Small businesses benefit from various tax credits that reduce the amount of tax they pay to the government. Here, we discuss tax credits, why they exist and provide a list of the top tax credits that small business owners should know.

Small Business Tax Credits

A small business tax credit is an amount of money subtracted from the taxes the business owes. Tax credits differ from tax deductions. For example, deductions cut a business’ total tax by a percentage of the deduction, depending on the tax bracket. Alternatively, tax credits reduce the tax due, not the amount of taxable income. In other words, a small business tax credit is a dollar for dollar deal – every dollar of credit cuts the business’ tax by a whole dollar. This credit is a significant benefit for small business owners because it helps recover some operating costs and retains the precious capital needed for growth.

As a practical example, if your business owes $20,000 in taxes, but you can claim a $5,000 tax credit, that amount is subtracted from your total tax bill making the new tax bill $15,000.

The Purpose of Small Business Tax Credits

The U.S. government grants tax credits to promote behaviors it finds favorable. For example, tax credits are offered to businesses as incentives for activities that benefit employees, promote specific industries, or aid or benefit society. One example is the government offering tax credits to businesses that purchase electric vehicles. The government encourages this to fight climate change and global warming. Because tax credits can have such a dramatic impact on a small business’s bottom line, it is crucial to stay apprised of tax credits for which your business is eligible.

7 Small Business Tax Credits for 2021

In the wake of the COVID-19 pandemic, related tax credits for small businesses top the list.

1. Employee Retention Credit

Under the American Rescue Plan, the Employee Retention Credit (ERC) is extended for small businesses through December 2021 and is available for all four quarters of the year. This tax credit allows small businesses to offset payroll tax liabilities by up to $7,000 per employee per quarter. That means a credit of up to $28,000 per employee is available for small businesses whose revenue declined due to the COVID-19 pandemic. A 20 percent decline in gross receipts during a single quarter makes a business eligible for this tax credit.

2. Paid Leave Credit

Another tax credit that falls under the American Rescue Plan is the Paid Leave Credit. This credit is extended through September 30, 2021, and offers credits for small and midsize businesses that offer paid leave to employees for COVID-related illness, quarantine, or family caregiving. The allowable credit is equal to wages up to $5,000 of paid leave for sick or quarantining employees.

Note: Small businesses are no longer required by law to offer paid leave related to COVID; however, if they do, the credit still applies.

Other tax credits of which small businesses should be aware are:

3. Health Care Tax Credit

With the Health Care Tax Credit, the smaller the business, the bigger the credit. The credit is highest for businesses with fewer than ten employees. Generally, the way to qualify for the credit is by enrolling in a Small Business Health Options Program (SHOP).

A business must meet the following requirements to qualify:

• (a) have fewer than 25 full-time employees,
• (b) have an average employee salary of approximately $50,000 per year or less,
• (c) pay at least 50 percent of full-time employees’ healthcare premiums, and
• (d) offer SHOP coverage to all full-time employees.

This credit can be claimed for two consecutive years, applicable from 2017 forward.

4. Work Opportunity Credit

This credit is available to employers who hire from specific groups that face barriers to employment. For example:

• Qualified IV-A Recipient – receiving TANF assistance
• Qualified Veteran – the IRS provides details of what “qualified” entails on their site under Tax Credits
• Ex-Felon
• Designated Community Resident (DCR) – between 18 and 40 years old and living in an empowerment zone, an enterprise community, or a renewal community
• Vocational Rehabilitation Referral – a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services
• Summer Youth Employee
• Supplemental Nutrition Assistance Program (SNAP) Recipient
• Supplemental Security Income (SSI) Recipient
• Long-Term Family Assistance Recipient
• Qualified Long-Term Unemployment Recipient

Under the Consolidated Appropriation Act, 2021, this credit was extended until December 31, 2025.

5. Disabled Access Credit

Eligible small businesses that earn $1 million or less and have a maximum of 30 full-time employees in a year can claim this credit each year in which expenditures are incurred to make their business accessible to persons with disabilities under the Americans with Disabilities Act (ADA).

Expenditures include, but are not limited to, installing wheelchair ramps, upgrading restrooms, and providing Braille text materials.

6. Employer-Provided Childcare Facilities and Services

While few businesses these days seem to provide in-house child care for their employees’ children, a tax credit can make this an attractive option. This credit is a general business tax credit for 25 percent of qualified employer-provided child care expenditures plus 10 percent of qualified child care resources and referral expenditures. The credit is capped at $150,000 per tax year.

