COVID and Taxes: Tax Breaks That You Should Know

Despite the ongoing COVID-19 pandemic, tax time is finally here, and it’s important for everyone to learn more about all of the new tax opportunities that small businesses may qualify for.

Despite the ongoing COVID-19 pandemic, tax time is finally here, and it’s important for everyone to learn more about all of the new tax opportunities that small businesses may qualify for.

Multiple tax relief bills were introduced during the last year and they provide much-needed relief for small and start-up businesses. It is important that taxpayers of all sizes are aware of the financial relief that they might be eligible for. With businesses reeling due to the pandemic, we are here to explain some of the most advantageous provisions of the CARES Act and the American Rescue Plan Act which might provide you with some much-needed cash flow relief.

Restaurant Revitalization Fund

The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide emergency assistance for eligible restaurants, bars, and other qualifying businesses impacted by COVID-19. This program provides funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss of up to $10 million per business and no more than $5 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023.

Shuttered Venue Operators Grant

The Shuttered Venue Operators Grant (SVOG) program was established by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, and amended by the American Rescue Plan Act. The program includes over $16 billion in grants to shuttered venues, to be administered by SBA’s Office of Disaster Assistance.

Eligible applicants may qualify for grants equal to 45% of their gross earned revenue, with the maximum amount available for a single grant award of $10 million. $2 billion is reserved for eligible applications with up to 50 full-time employees.

Eligible entities include: Live venue operators or promoters, Theatrical producers, Live performing arts organization operators, Museum operators, Motion picture theater operators (including owners), and Talent representatives. If your business falls within one of these categories, we strongly encourage you to evaluate if and how your business can benefit from this program.

Credits:

Across all industries, small and start-up businesses may have an opportunity to receive financial relief through payroll tax credits, which may result in immediate cash-flow to qualified businesses. Three such credits are the Research and Development (R&D) Credit, the Employee Retention Credit (ERC), and the Credit for Sick and Family Leave.

1. Research & Development (R&D) Tax Credit

A qualified small business may apply all or part of the R&D tax credit to offset the employer portion of certain payroll tax liabilities (generally 6.2% of an employee’s salary, up to an annual cap), rather than income tax liability (i.e., the credit may be available regardless of profitability). A qualified small business may receive up to $250,000 of payroll tax relief each year for up to 5 years. That could result in offsets of up to $1,250,000 to your company’s payroll tax liabilities. 

In order to qualify for this credit, an eligible employer must meet the following requirements:

1. The company did not have gross receipts prior to the 5 taxable years ending with the taxable year in question

2. Gross receipts for the taxable year is less than $5,000,000

3. The company otherwise qualifies for the R&D credit – e.g., it invests in new or improved products, processes, software, techniques, formulas, or inventions.

2. Employee Retention Credit (ERC)

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes the Employee Retention Credit (ERC), which provides immediate cash-flow relief to eligible employers that have been impacted by the COVID-19 pandemic. Such cash-flow relief comes in the form of a refundable employment tax credit, up to $5,000 per impacted employee for 2020. The ERC was further expanded and extended to provide a credit of up to $28,000 per impacted employee in 2021.

In order to qualify for this credit, an eligible employer must meet one of the following requirements:

1. Have fully or partially suspended operations during an applicable calendar quarter in 2020 or 2021 due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19 OR:

2. Have experienced a significant decline in gross receipts during the calendar quarter

What is the maximum credit that can be claimed?

1.   For 2020: 50% of qualified wages paid to each employee, up to $10,000 per year. Therefore, maximum credit for 2020 is $5,000 per employee.

2.   For 2021: 70% of qualified wages paid to each employee, up to $10,000 per quarter. Therefore, maximum credit for 2021 is $28,000 per employee ($7,000 per quarter).

There are additional rules and considerations regarding how to identify and measure qualified wages, which vary for large and small eligible employers.

3. Credit for Sick and Family Leave

The Families First Coronavirus Response Act (FFCRA) provides eligible employers with a refundable tax credit in the full amount of sick leave and family leave wages, plus related health plan expenses and the employer’s share of Medicare tax, with respect to certain sick and family and medical leave for reasons related to COVID-19. This credit was amended and extended by the COVID-related Tax Relief Act of 2020 and the American Rescue Plan Act of 2021. Although certain employers were required to provide paid leave for the period of April 1, 2020 through December 31, 2020, the credit remains available for applicable leave wages voluntarily paid by eligible employers through September 30, 2021.  The refundable credit is applied against certain employment taxes on wages paid to all employees. Eligible employers can reduce federal employment tax deposits in anticipation of the credit.  They can also request an advance of the paid sick and family leave credits for any amounts not covered by the reduction in deposits.

The credit may be based on the wages paid in the following circumstances:

1. An employee who is unable to work (including telework) because of coronavirus quarantine or self-quarantine or has coronavirus symptoms and is seeking a medical diagnosis, is entitled to paid sick leave for up to two weeks (up to 80 hours) at the employee’s regular rate of pay, or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day, but no more than $5,110 in total.

2. An employee who is unable to work (including telework) due to caring for someone subject to a coronavirus related quarantine, or caring for a child because the child’s school or place of care is closed, or the paid child care provider is unavailable due to the coronavirus, is entitled to paid sick leave for up to two weeks (up to 80 hours) at two-thirds the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day, but no more than $2,000 in total.

3. An employee who is unable to work because of a need to care for a child whose school or place of care is closed or whose childcare provider is unavailable due to the coronavirus, is also entitled to paid family and medical leave equal to two-thirds of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to ten weeks of qualifying leave can be counted towards the family leave credit. 

Section 139 Disaster Relief Payments

While Section 139 has been around since 2002, it has been highlighted during the pandemic. It provides a way for an employer to make certain payments to an employee that is affected by COVID-19, without the employee recognizing that payment as income. The payments are also fully deductible by the business, but they must be reasonable based on the circumstances. The payments are made directly to the employee and the money is to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of COVID-19, or other ‘qualified disaster’. Qualified expenses could include, e.g., childcare, medical expenses, or increased home expenses. Payment could be considered taxable income if any of the following limitations apply: the payments are unreasonable, the payments are intended to replace the employee’s income, the payment was reimbursed by insurance or another source, or the payment was claimed as a credit or a deduction on the employee’s personal tax return.

As the government continues to roll out business incentives for small businesses everywhere, we hope that you found this information helpful. These various credits and deductions can provide a meaningful cash boost to your business as you try to navigate these challenging times. Every business owner should take time to review these provisions and evaluate the potential benefits they can provide.

Source: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/restaurant-revitalization-fund

https://www.sba.gov/funding-programs/loans/covid-19-relief-options/shuttered-venue-operators-grant

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