In March, the United States federal government passed two COVID-19 relief bills: The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid Relief and Economic Security (CARES) Act. These bills are responsible for a variety of relief options designed to help small business owners weather the coronavirus pandemic, such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL). They also included some lesser known tax relief options for business owners, including some tax credits and tax deferral options that could be very valuable for corporations and small business owners alike.
While 2021’s tax deadline may seem far away, especially since this year’s extended July 15 tax deadline just passed, it’s wise for business owners to look at these newly available tax relief options sooner rather than later. It’s worth checking to see if you should track business operations differently or potentially even shift your overall tax planning strategy, since this could save you time and/or money come next tax season. Wondering if the new IRS rules will change the way you do your taxes? Below, we’re going over four of the tax changes that can benefit business owners during COVID-19.
Employee Retention Tax Credit
The Employee Retention Tax Credit, created by the CARES Act, could be a very valuable credit for eligible employers. To be eligible for this credit, an employer cannot have received a Small Business Association (SBA) loan through the Paycheck Protection Program and they must meet one of the following conditions:
- Employer had their operations fully or partially suspended due to a COVID-19 outbreak related government order that limits commerce, travel, or group meetings.
- Gross receipts for the 2020 quarter declined more than 50% when compared to the same 2019 quarter.
Qualifying employers with over 100 employees can receive a tax credit of 50% of wages up to $10,000 paid to employees who are not working. Qualifying small business owners with 100 or fewer employees can receive a tax credit of 50% or wages up to $10,000 paid to any employees. This credit is capped at $5,000 per employee regardless of number of employees.
Eligible employers can get immediate access to this credit by reducing employment tax deposits. Those who don’t have employment tax deposits that are equal to or higher than the credit may request an advance payment of their IRS credit by submitting Form 7200.
Paid Sick Leave Tax Credit
The FFCRA allows certain employers to use the new Credit for Sick and Family Leave. If an employer has under 500 employees and provides paid sick leave for any employees, they can receive a credit in the full amount of the required sick leave and sick pay outlined in the FFCRA. This required sick pay amount ranges from 100% to two thirds of the employee’s regular pay (capped at $511 per day) and varies based on the reason for leave. You can find in depth information on these variations by reading the COVID-19-Related Tax Credits for Required Paid Leave Provided by Midsize and Small Businesses FAQs here on IRS.gov.
Payroll Tax Deferral
The CARES Act allows any employer to defer their payment of employer Social Security from March 27, 2020 to December 31, 2020. Employers must pay at least 50% of any deferred employer Social Security by the end of 2021 and must pay the full amount by the end of 2022.
Net Operating Loss Carryback
When the Tax Cuts and Jobs Act passed in 2017, it cut the ability to claim Net Operating Losses (NOLs) to 80% of taxable income, while also taking away the ability to carry back NOLs to prior tax years. In an effort to help the many businesses that will likely have NOLs for 2020, the CARES Act has expanded NOLs rules. Per the CARES Act, businesses can now carry back 100% of NOLs generated in 2018, 2019, or 2020 to the prior five tax years. These carryback rules apply to a variety of taxpayers, including C corporations, small businesses, individuals, self-employed persons, estates, and trusts and tax-exempt organizations filing Form 990-T.
Final Thoughts
The tax credit and deferral options included in the FFCRA and the CARES Act are a valuable form of relief for many small businesses in the United States– and they may only be the start of all the COVID-19 relief that will be available to business owners. As we move into August, the Centers for Disease Control (CDC) is still recommending strict social distancing guidelines due to the increasing spread of COVID-19 in the United States. Because the U.S. is currently unable to proceed with a full reopening, lawmakers in Washington are developing another stimulus package. What will be in the final bill that passes this summer remains to be seen, but it seems likely that the stimulus package will include more financial assistance for the many small business owners who are struggling during the ongoing pandemic.