Qualifying expenditures:

• Include operating costs of a qualified child care facility
• Include costs for acquisition, construction, rehabilitation, or expansion of a property used as a care facility (but not land or any part of the principal residence of the taxpayer)
• May not exceed the fair market value of care provided

The employer-run facility must open enrollment to employees and must not discriminate in favor of highly compensated employees. At least 30 percent of the facility’s enrollment must consist of dependents of taxpayer employees.

7. Research and Development (R&D) Tax Credits

Several R&D tax credits exist for small businesses. These credits typically apply to science, medical and technology-based businesses; however, many businesses engage in qualified R&D activity.

The following activities qualify for an R&D tax credit:

• New prototype or model development
• Proprietary product on which you seek a patent
• Developing a new manufacturing process or business process
• Improving product efficiency or existing business processes
• Improving quality control processes
• Environmental or certification testing

Businesses that qualify for this credit can subtract up to 10 percent of R&D costs from their tax bill.

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Ask your tax professional about small business tax credits that apply to your business. There are additional federal small-business tax credits from state and local governments. Tax credits often expire after a few years, so act quickly to take advantage of those that apply to you.

Call us now at 626-793-4322 to learn more or request your free consultation online to get started.

The Consolidated Appropriations Act of 2021 brings a favorite business tax deduction back to life. The so-called “three-martini lunch” is in vogue once again; however, not everyone is happy about it. So, what does this mean for businesses? Read on to learn more about the deduction and the associated pros and cons.

What is the Three-Martini Lunch Tax Deduction?

There was a time – up until the mid-1980s – that business owners and executives could take a 100 percent tax deduction for entertaining clients, colleagues, or even themselves (as it was not unheard of for personal expenses to be grouped in with “business expenses”).

The somewhat scoffing name of the deduction – the Three-Martini Lunch – comes from these lavish “business expenses” that sometimes included leisurely lunches (complete with cocktails), rounds of golf, sporting event tickets, and even vacations. However, under tax laws at the time, as long as the activities were conducted in the name of entertaining clients, they could be deducted on a business’ federal return.

What Changed?

The Tax Reform Act of 1986 eliminated or significantly reduced many tax deductions, including putting a severe halt to businesses’ total deductions for entertaining potential or current clients. Beginning in 1987, the business meal deduction decreased from 100 to 80 percent. Further, the Act called for any part of the meal that was considered “lavish and extravagant” to be excluded from the amount used to calculate the deduction (although no accurate guidance was provided on what constituted “lavish and extravagant”).

Over the years, the deduction was further reduced, and finally, the Tax Cuts and Jobs Act (TCJA) of 2017 repealed the entertainment allowance and scaled the business meal deduction down to 50 percent. The deduction applied only to expenses encountered during actual business activities or active discussions.

Of course, there were caveats and loopholes associated with the changes; however, those loopholes no longer seem necessary as, after more than 30 years, the 100 percent deduction is restored. This increase is due to the Taxpayer Certainty and Disaster Tax Relief Act of 2020, part of the Consolidated Appropriations Act of 2021 (CAA 2021).

The Consolidated Appropriations Act of 2021

Championed by the White House and Senator Tim Scott, a Republican from South Carolina, the Act increases the deduction to 100 percent so that businesses can deduct the total cost of business meals on federal taxes. This increase in deduction occurred by way of an amendment to the Tax Reform Act of 1986 that makes an exception to the 50 percent rule until January 1, 2023.

What You Should Know

For expenses to be fully deductible, they must be paid or incurred during 2021 or 2022, and the food and beverages claimed must be provided by a restaurant. The Act does not explicitly apply this full deduction to entertainment expenses. Intended to help the flailing restaurant industry during the global pandemic, the Act leaves many business personnel with questions. For example, what constitutes a “restaurant”? (this is not clearly defined in the IRS code).

For some guidance, Section 4.01 of Part III of the IRS procedural guide for taxpayers who own or operate a restaurant or tavern deems a “restaurant” to be a place where “food and beverages are prepared to customer order for immediate on-premises or off-premises consumption. Examples are full-service restaurants, limited-service eating places, cafeterias, special food services (like food service contractors, caterers, and mobile food services), and bars, taverns, and other drinking places.”

