How the Covid-19 Relief Bill Can Reduce Startup Business Taxes
Written by Baixue Ma, Tax Lead, airCFO
The COVID-19 pandemic has caused significant challenges for some startup businesses, while creating tremendous opportunities for others. But no matter which category your startup falls into, this public health crisis has sparked important implications that can reduce your company’s tax obligation to the federal government. Perhaps the most significant recent development involves how expenses are treated when paid with funds obtained from the Paycheck Protection Program (PPP).
This article will outline the deductions and benefits your startup should be aware of, including:
- PPP expenses are fully deductible, and PPP forgiveness is not taxable.
- Payroll tax credits are available for employees positive with COVID-19 or quarantining, and for employees caring for adults or children with COVID-19 or quarantining in case of it.
- Employee retention credits may help your startup avoid staff layoffs.
- Business meals are now fully deductible.
PPP expenses fully deductible, PPP forgiveness not taxable
Initially the U.S. Department of the Treasury took the position that if a PPP loan was forgiven, any expenses paid with those funds wouldn’t be deductible. Tax professionals didn’t accept the Treasury’s hard-line stance without a fight. The American Institute of Certified Public Accountants lobbied vehemently to be allowed to write off expenses paid with PPP loans, arguing that this relief was desperately needed by their business clients if companies were to survive the fallout from the health crisis. So there was a collective sigh of relief from taxpayers and tax professionals when the Consolidated Appropriations Act was signed into law on Dec. 27, 2020. It clearly stated these deductions won’t be denied. Also, businesses that meet the necessary requirements can receive forgiveness for their PPP loans, and that will be considered tax-exempt income. In addition, taxpayers don’t have to reduce Net Operating Loss (NOL) carryforwards, which tends to be required when debt is cancelled by a lender.
Relief for employers when staff fall sick with coronavirus
The Consolidated Appropriations Act also addresses payroll tax credits, extending initiatives designed to defray the impact of COVID-19 on businesses’ bottom lines while offering support to employers providing sick and family leave to those afflicted with coronavirus, or caring for family members with the virus. Under the Families First Coronavirus Response Act (FFCRA), a payroll tax credit can be used for up to 100 percent of emergency paid sick leave until March 31 2021
Under FFCRA, employers can provide leave through the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (Expanded FMLA). Employers are entitled to fully refundable tax credits to cover the cost of their employees’ leave time during periods when they can’t work, and this includes telework. The credit can be applied to wages paid to employees in the following situations: those under a quarantine or isolation order by federal, state or local government, or self-quarantining on the advice of a health care provider; employees who are experiencing symptoms of COVID-19 and are in the process of seeking a medical diagnosis; employees who are caring for someone under government-mandated quarantine or in self-quarantine under advice from a doctor; and those who are caring for a child of an employee who fits the aforementioned criteria if other child care options aren’t available because of COVID-19 closures and precautions. There are two categories that determine how much the credit can be. Employees facing potential or actual illness themselves are eligible for paid sick leave up to two weeks, or 80 hours, at their regular pay rate or applicable minimum wage (whichever is higher) up to $511 per day, for a total maximum of $5,110. Employees who can’t work because they are caring for others with COVID, or their children, may receive paid sick leave for up to two weeks, or 80 hours, at two-thirds of the employees’ regular pay rate, up to $200 per day for a total maximum of $2,000.
Hang on to valued employees with the help of retention credits
The employee retention credit was devised to help pandemic-affected businesses avert staff layoffs and maintain payrolls. Coming under the CARES Act, it has been expanded to include the first half of 2021. From January 1 through June 30, employers who meet certain requirements can receive a refundable quarterly payroll tax credit equivalent to 70 percent of qualified wages. Businesses considered to be impacted by the pandemic include those whose operations were partially or fully suspended in any calendar quarter because of a government order limiting commerce, travel or group meetings, and those that experienced significant declines in gross receipts. “Significant” is defined as a decline in revenues of more than 20 percent when comparing the same quarter’s numbers from the previous year. This eligibility continues until the next quarter after one when gross receipts are greater than 80 percent of the previous year’s gross receipts for that same quarter.
Employers might still qualify for the employee retention credit even if they received PPP loans, but only for wages that were not paid using forgiven PPP proceeds. Wages also don’t qualify for the employee retention credit if they are paid using the emergency paid sick leave provisions under the FFCRA.
Butter up your customers and clients with fully deductible restaurant meals
In an effort to provide a much-needed boost to an industry beleaguered by the pandemic, the Consolidated Appropriations Act has deemed that meals from restaurants are fully deductible for businesses. This applies to meals purchased in 2021 and 2022. Previously only 50 percent deductible, this can result in significant savings to businesses wanting to break bread with employees and clients. At the same time, it will offer some support for restaurants struggling to survive a world health crisis that has led to empty dining rooms and a desperate scramble to bolster depleted revenues. A study released by the National Restaurant Association in December revealed that more than 110,000 restaurants across the United States – or 17 percent – have closed their doors permanently since the pandemic began. That includes franchises, chains, and independents. A whopping 90 percent of restaurants surveyed have experienced a decline in revenues.
Meals from restaurants that are 100 percent deductible include those brought into the office for staff, those consumed during business travel or eaten at seminars and conferences, meals eaten with clients, and food brought in from restaurants for office parties and other team-building events. Entertainment expenses are still not deductible, but you can deduct meals purchased in conjunction with an entertainment activity if the food is billed separately, such as lunch purchased at a sporting event that is attended with a client. To form a solid paper trail, separate various types of restaurant expenses into the applicable categories.
Think strong, think smart, and think ahead
Surviving the uncertainty of the COVID-19 pandemic isn’t going to be easy for businesses navigating these rocky uncharted waters. It’s a situation unlikely to be duplicated in our lifetime, a public health crisis at a scale of which we haven’t seen since the Spanish flu pandemic of 1918. But with the proper attention paid to details such as rapidly changing tax laws, it is possible for businesses to emerge stronger, smarter, and perhaps even more profitable.
Need help? Let’s talk.
Now that you know how the Covid relief bill can help you with deductions and benefits for your startup, it’s time to put that knowledge to work.
Need some help navigating what this means for your startup? Schedule a discovery call and let’s see if we can help.
Author Note: Baixue leads up the tax team at airCFO. She is a CPA with extensive experience advising startups, and previously worked in a regional CPA firm and a Big 4.