Thanks to tax code changes in recent years, business owners can take advantage of tax breaks for their small businesses, including tax credits and deductions.
The Tax Cuts and Jobs Act (TCJA) enacted in 2017 and the Coronavirus Aid, Relief, and Economic Security Act stimulus bill signed into law in 2020 provides opportunities for small businesses to reduce their tax obligations.
Experts share the following highlights of recent changes that could positively impact your tax return this year.
Qualified Business Income Pass-Through Deduction
As part of the TCJA, lawmakers created the Qualified Business Income Deduction to match the act's corporate tax rate reduction from 35% to 21%. It gives "pass-through" organizations—sole proprietorships, S corporations, and partnerships—a 20% deduction on qualified income.
"While it seems straightforward, this is a complex calculation and has many nuances," says Alton Moore, a CPA, tax attorney, and founder of Evolution Tax and Legal.
He notes that, in addition to the deduction that's calculated in one of three ways, the deduction doesn't apply to the following business categories:
- Actuarial science
- Brokerage services
- Financial services
- Health services, such as performed by doctors and nurses
- Investing and investment management
- Law, including lawyers
- Performing arts
- Any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners
- Services you performed as an employee of another person or business
Depreciate Business Assets 100% in First Year
"Small business owners that purchase new equipment, computers, and cars can use bonus depreciation instead of spreading the cost over a number of years," says Yvette D. Best, a tax accountant and owner of Best Services Unlimited LLC.
The TCJA increased the amount of "bonus depreciation," also known as the "first year depreciation deduction," for allowed purchases from 50% to 100%.
Employee Retention Credit
Businesses that continued to pay employees while they were closed due to the pandemic, that reduced hours because of local restrictions, or that have gross receipts that are 50% less in a 2020 quarter compared to the same quarter in 2019 because of COVID-19, are eligible for a $5,000 credit per paid employee.
"This will offset the employer's 6.2% share of Social Security taxes, with the excess being refundable," says Jacob Dayan, CEO and co-founder of Community Tax. "This is a potentially great tax break for those who have been heavily impacted by the pandemic, while also keeping people employed."
Family and Medical Leave Tax Credit
According to the Internal Revenue Service, the Families First Coronavirus Response Act "provides businesses with tax credits to cover certain costs of providing employees with required paid sick leave and expanded family and medical leave for reasons related to COVID-19, from April 1, 2020, through December 31, 2020."
Best adds that "eligible self-employed individuals are also entitled to claim an income tax credit for qualified sick and family leave."
To be eligible as a self-employed person, she says, you must be:
- Conducting a trade or business as a self-employed individual, and
- Eligible to receive paid sick leave under the Emergency Paid Sick Leave Act if you were an employee of an employer (other than yourself), and/or
- Eligible to receive paid family leave under the Emergency Family and Medical Leave Expansion Act if you were an employee of an employer (other than yourself).
Employee Retirement Plan Tax Credit
The SECURE Act, passed in December 2019, increases the amount of tax credits provided to small businesses that want to offer retirement plans to themselves and their employees.
Employers with up to 100 employees are now eligible for an annual tax credit equal to 50% of the costs to set up and administer a retirement plan and educate employees about it. The credit applies for three years.
"A small employer can receive a tax credit of up to $5,000 for three years for starting a new qualified retirement plan," says Brian Halbert, vice president of retirement services at WD Pensionmark. The previous amount was $500 per year for three years.
Those businesses also qualify for an additional tax credit of up to $500 per year for three years when they include automatic enrollment into the qualified employer retirement plan.
Consult a Professional
To make sure you're taking advantage of all available tax breaks, credits, and deductions, talk to a tax attorney, accountant, or enrolled agent. And remember, professional service fees are deductible.