Ever since the CARES Act was passed in early 2020, many businesses in Maine and across the country have been waiting for additional government action to help handle the economic fallout of the COVID pandemic. After much back and forth — and much delay — the Consolidated Appropriations Act (CAA) was signed into law just days before the new year (and just days before many tax and business breaks were set to expire).
Here are a few of the tax changes the CAA puts in place that may be relevant to business owners here in Maine.
Note: These tax changes can be found in Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) and the COVID-Related Tax Relief Act (COVIDTRA), which are part of the CAA.
Deduction for Business Meals at Restaurants
Previously, business meal deductions were generally limited to 50% of the cost. But for 2021 and 2022, taxpayers can now deduct 100% of the cost of business-related food and beverage expenses. This update was somewhat controversial. Opponents derided the change as a tax break for wealthier business owners who enjoy “three-martini lunches”. Proponents, however, said it’s intended to help restaurants that have been severely impacted by COVID-related restrictions.
CARES Act Loan Forgiveness and Financial Assistance
The CARES Act expanded access to federal Economic Injury Disaster Loans (EIDLs), allowed applicants to request $10,000 advances and granted loan repayment assistance to eligible recipients. The new law favorably clarifies that federal-income-tax-free treatment applies to forgiven EIDLs and certain loan repayment assistance.
Another clarification states that deductions and tax basis increases are allowed for expenditures paid for with forgiven amounts, and that no “tax attribute reductions” are required as a result of forgiven amounts.
Eco-Friendly Tax Breaks and Credits
There are several environmental and energy efficient related tax breaks that have been created or extended by the CAA. These include:
- Credit for Alternative Fuel Vehicle Refueling Equipment: Extended personal and business federal income tax credit that can be claimed for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling equipment.
- Credit for Fuel Cell Vehicles: A federal income tax credit can be claimed for 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, and heavier vehicles can qualify for bigger credits of up to $40,000.
- Credit for Energy-Efficient Manufactured Homes: Manufacturers of residential homes can claim a tax credit of $1,000 or $2,000 for homes that meet applicable energy-efficiency standards. The CAA extends the credit to cover new homes that are acquired from manufacturers in 2021 for use as residences.
- Deduction for Energy-Efficient Commercial Buildings: Commercial building owners can claim deductions for expenditures for energy-efficient improvements to lighting, heating, cooling, ventilation, and hot water systems and building envelopes.
NOL Rules for Farming Losses
Farms with net operating losses (NOLs) are allowed to carry back those NOLs to the two preceding tax years. They are also allowed to waive the carry-back privilege and instead only carry NOLs forward to future tax years. As a tax relief measure, the CARES Act allows NOLs that arise in tax years beginning in 2018-2020 to be carried back for five years
The new legislation allows farming businesses that chose the two-year NOL carry-back option before the CARES Act became law to elect to retain that two-year carry-back rather than follow the five-year carry-back rule set forth in the CARES Act. The new law also allows farmers who previously waived the carry-back privilege to revoke the waiver. These changes apply retroactively as if they were included in the CARES Act.
New Markets Credit
The new markets federal income tax credit can be claimed by both individual and corporate taxpayers. The credit equals 39% of the 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. Now, the $5 billion annual allocation is extended to cover allocations made for 2021-2025. The carryover period for taxpayers to utilize unclaimed new markets tax credits is also extended through 2030.
Work Opportunity Tax Credit
Employers can claim the work opportunity tax credit (WOTC) for hiring members of 10 targeted groups. Before the CAA, the WOTC only applied to first-year wages paid to qualifying employees who were hired before 2021.Now it’s extended to cover first-year wages paid to qualifying employees who are hired in 2021-2025.
Empowerment Zone Breaks
Special federal income tax incentives are available in census tracts designated as empowerment zones. In these zones, taxpayers are potentially eligible for 20% wage credits under IRC Sec. 1396, enhanced first-year depreciation deductions under IRC Sec. 1397A, tax-exempt bond financing under IRC Sec. 1394, and deferral of federal capital gains tax under IRC Sec. 1397B 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. Now, they’re extended through 2025.
However, the new law terminates the Section 1397A enhanced first-year depreciation rules for property placed in service in tax years beginning in 2021 and beyond and terminates the Section 1397B capital gains tax deferral break for sales that occur in tax years beginning in 2021 and beyond.
Your Tax Advisor Can Help
The CAA is a massive law, and these are just some of the tax breaks it includes. If you’d like more guidance on potential tax breaks or credits for your Maine business, contact us at Filler and Associates.