The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020, in order to provide additional relief relating to the coronavirus (COVID-19) pandemic. Included in the CAA are several provisions relating to businesses. These provisions are meant to clarify and modify certain items put forth in the Coronavirus Aid, Relief and Economic Security (CARES) Act, while providing aid to businesses affected by the pandemic.
SC&H’s Key Takeaways
- The CAA allows for deductions for expenses paid for by Paycheck Protection Program (“PPP”) and EIDL loans as long as those expenses are otherwise ordinarily deductible.
- The CAA clarifies that forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance are all not included in gross income and related deductions are allowable.
- The CAA generally assigns a 30-year ADS depreciation period to residential rental property for tax years beginning after December 31, 2017, even though it was placed in service before January 1, 2018.
- Expenses for food or beverages provided by a restaurant will be 100% deductible for expenses paid or incurred after December 31, 2020.
Tax Treatment of Covered PPP Loan Forgiveness
Pre-CAA
The CARES Act put forth that a recipient of a PPP loan may have their loan forgiven to the extent it was used for payroll costs, mortgage interest, rent and utilities. The CARES Act states that amount of the loan that is forgiven will not be taxable. However, the IRS ruled in 2020 that the related expenses will also not be tax deductible.
Post-CAA
The CAA states that expenses paid for with PPP loan proceeds are now deductible as long as they are otherwise ordinarily deductible. It also states that the tax basis and other attributes of the borrower’s assets will not be reduced due to loan forgiveness. This change is effective as of the enactment date of the CARES Act, which was March 26, 2020.
Tax Treatment of Certain Loan Forgiveness and Other Business Financial Assistance
Pre-CAA
The Small Business Administration (SBA) has had a long-standing loan program aimed to assist business, renters, and homeowners located in regions of declared disasters. This loan program is referred to as the Economic Injury Disaster Loan Program (EIDL). The CARES Act expanded access to EIDL loans to qualifying small businesses and agriculture businesses while also establishing an emergency grant allowing an applicant to receive up to a $10,000 advance on the loan. A loan repayment assistance program was also put in place for those businesses that may need it.
Post-CAA
After the CAA was signed, some clarification was provided in the area of EIDL loans. Forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance are all not included in gross income. The CAA also clarifies that, like the PPP loans, expenses that are paid for by the loan proceeds will be deductible as long as those expenses are otherwise ordinarily deductible. Also similar to PPP loans, tax basis and other attributes of the borrower’s assets will not be reduced as a result of loan forgiveness. This provision is effective for tax years ending after March 26, 2020.
Depreciation of Certain Residential Rental Property Over 30-Year Period
Pre-CAA
Remember all the way back to December 22, 2017 when the Tax Cuts and Job Act (TCJA) was signed into law and provided an overhaul to the nation’s tax code. In the TCJA, a provision existed that allowed real property trade or businesses to elect out of the business interest deduction limitation under certain conditions. One of the conditions was the electing taxpayer had to use the alternative depreciation system (ADS) for nonresidential real property, qualified improvement property, and residential rental property placed in service after December 31, 2017. Additionally, the TCJA changed the ADS life for residential rental property from 40 years to 30 years for property placed in service after December 31, 2017.
Post-CAA
The CAA assigns a 30-year ADS depreciation period to residential rental property for tax years beginning after December 31, 2017, even though it was placed in service before January 1, 2018. This applies if the property was held by an electing real property trade or business and, before January 1, 2018, was not subject to ADS.
50% Limit on Business Meal Deduction Changes
Pre-CAA
Taxpayers generally were able to deduct 50% of the ordinary and necessary food and beverage expenses associated with operating a trade or business. These food and beverage expenses were subject to certain exceptions laid out in the tax code.
Post-CAA
The CAA allows for a full (100%) deduction for food and beverage expenses provided by a restaurant after December 31, 2020 but before January 1, 2023.