What you’ll discover:
Are there COVID-19 tax benefits for firms who retain employees?
What about COVID-19 tax benefits to assist small enterprises in covering employee sick leave and family leave?
Under the CARES Act, may I delay the employer component of payroll taxes?
What COVID-19 small company tax relief provisions are available to me for business losses?
What additional tax techniques can I use to assist my small company during the pandemic?
The COVID-19 epidemic is still affecting each of us in various ways. Earlier this year, several small firms were forced to shut temporarily or cut capacity, while others were compelled to make substantial modifications to operations in order to safeguard workers and the public.
In addition to state-specific laws, many major pieces of legislation affecting small enterprises were approved in 2020. The Families First Coronavirus Response Act (FFCRA), the Coronavirus Assistance, Relief, and Economic Security Act (CARES Act), and the Paycheck Protection Program are among them (PPP). A comprehensive examination of these laws is beyond the scope of this article; nonetheless, company owners should obtain advice to determine if and to what extent they may be affected.
Many companies, especially small firms, need financial aid to navigate these turbulent times. Although small company loans might help with certain financial requirements, there are also some tax incentives available to qualifying enterprises that provide immediate assistance in some situations.
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Are there COVID-19 tax advantages for companies who keep their employees?
If your small company employs one or more people, you may be eligible for one or more of the IRS tax credits listed below, such as the employee retention credit, paid sick time credit, and family leave credit.
Employee retention bonuses. Companies contemplating layoffs or furloughs should first look into any tax benefits related 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 in a comparable quarter in 2019 were less than half of their gross receipts in a comparable quarter in 2019. These credits are available to almost all enterprises, including non-profit organizations. There are a few exceptions, including small enterprises who used PPP loans and state and local governments and their agencies. The credit is equal to 50% of up to $10,000 in wages given to an employee, including the cost of employer-sponsored health insurance (up to $5,000 per employee).
If you feel your company is qualified, you do not have to wait until your next tax return to take advantage of it. Just lower the amount of federal employment tax deposits by the credit amount, and account for the difference on IRS Form 941, Employer’s Quarterly Federal Tax Return. Employers may seek advance payments utilizing Form 7200 Advance Payment of Employer Credits if the amount of federal employment taxes is insufficient to satisfy the amount of the credit to which they are entitled. Because of COVID-19.
What about COVID-19 tax benefits to assist small enterprises in covering employee sick leave and family leave?
Businesses that paid workers for sick leave or family leave may be eligible for credits, which include:
Paid for sick leave. This credit applies to employees, including remote workers, who are unable to work owing to COVID-19 quarantine (or self-quarantine). Companies subject to the CARES Act must pay their workers sick leave for up to 10 days (80 hours) at a rate of $511 per day. The complete amount of paid leave, plus associated health expenditures, plus the employer’s portion of Medicare taxes paid between April 1, 2020 and December 31, 2020, is the amount of potential credit for the employer.
Credit for family leave. Employers may also be eligible for tax rebates if their workers are unable to work due to caring for someone with COVID-19 or because a school or daycare is closed. Employees in these instances are still entitled to paid time off for up to 10 days at 2/3 of their usual income, up to $200/day.
Businesses may obtain immediate reimbursement and benefit from paid sick time and/or family leave tax credits by decreasing their payroll tax contributions by the credit amount. Employers may file IRS Form 7200 if their payroll tax payments are inadequate to fulfill the credit.
Under the CARES Act, may I delay the employer component of payroll taxes?
The CARES Act has a provision that allows companies to postpone the 6.2% employer component of Social Security FICA taxes for salaries given to employees between April 27, 2020 and December 31, 2020. This payroll tax deferral is open to all companies, and no financial damage from the epidemic is required. Additionally, owing to the PPP Flexibility Act, which went into effect on June 5, 2020, firms may continue defer payroll taxes even after PPP debt forgiveness – a change from the original standards. If your company decides to use this deferral, half of the deferred taxes must be paid by December 31, 2021, with the remaining amount payable by December 31, 2022.
What COVID-19 small company tax relief provisions are available to me for business losses?
There are numerous possible tax benefits connected to corporate losses:
Claim losses as losses from the previous year. In the aftermath of a federal disaster declaration, firms may claim some losses as previous year losses under Section 165(i) of the tax law (such as the COVID-19 pandemic). If your company suffered pandemic-related expenditures in 2020, you may be able to deduct them on your 2019 taxes or claim them as losses in 2020. This might minimize the amount owed by your company or possibly give a tax refund. This write-off may not apply to all costs. When in doubt, consult with your accountant or a tax expert to determine whether costs may qualify.
Losses should be carried forward. The CARES Act also contains a provision that allows firms to roll losses from 2018 to 2020 back up to five years, possibly enabling them to receive refunds for taxes paid in earlier tax years. This is a generic option for all sorts of organizations, including S-corporations, partnerships, LLCs, and even sole proprietorships.
The selling of a business. If you have to sell your firm due to the pandemic, you may be entitled to take advantage of a tax code section 1244 provision. Company owners who were initial investors in eligible C-corporations or S-Corporations (but not partnerships) and sell may be entitled to offset ordinary income with up to $50,000 in net losses (up to $100,000 for a married couple filing jointly). Similarly, C-corporation owners who held stock in their firms for at least five years before to selling may be able to use tax code section 1202 to avoid capital gains taxes on potentially millions of dollars in sales proceeds.
What additional tax techniques can I use to assist my small company during the pandemic?
In addition to payroll tax credits and company losses, there may be additional tax solutions that might bring financial relief. For example, if your company utilizes accrual accounting, you may be able to transition to cash accounting and avoid paying taxes until your customers pay for products or services.
You may also be eligible to seek an immediate refund of corporate AMT credits or take advantage of the increased business interest expenditure deduction level for 2019 and 2020, which is now 50% (up from 30%).
As with any aspect of business taxes, consult with a lawyer or an accounting specialist to see what sorts of tax relief your company may be qualified for. In certain circumstances, retroactive treatment may make it desirable to submit revised returns for earlier tax years.