Now, don’t go to sleep on me, please. I know that a tax article won’t exactly be the most riveting thing you’ll read today. But it could be the most profitable.
That’s because taxes can eat up anywhere from 15% to 25% of a small-business owner’s income. Every dollar saved on federal taxes means more cash in your bank account, and that can mean surviving or failing these days.
The good news is that the latest $900 billion anti-virus stimulus bill, signed by then-President Donald Trump in late December, contains a number of tax benefits for small businesses that take the time to take advantage. Here are the six biggest:
1) The Employee Retention Tax Credit has been enhanced and extended through June 30.
To qualify for the credit for the first or second quarter in 2021, your business must have fewer than 500 employees (it was previously 100). You also must have been forced to at least partially suspend business operations due to COVID-19 or had a 20% revenue decline in any quarter compared with the same quarter of 2019.
If that’s the case, then you’re entitled to a tax credit equal to 70% of each employee’s wages (which now includes health insurance payments), up to $10,000 per worker per quarter. You use the credit to cut the employer’s portion of Social Security taxes (FICA). The credit is refundable — if the credit is larger than your tax debt, you get the difference back in cash.
You can also take this credit even if you’re getting money from the Payroll Protection Program, provided you don’t use the same wages in both the credit and forgiveness calculations. In short, no double-dipping. The credit is available for both the first and second quarters of 2021.
Some employers might be able to go back to 2020 and retroactively claim this credit. Talk to a tax professional about this.
2) The Families First virus tax credit has been extended through March 31.
This had required employers to keep paying employees forced to miss work due to COVID-19 (such as staying home with children while schools were closed), but offered a tax credit to help cover the cost. Employers no longer must pay such workers. But the new stimulus bill extended the refundable tax credit through the first quarter for those bosses that voluntarily choose to continue paying such employees.
3) You can continue to defer your employer’s Social Security tax, also through March 31.
Regardless of whether your company has been affected by COVID-19, you are still able to defer your employer’s Social Security (FICA) taxes for the first quarter this year. This is not a credit or a forgiveness. It’s merely a push back in the due date — and you will still be required to pay up. Half will be due by the end of 2021, the rest at the end of 2022. But, in effect, it’s an interest-free loan from the government.
4) The Work Opportunity Tax Credit has been extended through 2025.
This is a credit for hiring a person from selected categories — veterans, ex-felons, welfare recipients — but, most important, people who have been jobless for more than six months. The credit, which is calculated per employee and ranges from $1,200 from $9,600, is taken on your company’s tax return and is also available for pass-through (i.e. S-Corps, Partnerships) organizations. Considering today’s massive unemployment and the hope that many will returning to the workforce, this credit may prove an enormous financial benefit to employers who hire this year.
5) Nonprofits will get a revenue boost because of extended tax deductions.
The new legislation extends the increased deductions for charitable contributions through the end of 2021. That means that individuals can take a $300 ($600 for joint tax returns) deduction on this year’s taxes above the standard deduction for charitable donations. Corporations will also be allowed to deduct up to 25% of their taxable income for charitable contributions, an increase from the normal 10% allowed.
6) Finally, if you lost money in 2020 and earlier, file your tax returns quickly.
A little-known, but significant tax benefit remains from the first round of stimulus funding last March. For one time only, companies that lost money in 2020 (2019 and 2018 tax years are also eligible) can carry back that loss for up to five years against their prior tax returns. Which means that if you paid taxes in those years, you can get a tax refund. It’s not automatic, so if you need the cash, file that return.
Still awake? I hope so. Your reward for doing so may be more cash in the bank.