Tax Benefits and Financial Resources Available to Small Businesses in 2021
The Consolidated Appropriations Act, 2021 (Act) was signed into law on December 27, 2020. This Act contains many changes and updates to the previous relief bill for COVID-19, and it would be impossible to cover all of them in one article. In this post, we aim to highlight a few of the provisions of the Act that would be of interest to small businesses:
1. Expenses paid using forgiven Paycheck Protection Program (PPP) funds are tax deductible. The Act reverses the IRS’s previous guidance and permits taxpayers to deduct the expenses paid with the PPP loan proceeds to the extent they would otherwise qualify as ordinary and necessary business expenses. Special rules apply.
2. The second round of PPP loans is available to not only first-time qualified borrowers but also to borrowers that previously received a PPP loan. Special rules apply.
3. Businesses may be able to claim Employee Retention Credit (ERC), a payroll tax credit, and borrow a PPP loan.
– Prior law: A company was not eligible for the ERC if the company had accepted a PPP loan.
– New law: Now the ERC may be claimed retroactively and prospectively if the company can meet certain requirements.
– Maximum tax credit amount is increased.
– The time period for the ERC tax credit is extended through July 01, 2021.
***UPDATE***
- The American Rescue Plan Act (ARPA) enacted on March 11, 2021 extends this tax credit through December 31, 2021.
- The ARPA provides the ERC tax credit to businesses that began carrying on any trade or business after February 15, 2020. Special rules apply.
- The statute of limitations for the IRS to audit ERC claims is increased from from three to five years.
4. Economic Injury Disaster Loans (EIDL) Advances do not reduce PPP forgiveness:
– Prior law: Borrowers that received an EIDL Advance (advances between $1,000 and $10,000) had that amount subtracted from their total PPP forgiveness.
– New law: The Act now provides that EIDL Advances will not reduce PPP loan forgiveness. If you received forgiveness already and the amount of your EIDL advance was not forgiven, you can contact your lender to have the advance portion forgiven as well.
5. Charitable contribution:
– For tax year 2020, taxpayers could take the standard deduction and deduct up to $300 above-the-line for charitable contributions.
– This above-the-line charitable contribution is increased to $600 for those married filing jointly for tax year 2021.
6. 100% tax deduction for business meals provided by a restaurant.
– Prior law: Business meals are only 50% tax deductible.
– New law: Business meals provided by a restaurant are 100% tax deductible for tax years 2021 and 2022.
7. Extended employer tax credits for paid sick leave and expanded family and medical leave voluntarily provided to employees until March 31, 2021.
– Prior law: The Families First Coronavirus Response Act (FFCRA) required certain employers to provide employees with paid sick leave or expanded family and medical leave related to COVID-19, and reimbursed the employers, via refundable tax credits, dollar-for-dollar, for the cost of providing paid sick and family leave wages to the employees. FFCRA was set to expire on December 31, 2020.
-New law: The Act extended employer tax credits for paid sick leave and expanded family and medical leave voluntarily provided to employees until March 31, 2021. However, the Act did not extend employees’ entitlement to FFCRA leave beyond December 31, 2020, meaning employers will no longer be legally required to provide such leave.
***UPDATE***
The American Rescue Plan Act (ARPA) enacted on March 11, 2021 extends this tax credit through September 30, 2021.
8. Monthly loan payments on existing and new SBA loans may qualify for payment by the Federal Government (i.e., no payment required by the business) for the first 6-9 months of 2021.
Click here to see the full bill – Consolidated Appropriations Act, 2021
Click here to see the full bill – American Rescue Plan Act, 2021
Source: Accounting in a Box
