3 Ways Small & Midsized Businesses Can Maximize Tax Benefits
Are you maximizing your tax benefits? From employee retention credits to tax credits for innovation, there are many strategies for small and midsized businesses to capitalize on deductions and benefits for the 2021 tax year – and beyond.
Over the past two years of the COVID-19 pandemic, opportunities for loan forgiveness, credits for paid leave, and employee retention programs have provided tax relief for small and midsized businesses.
While eligibility for tax deductions can vary by situation, there are a few key credits that small and midsized businesses should be sure to explore as a way of maximizing profit. As with many tax issues, a CPA with a holistic understanding of your business is best positioned to ensure that you are taking advantage of all credits for which you are eligible.
Many such opportunities are easily overlooked – or dismissed in the mistaken belief that the criteria is narrower than it really is.
Employee Retention Credit
The Employee Retention Tax Credit (ERC) is a refundable tax credit designed to encourage businesses to retain employees during the COVID-19 pandemic. The credit is available for qualified wages paid between March 13, 2020 and September 30, 2021. The discontinuation of the ERC program does not impact your ability to claim the credit on a retroactive basis. Businesses have three years to go back and claim the credits on amended tax returns.
There are two ways an organization can qualify for the ERC:
- If your organization has experienced a significant decline in gross receipts, it can qualify for ERC. For the 2021 tax year, this includes organizations that have experienced a 20% decline in gross receipts during a quarter, compared to the same quarter in 2019. For the 2020 tax year, the threshold is a 50% decline in gross receipts for a quarter compared to 2019.
- A second method of qualification that does not involve gross receipts is if your business was impacted by a government shutdown. This does not necessarily mean that your business had to be closed. There are other conditions such as the inability to get materials from suppliers that may qualify you as being impacted by a government shutdown.
If you meet one of the qualifications, the credit can be as high as $5,000 per employee in 2020 and up to $21,000 per employee in 2021.
A common misconception is that if an organization took a PPP loan it is not eligible for employee retention credits. However, you can still qualify for both, as long as you don’t use the same payroll dollars for calculating PPP loan forgiveness and ERC.
At Kirsch CPA Group, we’ve helped small and midsized clients receive significant employee retention credits, with many receiving in excess of $100,000. Contact us to learn more about qualifying for ERC.
COVID-Related Paid Employee Leave
Tax credit for COVID-related paid employee leave is part of the Families First Coronavirus Response Act (FFCRA), yet many organizations remain unfamiliar with this advantage. Companies that offered employees paid time off for receiving the COVID-19 vaccine, quarantining for potential exposure, or recovering from the virus may be eligible for this credit to reduce payroll taxes.
The maximum amount of credit awarded amounts to the daily salary of an employee (up to $511 per day) for up to two weeks. If your organization qualifies for this credit, be sure to evaluate the interplay with ERC.
Research & Development Credits
Research and development credits are commonly overlooked by companies that mistakenly assume they will not qualify. Rapid changes in technology over the last decade have forced many companies to continually innovate and improve products or production processes and create efficiencies.
The R&D credit rewards companies who pursue innovation and applies to companies that work on developing new or improved products or processes in the U.S. The R&D credit isn’t just limited to the development of a product that is new to the industry, it also includes products that are new to you. So, is your company working on a new product or changing a production process? You may be eligible to recoup some of the cost even if the effort does not succeed.
From software design to new products to innovative manufacturing techniques, this credit can help you recoup wages, supplies, and contracted expenses incurred for research and development.
Starting in 2022, there are some changes to the tax treatment of R&D costs, so even if you have claimed this credit in the past, it is important to understand the implications on your taxes in 2022 and forward.
Work with an Experienced CPA Team to Maximize Tax Benefits
Filing for tax benefits can be complex, particularly when there is interplay among credits or deductions.
Kirsch CPA Group’s team of industry veterans works closely with your company to gain a comprehensive view of your business and your financials to identify the credits that maximize your financial savings.
We also evaluate state credit opportunities, as well as pass-through entity credits, R&D credits and more. Additional potential opportunities can include:
- Qualifying business income deductions
- Government funding
- Loan forgiveness
At Kirsch, we believe that a holistic knowledge of your business is critical to maximizing tax deductions and other benefits, and our approach is built around a deep understanding of your goals. Whether you are planning for the 2021 tax year or beyond, a thorough evaluation of opportunities for tax credits is key to optimizing your organization’s profitability.
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