The pandemic has affected nearly every small business posing a threat to their sustainability. The government brought many schemes to support these businesses. This document gives a top line overview of the tax deductions/credits and allowable expenses for these small businesses.
Section 162 of the Internal Revenue Code allows businesses to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Note that no deduction is allowed for personal, family or living expenses.
- 20% pass-through tax deduction- If you function as a Sole-Proprietorship, Partnership, LLC, S-Corp then you are a pass-through entity, meaning a legal entity where income “passes through” to investors or owners; that is, these entities are not subject to corporate income tax or any other entity level tax. These qualify for an automatic 20% deduction from business taxable income. For more details click on the link https://www.irs.gov/newsroom/irs-highlights-tax-reform-changes-that-affect-businesses
- Business Vehicles- If you are using a car for business purposes then you can deduct, he entire amount of the car up to certain limits. It must be noted that only the expenses incurred for business purposes can be deducted. This can be claimed either by subtracting business miles or by capitalizing the vehicle as an asset and depreciating the portion of that cost each year.
- Business Travel- You can deduct 100% of expenses concerning business travel, vacation, and lodging. The travel should be solely for business purposes.
- Business meals- business meals are 100% deductible for tax years 2021 and 2022. This rule was made for the hospitality industry so that they can recover from the pandemic.
- Home-office deduction- this allows you to deduct expenses concerning mortgage interest, property taxes, insurance, utilities, WIFI repairs, and also depreciation from taxable income. The important point to note here is that you use a part of your home for business.
- Business Interest Expenses- If your business has any debt then you can deduct the interest expense associated with it. It must be noted that the principal payment is not an expense therefore this cannot be deducted. However, you can deduct the entire amount that the bank earns from issuing debt to you.
- Coronavirus Aid, Relief, and Economic Security (CARES) Act- was set up in response to the economic downturn as a result of the pandemic. This Act came with the concept of the Paycheck Protection Programme (PPP), which are forgivable loans to small businesses. PPP is considered as a forgivable loan till the time the money is being utilized for payroll, rent/mortgage, and utility payments. Any kind of fund which is received by business as a way of PPP is not considered as taxable.
- Economic Injury Disaster Loan (EIDL)- This programme supports businesses that suffered a temporary loss of revenue caused by the pandemic. EIDL funds are typically not taxed at the federal level. But it’s important to monitor your state’s ruling on how it treats forgiven funds in terms of both taxation and expense deductions. EIDL loan is not forgivable. Borrowers do have to pay back EIDL loans according to the SBA’s (Small Business Administration) repayment terms.
- Employee Retention Tax Credit (ERTC)- Eligible employers can get immediate access to this credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. This act encourages businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
Full or partial suspension of the business by the government
significant decline in gross receipts i.e., more than 50% drop in the gross receipts for any given quarter when compared with the same quarter in 2019.
- Families First Coronavirus Response Act (FFCRA)- this programme provides small and midsize employers refundable tax credits that reimburse them for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. Businesses that provided paid leave `falling under this category can claim 100% tax credits.