Business Tax Breaks Thanks to the Recently Enacted CAATax Planning
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020.
The legislation adds a few new federal income tax breaks for businesses and extends a bevy of other business breaks that were set to expire at the end of 2020.
This article covers the most important things that small-business owners need to know. Note that you find the tax changes explained here in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) and the COVID-Related Tax Relief Act of 2020 (COVIDTRA). The CAA included both acts inside its 5,593 pages.
100 Percent Deductions for Business Meals Provided by Restaurants
We mentioned this last month but have it again here because we like it.
Under the new law, you may deduct 100 percent of the cost of business-related food and beverages provided by restaurants in 2021 and 2022.
The “provided by” language ensures that this break applies equally to take-out and sit-down meals. In the past, you could generally deduct only 50 percent of the cost of business meals. The temporary 100 percent deduction rule is intended to help restaurants survive COVID-19 economic fallout. Good idea!
Work Opportunity Credit Extended for Five Years
Your business can claim the work opportunity tax credit (WOTC) for hiring members of 10 targeted groups. Before the CAA, the WOTC applied to first-year wages paid to qualifying employees who were hired before 2021.
New law. The TCDTRA extends the WOTC to cover first-year wages you pay to qualifying employees hired through 2025.
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 percent of a taxpayer’s 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 CAA, a $5 billion allocation was made to the new markets tax credit program for 2020.
New law. The TCDTRA extends $5 billion annual allocations to cover allocations made through 2025. The TCDTRA also extends the carryover period for taxpayers to utilize unclaimed new markets tax credits through 2030.
Some Empowerment Zone Breaks Extended for Five Years (Others Allowed to Expire)
You can claim special federal income tax incentives in census tracts designated as empowerment zones. In these zones, taxpayers are potentially eligible for 20 percent wage credits, enhanced first-year depreciation deductions, tax-exempt bond financing, and deferral of federal capital gains taxes when qualifying assets are sold and sales proceeds are reinvested in other qualifying assets.
Before the CAA, empowerment zone designations were scheduled to expire on December 31, 2020.
New law. The TCDTRA extends through 2025 the period for which empowerment zone designations can remain in effect. But the new law terminates the enhanced first-year depreciation rules for property placed in service in tax years beginning in 2021 and beyond. The new law also removes the capital gains tax deferral break for sales in tax years 2021 and beyond.
Tax-Free Treatment for Employer Section 127 Plan Payments Toward Employee Student Loans Extended
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allowed federal-income-tax-free treatment for payments made by employer-sponsored Section 127 educational assistance plans toward student loan debts of participating employees. Between March 28, 2020, and December 31, 2020, the employer could pay up to $5,250
per employee toward principal and interest with no federal income tax hit for the employee. Employers could deduct the payments.
New law. The TCDTRA extends this break to cover qualifying student loan debt payments made under Section 127 plans through 2025.
Liberalized Depreciation Rule for Residential Rental Property Owned by Electing Real Estate Businesses
For tax years beginning in 2018 and later, the Tax Cuts and Jobs Act (TCJA) imposed new limitations on deductions for business interest expense.
But real property businesses can elect out of the TCJA business interest expense limitations by choosing to depreciate non-residential real property, qualified improvement property, and residential rental property using the straight-line method over 30 years, under the so-called alternative depreciation system (ADS).
If you make this election, it applies to affected property placed in service in 2018 and later.
New law. For tax years beginning in 2018 and later, the TCDTRA assigns the 30-year depreciation period to residential rental property that was placed in service before 2018, if the property was already being depreciated under ADS and is held by a real property business that elects out of the TCJA business interest expense limitations.
Before this change, you had to depreciate such property over 40 years under the pre-TCJA ADS rules.
More Flexible Rules for Farming Losses
Taxpayers with net operating losses (NOLs) from farming are allowed to choose to carry back those NOLs to the two preceding tax years. You can also choose to waive the carryback privilege and instead carry farming NOLs forward to future tax years.
The CARES Act allowed farming NOLs that arose in tax years beginning in 2018-2020 to be carried back for five years, as a tax relief measure.
New law. The COVIDTRA allows farmers that elected the two-year NOL carryback option before the CARES Act became law to elect to retain that two-year carryback rather than follow the five-year carryback rule set forth in the CARES Act.
The new law also allows farmers that previously waived the carryback privilege to revoke the waiver. These changes apply retroactively as if they were included in the CARES Act on Day One.
