Small Business Tax Tips and Considerations for 2021, Part 2
Tax Planning for Unemployment in 2021
Unemployment compensation is Federally taxable. Most states including California do not tax unemployment compensation. Since unemployment income is Federally taxable, if you do not have money set aside or have adequate withholding for those taxes, it could reduce your refund or even lead to a balance due when you file your 2021 tax return. This might be unexpected especially for those who elect to have taxes withheld. If tax withholding is elected, the California Employment Development Department withholds only 10% on the State portion of the benefit and not the Federal pandemic unemployment benefits, the “boost”, currently at $300 a week through September 6, 2021. Ten percent is the lowest Federal tax bracket. If a recipient of unemployment has other income, they most likely will be in a higher tax bracket.
Many Americans are still relying on unemployment benefits in 2021 to get by during the coronavirus pandemic. For 2020,
Congress included an exclusion of up to $10,200 in unemployment benefits if your adjusted gross income was less than $150,000. That is equal to 17 weeks of the Federal boost of $600 per week for a maximum possible exclusion of $10,200. This was a welcome benefit to those who received unemployment benefits last year and likely rescued many taxpayers who would have otherwise had a tax surprise.
So, what can you do? It is advisable to project your potential tax liability for 2021. If when including your expected unemployment benefits you will owe money with your 2021 income tax return, you can pay one or more quarterly Federal income tax estimated payment on IRS Form 1040-ES or online at IRS Direct Pay https://www.irs.gov/payments/direct-pay. Your tax preparer can help calculate your estimate but if you do your own tax returns there are many websites that offer free estimated payment calculator. We cannot count on Congress to provide the same or similar exclusion in 2021 that they did in 2020.
Targeted EIDL Grants – New $5,000 Grant
The American Rescue Plan provided additional funding to the Economic Injury Disaster Loan (EIDL) program and created a supplemental $5,000 Targeted EIDL advance for those businesses that qualified for the targeted advance under Section 331 of the Consolidated Appropriations Act of 2021 signed into law on December 27, 2020. Congress added an additional $5 billion of funding to this new program.
The program criteria are as follows:
- The entity has been in operation since at least January 31, 2020
- The entity employs not more than 10 employees
- The entity has been directly affected by the Covid-19 pandemic
- The entity is located in a low-income community as defined by the SBA
- The entity has suffered an economic loss greater than 50% in an eight-week period beginning on March 2, 2020, or later
Currently, the application process and timing for the new supplemental targeted EIDL grants has not yet been posted by the SBA. The SBA stated that details about these new efforts will be available in the coming weeks. You can check and see if your business is located in a low-income community by going to the following link: https://sbaeidl.policymap.com/app.
The American Rescue Plan exempts EIDL grants from Federal tax and provides that such exclusion will not result in a denial of deductions, reduction of tax attributes, or denial of increase in basis.
You can visit an SBA resource partner who can help guide you through the loan application process. You can find your nearest Small Business Development Center (SBDC) or Women’s Business Center here at: https://www.sba.gov/local-assistance.
Extension of the Employee Retention Credit
In December 2020, the Consolidated Appropriations Act of 2021 (CAA) extended and expanded the Employee Retention Credit (ERC) to June 30, 2021. Under the recently enacted American Rescue Plan Act the ERC can be claimed through December 31, 2021. The ERC program was enacted as part of the Cares Act on March 27, 2020, to provide reimbursement of wages for businesses affected by the Covid-19 virus and incentivize employers to maintain a pre-pandemic level workforce. The ERC can be claimed against 50% of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and December 31, 2020.
Originally the ERC was not available for those employers who took a Paycheck Protection Program (PPP) loan and had to show a loss in revenue of 50% or more for each calendar quarter of 2020 when compared to the respective revenue for the corresponding quarter in 2019 to qualify. The December 2020 CAA made the ERC much more available by allowing PPP borrowers to apply for and receive the credit for 2020 if they satisfied the 50% of receipts reduction.
The CAA amendment to the ERC dropped the threshold from 50% to 20% to qualify for the credit in the first and second quarters of 2021. Further, the amendment provided that 2021 wages can be reimbursed for up to 70% of the first $10,000 paid to each employee for each calendar quarter, amounting to a maximum of $7,000 per employee each quarter. The American Rescue Plan credit amount remains the same as the CAA. So, an employer could claim up to $7,000 per employee per quarter or up to $28,000 for 2021.
Unlike the PPP loan program there is no requirement that the business need monies or that there be any necessity to borrow money to claim the ERC. The wages credit received in not taxable, but the wages that were paid that qualified for the credit will not be tax deductible.
Since the ERC if claimed potentially affects 2020 you will want to file an extension for corporations due April 15. If you have an S corporation or LLC, that return was due March 15. If you have already filed you will want to check with your tax preparer and see if amended income tax and payroll tax returns can be filed. This is a complicated credit and it is suggested that you work with a CPA or qualified tax preparer to get the maximum benefit possible.
Avaunt Ltd. CPA’s and Consultants