Small businesses are still reeling from financial setbacks related to the coronavirus outbreak. However, there are a number of tax credits and incentives that businesses can take advantage of to help offset their losses. The CARES Act, Consolidated Appropriations Act (CAA), and the American Rescue Plan (ARP) included three significant tax credits and incentives for businesses to consider in 2021. Outlined below are the key takeaways from these tax breaks.
Employee Retention Credit
In an effort to incentivize businesses to retain employees during the pandemic, Congress enacted the employee retention credit (ERC). The ERC is a refundable payroll tax credit available to eligible businesses that pay qualified wages to their employees. Originally established through the CARES Act, the ERC refunded eligible wages made in pay periods between March 12, 2020, and December 31, 2020. The CAA extended this credit period through June 30, 2021, and the ARP extended it again through December 31, 2021, to give businesses more time to adjust to ongoing COVID-related setbacks.
The credit in 2021 has changed drastically from 2020. In 2020, the credit was 50% of up to $10,000 of qualifying wages per employee made between March 13, 2020, and December 31, 2020. In 2021, the credit rose from 50% to 70% and can be claimed each quarter. This means that if an eligible business employs 10 people, they can claim up to a $50,000 credit in 2020 ($10,000 eligible wages x 50% x 10 employees) and up to $280,000 in 2021 ($10,000 eligible wages x 70% x 4 quarters x 10 employees).
To be eligible for the ERC in 2021, a business must have experienced either a full or partial government-mandated shutdown or experienced a 20% drop in gross receipts compared to the same quarter in 2019. This is a significant change from 2020, where businesses had to prove a 50% decline in gross receipts compared to the same quarter in 2019.
Recent legislation also expanded eligibility to the program by (1) raising the employee threshold from 100 full-time equivalent (FTE) employees to 500 FTE employees beginning in 2021, and (2) allowing any private-sector business or tax-exempt business to apply for the credit. Please remember to keep accurate records for at least four years after filing to substantiate ERC claims.
READ MORE: 8 Accounting Tips for Sole Proprietors
Paid Leave Credits
The mandate to offer paid leave to employees expired on December 31, 2020, but employers that continue providing emergency paid sick and family leave will continue to be eligible for payroll tax credits. The CAA extended the tax credits through March 31, 2021, and the ARP extended them even further through September 30, 2021.
Businesses that provide paid leave in 2021 will be reimbursed through an immediate payroll tax credit. The maximum amount of wages eligible for the credit has been increased to $12,000 per employee beginning April 1, 2021, up from $10,000 for prior pay periods. The ARP also reset the 10-day limit for emergency paid sick and family leave on April 1, 2021, so even if an employee exhausted their leave prior to that date, the business is eligible for additional credits if they offer that employee another 10 days of paid leave.
Paycheck Protection Program
The Paycheck Protection Program (PPP) has also evolved and expanded. Like the ERC, the PPP loan is designed to keep employees on the payroll. Borrowers are eligible for loan forgiveness if the funds are used for qualifying expenses. To qualify for loan forgiveness, at least 60% of the loan must be used toward payroll costs and the remaining 40% must be used for payroll or nonpayroll business expenses, including costs associated with rent/mortgage or utilities.
One of the most welcomed changes released in the ARP is the ability to both claim the ERC and have their PPP loan forgiven. The only catch is that they cannot use the same wages to qualify for both programs. An advisor can help your business determine how to leverage the benefits to optimize the savings under both programs.
READ MORE: Small Business Tax Breaks for your Company
Next Steps
As the economy begins to open up and businesses start to show signs of recovery, many of these tax credits and incentives will start to wind down. It’s important to stay vigilant and continue to monitor opportunities, keep good records for tax filing purposes, and connect with one of our CPAs on ways to maximize these tax credits and incentives for your business.