By Ellen R. Swing
Every business has the goal of sustainability and improved cash flows. One way to achieve this is to take advantage of the tax provisions and rules that are made available for businesses. Here are some tax smart moves that business owners can leverage to strategize their tax savings and help towards this goal.
1. 5-Year Net Operating Loss Carryback Provision:
NOL or Net Operating Loss Carryback is the amount that can be carried back and deducted from income earned in previous years, resulting in a refund of tax payments made in the past. Prior to the provision, a business was not allowed to carry back losses for tax years beginning in 2018 and after.
Under the CARES Act, the provision allowed a 5-year carryback of losses incurred in 2018, 2019, and 2020 and suspended the loss limitation rules for those years. Business owners can carry back the net operating losses from 2018–2020 five years up to the earliest year. Additionally, any 2018–2020 losses that are carried forward will not be subject to the 80% limitation of taxable income through 2020. This allows businesses that previously paid taxes to get these payments refunded. This refund could go a long way to improve the cash flow for a business.
For tax years beginning January 1, 2021, the provision allows a 100% deduction for NOL incurred beginning in 2017 and earlier, and an 80% deduction for NOLs for tax years beginning after December 31, 2017. The carryback claims will need to be made on an amended tax return.
2. Accelerated Depreciation Rules:
Small businesses can deduct the purchase of capital assets by depreciating them over several years. However, the 2017 Tax Cuts and Job Act made changes to increase the benefits for buying equipment, machinery, vehicles, and other business property through increased write-offs on the tax return. Called Accelerated Depreciation Rules, the deduction process accelerates or speeds up the business deduction of an asset purchase, thereby reducing the tax liability for the year. A business can buy approximately $1.1 million in capital equipment — machinery, technology, etc. — and then deduct all of it in the same year for as long as it is put into service. Bonus depreciation of 100% is available for assets placed in service during 2019, 2020, 2021 and 2022. It is reduced to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026. Purchases of new and used equipment are eligible. Bonus depreciation is completely phased out for 2027.
3. Employee Retention Tax Credit:
In the wake of COVID-19 pandemic and as part of the 2020 CARES Act, the Employee Retention Credit (ERC) was created to help small businesses by encouraging employee retention amidst revenue losses. It is a refundable tax credit given to businesses and allows for as much as $10,000 per employee for 2020 and $28,000 per employee for 2021. The ERC was extended through the end of 2021 to give businesses more time to claim it. Credit is taken against the employer payroll taxes owed, and if the credit is higher than the taxes due, the difference can be claimed in refund. If it was not claimed in 2020, there is still time to amend the payroll tax and income tax returns.
There are 3 ways for businesses to qualify for the 2021 ERC.
- If a business was partially or fully shut down due to a governmental ordinance limiting its activities and operations.
- If a business had a loss of 20% of revenues in any quarter of 2020 (50% in any quarter of 2020) compared to the same quarter in 2019.
- If you are a recovery startup business which is defined as a company that started after February 15th, 2020, with no more than $1M in gross receipts for the three years prior to claiming the credit.
4. Work Opportunity Tax Credit :
The Work Opportunity Tax Credit (WOTC) is a federal tax credit made available to businesses who hire workers in certain target demographics who have consistently experienced employment barriers. It incentivizes workplace diversity and facilitates equal opportunity. Employers can claim the income tax credit of as high as $9,600 per employee in the targeted group. A jobseeker should be either recently out of prison, off welfare, or has been unemployed for more than six months. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. The new expiration date to take advantage of this credit is on December 31, 2025.
It is advised that business owners talk to an accountant to answer questions and educate on these strategies and the most relevant tax changes to maximize tax savings as well as make planning decisions for future years.