Plenty of American small business owners — including those run by black entrepreneurs — likely will not forget how difficult the COVID-19 pandemic made 2020 to operate in. After all, a large number of those firms have been forced to close or shut down temporarily, change their business models or seek new capital to just stay afloat. Simultaneously, there is some good news for entrepreneurs when it comes to filing taxes for this year.
“Small business owners who managed to stay afloat during the pandemic can qualify for some tax benefits that they may not be aware of,” says H&R Block chief tax officer, Kathy Pickering.
“They could receive tax credits in terms of qualified sick and family leave credits or an employee retention credit. Self-employed business owners also have the opportunity to defer payment of a portion of their self-employment tax to 2021 and 2022.”
As devastating as the crisis has been to small businesses, many may be unaware that the federal government’s CARES Act has tax implications and multiple tax advantages they may qualify for. Pickering shared with BLACK ENTERPRISE via email insights that can help small business owners understand COVID-specific deductions, deferrals and credits they may be eligible for. She also talked about the necessary actions business owners may do well to consider before the end of the year to maximize their return.
BE: Is there any estimate you can provide about how much money businesses could save?
The amount of any tax break depends on the size of the business and how it performed in 2020, but the tax dollars saved can be in the tens of thousands just from new laws passed in the last year.
The qualified sick leave credit is worth up to $511 per day (up to $5,110 total per employee) for up to 10 days of being unable to work due to the employee’s health needs related to COVID-19. If the employee is unable to work because they need to care for others, the credit is up to $200 per day (up to $2,000 in total per employee) for up to 10 days. The qualified family leave credit is worth up to $200 per day (up to $10,000 total per employee) of being unable to work due to certain COVID-19 related circumstances, like a child’s school or care provider was closed or unavailable due to COVID-19. For employers, the credits are refundable payroll tax credits based on qualifying wages paid to employees. For self-employed taxpayers, the credit amounts are based on average daily self-employment income.
The employee retention credit is 50% of qualifying wages (up to $10,000 wages per employee) paid to employees after March 12, 2020 and before January 1, 2021.
Self-employed taxpayers can postpone up to 50% of the social security portion of their own self-employment tax. The postponement applies to self-employment earnings for the period March 27 – December 31, 2020. Up to half of the postponed amount is due 2021 and the remainder is due in 2022.
Could you break down the PPP (Paycheck Protection Program) loan taxability a bit more? What exactly does that mean and how do small businesses know if they qualify?
Several hundred thousand businesses received PPP loans this year. Any small business who used a PPP loan has additional tax considerations for 2020. As long as the loan proceeds are used to cover certain expenses, mainly payroll, they are eligible to be forgiven. Businesses that received PPP loans should keep detailed records showing how they used the proceeds. To be eligible for full forgiveness, at least 60% should be used to cover payroll costs.
Normally, debt forgiveness is taxable income, but the CARES Act created an exception for forgiven PPP loans, making them tax-free. Because the loan itself is not taxed in these circumstances, the IRS issued guidance stating that eligible expenses paid with forgiven PPP loan proceeds by the business, such as payroll, rent, and utilities, cannot be deducted on the tax return in the year they were paid or incurred. This rule applies if the PPP loan has already been forgiven or if, by the end of the year, the business reasonably expects the PPP loan to be forgiven.
What are some other areas where there are tax breaks?
The CARES Act also eased the business and net operating loss rules. If you sustained a loss in the past three years you may be able to carry it back for five years and claim refunds of previously paid taxes.
Another CARES Act provision lets you take a distribution for any COVID-related issue from your IRA or retirement plan without paying the 10% additional tax. The distribution is still subject to tax, but you can spread the tax over three years instead of paying it all at once.