The COVID-19 pandemic continues to impact each of us in different ways. Many small businesses were forced to close temporarily or reduce capacity earlier this year while others found themselves faced with making significant changes to operations in an effort to protect employees and the public.
In addition to state-specific mandates, there were also several key pieces of legislation passed in 2020 that impact small businesses. These include the Families First Coronavirus Response Act (FFCRA), Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and Paycheck Protection Program (PPP). A full review of these laws is not within the scope of this article, however business owners should seek guidance to understand whether, and to what extent, they may be impacted.
Many businesses, particularly small businesses, need financial assistance to help them through these uncertain times. While some financial needs may be met through small business loans, there are also some tax breaks that offer relief for eligible businesses – immediate relief in some cases.
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Are there COVID-19 tax breaks for businesses that retain employees?
If your small business has one or more employees on the payroll, you may benefit from one or more of the IRS tax credits discussed below, including the employee retention credit, the paid sick time credit, and the family leave credit.
Employee retention credits. Businesses considering employee layoffs or furloughs should first consider available tax credits tied to employee retention. These credits are available to businesses of any size that were negatively impacted by COVID-19, due to government shutdown or suspension orders or that can demonstrate that their gross receipts are less than half of the gross receipts in a comparable quarter in 2019. Nearly all businesses are eligible for these credits, including non-profit organizations. However, there are a few exceptions, including small businesses that took advantage of PPP loans and state and local governments and their instrumentalities. The amount of the credit is 50% of up to $10,000 in wages, including the cost of employer-sponsored health insurance, paid to an employee (for a maximum of $5,000 per employee).
If you believe your business is eligible, you do not need to wait until you file your next tax return to take advantage. Simply reduce the amount of federal employment tax deposits by the amount of the credit, accounting for the reduction on IRS Form 941 Employer’s Quarterly Federal Tax Return. If the amount of federal employment taxes is not enough to cover the amount of the credit the employer is entitled to, employers can request advance payments using Form 7200 Advance Payment of Employer Credits Due to COVID-19.
How about COVID-19 tax breaks to help small businesses pay for employee sick time and family leave?
Employers who paid employees for sick time or family leave may receive credits, including:
- Paid sick time credit. This credit relates to employees, including remote workers, who are unable to work because they’ve been quarantined (or self-quarantined) due to COVID-19. Employers covered by the CARES Act are required to pay their employees sick leave for up to 10 days (up to 80 hours), up to $511 per day. The employer’s available credit amount is the full amount of the paid leave, plus related health expenses and plus the employer’s share of Medicare taxes paid between April 1, 2020 and December 31, 2020.
- Family leave credit. Similarly, tax credits may also be available to employers for employees who are unable to work because they are caring for someone else who has COVID-19 or because a school or daycare is closed. In these situations, employees are still entitled to paid time off for up to 10 days, at 2/3 their regular wages, up to $200/day.
Employers can be reimbursed and receive the benefit of the paid sick time and/or family leave tax credits immediately by reducing their payroll tax deposits by the credit amount. If payroll tax deposits are insufficient to cover the credit, employers can submit IRS Form 7200.
Can I defer the employer portion of payroll taxes under the CARES Act?
The CARES Act includes a provision allowing businesses to defer the 6.2% employer portion of Social Security FICA taxes for wages paid to workers between April 27, 2020 and December 31, 2020. This payroll tax deferral is available to all employers with no requirement to demonstrate financial impact from the pandemic. And, thanks to the PPP Flexibility Act, enacted on June 5, 2020, businesses can still defer these payroll taxes even after PPP loan forgiveness – a modification to the original rules. If your business chooses to take advantage of this deferral, half of the deferred taxes must be paid by December 31, 2021, with the remaining balance due no later than December 31, 2022.
What are the COVID-19 small business tax relief measures I can use for business losses?
There are several potential tax breaks related to business losses:
- Claim losses as prior year losses. Section 165(i) of the tax code allows businesses to claim certain losses as prior year losses in the wake of a federal disaster declaration (such as the COVID-19 pandemic). If your business incurred pandemic-related expenses in 2020, you may be able to deduct them on your 2019 taxes or choose to claim them as 2020 losses. This can reduce the amount your business owes or even provide a tax refund. Not all expenses are eligible for this write-off. When in doubt, talk to your accountant or tax attorney about what types of expenses may qualify.
- Carry back losses. The CARES Act also includes a provision allowing businesses to carry losses from 2018 to 2020 back up to five years, allowing businesses to potentially claim refunds for taxes paid in those previous tax years. This option is generally available for all types of businesses, including S-corporations, partnerships, LLCs, and even sole proprietorships.
- Business sale. If you had to sell your business because of the pandemic, you may be able to take advantage of a provision in tax code section 1244. Business owners who were original investors in qualified C-corporations or S-Corporations (but not partnerships) and who sell may be able to use up to $50,000 in net losses (up to $100,000 for a married couple filing jointly) to offset ordinary income. Similarly, C-corporation owners who owned stock in their companies for at least five years before selling may be eligible to take advantage of tax code provision 1202 to eliminate capital gains taxes on potentially millions of dollars in sales profits.
What other tax strategies can I use to help my small business during the pandemic?
In addition to tax credits specific to payroll expenses and business losses, there may be other tax strategies that could provide financial relief. For example, if your business uses the accrual accounting method, you may be eligible to switch to cash accounting so you would not owe taxes until your customers pay for goods or services.
You may also be able to claim an immediate refund of corporate AMT credits or take advantage of the increase in the business interest expense deduction amount, now 50% (up from 30%) for 2019 and 2020.As with all things related to business taxation, ask a lawyer or talk to your accounting professional to explore what types of tax relief your business might be eligible for. In some cases, retroactive treatment may make it worthwhile to file amended returns for previous tax years.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.