January 27, 2021
The Covid-19 pandemic has led to a number of temporary changes in the tax code, as well as several incentive programs designed to help small businesses stay afloat during this trying time. For example, one option, the Paycheck Protection Program offers loans to small businesses that need the funds to keep their employees paid and off of unemployment during these lean times.
In addition to this loan option, the bills passed by Congress and signed by President Trump consisted of a number of related tax breaks as well. Designed to assist eligible small businesses in every way possible, these options give companies an additional helping hand, at least until everything returns to something resembling a state of normalcy once again.
Coronavirus Aid, Relief, and Economic Security Act
The Federal Government enacted two different pieces of legislation in order to help businesses and individuals that were affected by the coronavirus pandemic. One of them, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law in March 2020. This piece of legislation includes a number of important things, including changes to the tax code. It was designed to help companies that have been suffering from a loss of business due to the pandemic by providing ways for them to temporarily pay less money to the Federal Government and to get some money back from the IRS that they paid in previous years.
Families First Coronavirus Response Act
The second large piece of legislation, the Families First Coronavirus Response Act, also known as the FFCRA, was designed to protect employees who may have contracted the virus or have been exposed to those who have tested positive by providing them with mandated leave. However, the law also includes several incentives to employers, such as credits on that paid leave.
In all, these two pieces of legislation, as well as the other laws that were put into place due to the pandemic, provided small business with various tax breaks. With Covid-19 still looming, here are the top five tax breaks that small businesses may qualify for.
1) Carrying Forward – and Backward – Any Net Losses
Net Operating Losses, which, according to 2017 tax code, could previously only be carried forward into future years, can now be applied retroactively for up to five years. This change to the tax code was an important part of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, which allows for companies to get back a portion of the taxes that they previously paid to the federal government.
How does this work? Businesses that lost money this year (2020), due to the pandemic negatively affecting their bottom line, can now take the amount of their losses and apply them to the previous five years’ worth of federal tax returns. As a result, they can get money that they paid to the IRS refunded to them, helping them stay open during these trying times.
On top of that, the losses can also be carried forward into future years, helping the business stay somewhat afloat for time to come, or at least, pay less in federal taxes. The CARES Act included this provision in order to protect both large and small companies that may have had their business affected by the pandemic. In order to see if your business qualifies for this net operating loss option, consult a qualified tax consultant.
2) Employee Retention Credits
In order to help employers who have seen a loss of revenue, yet still employ their workers and pay them, the IRS has created an employee retention credit. The first $10,000 made by every employee (an amount that includes health care costs) counts toward the 50% credit. How does it work? The company still sends the payroll taxes paid by their employees, which are taken from their paychecks. However, the additional amount, which is submitted by the company to the IRS in order to cover the remaining portion of the payroll taxes, can be reduced by 50%. This saves the company from having to remit their entire eligible portion, allowing them to use the funds to pay for other costs, such as future payroll, utilities, and other things.
To take advantage of the credit, the eligible business simply needs to reduce the amount of payroll taxes that they send to the IRS. It’s that simple. Also, the IRS has an advance credit available. You can request this advance credit by sending in form 7200.
Is your business eligible for the credits? A company needs to fit into one of these categories in order to take advantage of this credit:
- They must have a significant decrease in the amount of money that they make, starting with the first quarter that payroll taxes were due in 2020. These gross receipts must be 50% of what they were previously.
- They have a clear reduction in business activity due to Covid-19. This means that the restrictions placed by various government agencies (cities, counties, states, federal) directly impacted the company, preventing them from doing business as usual.
It’s important to note that if the business received a paycheck protection program loan, then they are not eligible for the employee retention credit. In addition, any payroll funds that the company received from the Families First Coronavirus Response Act credit can also not be used towards the employee retention credit, as well as those that fall under the family and medical leave act or the work opportunity tax credit.
3) Credits under the Families First Coronavirus Response Act
Commonly shortened to FFCRA, the Families First Coronavirus Response Act provides tax credits to companies with less than 500 employees that have provided medical leave to employees due to Covid-19. The act is in place through the end of the calendar year, December 31, 2020, and it covers a variety of conditions that all relate to Covid-19.
For example, if an employee contracts Covid-19 or needs to quarantine after coming into contact with someone with the virus, the act provides them with two weeks of pay (80 hours) at their full rate. It also covers employees who need to care for someone who is quarantined or need to keep an eye on their children who cannot go to school because of the virus. In this case, it provides two weeks of pay (80 hours) at two-thirds of their standard rate. Finally, employees who need to remain in quarantine to care for a school-aged child for a longer period of time are eligible to receive ten weeks of leave paid at two-thirds of their standard rate. Not only does this provide the protection that employees need, but it also gives some tax credits to the employers.
