NFIB’s Primer on Tax Relief Policies for Small Businesses
Tax Day is few people’s favorite holiday, but there are plenty of small business tax wins that you can take advantage of to make it more painless. Check with your tax professional or tax software to see if you can take advantage of these credits and deductions.
The IRS has now delayed this year’s Tax Day to May 17, 2021. However, this date change does not apply to estimated tax payments due on April 15, 2021; small businesses and individuals responsible for quarterly estimated tax payments must still make those payments by April 15.
The most important small business-related tax measure in recent years is Section 199A of the IRS tax code, better known as the Small Business Deduction. This deduction allows for small businesses to claim up to a 20% tax deduction on their share of the business’s income – up to $164,900 in tax year 2021, or $329,800 for those filing jointly.
The Small Business Deduction was introduced as part of the Tax Cuts and Jobs Act of 2017, a law that included several pro-small business tax reform policies. Other significant tax gains for Main Street include an increase in the estate tax exemption to protect small business owners from tax preparation expenses created when business assets are passed on to family members, an increase in the maximum tax deduction for equipment, and more. You can read more about the Small Business Deduction and other pro-small business tax gains here.
According to NFIB research, 81% of small businesses consider the Small Business Deduction to be important to the health of their business. However, the policy sunsets in 2025, and it’s rumored that some in Congress and the Biden Administration will soon propose cuts to it and other pro-small business tax policies. Consider reaching out to your members of Congress and telling them that you support the ongoing efforts to make the Small Business Deduction a permanent part of the tax code.
NFIB member Lana Pol, a small business owner in Iowa, shared how the Small Business Deduction has helped her employees and business grow: “I own 5 small businesses which are pass-through entities. When the 20% tax deduction of qualified income was passed in 2017, we used the extra money to give our employees raises. We had not been able to give a lot of raises in the past few years due to the rising cost of health insurance. At the time we were paying 100% of the employee, spouse, and family coverage so every raise in health insurance affected how we could give our employees raises. We also used the extra money to help build a 39,000 sq. ft. warehouse.” She also praised the equipment deduction policy, adding, “We were also able to use the deductibility of equipment to purchase 6 new semi-trucks in the first year, and we’ve also used this every year since to completely update and expand our fleet of trucks.”
Pandemic Response Tax Relief
In response to the COVID-19 pandemic and government-mandated business restrictions, the federal government launched several new pro-small business tax provisions.
New and updated, is the Employee Retention Tax Credit (ERTC) a refundable, advanceable tax credit on employee wages that is available 2020 and all of 2021. For 2020, it offers a total maximum credit $5,000 per employee. Looking ahead to 2021, the new American Rescue Plan Act (ARPA) recently extended the period of eligibility for the ERTC to include all of 2021, versus a previous Q1 and Q2 limit. Since savings are up to $7,000 per employee per quarter in 2021, that’s a total maximum savings of $28,000 per employee in 2021.
The Families First Coronavirus Response Act (FFCRA) tax credit for paid sick leave and family leave has also been extended by ARPA. The program originally expired at the end of March but now lasts until the end of September 2021. The maximum size of this tax credit for family leave is now $12,000 per employee. You can read more about it and other small business-related measures in ARPA in our breakdown here.
NFIB does not provide legal, tax, or accounting advice, so please be sure to talk to your bookkeeper, CPA, or tax professional before taking advantage of any of these programs.