Tax planning is changing in a big way for small business owners.
More importantly, tax credit help is coming for small business owners affected by the COVID-19 pandemic.
Both the CARES Act and the Families First Coronavirus Response Act (FFCRA) have included provisions to help business owners with tax-related changes in 2020.
Here are nine tax credits that have been altered by COVID-19. You should consult with your accountant, attorney or a qualified tax professional about your specific tax strategy and situation.
1. Employee Retention Tax Credit (ERTC)
The credit is calculated at 50 percent of up to $10,000 in qualified wages paid to an eligible employee (employees must have at least 30 days of employment). The credit can be taken for wages paid after March 12, 2020, and before January 1, 2021.
Qualified wages are based on the number of employees the employer had during 2019. If the employer had more than 100 full-time employees, qualified wages are wages paid when employee services are not provided. If the employer had 100 or less than 100 full-time employees, all employee wages paid by eligible employers are credit eligible.
The ERTC credits can be taken against the employer’s share of Social Security tax but the excess is refundable. To speed up the process, employers can choose to hold on to employment taxes that would have otherwise been deposited.
2. Tax Credit For Sick & Family Leave
Major changes to sick and family leave for small businesses of less than 500 employees are included in the FFCRA. Those businesses are required to provide paid sick leave and paid family leave to employees for specific COVID-19 reasons.
To reimburse employers for these expenses, the CARES Act provides a refundable tax credit equal to 100 percent of the amount paid out for paid sick leave and paid family leave. This tax credit is paid every quarter. An employer won’t be penalized for failure to deposit payroll taxes if that was done in anticipation of a tax credit.
3. Delayed Payroll Tax Payments
Businesses and self-employed individuals can delay payroll tax payments thanks to the CARES Act. The payments, which are Social Security tax and deposits owed for 2020, can be deferred over the next two years.
Fifty percent must be paid by the end of 2021 and the remainder is due by the end of 2022.
Note that you may not defer these taxes if your business has received a Payment Protection Program (PPP) loan.
4. Charitable Donations
The CARES Act expanded deductible charitable cash gifts by corporations. Before the CARES Act, charitable contributions made by a corporation could not exceed 10 percent of taxable income. This has now increased to 25 percent. It’s important to note that this isn’t automatic and has to be elected.
5. Net Operating Loss Changes
Businesses that claim net operating loss (NOL) have had some limitations lifted because of the CARES Act.
If your business had NOLs from 2018-2020, then 100 percent of that NOL can be carried back up to five years. The federal government added this measure to improve cash flow and liquidity for some businesses.
6. Changes To Business Loan Deductions
The cap on the deduction for business losses on individual returns was removed by the CARES Act. The Act suspended the loss limitation rule for 2018 through 2020, so business owners that sustained losses limited in 2018 and 2019 can file amended returns to receive refunds.
7. AMT Credits For Corporations
The corporate alternative minimum tax (AMT) was repealed in the 2017 tax reform law, but corporate AMT credits were still available as refundable credits until the end of 2021. Businesses that were due to receive AMT credits at the end of 2021 can claim their refund now to help improve their cash flow.
8. Deductible Changes
Business owners should know they can increase their business interest expense deductions thanks to the CARES Act. For 2019 and 2020, the amount of interest expense that businesses can deduct on their returns has been raised to 50 percent from 30 percent of adjusted taxable income.
9. Writing Off Facility Improvements
If you own commercial property, thanks to the CARES Act, you can start to write off costs that are related to the improvement of the interior of a non-residential building. In a sense, this expands the tax deduction for many improvements to business property to 100 percent of the cost, with the deduction applicable right away. This can help provide more liquidity to businesses.
Remember to consult a tax professional about all of these CARES Act changes. It’s important to know how these changes will impact your bottom line now, and in the future.
For more in-depth information, visit irs.gov/coronavirus-tax-relief-and-economic-impact-payments.
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