2021 Tax Breaks and Benefits for Small Businesses

This year, businesses saw new tax breaks, incentives, and rules as the government tried to help businesses navigate the challenges of the coronavirus pandemic.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program (PPP), the PPP Flexibility Act, and updates to the Economic Injury Disaster Loan (EIDL) provided business with assistance and, in some cases, confusion over what is and is not taxable.

Programs enacted to address the COVID-19 slowdowns and shutdowns each have different tax implications, depending on the legislation. While it’s always a best practice to consult with a tax professional in your area, here are the basic tax implications of the pandemic relief programs, along with other tax breaks you might not have considered.

The CARES Act

The CARES Act included the Paycheck Protection Program (PPP). This emergency loan program allocated billions of dollars in forgivable loans to small businesses. Businesses can ask for and receive forgiveness for loans that funded payroll, rent/mortgage, and some utility payments.

The fine print: Any amount of money a business receives that has been forgiven under the PPP will not be considered taxable income for 2020. Any amount not forgiven is considered taxable business income.

Additionally, expenses paid for with forgiven money received will not be considered business expenses that could lower taxable income.

For example:

• A business takes a $100,000 PPP loan
• $90,000 of the loan went to salaries and qualified expenses (such as rent and utilities). This amount was forgiven and will not need to be repaid
• The remaining $10,000 loan amount is taxable income for 2020

The expenses paid with the forgiven funds are no longer deductible (such as salaries, FICA, mortgage payments) cannot be deducted from gross income as legitimate business expenses if they were paid for with forgiven PPP funds.

Even finer print: Inc. reports that by late September, the Small Business Association had received fewer than 100,000 PPP forgiveness applications. That is less than 2% of the total loans made. To qualify, the loans must be forgiven to take advantage of any tax reduction in overall income. Businesses are required to apply to their lender for loan forgiveness at the end of the loan period – up to 24 weeks from the inception of the loan.

Approval for forgiveness could take months: SMBs should fill out the necessary paperwork, through their lender, or the Small Business Administration’s website, as soon as possible to make their taxes for 2020 easier to manage.

CARES Act payroll tax deferrals

To help spread out the burden, the CARES Act allows businesses to defer payment and deposit of their portion of 2020 Social Security taxes. Half is due and payable on or before December 31, 2021, and the the second half due on or before December 31, 2022.

Economic Injury Disaster Loan (EIDL)

The Small Business Administration expanded the EIDL Program to provide loans and cash advances to businesses impacted by mandatory shutdowns and economic slowdowns. To date none of these loans are tax exempt. Any loans received will be considered taxable income for the year.

The fine print: Under the EIDL program, employers could apply for a $10,000 advance on the loan. Many received this advance, which was converted into a forgivable grant, even when their loan request was ultimately denied under the program. This grant, which need not be repaid, currently is considered taxable income. The IRS has issued no guidance on exempting EIDL grants to date.

Employee Retention Tax Credit

The ERTC was enacted to help businesses retain staff members if they were impacted by the virus. To qualify, an organization would have experienced 1 of 2 scenarios:

1. They’ve been fully or partially closed due to a government-mandated shutdown, or
2. They experienced a decline in gross receipts more than 50% for any quarter as compared with the same quarter in 2019

Employers are eligible for a tax credit equal to 50% of qualifying wages, up to $10,000 per employee, for wages paid from March 13, 2020, through January 1, 2021 under the ERTC.

Families First Coronavirus Response Act (FFCRA)

The FFCRA included provisions requiring some businesses provide sick and/or family leave to employees who were impacted by the pandemic, either directly through illness or due to school or daycare closures that inhibited their ability to work. There are tax credits available to businesses that made these payments.

Sick Leave Pay

Under the FFCRA, employers were required to pay sick leave for up to 2 weeks (80 hours) at a minimum of 2/3 the employee’s regular salary. The minimum pay required is $200 with a maximum of $2,000 total. 

Family Leave Pay

Under the FFCRA, employers were required to pay family leave for up to 10 weeks at a minimum of 2/3 the employee’s regular salary. The minimum pay required is $200 with a maximum of $10,000 total. 

Tax Credit

Businesses may claim a tax credit of 100% of the cost of any sick and family leave salaries, as well as qualified healthcare plan expenses and the employer’s share of FICA taxes for any sick leave expense they incurred under the FFCRA, providing the leave qualified under the FFCRA.

Increase in business interest expense deduction

Under the CARES Act, the allowable business interest expense deduction has been increased. For some organizations, the expense deduction has been increased from 30% to 50% of adjusted taxable income for many business entities and some sole proprietorships.

Tax relief by state

Many states have enacted additional tax relief and incentives to address the economics of coronavirus. Some state relief legislation is aimed at taxpayers, others at businesses. They vary, so be sure to check locally.

Small business healthcare tax credit

For businesses with less than 25 employees whose average salary is $50,000 per year or less, the Small Business Healthcare Tax Credit offers up to 50% in credits for the costs paid for premiums purchased  through the Small Business Health Options Program (SHOP) plan for ACA coverage.

Net operating loss carry back

For businesses that see a net operating loss (NOL) for 2020, or even beginning in 2018, newer tax rules allow carry back of the losses for 5 years.