According to the FFCRA, in sections 7001 and 7003, companies with fewer than 500 employees that have workers who used these three forms of leave are eligible for tax credits in those amounts. The businesses can claim the credit, which includes the full amount paid to the employee because of the leave. In addition, the business can retain any parts of Medicare tax, federal employment tax, and health care expenses paid by the company on the behalf of that employee. This means that not only are workers provided with the coverage that they need in case they have their lives upended by the virus, but companies also have an incentive to provide the mandated leave. Plus, the tax credit helps businesses that are already suffering from a loss of revenue but intend to keep their workers employed and busy by providing them with additional money.
All companies with fewer than 500 workers who are subject to the terms of the FFCRA are eligible for these tax credits and tax retentions under the law. In addition, some self-employed people, such as those who run small businesses of various kinds, may qualify as well. They may be eligible for the leave, the credits, and the tax retention, depending on the circumstances.
4) Payroll Tax Deferrals
Normally, when an employee receives a paycheck from their employer, a certain amount of taxes is taken out and paid directly to the federal government. This amount only covers a portion of what’s fully due, as the employer pays the rest on a regular basis. However, thanks to a provision in the CARES Act, employers have more time to pay their portion of the money due, the social security funds that they would normally remit. Having this extra money in their accounts can help companies stay open and functioning when their revenue is down.
According to the CARES Act, the amounts due to the federal government that would normally be paid between March 27 and December 31, 2020, are now due by the end of the year 2022, with 50% due by the end of 2021 and the other 50% by December 31, 2022. That is, the company has two full years to cover their portion of social security taxes due.
In the meantime, the business still needs to send the IRS the portion of their payroll taxes paid by the employee in the form of standard withholding, as well as their (the company’s) portion of Medicare taxes.
Originally, these payroll tax deferrals were only eligible for companies that did not receive a loan from the Paycheck Protection Program that was forgiven, meaning that they did not have to pay the funds back. However, as of June 5, 2020, that has changed, and all eligible companies can now withhold their portion of these funds, regardless of whether or not they received one of these loans that was forgiven.
Not only does the payroll tax deferral apply to companies that are sized small through large, but they also apply to those who are self-employed. Individuals who run their businesses can withhold up to 50% of the social security taxes based on their net earnings that they would normally send to the federal government. They also receive the same payment options that companies do, with 50% of those taxes due by the end of 2021 and the rest due by the end of 2022. This helps those self-employed workers stay in business by giving them some additional money to use for necessary expenses.
Although many businesses will qualify for this option, some may not. It’s important to speak to an expert tax professional in order to determine your company’s status and to see if you are eligible to participate in the deferrals.
5) The Excess Business Loss Disallowance is Suspended
Although this disallowance is something that appears on an individual tax return, it can apply to businesses as well – specifically, business owners. In the past, the excess business loss disallowance was now allowed for couples that filed joint returns and wanted to include the amounts of money that their businesses lost on that particular return. However, the CARES Act changed this and even made it retroactive to 2018 tax returns.
Previously, the amounts of those net operating losses were disallowed between the years of 2018 and 2025. But now, thanks to the CARES Act, these excess businesses losses are now allowed for 2018 through 2020 tax returns. For example, for couples that file their tax returns jointly, the amounts of these losses tend to be between $250,000 and $500,000, although those numbers are adjusted for inflation and may change.
With the signing of the CARES Act, excess business losses can now be applied to the previous tax years of 2018 and 2019, as well as the current year, 2020. Again, these deductions often appear on individual tax returns, such as those of small business owners. By providing them with the opportunity to claim these losses, the IRS is allowing them to retroactively receive money back for previous years that can be used for living expenses or even put back into the business that lost funds due to Covid-19.
Currently, the law only covers these particular years, but it may be extended into 2021, depending on any new legislation. In order to see if it is, as well as to see if you qualify for this new suspended disallowance, you will need to seek out a tax professional who can help you determine your eligibility.
Does Your Business Qualify for Covid-19 Tax Breaks?
As you can see, there are a number of different Covid-19 tax breaks available, including the five described here. The government is trying to help businesses that have suffered from lower revenues due to the Covid-19 pandemic. If you have any questions about whether or not your company qualifies for these tax breaks, which ones you can utilize together, or want to take advantage of specific ones, the best thing to do is speak to a tax professional today. This way, you will know right away which you are eligible for and can plan accordingly for the future of your business.
If you are wondering whether or not your small business is eligible for any of these Covid-19 tax breaks, reach out to the tax advisors at Enterprise Consultants Group. We have many years of experience in the field and can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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