3 tax breaks small businesses don't want to miss
Small employers faced unprecedented times in the last couple of years. Fortunately, Congress passed tax incentives for small business owners to take advantage of this critical situation.
For example, business owners can take advantage of payroll credits for keeping workers on staff. They also had one last year to expense all business meal costs. And those who bought a sports utility vehicle could have a boosted depreciation on their 2022 tax returns.
As small businesses begin to prepare their taxes, here are three tax breaks owners should look into this year.
Employee Retention Credit
Qualified small business owners can retroactively claim Employee Retention Credit (ERC) on quarterly federal tax returns, Form 941 and 941X, this season for wages paid between March 12, 2020, and Dec. 31, 2021 (Sep. 20, 2021 for non-startup recovery businesses). Employers may have to amend already-filed forms with the IRS to claim the credits. Employers can claim up to $26,000 per worker on payroll during this period.
In general, businesses can apply if they can prove that COVID-19 has affected their business revenue, because they “were closed or because of the government shutdown, or the last one was a supply-chain issue," said Roger Harris, president of Padgett Business Services and an IRS subject-matter expert.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the credit in 2020 to encourage businesses to keep workers on their payrolls during the pandemic. The maximum credit changed from $5,000 annually per employee in 2020 to $7,000 quarterly per employee in 2021.
However, claiming the credits has been a struggle for some, as many of the rules were updated after the qualified periods. Many small businesses had to amend their payroll taxes and business returns in the claiming process.
“Some of the legislation was retroactive legislation that required amended returns to claim the ERC, which had to be filed on paper and therefore became part of the IRS backlog,” Harris said. “Then when the money is received, the business is required to amend the tax returns for the years they received the ERC credits and reduce the wage expense claimed on the original return by the amount of the credits received.”
The deadline for ERC is three years and four months after the credit’s period, “because the ERC is claimed on a Form 941 or 941X, the statute of limitations for those forms begins on April 15 of the following year,” said Harris.
Although credits for the year 2020 are not due until April 15, 2024 to claim the credits, Harris shared that the process could be delayed.
“We had to wait for the IRS, most forms unfortunately had to be filed on paper. So now we had to wait for [the IRS] to open the envelopes to process the money,” Harris said.
Small business owners who bought sports utility vehicles (SUV) with gross vehicle weight ratings between 6,000 and 14,000 pounds for business purposes in 2022 can choose between two very generous depreciation methods this tax year.
The first is the 100% bonus depreciation that will begin to sunset in 2023, and the second is a depreciation known as section 179, allowing SUVs to take a $27,000 deduction. This amount was adjusted for inflation from last year's $26,200.
"So inflation finally caught up and [the IRS] increased that to $27,000," Kathryn Keane, an enrolled agent and a National Tax Practice Institute fellow, told Yahoo Finance. “So that's something I think is going to help small businesses when they're looking at purchasing a vehicle."
On the other hand, businesses can claim 100% bonus depreciation for the last time on their 2022 tax return before the regulation starts to phase out next year. This generous benefit allows full deduction on purchased SUVs.
While this seems like a way to go, Keane suggested that small business owners might want to choose the section 179 depreciation with a smaller upfront deduction if they live in states without bonus depreciation.
"Section 179 is preferred generally in states that do not allow for bonus depreciation," Keane said. "You always want to check your state because not every state is really hip to section 179."
"Here in New York, they don't like it at all on a sports utility vehicle," she added.
If the depreciation method varies between state and federal, employers should document the methods used for each jurisdiction.
Last year for 100% deduction on business meals
Small business owners can deduct the total cost of work-related meals for the last time on their 2022 tax returns before the tax rule reverts back to the general deduction of 50% of the cost of meals next year.
"In 2021 and 2022, we had the ability to deduct 100% of our meals if they were provided by a restaurant," said Kean. "That was a boon."
The requirement to qualify for the enhanced meal reduction included "meals must be from restaurants" and "business owners or an employee must be present," according to the IRS website.
The upgraded deduction helped the restaurant industry recover during the COVID-19 pandemic, and it will now sunset in 2023.
"I think that's what kept a lot of businesses afloat as so many people were slower to get back out," said Keane. "Hopefully, that will not have a detrimental effect on our small business restaurants out there."
"I really was hoping that they would extend it another year," she added.
Rebecca is a reporter for Yahoo Finance.
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