Guide to 2020-2021 small business taxes and stimulus relief

Editor’s Note: This guide was originally published on February 12, 2021. It includes latest small business relief from the PPP Extension Act and American Rescue Plan Act of 2021 below.

Finding ways to help your small business succeed can be tough during the best of times. Add in the challenges of the pandemic and myriad options for small business stimulus and tax relief, and it’s easy to see how small business owners may be overwhelmed.     

Thankfully, you don’t have to go it alone. Our small business tax pros can help you navigate the tax changes for small businesses affecting your 2020 return and understand what financial aid options might be available to you.

Here’s what you’ll find in our Guide to small business taxes and stimulus relief:

Small business tax relief and your 2020 taxes
Small business stimulus relief available now
Small business stimulus and loan guidance

Small business tax relief and your 2020 taxes

Updated as of 3/10/2021

For 2021 tax related programs, please see the Small business stimulus relief available now section.

Small business stimulus relief options such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) have become household names during the COVID-19 pandemic.

If you received funds from PPP, EIDL or other programs, you’ll want to know the latest on how they affect your 2020 small business tax deductions and the rest of your return.

Want help understanding what this means for you? Get help from a Block Advisors small business certified tax pro.

PPP and EIDL Loans: Tax treatment updates

Deduction eligibility. The good news from the Dec. 2020 relief bill is that you can deduct qualifying expenses paid with the money received from a forgiven PPP loan or emergency EIDL grants. This change overrides previous IRS guidance.

Federal/state taxability. Forgivable PPP loans won’t be included in your gross income at the federal level. For partnerships and S corporations, EIDL amounts excluded from gross income will also be tax exempt for partners and shareholders (tax basis will not be reduced as a result of this exclusion).

Check with your state revenue department to see if your forgiven loan will be taxable on your state return.

Expanded expenses. On top of payroll, rent or lease payments, mortgage interest and utilities, there are more expenses your forgiven paycheck protection loan can include:  

• Personal Protective Equipment (PPE) and costs for adapting your business for health and safety compliance.
• Essential supplier costs to keep your business open
• Property damage due to public disturbances, provided it wasn’t covered by insurance
• Operational expenses for payments on software and other accounting or HR services

Other small business tax relief

Updated as of 4/28/2021

The American Rescue Plan (ARP) Act modifies details for two tax related credits as noted below.

Expanded Family First Coronavirus Response Act (FFCRA) paid sick leave benefits. These benefits have garnered attention recently as President Biden highlighted that employers can use the credit to cover leave related to receiving or recovering from a COVID-19 vaccination. Businesses can benefit from a maximum credit of $511 per day per employee (capped at $5,110).

While employer tax credits were extended until March 31, 2021, criteria for these credits have been modified if the leave is taken after that date (Dec. 31, 2021 for self-employed people) as outlined below.

• The bill expands the maximum amount of wages for which the credit can be claimed to $12,000 and increases the percentage of income a self-employed person can claim as equivalent paid sick leave.
• The maximum number of sick days for which an employer may claim the credit resets after March 31, 2021.
• State and local governments and certain other governmental employers are allowed to claim the credit.
• Similar to the ERC, the credit applies to Medicare taxes instead of Social Security taxes after March 31, 2021.

Keep in mind, if you take advantage of these FFCRA tax benefits, you’ll claim them on your 2021 taxes (filed in 2022).

Need help navigating stimulus related credits and deductions for your 2020 tax return? We’re here to help. Make an appointment with a Block Advisors small business certified tax pro.

Expanded Employee Retention Credit (ERC). With the ARP Act, the ERC was extended through Dec. 31, 2021, giving employers an additional two quarters to claim this tax benefit. After June 30, 2021, this credit applies against the employer’s share of Medicare payroll taxes rather than Social Security payroll taxes. Special rules apply to recover startup businesses established after Feb. 15, 2020.  

