Covid-19 Related Tax Credits for Small Businesses

We all know that the recent viral outbreak (Covid-19) has really taken its toll on the global business. Previously, all businesses have to worry about was ensuring their employees were happy and productive (which they could do by offering the correct office supplies and also the right benefits for the job). But now there’s a lot more that business will have to worry about due to this outbreak. In just the US, to date, a staggering 36 million people have filed for unemployment claims – making it the highest since the Great Depression of the ’30s.

To keep this number at bare minimum, the US Government had to announce a relief package for small businesses in the form of the SBA Loans which we have already discussed in our last article.

Needless to say that the businesses were quick to jump in to avail this opportunity, however, as it was expected, even this huge, $2 Trillion relief package was not sufficient to keep many businesses afloat.

Therefore, In order to assist the businesses further, IRS has also decided to chip in. And this time, the assistance is more monetary as compared to the last relief when the IRS allowed taxpayers to postpone the filing and paying their annual income tax liabilities till July 2020.

This time, the IRS has introduced 3 new tax credits for small and mid-sized businesses who have taken hit from the Covid-19 pandemic and in this article, we’ll see what these tax credits are, the eligibility criteria and how the businesses can avail them.

3 New Tax Credits for Businesses Hit by COVID-19

1. Employee Retention Credit

This credit is to encourage businesses to retain their employees on the payroll. If I were to summarize this tax credit, it would be, “Retain your employees – Claim 50% tax credit”.

What this means that from March 12, 2020, to January 1, 2021, if you retain your employees, you can claim 50% tax credit on the wages up to $10,000 per employee. In other words, a tax credit of maximum ($10,000 x 50%) $5,000 per employee. 

Note: Employee Retention Credit is a Refundable Tax Credit. This means that if your tax liability is less than the credit, IRS would give you an advance.

As the Employee Retention Credit is available since March 2020, this means that you can claim this credit for the previous months as well which can make your tax credit more than your tax liability.

Qualified Businesses

All businesses regardless of size, except for the state and federal businesses and their instrumentalities are eligible for the Employee Retention Credit are qualified businesses and eligible to receive the ERC. These include Exempt organizations (Charitable Businesses) as well. However, they may need to meet the following eligibility requirements.

Eligibility Requirement

In order to be eligible for the Employee Retention Credit, businesses must fulfill the following requirements:

  1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter
  2. The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

The businesses need to analyze their financial performance on a quarter-by-quarter basis.

Also Read: Everything you need to know about the PayCheck Protection Program (PPP)

2. Paid Sick Leave Credit

This credit is available to businesses (with fewer than 500 employees) if any of their employees are unable to work (this also includes work-from-home) either because of the lockdown restrictions imposed by the Government or the employee has self-quarantined himself to recover from the virus or even as a precautionary measure.

How much Paid Sick Leave Credit can the businesses claim?

This credit is available for up to 10 days (8 hours per day). This makes the maximum credit of up to 80 hours.

The rate per hour would be the employees’ regular hourly rate up to $511 per day and $5,110 for 10 days.

The math is simple so let’s do this very quickly over here for the sake of understanding this credit.

Say you pay $12/hr to one of your employees who normally works 8 hours a day for you. If he’s unable to work due to the Covid-19 lockdown restrictions, you can claim up to $12 X 8 = $96 per day, making your total Paid Sick Leave Credit as $96 X 10 = $960

Similarly, if one of your employees gets paid $65/hr working 8 hours a day, you can claim the credit of up to $511 per day since $65 X 8 = $520/day is greater than the allowed maximum credit of $511 per day.

3. Family Leave Credit

This credit is similar to the Paid Sick Leave credit above and the businesses can claim a credit against their employee’s pay provided that their employee isn’t able to work (again, this includes work-from-home) as he had to take care any of their family members affected from the Coronavirus or to take care of the child because the child’s school or the childcare provider is closed due to the lockdown.

Family Leave Credit for Employers

The Family Leave Credit allowed is 2/3rd of employee’s regular pay, up to $200/day and $2,000 in total. The maximum credit period allowed is 2 weeks.

Moreover, the Family Leave Credit is also available for the employees. They can claim credit of up to 2/3 of their regular pay with up to $200 per day with a maximum of up to $10,000. The credit period allowed is 10 weeks.

Family Leave Credit for Employees

Employees can also claim paid family and medical leave equal to 2/3 of their regular pay, up to $200 per day and $10,000 in total.

Maximum duration of this credit is 10 weeks.

How can employers claim above credits?

There are 2 ways the employers can claim the above credits:

  1. When depositing their quarterly taxes, they can apply for those credits on their overall tax liabilities (withheld from employees) and deposit the reduced payroll tax liabilities
  2. If the taxes withheld are lesser than the claimed credit, employers can submit form 7200 – Advance Payment of Employer Credits Due to COVID-19

Final Word

I’ve tried to be quite concise and yet, comprehensive in discussing the Covid-19 related tax credits for small businesses. However, since tax is generally a vast topic with too many nuances and different cases to pay heed to it’s virtually impossible to address all the concerns.

Therefore, if you have any more questions and have no clue determining your tax credits, feel free to check out this FAQ sections on the IRS’s website

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