Months in the making amid contentious debates and dramatic overtures rivaling a Hollywood production, the Consolidated Appropriations Act, 2021 (CAA) was passed into law late on December 27th, 2020. This omnibus act brings together four pieces of legislation:
- The COVID-19-Related Tax Relief Act;
- The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act;
- The No Surprises Act; and
- The Taxpayer Certainty and Disaster Tax Relief Act of 2020.
CAA contains numerous tax relief provisions for individuals and businesses within each named Act.
This article focuses on key business provisions only.
PPP Loans, “Second Draw”
The CAA provides for additional PPP loans (“Second Draw Loan” or “Second Draw”) for smaller and harder-hit businesses that meet certain pre-conditions. The maximum amount of the Second Draw is the lesser of 2.5 times the average monthly payroll costs (3.5 times for the restaurant and hotel industry) in the preceding 12 months or the calendar year prior to the loan, or $2 million.
Importantly, the Act clarifies that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of the PPP loan (the IRS previously stated in Notice 2020-32 that such expenses would not be deductible under current provisions of the Internal Revenue Code). Additionally, tax basis and other tax attributes of the borrower’s assets will not be reduced (as is typically the case when debt forgiveness income is excluded from taxable income). Similar provisions were enacted for forgiveness of EIDL loans and grants.
30-Year ADS life for Residential Rental Property
Taxpayers owning residential rental property that elected out of the limitation on the business interest expense deduction by switching to ADS depreciation recovery periods, may now use a 30-year life (previously 40 years) for residential real property placed in service prior to January 1, 2018. This will allow for faster write-offs of the rental property. It is expected that the IRS will issue guidance on how to implement the depreciation change similar to guidance issued under Revenue Procedure 2020-25 dealing with the technical corrections under the CARES Act relating to certain qualified improvement property placed in service after December 31, 2017. Rev. Proc. 2020-25 permits taxpayers to change their depreciation by filing an amended return, or a Form 3115, Application for Change in Accounting Method.
Energy Efficient Commercial Buildings Deduction – Code Section 179D
Under Pre-CAA legislation, taxpayers could claim a deduction of up to $1.80 per square foot for energy efficient improvements to lighting, cooling, ventilation, hot water systems, and building envelope of commercial buildings if the property was placed into service before January 1, 2021. Even if the entire building does not qualify but certain sub-systems mentioned above meet energy standards, a partial $0.60 deduction per square foot is allowed. Qualifying commercial buildings include retail buildings, office buildings, industrial buildings, apartment buildings of at least four stories and warehouses. CAA not only made the deduction permanent but also added an inflation adjustment beginning after 2020.
Sandy Klein, CPA, is a partner at Shanholt Glassman Klein Kramer & Co., New York, N.Y.