New legislation means new benefits for business owners! In addition to opening the availability of new loan funds, the Consolidated Appropriations Act passed in December gives small business owners a host of benefits that the original CARES Act did not cover.
The biggest news of this new Act is the clarifying legislation around deductions of purchases made with PPP money. Purchases made with PPP money are eligible for deduction, potentially saving you thousands on taxes.
A second big provision of this Act is a change to meal deductions. With the passing of this legislation, restaurant meals for business purposes are 100% deductible as long as the business owner is present for the meeting. This credit drives customers back to the struggling restaurant industry, and lasts until December 31, 2022.
The biggest news is that small businesses are now eligible for both PPP loan money AND tax credits for employees. The CARES Act required that business owners choose between the two benefits, but the new Act allows for use of both, as long as funds from the two benefits do not overlap in their use.
The Employee Retention Credit (ERC) was available in the CARES Act, but it was often overlooked in favor of the highly-publicized PPP loans. This credit, which is a refundable tax credit of up to $7000 per employee per quarter, can be claimed by businesses with a 20% loss of revenue for Q1 and Q2 of 2021, as compared to either a.) the same quarter in 2019 or b.) the previous quarter.
A business can claim ERC if revenue for Q1 of 2021 is 20% lower than Q1 of 2019 (the previous quarter) or Q4 of 2020 (the same quarter in 2019). And can claim again if revenue for Q2 of 2021 is 20% lower than Q1 of 2021 or Q2 of 2019. The value of the credit is 70% of each employee’s wages for the quarter, up to $7000.
As an example, if business ABC has a decrease in revenue of 25% from Q1 of 2021 to Q1 of 2019, the business is eligible for ERC. If business ABC has 5 employees with salaries of $35,000 per year, or $8750 per employee per quarter, the business can claim $6125 per employee for a total of $30,625 in payroll credits per quarter.
If business ABC also has a decrease in revenue from Q2 of 2021 as compared to Q2 of 2019, the business is eligible for an additional credit of $30,625 for those 5 employees, for a total tax credit in 2021 of $61,250.
Because the calculations of these funds can be complex, we recommend that you speak with your accountant or tax professional about your specific situation and eligibility.