number of employees counted when determining the relevant qualified wage base has been increased from 100 to 500.

● New businesses that did not exist in 2019 can claim the credit under certain rules.

● Group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance (retroactive from the start of the CARES Act).

Tax rules That have expired: Certain tax breaks for empowerment zones ended on December 31, 2020, including the increasing first-year expensing deduction, tax deferral available through the rollover of gain on empowerment zone investments, and the empowerment zone employment credit.

Final Thought

Due to the changes, the IRS needs to revise form instructions and its publications for 2020 returns, as well as providing guidance on new rules. What’s next from Congress?

Who knows? But it appears the tax system for small businesses could get more complex and confusing before it gets better.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.