With the government shutdowns and economic fallout from the pandemic, 2020 was a rough year for many businesses. But thanks to recent legislation aimed at helping business owners recover from the pandemic, you could see a silver lining in the form of significant tax-saving opportunities when you file your annual tax return this April.
First off, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed last March, and in addition to emergency loans like the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL), it also included several tax breaks to help struggling businesses, most notably, the Employee Retention Credit (ERC). From there, the Consolidated Appropriations Act 2021 passed in December 2020, expanded and extended the ERC program to address the lingering effects of the pandemic.
Finally, in addition to the pandemic-related legislation, multiple provisions of the 2017 Tax Cuts and Jobs Act (TCJA) continue to provide potentially hefty reductions to your tax bill. On that note, here we’ve highlighted five key tax-saving opportunities you should keep top of mind when you file your 2020 return.
1. Expansion and Extension of the ERC
Under the original version of the ERC, any business that was fully or partially suspended as a result of government-mandated COVID-19 shutdown orders or whose gross receipts fell by more than 50% in a quarter in 2020 compared to the same quarter in 2019 may be eligible for the tax credit. The tax credit is worth 50% of qualifying wages, with payments of up to $10,000 per employee for wages paid from March 13, 2020 through January 1, 2021. Initially, the ERC was not available to those employers who took a PPP loan, but this rule was changed for 2021.
Based on changes enacted under the Consolidated Appropriations Act 2021, the ERC is now available to business owners who took a PPP loan, including borrowers from the initial round of PPP, who originally were ineligible to claim the tax credit. However, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP. Eligible employers now have until June 30, 2021 to claim the tax credit.
On March 1, 2021, the IRS issued Notice 2021-20 that offers guidance for employers claiming ERC for wages paid through the end of 2020. The notice explains how employers who received a PPP loan can retroactively claim the employee retention tax credit. In order to claim the credit for past quarters, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarter(s) in which the qualified wages were paid.
For business owners who qualify in 2021, including PPP recipients, the new law expands the credit and allows them to claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee, per quarter for the first two quarters of 2021. This means you could potentially claim $7,000 per quarter, per employee (or $14,000) for 2021.
The IRS plans to release additional guidance addressing the changes for 2021 in a future notice. Given the changing and complex nature of the ERC, consult with a Family Business Lawyer™ or your CPA to ensure you get the most benefit from the tax credit in 2020 and 2021.
2. Take a 20% QBI Deduction For Pass-Through Income
One of the biggest tax breaks offered by the TCJA was the Qualified Business Income (QBI) Deduction, and it’s still available for 2020. Starting in 2018 and running through 2025, this provision allows qualifying business owners to take a straight 20% deduction on their net business income for the year. And this deduction is in addition to any ordinary business-expense deductions you might have.
To qualify, your business must be set up as a “pass-through” entity, meaning your company’s taxes pass through and are paid at your personal income tax rate. This business structure includes sole proprietorships, partnerships, limited liability companies (LLC), and S corporations—basically all businesses except C corporations and LLCs taxed as corporations.
The deduction does have some restrictions, including for specific types of service businesses like law practices and accounting firms, and it begins to phase out at higher income levels. For 2020, the deduction begins to phase out once your taxable income surpasses $163,300 if single and $326,600 if married and filing jointly. Given these restrictions, meet with a Family Business Lawyer™ or your CPA to see if your company qualifies.
Next week, in part two of this series, we’ll cover the remaining three ways you can save big on your 2020 tax bill.