Small business stimulus relief available now

Updated as of 6/8/2021

Below, we’ve outlined which small business coronavirus relief programs have been expanded and established as part of the American Rescue Plan (ARP) Act of 2021.  

Need help understanding how your business could benefit? Connect with a Block Advisors Block Advisors small business certified tax pro today.

Please note: The Paycheck Protection Program application period has ended. For details on the loan eligibility and tax impacts, review our Paycheck Protection Program article.

Targeted Economic Injury Disaster Loan (EIDL) Grants. Created as a way to help small businesses with cash flow issues, the third round of funding of $15 billion from the ARP Act seeks to help those hardest-hit by the pandemic.

• EIDL Advance targeted to low-income communities. Grants of up to $10,000 are available to business owners in communities designated as low-income by the Internal Revenue Code. Businesses must have no more than 300 employees and must have experienced an economic loss of more than 30% (determined by comparing gross receipts from specific periods).
• Additional EIDL Advance grants targeted to “severely” and “substantially impacted” small businesses. Grants of $5,000 are available to businesses that have no more than 10 employees in two stages as follows. If eligible, some businesses could receive a total of $15,000 in grants.
  • The first stage will be for “severely impacted” business that have a loss of more than 50%
  • The second stage will be for “substantially impacted” business with a loss between 30-50%.
• Extended coverage and application timeframes. The EIDL grant period is now through Dec. 31, 2021. Additionally, the SBA has 21 days to approve and disburse EIDL grants (previously this was three days).

Securing new loan funding. If you’re interested in applying for an EIDL loan, you can submit your application with the SBA. For additional qualification details, visit sba.gov.

Restaurant Revitalization Fund (RRF). As coronavirus safety measures drastically impacted many businesses in the food sector, this fund establishes $25 billion in grants to provide relief for small and mid-sized restaurants, bars, food stands and similar venues. The bill earmarks $5 billion for businesses with 2019 gross receipts of $500,000 or less.

• Exclusive early access for certain applicants. Businesses owned by women, veterans and socially and economically disadvantaged individuals will receive priority access to the funds for the first 21 days.
• Grants are equal to the pandemic-related loss (calculated by subtracting 2019 revenue by 2020 revenue). Businesses may receive up to $10 million per entity or $5 million per physical location (limited to 20 locations).
• Funds may be used to cover certain eligible expenses. Among other expenses determined to be essential by the Small Business Administration, eligible costs include:
  • payroll
  • utilities
  • rent payments (not including prepayment)
  • principal and interest payments on a mortgage (not including any prepayment on principal)
  • maintenance expenses (including construction for outdoor seating)
  • supplies and cleaning materials.

Securing RRF funding. If you’re interested in applying for an RRF grant, you can submit your application with the SBA. For additional qualification details, visit sba.gov.

Tax treatment of RRF grants (Applies to 2021 taxes)

If you receive an RRF grant, it will not be included in your business’ gross income and any deductible expenses paid with funds from this program will still be deductible.

For partnerships and S corporations, amounts excluded from gross income will also be tax exempt for partners and shareholders (tax basis will not be reduced as a result of this exclusion).

Business meals are now fully deductible in 2021-2022

Call it a win-win for both business owners and the restaurants they patronize. To help stimulate restaurant spending, the IRS and Treasury announced that businesses may now deduct 100% of the cost of food or beverages consumed in 2021 and 2022. The change, which doubles the previous deduction limit of 50%, is part of the Taxpayer Certainty and Disaster Relief Act of 2020.

Whether you’re dining out on the road and want to claim this as part of business travel expenses or if you’re taking a meal in your hometown, you’ll want to take note of the details. 

You can deduct 100% of the cost of your food and beverages provided by a restaurant provided the:

• Business owner or an employee of the business is present.
• Expenses are not lavish or extravagant under the circumstances.
• Establishment doesn’t primarily sell pre-packaged goods not for immediate consumption (ex. grocery or convenient stores).
• Amounts are paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.

