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In the wake of the coronavirus pandemic, the U.S. government has responded by passing legislation to offer small businesses financial and tax relief. Both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act (FFCRA) specifically include provisions to help businesses with new tax credits and changes.

Here are nine tax credits or changes small businesses that are affected by the COVID-19 crisis need to be aware of in 2020.

Employee Retention Tax Credit

One of the most important new tax credits is the Employee Retention Tax Credit (ERTC), which has been designed to encourage businesses to keep on employees. Businesses are eligible for an employee retention tax credit if business operations were fully or partially suspended due to a COVID-19 shut-down order or if gross receipts declined by more than 50% compared to the same quarter in the prior year.

Eligible businesses can get a refundable 50% tax credit on wages up to $10,000 per employee. The credit can be obtained on wages paid or incurred from March 13, 2020, through December 31, 2020.

In order to claim the ERTC, eligible employers will report total qualified wages and related health insurance costs on their quarterly tax returns (via Form 941) beginning in the second quarter of 2020. The ERTC credits can be taken against the employer's share of Social Security tax but the excess is refundable. To speed things up, employers may choose to hold on to employment taxes that would have otherwise been deposited.

Tax credit for sick and family leave

The FFCRA made big changes to sick and family leave for small businesses that have less than 500 employees. Those businesses will be required to provide paid sick leave and paid family leave to employees for specific reasons related to the Coronavirus. To reimburse employers for those expenses, the CARES Act provides a refundable tax credit equal to 100% of the amount paid out for paid sick leave and paid family leave. This tax credit is paid every quarter. However, to help small businesses with cash flow, Treasury has said that businesses can hold onto the employer portion of payroll taxes that they would normally deposit and use that to pay for leave. At the end of the quarter, if the Treasury owes an employer additional reimbursements it will be paid at that time. An employer will not be penalized for failure to deposit payroll taxes if that was done in anticipation of a tax credit.

Delayed payroll tax payments

Businesses and self-employed individuals can also delay payroll tax payments due to the CARES Act. These payments, which are Social Security tax and deposits owed for 2020, can instead be deferred and paid over the next two years. Fifty percent must be paid by the end of 2021 and 50% must be paid by the end of 2022. (Important note: The ability to defer these taxes generally does not apply to a business that receives a Paycheck Protection Program (PPP) loan. However, businesses can participate in the new PPP and also take advantage of new provisions allowing them to defer payroll taxes, under certain conditions. The IRS has provided that businesses can take advantage of both programs up until the point at which they have any loans forgiven – then the deferral ends.)

Charitable gift deduction expansion

The CARES Act has expanded deductible charitable cash gifts by corporations. Before the Act, charitable contributions made by a corporation could not exceed 10% of taxable income, but this has now been increased to 25%. This change is not automatic and must be elected.

Net operating loss changes

Businesses that have net operating losses (NOLs) have some limitations relaxed because of the CARES Act. If your business had an NOL in the tax years 2018, 2019, or 2020, 100% of that NOL can be now be carried back up to five years. NOLs from 2018, 2019, and 2020 may be carried forward up to 20 years, but will be subject to the 80% limitation. This may improve cash flow and liquidity for some businesses, including pass-through businesses and sole proprietors.

Businesses that were due to receive AMT credits at the end of 2021 can instead claim a refund now, in order to improve cash flow.

Marilyn Landis, president and CEO of Basic Business Concepts, discusses small business coronavirus tax changes.

Coronavirus Guide for Small Businesses

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Business loss deduction changes

The cap on the deduction for business losses on individual returns was halted in the CARES Act. Under the 2017 tax reform law, business losses that exceeded a $500,000 threshold for couples and $250,000 for individuals were nondeductible, with any excess carried forward. The CARES Act suspends this loss limitation rule for 2018 through 2020, so business owners who had losses limited in 2018 and 2019 could file amended returns to receive refunds.

Corporate AMT credits

The corporate alternative minimum tax (AMT) was repealed in the 2017 tax reform law, but corporate AMT credits were made available as refundable credits over several years, ending in 2021.

Businesses that were due to receive AMT credits at the end of 2021 can instead claim a refund now, in order to improve cash flow.

Interest deductibility changes

Businesses are able to increase their business interest expense deductions on their tax returns because of the CARES Act. For 2019 and 2020, the amount of interest expense that businesses are allowed to deduct on their tax returns is increased to 50% from 30% of adjusted taxable income.

Facility improvement write-off

Through a provision in the CARES Act, businesses and commercial property owners can immediately start to write off costs associated with improving the interior of a non-residential building. This basically expands the tax deduction for many property improvements to 100% of the cost, with the deduction applicable right away, which can provide more liquidity to businesses. This change was issued to fix some language of the 2017 tax reform law and the change is effective for 2018 to present, so businesses might think about amending older tax returns if they made facility improvements in 2018 or 2019.

One last thing

Most of the changes above will apply in some way to small- and medium-sized businesses, but there are other small provisions related to things such as alcohol and aviation excise taxes. Be sure to talk with your tax advisor or financial planner about how coronavirus legislation will impact your bottom line this year and beyond.

For more resources from the U.S. Chamber of Commerce:

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Published April 15, 2020