The Consolidated Appropriations Act, 2021 (CAA 2021) has a few different benefits for businesses including another round of PPP, payroll tax benefits and what I’m going to talk about in this article, a number of income tax items.
There are nine business income tax items in the Consolidated Appropriations Act, 2021 (CAA, 2021). Of those, here are the top three, that I think will mostly commonly affect small businesses.
- The tax deductibility of expenses paid with PPP proceeds.
- The tax treatment of EIDL grants, which during 2020 was generally $10,000.
- The tax deductibility of meals provided by restaurants in 2021 and 2022.
Expenses paid with PPP proceeds
This has been a hot topic since the Treasury pointed out, shortly after enactment of the PPP program, that federal tax law generally doesn’t allow deductions for expenses that are paid with tax exempt income. Paycheck Protection Program loans issued by the Small Business Administration are forgivable if borrowing business meets certain criteria which includes using the proceeds to cover eligible expenses that would otherwise be tax deductible under normal circumstances. When the program was created under the CARES Act, the forgiveness of debt income was specifically excluded from being taxable. However the idea that expenses paid by the PPP proceeds were not tax deductible, diminished what many expected as the full benefit of the PPP program. Fortunately this has been corrected with the CAA 2021. The act clarifies that taxpayers with PPP loans forgiven can deduct otherwise allowable expenses. Furthermore for my fellow tax nerds, tax basis and attributes will not be reduced by loan forgiveness.
Tax treatment of EIDL grants
Many small businesses received an Economic Injury Disaster Loan (EIDL) grant from the SBA, generally in the amount of $10,000. Note the grant was called an “advance” on what could have been a larger EIDL loan, however this grant was designed to not require repayment. The Act clarifies that these grants, along with other forgiveness of EIDL loans or certain loan repayment assistance is not taxable income. Also, similar to PPP, the expenses paid with EIDL proceeds are tax deductible if they would otherwise have been deductible. And again for my fellow tax nerds, this forgiveness also does not reduce tax basis and attributes.
Business meals provided by restaurants tax deductible
One of the more “famous” tax rules in business is the 50% limit on deducting food and beverage expenses associated with operating a trade or business. To deduct any amount, the expense must be considered ordinary and necessary for the business. This 50% limit includes meal expenses related to employees traveling for work.
The Act eliminates the 50% limit for food or beverages provided by a restaurant during 2021 and 2022, making those meals 100% deductible!