How the Consolidated Appropriations Act Impacts Businesses

The Consolidated Appropriations Act of 2021 (CAA), signed into law on December 27, 2020, contains numerous tax breaks for businesses impacted by the Coronavirus pandemic. Here are some highlights:

Business meal deductions

covid-19 reliefThe new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements still apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

In order to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances, and
  • You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided during an entertainment activity (such as a sporting event or theater performance), they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment is nondeductible.

Paycheck Protection Program loans

The new law authorizes more funding for the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans.

Tax consequences of PPP loan forgiveness

The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. The law also makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.

The IRS and Treasury Department released guidance on claiming deductions for expenses associated with PPP loans that have been forgiven.

Waiver of information reporting for PPP loan forgiveness

Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration.

Employee retention tax credits

Under the CARES Act, an employer could claim an employee retention credit for 50% of the first $10,000 of qualified wages paid in 2020, up to a maximum $5,000 credit per employee. The new law extends the tax credit to 70% of wages paid up to $10,000 for any quarter and increases the maximum credit to $14,000 for qualified wages paid through July 1, 2021.

Family and medical leave credit

The Families First Coronavirus Response Act provided employers with a tax credit in 2020 for offering paid family and medical leaves resulting from the COVID-19 pandemic. This credit has been extended, with modifications, through March 31, 2021.

Questions

These are just a few of the provisions in the new law that are favorable to businesses. Contact us today if you have questions about your specific business situation.

© 2021

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