Because the tax laws are constantly changing, it is very important for small business owners to stay up to date on these evolving rules. This year, there are several changes to the federal tax code that will ultimately affect small businesses. While it is helpful to work with a tax professional to ensure you are calculating your business taxes correctly, this article will help you better understand those particular changes:
Families First Coronavirus Response Act
The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19 through March 31, 2021. Businesses that made these payments are eligible for tax credits for 100 percent of the cost of sick-leave pay, family-leave pay, qualified healthcare plan expenses, and the employer’s share of FICA payroll taxes for sick-leave expenses they incurred under this act. If you qualify, it is critical to claim this tax credit for the first quarter of 2021.
Deferred Social Security Taxes
For the 2020 tax year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act enables employers to defer deposits of their portion of Social Security taxes, which were due between March 27, 2020 and Dec. 31, 2020. But in 2021, half of these deferred taxes became due by Dec. 31, 2021, with the remainder coming due on Dec. 31, 2022. Consequently, if small business owners did not pay the first half on time, the IRS considered all of the deferral invalid and assessed penalties on all of the deferred taxes using the original due date.
Net Operating Rules
If any business had a net operating loss in 2018, 2019, or 2020, which is being carried into 2021, it will be limited to 80 percent of taxable income.
Employee Retention Tax Credit
The Infrastructure Investment and Jobs Act (IIJA), commonly referred to as the Bipartisan Infrastructure Bill, is a United States federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on November 15, 2021.
The act was initially a $715 billion infrastructure package that included provisions related to federal-aid highway, transit, highway safety, motor carrier, research, hazardous materials and rail programs of the Department of Transportation. After congressional negotiations, it was amended and renamed the Infrastructure Investment and Jobs Act to include funding for broadband access, clean water, and electric grid renewal. This amended version included $1.2 trillion in spending, with $550 billion being newly authorized spending on top of what Congress was planning to authorize regularly.
The Infrastructure Investment and Jobs Act canceled the 2021 fourth-quarter employee retention tax credit. If small business owners did not claim this credit for Q4, they will not be able to do so. And if entrepreneurs already claimed it, they may be penalized unless they deposited the taxes on (or before) Dec. 20, 2021, or by Jan. 31, 2022.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December of 2021, provides several provisions to help individuals and businesses that give to charity. The new law extends (through the end of 2021) several temporary tax changes originally enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
It is important to note that the charitable contribution rule is advantageous for taxpayers for the 2021 tax year. A C corporation can deduct donations up to 25 percent – rather than the previous 10 percent of its taxable income. To take advantage of this, a business must elect the Increased Corporate Limit on a contribution-by-contribution basis.
In addition, businesses donating food inventory can qualify for deductions of 25 percent, which is up from 15 percent. This is applied to taxable income for C corporations. For S corporations, sole proprietorships and partnerships, it is based on aggregate net income for all trades or businesses from which the contributions are made.
Excess Business-Loss Limitation Rules
Businesses have been able to carry net operating losses back five years or carry them forward indefinitely via a temporary suspension of Tax Cuts and Jobs Act rules in 2019 and 2020. But these rules are now back in place for the 2021 tax year. As a result, taxpayers are unable to deduct losses of more than $524,000 if married and filing jointly–or $262,000 if they are single. This particular rule applies to all business income and losses, including Schedule C and pass-through entity income and losses.
And W-2 wages can no longer be used to offset the business losses. Spousal income is taxed separately and may result in a tax bill–even if the business losses are greater than the spousal income.
Is your head spinning? If the answer is a resounding yes, it may be helpful to contact your tax accountant. But whatever you decide to do, keep in mind that just staying on top of the continuous tax changes is half the battle.
When you decide to work with NCH, we are partnered with a tax company that can help you prepare your business and personal tax returns so you can focus on other important tasks in running your business. Call us at 1-800-508-1729 to learn more!