Tax season is always stressful, but 2021 is going to offer up new issues for everyone due to the pandemic.
Small business owners need to be aware of new incentives and programs that could help them get through COVID-19.
The last major change to the tax code came in 2018 with the Tax Cuts and Jobs Act. This act brought with it a new lower corporate tax rate, new rules for pass-through businesses and a tax break for certain industries.
However, the pandemic resulted in changes to businesses taxes for 2021. Many new incentives were put in place as the United States government tried to combat COVID-19’s assault on the economy. Here are some of the new programs and changes to be aware of:
- CARES Act – The Coronavirus Aid, Relief and Economic Security Act was put in place as an emergency loan that allocated money to small businesses across the country. The Paycheck Protection Program (PPP) loan was part of it. Any loan money a business received in 2020 through a PPP loan is not considered taxable income. Still, any amount that isn’t forgiven is taxable business income. The new round of relief in late December 2020 will let business owners deduct expenses that their PPP money paid for. The IRS will provide guidance on how exactly the new relief package will affect a business owner’s overall tax liability.
- Economic Injury Disaster Loan (EIDL) – The EIDL helps businesses affected by mandatory shutdowns or economic slowdowns caused by the pandemic. The Small Business Administration (SBA) expanded the EIDL program during the pandemic. It’s important to note that a business that receives funding from an EIDL is still required to pay income taxes on this loan.
- Employee Retention Tax Credit (ERTC) – Businesses affected by the pandemic can use the ERTC to retain staff members. But to be eligible, a business must have been fully or partially closed due to a government-mandated shutdown or experience a decline in gross receipts of more than 50 percent for any given quarter when compared with the same quarter in 2019. And, employers that quality for the ERTC are eligible for a tax credit equal to 50 percent of qualifying wages, up to $10,000 per employee between March 13, 2020 and Jan. 1, 2021.
- Families First Coronavirus Response Act (FFCRA) – The FFCRA required some businesses to provide sick/family leave to employees who were affected by the pandemic. Businesses that made these payments are eligible for tax credits for 100 percent of the cost of sick-leave pay, family-leave pay, qualified healthcare plan expenses and the employer’s share of FICA taxes for sick-leave expenses they incurred under the FFCRA.
- Interest Expensive Deduction Increases – With the CARES Act, the allowable business interest expense deduction was increased for some LLCs from 30 percent to 50 percent of adjusted taxable income.
There are many things to remember with small business tax structures, that’s why it’s vital to work with a CPA or a tax professional that understands your business. They can guarantee that your business is doing the right things with all the deductions available to you. And, probably the most vital, is that you’re paying the government exactly what you owe. Just be sure to choose the right one.
Not all is looking dire for entrepreneurs and start-ups heading into 2021. The number of new businesses forming has surged during the pandemic, partly driven by thee increase in savings Americans have after the CARES Act was enacted and potentially due to more Americans seeking creative ways to earn a living during the pandemic.
These “green shoots” in business formation are a hopeful sign that the United States can begin to recover.
Publishing note: This blog is not offered as tax advice. Please seek advice from a tax professional if you're a small business owner.
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