Another question taxpayers are asking is how should non-food and beverage expenses be handled? (there is no accurate guidance on entertainment expenses).

As you consider these and other questions regarding the new deduction guidelines, also consider some of the proposed pros and cons of the ruling.

Pros and Cons of the Three-Martini Lunch

Returning to a full deduction for business meals and entertainment has been praised and criticized regarding how the change will impact businesses and the economy in general.

Some suggested benefits include:

• An increase in business will help restaurants and bars reopen in the time of the global pandemic.
• New employment for those out of work and reemployment for furloughed food service employees.
• A limited-time (two-year) action to bolster the foodservice industry during the pandemic.

Some of the criticisms of the Act are that:

• This deduction robs tax relief funds that are more important.
• It could be challenging to eliminate the deduction when the two-year limit comes.
• The benefit will extend only to the wealthy who do not need immediate tax relief.
• Only large, high-end restaurants that serve wealthy business clientele will benefit.

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These and other points of interest – as well as many questions – will likely arise as the tax year unfolds. To address these, it is always best for business owners to consult with a tax professional.

Our experienced Pasadena, CA accounting firm can save you real money on your taxes through sophisticated tax planning. To learn more about personal or business tax planning, call 626-793-4322 now or request your free consultation online.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law on December 20, 2019. The Act will likely impact large numbers of working Americans as well those already retired. In general, the Act is intended to increase access to tax-advantaged retirement plans and to help prevent older Americans from outliving their assets.

Here are some of the changes that could affect your planning.

Delayed Deadline for Taking Required Minimum Distributions

Tax law has generally required individual retirement account (IRA) owners and retirement plan participants to begin taking required minimum distributions (RMDs) from their accounts once they reach age 70½. The new law pushes back the age at which these distributions must begin to age 72 for IRA owners and plan participants born on or after July 1, 1949. This change allows individuals to take advantage of their retirement account’s tax-deferred nature for a longer period.

No Age Limit for Making Traditional IRA Contributions

Beginning with the 2020 tax year, the new law eliminates the 70½ age limit for making annual contributions to traditional IRAs. This is a plus for those people who continue to work past age 70½ and want to keep saving for retirement on a tax-deferred basis.

Penalty-Free Birth and Adoption Distributions

The new law also expands the exceptions to the 10% penalty for early withdrawals from IRAs and other tax-deferred retirement plans by adding an exception for “qualified birth or adoption distributions” up to $5,000. The new law defines a “qualified” birth or adoption distribution as a withdrawal from an IRA or other eligible retirement plan made during the one-year period beginning on the date the IRA owner’s or the plan participant’s child is born or the adoptee’s adoption is finalized. If desired, parents may replenish their retirement savings by repaying the amount distributed.

Restrictions on Stretch IRAs

The new law places severe restrictions on the use of “stretch” IRAs. A stretch IRA generally permitted beneficiaries to take their RMDs from an inherited IRA over their life expectancy. Thus, beneficiaries were able to stretch payments from the inherited IRA over many years and potentially pass on the inherited IRA to their own beneficiaries. The SECURE Act changes the RMD rules for beneficiaries of IRA owners (and plan participants) who pass away in 2020 or later. Under the SECURE Act, the use of stretch IRAs is restricted to a limited group of IRA beneficiaries. The specific details on who is eligible to use stretch IRAs is complex, and IRA owners who base their estate plans on the use of a stretch IRA should consult with a financial professional to see how they might be impacted.

Small Business Retirement Plans

Good news if you own a small business — the SECURE Act provides incentives to make it easier for you to establish a retirement plan. Starting in 2020, eligible employers that establish a 401(k) or SIMPLE IRA plan with automatic enrollment may qualify for a new tax credit of $500 per year for up to three years. In addition, the existing credit for small employer plan startup costs has increased to as much as $5,000 per year for three years. Previously, the annual credit maximum was $500. Employers also have more time to establish a qualified retirement plan. Previously, a qualified plan, such as a profit sharing plan, had to be adopted by the last day of the employer’s tax year to be effective for that year. The SECURE Act allows a qualified plan to be adopted as late as the employer’s tax filing deadline (plus extensions).

Your financial and tax professionals can provide more details about these and other important SECURE Act changes and how they may affect your retirement planning.

Don’t take risks with your tax return! Trust Figueroa & Co for error-free tax preparation. Call 626-793-4322 or request a free consultation online.