Deduction for Energy-Efficient Commercial Buildings Made Permanent
Commercial building owners can claim deductions for energy-efficient improvements to lighting, heating, cooling, ventilation, and hot water systems and to 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 TCDTRA makes this deduction permanent and adds an inflation-adjustment feature for tax years beginning in 2021 and later.
Tax Impact of CARES Act Loan Forgiveness and Financial Assistance Favorably Clarified
The CARES Act expanded access to Economic Injury Disaster Loans (EIDLs) from the Small Business Administration (SBA) and allowed EIDL applicants to request $10,000 advances.
The CARES Act also granted loan repayment assistance to eligible EIDL recipients.
The COVIDTRA clarifies that federal-income-tax-free treatment applies to forgiven EIDLs and certain loan repayment assistance. Another clarification stipulates that deductions and tax basis increases are allowed for expenditures paid with forgiven amounts, and that no tax attribute reductions are required as a result of the forgiven amounts.
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 TCDTRA extends the credit to cover new homes that are acquired from manufacturers in 2021 for use as residences.
Credit for Alternative-Fuel Vehicle Refueling Equipment Extended
Your business can claim a federal income tax credit for up to 30 percent of the cost of installing non-hydrogen alternative-fuel vehicle refueling equipment (say, for your business’s Tesla fleet—or more likely for use by your employees who own electric vehicles).
New law. The TCDTRA extends this break to cover qualifying 2021 expenditures.
Credit for Fuel Cell Vehicles Extended
Your business can claim a federal income tax credit for buying 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 TCDTRA extends this break to cover qualifying 2021 purchases.
Seven-Year Depreciation for Motorsports Entertainment Complexes Extended for Five Years
Before the TCDTRA, a seven-year depreciation recovery period applied to motorsports entertainment complex property placed in service before 2021.
New law. The TCDTRA extends the seven-year recovery period to cover qualifying property placed in service through 2025.
First-Year Expensing for Entertainment Productions Extended for Five Years
Before the TCDTRA, you 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 TCDTRA extends this taxpayer-friendly deal to cover qualifying productions commencing through 2025.
Three-Year Depreciation for Young Racehorses Extended
Perhaps most important of all, the new law extends the three-year depreciation recovery period to cover racehorses that are no more than two years old when placed in service in 2021.
You have to admire the plethora of tax breaks available to businesses in this article, and you know this is simply a tiny snapshot of tax breaks that are available.
Here’s a bird’s-eye look at the changes in this article:
- You can deduct 100 percent of your business meals that are provided by restaurants in 2021 and 2022.
- For hiring members of 10 targeted groups, you can obtain the work opportunity tax credit for first year wages through 2025.
- You can now qualify for the new markets 39 percent tax credit for investments through 2025.
- The empowerment zone tax breaks that were scheduled to expire on December 31, 2020, are extended through 2025, but the new law terminates, for 2021 and later, both (a) the enhanced first year depreciation rules and (b) the capital gains tax deferral break.
- Employers may continue through 2025 making Section 127 education plan payments that cover student loan principal and interest up to the plan maximum of $5,250.
- For residential rental property that you placed in service before 2018, which you were depreciating over 40 years under the straight-line method, you can now use 30 years if you elect out of the TCJA business interest expense limitations.
- Farmers may elect a two-year NOL carryback rather than the five-year carryback, retroactively, as if this change were in the original CARES Act.
- The $1.80 per-square-foot or $0.60 per-square-foot deductions for energy-efficient improvements to commercial buildings are now permanent.
- SBA EIDL advances and SBA EIDL loan repayment assistance are not taxable, and you suffer no tax attribute reductions as a result of the tax-free monies.
- Manufacturers of residential homes can claim a credit of $1,000 or $2,000 for homes that meet applicable energy-efficiency standards through 2021.
- Your business can claim a business federal income tax credit for up to 30 percent of the cost of installing non-hydrogen alternative-fuel vehicle refueling equipment (say, for your employees’ electric vehicles) through 2021.
- Your business can claim a federal income tax credit for buying vehicles propelled by chemically combining oxygen with hydrogen to create electricity, through 2021 (credits range from $4,000 to $40,000).
- The new law extends the seven-year recovery period to cover motorsports entertainment complex property placed in service through 2025.
- You can elect to claim the first-year write-off for the cost of qualified film, television, and theatrical productions commencing before 2025, subject to a $15 million per-production limit or a $20 million limit for productions in certain disadvantaged areas.
- For racehorses that are no more than two years old that you place in service during 2021, you may use three-year depreciation.