Thanks to the stimulus programs, there are now five ways small can save big on their taxes in 2021 … and even get money back.
The signing of the American Rescue Act this week means that more than $5tn has been spent on stimulus programs in the US to fight the economic impact of the Covid pandemic. A significant amount of this money has been earmarked towards funding small businesses, such as the paycheck protection program and the economic injury disaster loan program. However, all of the stimulus programs contained generous tax incentives that can not only save business owners a significant amount on their taxes in 2021, but also provide additional funding. Here are five that every small business owner should be considering.
The employee retention tax credit is one such tax incentive. The credit was initially part of the March 2020 Cares Act and has been extended through 31 December 2021. To be eligible for the credit for any quarter in 2021 a business must show that it has been partially or fully shut down or experienced a revenue decline of more than 20% that quarter compared with the same quarter in 2019. If eligible, then the business can take a credit of up to $7,000 per employee per quarter based on their wages against their employer payroll taxes owed.
The big deal is that if the credit is larger than what’s owed, the business can get the difference back in cash. The credit is also available to businesses that participate in the paycheck protection program, although wages used for forgiveness cannot be used to calculate the credit. The criteria for claiming the credit in 2020 are different but businesses owners can still apply to do that. All of these calculations are done on a company’s quarter federal tax returns.
Families First Coronavirus Response Act tax credit
Another tax benefit has to do with the Families First Coronavirus Response Act (FFCRA). This legislation predated the Cares Act in 2020 and required employers to compensate their employees if they had to take time off because they, or their family members, were affected by Covid. This includes having to stay home to supervise their children while they attended virtual classes. The act provided for a tax credit where the business owner could claim money back on their federal payroll tax returns for the wages they were required to pay.
The FFCRA is now voluntary in 2021. But for those employers that do continue to offer these benefits – which now includes time off to get vaccinated or to recover from any effects of vaccinations – the credit is still available and has been extended through September.
Cobra tax credit
Cobra – or Continuation of Health Coverage – is a federal law that requires employers to make health insurance available under their corporate health plans to employees for a certain period of time who lose their benefits because of layoffs or reduced hours of employment. The idea is that people don’t lose their health insurance if they lose their jobs, but they do have to pay.
In a new provision, the American Rescue Plan now fully subsidizes for the continuation of Cobra benefits for employees from April through September and offers a tax credit for employers who continue to pay for the health insurance premiums on behalf of their laid-off employee.
Carryback of losses
There is another big benefit for companies that lost money in either 2020, 2019 or 2018.
Thanks to the Cares Act – and subsequent stimulus bills which kept this rule in place – companies that lost money those years can, for one time only, carry back those losses for up to five years. Which means that if a business paid taxes in the past, those losses would reduce what was owed and therefore a company would be due the money back. Normally tax rules don’t allow this kind of carryback but this year is an exception. We’re telling our clients to amend and file their corporate returns as quickly as possible in order to start the refund process, which takes an average of six weeks.
Work opportunity tax credit
The National Federation of Independent Businesses reported this past weekthat 40% of their surveyed members had open jobs to fill and another 56% of owners reported hiring or trying to hire in February, up five points from January. These numbers are likely to increase significantly over the next few months as the economy recovers. The good news is that a big tax credit related to hiring has been extended through 2025.
It’s called the work opportunity tax credit and it provides a credit on income taxes due for any employer that hires a veteran, someone off of welfare or – more timely – a worker who has been unemployed more than six months. It could be an enormous tax benefit for those employers who take advantage. Some of my clients are calculating this credit in advance before a hire and then using it as a signing bonus to help them better compete against others seeking talent.
Clearly there are significant tax benefits – many which include cash refunds – for small business owners who choose to take advantage of them. My smartest clients are already talking to their tax advisers and getting help. They know that these benefits are short-term. They also know that leveraging them could provide much needed funds to help them navigate to, and through, the post-pandemic recovery.