Three Things Small Business Owners Should Be Discussing with Their CPAs Right Now

Date March 14, 2022
Categories
Article Authors

Contributing Authors: Peter Roupas, CPA, JD, Amelia Mateer, CPA, Josh Masters,CPA, Nabat Mammedova, CPA, Joyce Gebrosky, and Mary Manolakos

If you’re a small business owner and haven’t yet filed your 2021 business tax return, you’re likely talking to your CPA right now. With the deadline looming, you might be in a hurry to complete your return and put taxes behind you, so you can focus on other more pressing business matters. But don’t rush. There are several things to discuss with your CPA before you finalize your return, including some changes in the tax law resulting from the COVID pandemic that could generate substantial savings for you and your business.

Here are three issues that as a small business owner you’ll want to discuss with your CPA:

Employee Retention Credit

The Employee Retention Credit (ERC) is incredibly generous and broad. It can yield a cash refund of up to $7,000 per employee, per quarter. To qualify, your business must have experienced a 20% decrease in revenue in any quarter compared to that same quarter in 2019 (i.e. to pre-COVID levels). For most businesses, the credit expired after quarter three.

Some small business owners, in particular sole proprietors organized as single member LLCs, are overlooking the ERC. Remember, you need only one employee other than yourself to qualify for the credit. Assume, for example, your business has one employee, an administrative assistant and bookkeeper, whose salary for the year is $40,000. You could potentially receive a credit of $7,000 per quarter for quarters one, two, and three. That’s a total credit of $21,000, a significant cash inflow for a small business owner. For businesses with more than one employee, multiply that credit by your number of employees, and you can understand the magnitude of this generous credit.

If you’re a start-up business, and don’t have 2019 revenues, that doesn’t preclude you from taking the credit. Talk to your CPA to determine if your business qualifies as a Recovery Startup Business.

Many businesses, particularly those with 2021 annual revenues that were similar to pre-COVID levels, are surprised to discover that they qualify for the credit. Remember, if your sales dipped by 20% in a particular quarter compared to 2019, you may qualify. Hence, businesses who experience inconsistent revenues from quarter to quarter during the year should be extra mindful to perform those sales comparisons to 2019!

If you qualify for the ERC, your 2021 tax return will be impacted, as the expenses related to the credit are not deductible, which means an increase in taxable income. So be sure to factor this spike when tax planning with your CPA.

Business Meals

New and more generous tax deductions are available for 2021 food and beverage expenses. The rules—some of the changes are considered temporary by the IRS—include:

  • Meals are 100 percent deductible if purchased from a restaurant between December 31, 2020, and January 1, 2023. The IRS defines a restaurant for purposes of this provision as a business that prepares and sells food or beverages for immediate consumption. The definition does not extend to businesses that primarily sell pre-packaged food or beverages not specifically for immediate consumption, like grocery stores; beer, wine, and liquor stores; and vending machines. Nor is an eating facility located on the business’s premises considered a restaurant, even if it’s operated by a third-party.
  • The 50 percent deduction limitation still applies to food and beverage purchases made at non-restaurants.
  • Entertainment expenses remain non-deductible. However, food and beverages purchased at an entertainment event can be deducted if stated separately from the entertainment costs. They can be on a separate bill or listed as separate line items on the bill.

To ensure you maximize your food and beverage deductions, be sure to discuss those expenses with your CPA.

Retirement Plan Options

Tax time is always an appropriate time to discuss your retirement plan funding options with your CPA, as you have until the filing deadline, including extensions, to make your contribution. Have your CPA run different scenarios to determine the appropriate amount to contribute. And if you need more time to determine your contribution for 2021, consider filing an extension.

If you don’t currently have a retirement plan, setting one up now can yield a tax deduction for 2021. And if you have a retirement plan, consider upgrading to another plan, particularly if your earnings for the year increased over previous years, or if you anticipate increases in your future earnings.

Business owners have several plans to choose from, each with its set of rules and requirements:

Traditional IRA:

  • Must have earned income
  • Maximum annual contribution amount: $6,000 (an additional $1,000 for ages 50 and older), or amount of earned income if less than $6,000
  • Contribution deadline: April 18, 2022 for 2021 contributions
  • Advantages: contributions are generally tax-deductible; earnings are tax-deferred until withdrawn
  • Self-Employed IRA (SEP):

  • Must have self-employment income
  • Maximum annual contribution amount: 20 percent of net self-employment income after self-employment tax deduction, up to a maximum of $58,000
  • Contribution deadline: due date of return, including extensions
  • Advantages: easy to set up and maintain; allows you to choose how funds are invested; you are immediately 100 percent vested; no reporting requirements; does not require recurring contributions
  • SIMPLE IRA:

