For the past year, the COVID-19 pandemic has wreaked havoc on the finances of most Americans. Small business owners have been forced to make one tough decision after another about what to do next to keep their businesses afloat or whether to cut their losses and making these decisions is doubly stressful because every decision affects not only the business owner but also the employees.
The CARES Act and other pieces of legislation designed to provide economic relief for a society affected by the pandemic have offered financial support to people who lost their jobs because of the pandemic, as well as giving business owners an incentive to keep employees on the payroll even though revenues have decreased. As entrepreneurs prepare to file business tax returns this spring, the federal government is offering several business tax credits to help small businesses stay solvent during the slow return to normalcy.
Businesses Can Claim an Employee Retention Tax Credit of Up to $7,000 per Employee
Tax credits are when the IRS subtracts a certain amount from the taxes you would ordinarily have to pay. (They are different from tax deductions, which declare certain amounts of your income non-taxable and then calculate your tax obligations based on the remaining income.) This year, business owners can claim an employee retention tax credit of 70% of the first $10,000 earned by each employee in each quarter. To be eligible for this tax credit, you must either have had to shut down your business operations in response to a stay-at-home order, or else show that the pandemic caused your gross revenue to decrease by at least 20%, compared to the same quarter of last year. This tax credit is refundable, so if, after applying for the tax credit, you owe a negative amount of tax, you can get the IRS to send you a check for the difference by filling out Form 7200.
Paid Sick Leave Tax Credit
The IRS is also offering a tax credit to business owners who continued to pay workers who had to miss work because of COVID-19 illness, mandatory quarantine, or pandemic-related caregiving responsibilities. Pursuant to the Families First Coronavirus Response Act of 2020, employers can receive a tax credit for paid leave they provided to employees who missed work for any of the following reasons:
- The employee’s own COVID-19 illness
- Caring for a family member infected with COVID-19
- A mandatory self-isolation after COVID-19 exposure
- Lack of childcare because of school or daycare closures
If the employee missed work because of their own illness or quarantine, you can claim a tax credit for up to 80 hours of paid leave at 100% of the employee’s pay rate. If the employee missed work to care for someone else, you can claim a tax credit for up to 80 hours of paid leave at two-thirds of the employee’s pay rate.
Before you meet with your tax preparer, you should consult a small business lawyer to make sure you are claiming all the tax credits for which you are eligible and putting the money you are saving on taxes to the best possible use.