This article is intended to briefly introduce a few tax credits that may be applicable to
small to midsize businesses. These tax credits range from those related to COVID-19,
with short expiry dates, to credits that are available over a longer duration.
Tired of hearing all the tax related buzz words – PPP, ERC, CARES ACT, SBA, EDIL and on and on? While we know 2020 and 2021 to date have been overwhelming for small businesses in terms of navigating these buzz words, regulations and opportunities, there are still a treasure trove of tax related credits available to small businesses that can immensely help with cash flow. Make sure to talk to your accountant if these, and other federal and state tax credits, may apply to you.
Sick and Family Leave Credit
The government essentially is covering these employee wages if an employer paid for employees during when the employee took sick or family leave for COVID-19 related reasons for periods of leave from April 1, 2020, through September 30, 2021. Depending on the reason the employee was out (sick him or herself or to take care of a family member), the credit is based on the sick wages paid (capped at certain daily limits and hours), certain health insurance amounts, as well as the eligible employer Medicare paid portion for the related wages. The credit funds can be obtained by filing an amended Form 941 for the applicable quarter or by filing for a quick advance on the tax credit with Form 7200, Advance of Employer Credits Due To COVID-19.
Employee Retention Credit
This credit has two pieces – one that applies to 2020 tax year and the other that applies to 2021.
For 2020, If the employer had full or partial shutdown due to a state or federal government
order or a 50% or more reduction in gross receipts, they could get up to $5k per employee in tax credits for wages paid between March 12, 2020 and before January 1, 2021. The credit can include certain health insurance payments also. The cash for the tax credit can be applied for by filing an amended Form 941X for each applicable quarter of 2020.
For 2021, the ERC eligibility criteria of full or partial government ordered shut down remains the same. If the employer is eligible based on gross receipts reduction criteria, then for the 2021 ERC, gross receipts only need to have gone down by 20%. The tax credit can be claimed against the employer share of matching payroll taxes and is equal to 70% of the qualified wages they pay to employees in 2021.
Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the
maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $28,000 in 2021! The manner for obtaining the cash for the credit remains the same as that for 2020 above.
You can learn more about the Employee Retention Tax Credit on a prior article I wrote here.
Research and Development (R&D) Credit
This is one of the most overlooked credits out there. The R&D credit may be claimed by taxpaying businesses that develop, design, or improve products, processes, formulas, or software. What constitutes R&D with regard to the credit is much more expansive than business owners realize, with activities related to applied sciences and other technical projects qualifying companies from numerous industries and can be applied for businesses of all sizes, not just major corporations with research.
If your business develops or designs new products or processes or enhances existing products or processes or develops or improves upon existing prototypes and software, you can claim the credit. The credit may be claimed for both current and prior tax years.
To claim the credit, the taxpayer must contemporaneously evaluate and document their research activities to establish the amount of qualified research expenses paid for each qualified research activity. Expenses such as wages paid to employees, amounts paid for supplies used in the qualified research or amounts paid to subcontractors engaged in the qualified research work – all of these can be used to claim the R&D credit. IRS Form 6765 is used to claim the credit.
Other Tax Credits Commonly Missed
Health care credit (If you employ fewer than 25 full-time equivalent employees and pay at least half of the premiums for single health insurance coverage for employees); retirement plan set up tax credit (the credit is up to the greater of $500; or the lesser of $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan, or $5,000); the disabled access credit or the alternative energy sources credit.
These are just some of the federal tax credits available to businesses – essentially cash that the government wants to give to businesses that qualify. In addition to these federal tax credits, there are numerous state tax credits may apply. Please be sure you review your businesses’ tax credit situation closely so as not to leave eligible money on the table.
Samreen Sadiq is a CPA with Taksey, Neff, & Associates, LLC.
She can be reached at (301) 294-1100 ext 105