  • For employers with fewer than 100 employees
  • Eligible employees must have earned at least $5,000 in any two prior years and are expected to earn at least that much in the current year
  • Employee can elect to defer up to $13,500 (an additional $3,000 for ages 50 and older)
  • Employer can either match employee deferral dollar for dollar up to 3 percent of the employee’s wages, or contribute 2 percent of wages, up to $290,000, for all employees
  • Advantages: higher contribution limits than a SEP; not as complicated as a 401k
  • 401(k):

  • Any employer can set up a 401(k) plan
  • Eligible employees can elect to defer up to $19,500 (an additional $6,500 for ages 50 and older)
  • Advantages: the maximum deduction for employer and employee; employers allowed to match employee contributions; employee is generally fully vested sooner; plan is managed by professionals; easy for employees to contribute, usually through payroll deductions
  • So before you finalize your business return this season, be sure to pause and consider whether you’ve fully vetted the above considerations. The tax savings could be significant.

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    Watch: COVID 19 Relief Update Paycheck Protection Program & Employee Retention Credit

    Date January 13, 2021
    Categories
    On December 27, 2020, the Consolidated Appropriations Act 2021 (CAA), also referred to as the Economic Aid Act or Omnibus Bill, was signed into law, providing new COVID 19 relief options for individuals and small businesses, including a second round of Paycheck Protection Program (PPP) loans and an extended and expanded Employee Retention Credit. Interested borrowers have been awaiting guidance, which the SBA and Department of the Treasury have begun to release. Join Amy Reynallt, MBA and Ben DiGirolamo, CPA, JD as they discuss the new guidance which includes:
    • Interim Final Rules on the First and Second PPP Draws
    • First Draw and Second Draw PPP Loan Applications
    • Updates on the Employee Retention Credit
      Download the Materials.

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    FAQs – Employer Benefits of the FFCRA and CARES Act

    Date April 13, 2020
    Article Authors

    The Families First Corona Response Act (FFCRA) and Coronavirus Aid, Relief and Economic Security (CARES) Act created three employer benefits claimed through payroll taxes, a 100% refundable credit against the cost of benefits paid under the FFCRA (FFCRA Credits), the Employee Retention Credit, and Employer Payroll Tax Deferral. The following is a list of FAQs and observations on these three provisions.

    Who is eligible to claim the credit/benefit?

    FFCRA Credits
    Any business paying employees under the sick leave or expanded FMLA coverage provided by the FFCRA. Generally, all employers with under 500 employees are covered by the FFCRA. See the following Department of Labor FAQ for specific questions on eligibility and benefits. Department of Labor FAQ

    Employee Retention Credit
    Those that carry on a trade or business during the calendar year 2020, including a tax-exempt organization, that either:

    • Fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
    • Experiences a significant decline in gross receipts during the calendar quarter.

    Employer Payroll Tax Deferral
    Every business until they are approved for loan forgiveness under the CARES Act.

    Can I take a Payroll Protection Program (PPP) Loan and receive the benefit?

    FFCRA Credits
    Yes. However, the benefits paid under the FFCRA are not included in payroll costs for the calculation of the loan amount or amount forgiven.

    Employee Retention Credit
    No. Employers receiving a PPP loan are ineligible for the credit.

    Employer Payroll Tax Deferral
    Yes. Businesses with loan amounts forgiven under the CARES Act are ineligible. According to the following IRS FAQ, all employers, including those applying for PPP loans, claiming FFCRA credits, and claiming the CARES Act employee retention credit, can defer the payment of the employer’s share of social security tax until they receive a decision from their lender that any portion of its PPP loan is forgiven. IRS Deferral of Employment Tax Deposit FAQ

    When can an employer receive the credit/benefit?

    FFCRA Credits
    Employers can claim the 100% tax credit against employment taxes for benefits earned starting April 1st. The credit will be claimed on Form 941, Employer’s Quarterly Federal Tax Return. Employers may receive an advanced credit by reducing their otherwise required payroll deposits. If the total credit exceeds their payroll deposit they can file Form 7200 to claim a refund. Below is a link to the IRS FAQ on the FFCRA benefits and tax credits, including examples of how to claim the credit. IRS FFCRA Credits FAQ

    Employee Retention Credit
    The employee retention tax credit applies to wages paid after March 12, 2020, and before January 1, 2021. According to the IRS, 1st quarter credits earned for pay between March 13th and March 31st will be claimed on a second quarter Form 941. The credit will not be claimed on the first quarter payroll return. Employers may receive an advanced credit by reducing their otherwise required payroll deposits. If the total credit exceeds their payroll deposit they can file Form 7200 to claim a refund. Below is a link to the IRS FAQ on the employee retention credit, including examples of how to claim the credit. IRS Employee Retention Credit FAQ

    Employer Payroll Tax Deferral
    The deferral period starts on March 27, 2020, and ends December 31, 2020. Employers may defer payment of their share of social security taxes during this period. Employers receiving a PPP Loan will no longer be allowed to defer payment once they receive a decision from their lender that their loan is forgiven.

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