Small business tax deductions can help your business continue to run smoothly. Here’s what to know about relief options for your small business.
The IRS defines small businesses – within the context of tax relief and deduction options – as any business with assets under $10 million. These businesses, including self-employed professionals and independent contractors, can avail of certain tax credits and deductions to help minimize their tax liability and stay afloat during the COVID pandemic. Let’s dive into the current tax relief programs and general small business tax deduction options for the new year.
Basic Business Tax Deductions and Tax Credits
Tax credits are money the IRS lets you omit from your tax liability. When a tax credit is described as refundable, the IRS lets you withdraw the remainder of as cash if your tax liability is more than covered. Most tax credits require businesses to meet certain eligibility requirements to avail for a tax credit.
The IRS provides multiple different forms for small business tax credits, from ones designed to provide special benefits to carbon dioxide sequestration programs to a tax credit for paid family and medical leave, in addition to basic tax deductions.
Tax deductions for businesses essentially allow companies to minimize their tax liability by writing off eligible business expenses, from office supplies to fuel.
Not all business expenses can be deducted. Capital expenses generally cannot be deducted, for example, unless the startup of a business fails (in which case they become capital losses). These include assets that continue to generate value for the business, such as buildings, equipment, or vehicles. In this case, the business hasn’t really lost any value – it simply moved it around, from liquid cash to an asset.
Knowing what your business can and cannot deduct can require great attention to detail and a thorough understanding of federal and state tax laws. Be sure to consult a professional when dealing with tax credits and deductions.
Coronavirus-Related Tax Relief for Small Businesses
Following the beginning of the coronavirus crisis, the government and US Treasury rolled out multiple different relief programs aimed to aid American workers, families, and small businesses, providing economic relief to keep companies and households afloat during the harshest and hardest months of the crisis.
Most of these tax relief programs ended in early to late 2021, and very few are slated to be extended into 2022, if at all.
For small businesses, in particular, coronavirus-related tax relief and financial assistance programs took on the form of an
- Employee Retention Tax Credit
- A Paid Sick and Family Leave Credit
- A Paycheck Protection Program
- An Emergency Capital Investment Program
Among these four, the first two are tax-related, in that they provide refundable tax credits, which can be used to minimize a business’s tax liability and even provide a cash infusion if withdrawn.
Employee Retention Tax Credit
The Employee Retention Tax Credit began in 2020 as a refundable tax credit equal to $5,000 per employee, or 50 percent of eligible wages paid, whichever was less. Eligible businesses that took out PPP loans are also allowed to claim an Employee Retention Tax Credit for 2020, provided they do not use the eligible wages calculated for the tax credit for their PPP loan forgiveness application.
In 2021, the Employee Retention Tax Credit was extended – first into the first quarter of the year and eventually throughout the entire fiscal year. This time, employees received a tax refund equal to the lower of either $7,000 per employee or 50 percent of eligible wages paid. Eligibility to receive an Employee Retention Tax Credit in 2021 was lowered to a 20 percent decline in gross receipts during a single quarter compared to 2019.
The Employee Retention Tax Credit has not been extended into 2022, however eligible businesses can still claim their tax credit retroactively, provided they file their amended payroll tax forms.
Paid Sick and Family Leave Tax Credit
The other major coronavirus-related tax credit was the Paid Sick and Family Leave Tax Credit, or the Paid Leave Credit.
This tax credit was provided to offset the requirement that businesses with 500 or fewer employees were required to provide paid sick and family leave for employees struggling with the results of the pandemic. It initially took on the form of wages paid over an 80-hour paid leave per employee, either:
- At a cap of $511 per day per employee (or $5,110 over the full ten days) if the employee was sick or quarantining, or;
- Two-thirds of an employee’s wages, at a cap of $200 per day per employee, if the employee was taking care of someone else who was quarantining, or if their child’s school or child care was closed due to COVID.
In addition, employers were obligated to provide employees with ten weeks of paid leave to take care of their children while school or child care was unavailable due to COVID, receiving an incentive tax credit equal to two-thirds of their employee’s wages, capped at $200 per day per employee, or a total of $10,000 per employee.
The tax credit was extended throughout 2021, but the requirement to provide paid leave was not. This means only businesses that continued to provide paid leave to their employees for COVID-related obligations were eligible for a tax credit. If you have not received your tax credit, you can file amended payroll tax forms to claim the tax credit and receive a refund for your business.
The Paid Leave Credit is not being extended into 2022.
Child Tax Credit
While not strictly relevant to small businesses tax deductions, the Child Tax Credit was relevant to millions of self-employed and working Americans with dependents, as it was slated to be extended into 2022 – remaining one of the only coronavirus tax relief offerings that might have made it into the new year.
As many as 35 million families across the US relied on the tax credit, with many using it for school supplies and childcare. With cases surging and a new variant looming on the horizon, news of Congress’ inability to extend the program has caused many lawmakers to try and figure out state-level solutions instead to help families retain an important safety net ahead of yet another wave of economic uncertainty. So far, seven states have their own implemented Child Tax Credit, with another nine states having seen proposals for one in the past two years.
While small business owners with dependents and other families might not see an expansion of the Child Tax Credit in 2022 – the jury is still out on whether Congress will be able to vote in a revised version of the Build Back Better bill next year – there are still other deductions and tax credits to take advantage of, both for individual taxpayers and small businesses working to survive the ongoing crisis.
Other Important Tax Relief Tips
Running a small business is a monumental task. Most small business owners are struggling to make ends meet, nowadays more than ever.
There’s payroll to worry about, increasing fuel costs, supplier rates, and unprecedented supply chain issues. Everything from lumber to server space is becoming more expensive, and there are a million balls to keep juggling in the air.
Why let one more worry pile up and cost you precious capital? Get in touch with a tax professional to help you minimize your business’s tax liability, from providing sensible and actionable tax credit information to tax return filing services down to advice on restructuring. Let Rush Tax Resolution help. Get in touch with us today and find out more.