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Small businesses battling the dampening effect of both the COVID-19 pandemic and shelter-in-place orders may be looking at smaller tax burdens than usual thanks to several COVID-19 related tax credits.
Since the pandemic reached American shores, the federal government has rolled out multiple tax credits for small businesses via the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
COVID-19 related tax relief
Both the FFCRA and CARES Act outlined additional tax credits and other forms of tax relief that small businesses can take advantage of to reduce the economic impact of COVID-19, including:
- Employee Retention Tax Credit (ERTC): Refundable tax credit against certain employment taxes equal to 50% of the employee wages paid between March 13 and December 31, 2020, with a maximum of $10,000 per employee. Eligible for businesses experiencing full or partial suspension of operations in 2020 due to government movement restriction orders related to COVID-19, or have recorded a drop in gross receipts in any 2020 quarter of more than 50% o compared to the corresponding 2019 quarter
- Tax credit for paid sick and family leave: Under the FFCRA, these are fully refundable tax credits for paid sick leave (up to 2 weeks per employee) and family leave wages (up to 10 weeks in total) for COVID-19 related reasons. Employers are also exempt from paying the employer portion of social security tax imposed on those wages.
- Postponed federal tax payment deadlines: The 2019 income tax filing and payment deadlines for businesses who file and pay federal income taxes on April 15, 2020, have been automatically extended until July 15, 2020.
- Payroll tax deferral relief for all employers and self-employed individuals: Under CARES, deposit and payment of employer's share of Social Security taxes and payment of certain self-employment taxes owed in 2020 can be deferred across the next two years instead. Half must be paid by end-2021 and the other half must be paid by end-2022. Businesses that have had their Paycheck Protection Program loans forgiven are ineligible.
- Liberalized rules for deducting net operating losses: Businesses that had net operating losses (NOLs) in 2018, 2019, or 2020 tax years, can now carry that back up to 5 years by filing amended returns.
- Better depreciation rules for real estate qualified improvement property: Small businesses that own commercial property can immediately start writing off 100% of costs incurred in improving the interior of their properties. This rule is applicable from 2018, so eligible businesses can amend old tax returns to receive tax refunds.
- Suspension of excess business loss disallowance rule: The Tax Cuts and Jobs Act of 2017 (TCJA) capped tax deductions against business losses at $500,000 for couples and $250,000 for individuals, with any excess carried forward. CARES suspended this cap for 2018, 2019, and 2020 tax years, effectively pushing back implementation until 2021. Business owners can file amended returns to receive refunds, if eligible.
Existing tax credits
Tax credits are dollar for dollar amounts that can be subtracted from the amount of tax your small business owes the government. This differs from tax deductions, which are subtracted from your taxable income before you calculate the amount of tax your business owes.
Prior to the two coronavirus bills, there were already several types of tax credits commonly available to small businesses, such as:
- Earned Income Tax Credit (EITC): This is a tax credit that benefits working individuals with low or moderate income. Small business owners who earn income from running or owning a business or farm and meet basic rules, may qualify for EITC as well.
- Work Opportunity Tax Credit (WOTC): Claimable by employers hiring individuals from groups who face significant barriers to employment, such as qualified veterans, ex-felons, and people on benefits or an assistance scheme.
- Small Business Health Care Tax Credit: For employers with less than 25 full-time equivalent employees and who offer employees a qualified health plan to its employees and pay at least half the cost of coverage for each employee.
- Credit for Employer-Provided Childcare Facilities and Services: Businesses that provide childcare facilities for its employees or have a program in place to refer employees to external childcare providers, can claim a portion of such expenditure as a tax credit.
- Plug-In Electric Drive Vehicle Credit (IRC 30D): For businesses using qualified e-vehicles including passenger vehicles and light trucks, with maximum credit per vehicle at $7,500.
- Child and Dependent Care Credit: For payments made towards a childcare or dependent care, with a maximum credit of $6,000 per family.
- Premium Tax Credit (PTC): Refundable credit for premium payments made towards health insurance bought at the Health Insurance Marketplace.
- Retirement Plan Startup Costs Tax Credit: A credit for up to 50% of ordinary and necessary eligible startup costs you incurred in setting up, administering, and educating employees about a retirement plan, with a maximum of $500 annually.
Before filing claims or requesting advances on these COVID-19 related small business tax credits, it is vital that small business owners read the fine print in the related IRS pages linked. If you remain unsure, consult your accountant. In this uncertain business environment, every little bit helps.
