I think we can all agree that 2020 was one heck of a year. I think most of us would like to leave it in the past, but unfortunately for us accounting and tax professionals we can't because we still have to prepare 2020 tax returns for our clients.
On December 27, 2020 there was a massive tax bill entered into law called the Consolidated Appropriations Act, 2021. This bill was over 5000 pages long and had a ton of provisions and extensions for individuals and businesses, but I want to highlight a few of the new tax credits and provisions that I believe will most benefit small business filers.
Charitable Contribution Extension
Ordinarily, charitable contributions are only tax deductible by sole proprietors or single member LLCs if you itemize on your personal tax return using Schedule A. This year, there was a provision in the CARES Act passed back in March that allowed for a $300 over the line charitable contribution (meaning you won't need to itemize in order to take the deduction). Unfortunately, when that bill passed into law, Congress didn't consider married couples. We can celebrate because the new Consolidated Appropriations Act eliminated the marriage penalty and now couples that file jointly can take up to $600 in charitable contributions (for tax year 2021 only).
Expenses Paid with Forgiven Loan Money Are Tax-Deductible
If you were fortunate enough to receive a Paycheck Protection Program (PPP) loan to help your business through the pandemic, it will excite you to know that you can now deduct the expenses you paid with the proceeds of the loan on your tax return. There was some controversy surrounding the deductibility of these costs late spring last year when the IRS issued Notice 2020-32 stating that recipients may not deduct these business expenses. We all knew that wasn't the intended spirit of the program, and Congress corrected it in the new act. Business owners now have the full force of the law behind them as they confidently take the deductions they are eligible for.
Exclusion of Grant and Loan Forgiveness
Not only did this act make the PPP expenses tax deductible, it also reiterated that it does not consider your PPP loan forgiveness amount as taxable income. Also, if your business received the Economic Injury Disaster Loan (EIDL) grant, it is also excluded from taxable income.
Please note this exclusion does not include any state, local or private grants you received, so you want to make sure you check the terms of the grants to confirm if it's non-taxable.
Employer Tax Credits
The Employer Credit for Paid Sick and Family Leave, originally passed under The Families First Coronavirus Response Act, was set to expire December 31, 2020. This credit has now been extended under the new act to include wages paid thru March 31, 2021. Not only is this credit for employers, but it's also available for self-employed individuals and their families who have been negatively impacted by the coronavirus. The self-employed credit can be claimed as a refundable credit on your personal tax return using Form 7202.
The Employee Retention Credit, originally part of the CARES Act, was set to expire regarding compensation paid after December 31, 2020. This credit has also been extended and applies to compensation paid to a covered employee through June 30, 2021.
Please note you can not use the same wage expenses to claim both credits.
Payroll Tax Deferral
Under the CARES Act, both employers and self-employed business owners had the option to defer the 6.2% employer portion of social security taxes for wages paid during the period of March 27 – December 31, 2020. The new act has extended that deferral period thru April 2021.
Lastly, in an effort to help the restaurant industry, the new act includes a temporary return of the deduction for business meals at 100% instead of 50%. This 100% business deduction is only in place for tax years, 2021 and 2022.
In conclusion, there are several tax provisions that your business could benefit from. So before you rush out to prepare your tax return, make sure you are really evaluating if your business can benefit from any of these new credits or extended provisions. It could also be a good idea to work with a tax professional this tax year. Their advice and guidance can ensure you stay in compliance and you are not losing anything else because of this unforgettable past year.
This article was written in partnership with wiseHer - a technology platform that provides on-demand expert advice for small businesses and women to accelerate their business or career.
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