Small business stimulus and loan guidance

Updated as of 3/10/2021

Complicated times can make for complicated taxes. But keeping your business on track shouldn’t be complicated. We understand you have questions—and we’re here to answer them.

Don’t see your situation covered below? Put our expertise to work for you. Connect with a Block Advisors small business certified tax pro today.

Question: I took a PPP loan in 2020. Does that impact my taxes?

Answer: Money received from your forgivable PPP loan will not be included in your gross income at the federal level, but you’ll want to check with your state to determine if the forgiven loan is taxable on your state return.

In addition, recent legislation provides for the ability to deduct business expenses paid with forgiven PPP loans and other COVID-related loans and grants. To fully understand your eligibility for tax credits and deductions, we recommend speaking with one of our Block Advisors small business certified tax pros to help you.

Question: What is the Employee Retention Credit, and how do I take it?

Answer: The Employee Retention Credit (ERC) is a refundable tax credit aimed at helping small business owners keep employees on their payroll, even if they’ve stopped doing business or their finances took a significant hit from the pandemic.

Unlike business loans, the ERC isn’t applied for— it’s a credit on a business’ payroll tax returns.

From Jan. 1, 2021 and through Dec. 31, 2021, small businesses with fewer than 500 employees that experienced a quarterly revenue decline of 20% (previously 50%) year-over-year can claim a payroll tax credit for 70% of qualified wages up to $10,000 per employee per quarter. If the credit is larger than your payroll tax debt, you get the difference back in cash. You can qualify for this credit even if you took a PPP loan. However, you can’t use the same wages for both the ERC and PPP loan forgiveness.

You need to follow specific instructions to claim this credit. Don’t worry, when you work with one of our Block Advisors small business certified tax pros, we’ll take care of every last filing detail.

Question: What is the FFCRA—or Family First Coronavirus Response Act—and how can it benefit me?

Answer: The Family First Coronavirus Response Act (FFCRA) was designed to help American families and small businesses. Originally, it required employers to keep paying employees who had to miss work due to COVID-19, and those who did receive a tax credit to help cover the costs.

Now, the tax credit also applies to employers who voluntarily kept paying employees who missed work due to COVID-19.  It includes several elements, like guaranteed free coronavirus testing, a boost to unemployment insurance, and improvement to food safety programs.

The focus of FFCRA, though, is paid leave.

This act offers employees paid sick leave through two new laws:

• The Emergency Family and Medical Leave Expansion Act (EFMLEA)
• The Emergency Paid Sick Leave Act (EPSLA)

To qualify for FFCRA tax credits, your employees need to take paid sick leave or expanded family and medical leave for reasons related to COVID-19 between April 1, 2020, and Sept. 30, 2021. Also, you must be a business or tax-exempt organization with 500 employees or less. Your employees on leave, temporary leave, or those who are temporary with a continuing relationship count toward your eligibility. Independent contractors don’t count toward that 500-employee rule.

Also, you need to offer your employees up to 80 hours (or two weeks) of paid sick leave at 100% of their pay. Your employees must use the paid sick leave because they:

• Experienced COVID-19 symptoms and sought a medical diagnosis
• Quarantined or isolated subject to an order related to COVID-19 or
• Advised to self-quarantine by a health care provider

Additionally, you need to offer your employees 80 hours, or two weeks, of paid sick leave due to care for others. You must pay two-thirds of the employee’s regular rate of pay for employees who are caring for someone in quarantine, or providing childcare because of school or daycare closures, with a limit of $200 per day ($2,000 total).

A credit may also be available for qualified family leave wages for employees who are unable to work or telework due to a need to leave to care for a child due to provider closures related to COVID-19.

Get small business stimulus and tax relief help

There’s a lot to dive into where small business stimulus relief is concerned. You can rest a little easier knowing that you can rely on one of our Block Advisors small business certified tax pros to help make sense of it all.

Connect with a Block Advisors small business certified tax pro today!