Businesses of all sizes and industries have been through a rough time. Fortunately, help is on the way. In late December of 2020, Congress passed The Consolidated Appropriations Act, 2021. It includes a new round of Paycheck Protection Program (PPP) loans. Here’s what you need to know the effects of these tax changes on your business.
Changes to Business Meals
One exciting new change in tax regulations applies to business meals. Previously, the IRS only allowed a 50% deduction of eligible business meals (including meal expenses while traveling for business). Moving forward, the IRS will allow a 100% deduction of all eligible business meals. Note that this rule went into effect on January 1, 2021. As such, you’ll need to deduct just 50% of business meals when you file your tax return for last year.
The Initial Paycheck Protection Program (PPP)
Although the first round of PPP loans has already closed, the IRS has continued to issue clarifying guidance regarding their tax implications. There was quite a bit of confusion as to whether PPP money was taxable. Initially, the IRS informed us that, although businesses do not have to pay taxes on PPP loans, they also could not deduct expenses that the PPP money paid for. Fortunately, this was corrected. You can now deduct your PPP expenses.
EIDL Advances and PPP Forgiveness
The Economic Injury Disaster Loans (EIDL) and Advance Program was available to small businesses and nonprofits that were affected by COVID-19. EIDL payments include grants and long-term, low-interest loans. When EIDL advances were first released during the Spring of 2020, entities could originally apply for a maximum of $10,000 per employee. That figure was then clarified. Entities could apply for $1,000 per employee, up to a maximum of 10 workers.
There was also some confusion regarding how EIDL advances affected PPP loan forgiveness. Initially, an EIDL advance would reduce the amount of forgiveness an entity was entitled to. For example, if you received $10,000 in EIDL payments and $100,000 in PPP loans, you could only pursue forgiveness of $90,000. That has since been changed. As long as you spent the money in the correct categories, PPP loans are now 100% forgivable. Note also that the money is tax-free.
The new stimulus package includes another round of PPP loans for business owners. There are tighter eligibility requirements. However, if you didn’t receive money during the first round of PPP, you may be eligible this time. In addition, you are likely eligible if your business experienced at least a 25% reduction in revenue for any quarter during 2020 compared to the same quarter during 2019.
If you qualify, you can borrow up to 2.5 times your average monthly payroll, based on your choice of your average monthly payroll for either 2020 or 2019. If your business is in the hospitality or restaurant industry, however, you can get up to 3.5 times your average monthly payroll.
With the rapidly evolving tax laws, it’s important to work with a CPA firm that is committed to staying informed and helping your business weather the storm. At The Royce CPA Firm, our tax professionals have been hard at work staying on top of all of the recent regulatory changes in order to provide world-class services to our valued business clients. Contact us in Tucson at (520) 321-4626 to schedule a tax prep appointment.